<PAGE> 1
PROSPECTUS SUPPLEMENT
-----------------------------
TO PROSPECTUS DATED DECEMBER 28, 1999
ADVANTA MORTGAGE LOAN TRUST 2000-2
ISSUER
$649,728,000
(APPROXIMATE)
MORTGAGE LOAN ASSET-BACKED CERTIFICATES, SERIES 2000-2
<TABLE>
<S> <C>
[Advanta Logo] [Advanta Logo]
ADVANTA CONDUIT RECEIVABLES, INC. ADVANTA MORTGAGE CORP. USA
SPONSOR MASTER SERVICER
</TABLE>
WE SUGGEST THAT YOU READ
THE SECTION ENTITLED "RISK
FACTORS" STARTING ON PAGE
S-6 OF THIS PROSPECTUS
SUPPLEMENT AND PAGE 8 OF
THE PROSPECTUS AND CONSIDER
THESE FACTORS BEFORE MAKING
A DECISION TO INVEST IN THE
CERTIFICATES.
These certificates
represent non-recourse
obligations of the trust
only and are not interests
in or obligations of any
other person or entity.
Neither these certificates
nor the mortgage loans will
be insured or guaranteed by
any governmental agency or
instrumentality.
This prospectus supplement
may be used to offer and
sell the certificates only
if accompanied by the
prospectus.
THE TRUST IS OFFERING THE FOLLOWING SIX CLASSES OF
SENIOR CLASS A CERTIFICATES:
<TABLE>
<CAPTION>
INITIAL
PRINCIPAL PASS- FINAL SCHEDULED
CLASS BALANCE THROUGH RATE PAYMENT DATE
----- ------------ ------------ ---------------
<S> <C> <C> <C>
A-1 $258,839,000 LIBOR + 0.14% March 25, 2015
A-2 $ 54,646,000 7.61% March 25, 2015
A-3 $123,250,000 7.76% May 25, 2018
A-4 $ 83,139,000 7.93% April 25, 2023
A-5 $ 64,854,000 8.25% August 25, 2030
A-6 $ 65,000,000 7.72% March 25, 2015
</TABLE>
- The pass-through rates on the class A-1, A-4, A-5
and A-6 certificates are subject to a cap.
- The pass-through rates on the class A-4, A-5 and
A-6 certificates step up in the event that the
clean-up call is not exercised.
Interest and principal on the class A certificates
are scheduled to be paid monthly on the 25th day of
the month, or the next business day. The first
scheduled payment date is September 25, 2000.
The property of the trust consists of a pool of
fixed rate, sub-prime residential mortgage loans.
Each class of the class A certificates will have
the benefit of an insurance policy from Ambac
Assurance Corporation which will guarantee payments
with respect to the class A certificates.
[AMBAC LOGO]
Delivery of the class A certificates is expected to be made in book-entry form
through the facilities of The Depository Trust Company, Clearstream, and the
Euroclear System on or about August 22, 2000.
<TABLE>
<CAPTION>
CLASS PRICE TO PUBLIC UNDERWRITING DISCOUNT PROCEEDS TO THE SPONSOR
----- --------------- --------------------- -----------------------
<S> <C> <C> <C>
A-1 100.00000% 0.175% 99.82500%
A-2 99.98722% 0.250% 99.73722%
A-3 99.99925% 0.275% 99.72425%
A-4 99.96238% 0.325% 99.63738%
A-5 99.97135% 0.375% 99.59635%
A-6 99.98919% 0.275% 99.71419%
--------------- ------------- ---------------
Total $649,663,207.80 $1,620,675.00 $648,042,532.80
</TABLE>
Investors in the fixed rate certificates will also be required to pay the
interest that accrued on their certificates from the cut-off date to the date of
issuance. The proceeds to the sponsor were calculated before deducting expenses
payable by the sponsor, which are estimated to be approximately $700,000.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus supplement. Any representation to the
contrary is a criminal offense.
Underwriters of the class A-1 certificates
BEAR, STEARNS & CO. INC.
MORGAN STANLEY DEAN WITTER
PRUDENTIAL SECURITIES
Underwriters of the class A-2, A-3, A-4, A-5 and A-6 certificates
BEAR, STEARNS & CO. INC. MORGAN STANLEY DEAN WITTER
August 16, 2000
<PAGE> 2
IMPORTANT NOTICE ABOUT THE INFORMATION PRESENTED IN THIS PROSPECTUS SUPPLEMENT
AND THE ACCOMPANYING PROSPECTUS
We provide information to you about these securities in two separate
documents that progressively provide more detail: (1) the accompanying
prospectus, which provides general information, some of which may not apply to
this series of securities; and (2) this prospectus supplement, which describes
the specific terms of this series of securities.
This prospectus supplement does not contain complete information about
the offering of these securities. We suggest that you read both this prospectus
supplement and the prospectus in full. We cannot sell these securities to you
unless you have received both this prospectus supplement and the prospectus.
TABLE OF CONTENTS
<TABLE>
<S> <C>
SUMMARY ...................................................................... 3
RISK FACTORS ................................................................. 6
THE SPONSOR AND THE MASTER SERVICER .......................................... 7
Developments Concerning Advanta Corp. and its Subsidiaries ................ 8
Pending Consumer Mortgage Lending Proposals ............................... 10
Pending Legislative Proposals ............................................. 10
DELINQUENCY AND LOSS INFORMATION ............................................. 11
USE OF PROCEEDS .............................................................. 13
THE MORTGAGE LOANS ........................................................... 13
DESCRIPTION OF THE CERTIFICATES .............................................. 19
Pass-Through Rates ........................................................ 19
Distributions of Interest ................................................. 21
Distributions of Principal ................................................ 21
Flow of Funds ............................................................. 21
Optional Redemption ....................................................... 22
Calculation of LIBOR ...................................................... 23
CREDIT ENHANCEMENT ........................................................... 23
THE POOLING AND SERVICING AGREEMENT .......................................... 25
Formation of the Trust .................................................... 25
Sale of Mortgage Loans .................................................... 25
Termination of the Trust .................................................. 25
PREPAYMENT AND YIELD CONSIDERATIONS .......................................... 25
Projected Prepayments and Yields for Class A Certificates ................. 25
Payment Lag Feature of the Fixed Rate Certificates ........................ 37
THE CERTIFICATE INSURER ...................................................... 37
THE CERTIFICATE INSURANCE POLICY ............................................. 38
MATERIAL FEDERAL INCOME TAX CONSEQUENCES ..................................... 39
REMIC Elections ........................................................... 40
Special Tax Attributes .................................................... 40
Supplemental Interest Amounts ............................................. 40
Taxation of Foreign Investors ............................................. 41
Information Reporting and Backup Withholding .............................. 42
STATE TAXES .................................................................. 42
ERISA CONSIDERATIONS ......................................................... 42
RATINGS ...................................................................... 44
LEGAL INVESTMENT CONSIDERATIONS .............................................. 44
UNDERWRITING ................................................................. 44
EXPERTS ...................................................................... 46
LEGAL MATTERS ................................................................ 46
GLOSSARY ..................................................................... 47
</TABLE>
S-2
<PAGE> 3
SUMMARY
- This summary highlights selected information from this
prospectus supplement and does not contain all of the information that you need
to consider in making your investment decision. To understand all of the terms
of the offering of the class A certificates, carefully read this entire
prospectus supplement and the accompanying prospectus.
- This summary provides an overview of structural provisions,
calculations, cash flows and other information to aid your understanding and is
qualified by the full description of the structural provisions, calculations,
cash flows and other information in this prospectus supplement and the
accompanying prospectus.
TITLE OF SERIES
Advanta Mortgage Loan Trust 2000-2, Mortgage Loan Asset-Backed Certificates,
Series 2000-2.
SPONSOR
Advanta Conduit Receivables, Inc.
MASTER SERVICER
Advanta Mortgage Corp. USA.
ISSUER
Advanta Mortgage Loan Trust 2000-2.
TRUSTEE
Bankers Trust Company of California, N.A.
THE TRUST
The sponsor is forming the Advanta Mortgage Loan Trust 2000-2 to hold a pool of
fixed rate, sub-prime residential mortgage loans. All of the mortgage loans will
be originated or purchased by affiliates of the sponsor.
CERTIFICATE INSURER
The trustee will hold an insurance policy issued to it by Ambac Assurance
Corporation guaranteeing payment of minimum required monthly amounts due to the
owners of the class A certificates.
CLASS A CERTIFICATES OFFERED
$649,728,000 Advanta Mortgage Loan Trust 2000-2, Mortgage Loan Asset-Backed
Certificates, Series 2000-2, Class A to be issued in the following classes with
initial principal balances as set forth below:
<TABLE>
<CAPTION>
INITIAL
PRINCIPAL PASS-THROUGH
CLASS TRANCHE TYPE BALANCE RATE
----- ------------ ------- ----
<S> <C> <C> <C>
A-1 Senior Sequential
Floater $258,839,0000 LIBOR+0.14%
A-2 Senior Sequential $54,646,0000 7.61%
A-3 Senior Sequential $123,250,0000 7.76%
A-4 Senior Sequential $83,139,0000 7.93%
A-5 Senior Sequential $64,854,0000 8.25%
A-6 Senior NAS $65,000,0000 7.72%
</TABLE>
- a senior tranche is not subordinate to any other class;
- a sequential tranche is a class in a series of sequential-pay
classes;
- a NAS tranche is a non-accelerated senior class, also known as
a lockout class; and
- a floater tranche is a class having an adjustable interest
rate; all other classes have fixed interest rates.
The class A-1, A-4, A-5 and A-6 certificates are subject to a cap on the
pass-through rate.
The class A-4, A-5 and A-6 certificates are subject to an increase in the
pass-through rate on the payment date immediately following the month in which
the clean-up call may first be exercised.
S-3
<PAGE> 4
The class A certificates will initially be issued in book-entry form through
DTC, Clearstream or Euroclear.
OTHER CERTIFICATES
The trust will also issue subordinate certificates which are not being offered
by this prospectus supplement. The subordinate certificates are subordinate to
all class A certificates and essentially represent the excess of the aggregate
mortgage loan balance over the aggregate principal balance of the class A
certificates, plus any excess cashflow which is not required to be applied to
payments on the class A certificates. The subordinate certificates will
initially be retained by the sponsor or its affiliates.
INITIAL CUT-OFF DATE
As of the opening of business on August 1, 2000.
STATISTICAL CALCULATION DATE
As of the opening of business on August 1, 2000.
CLOSING DATE
On or about August 22, 2000.
FINAL SCHEDULED PAYMENT DATES
Although it is anticipated that the actual final payment date for each class
will occur earlier than the final scheduled payment date, the final scheduled
payment dates for each of the classes are as follows:
<TABLE>
<CAPTION>
FINAL SCHEDULED
CLASS PAYMENT DATE
----- ------------
<S> <C>
A-1 March 25, 2015
A-2 March 25, 2015
A-3 May 25, 2018
A-4 April 25, 2023
A-5 August 25, 2030
A-6 March 25, 2015
</TABLE>
THE MORTGAGE LOANS
The mortgage loans owned by the trust will consist of a pool of fixed rate,
first or junior lien sub-prime residential mortgage loans
See "The Mortgage Loans" for statistical information about the mortgage loans.
DISTRIBUTIONS
Owners of class A certificates will be entitled to receive payments of interest
each month. Owners of class A certificates may not necessarily receive a
distribution of principal in any given month. The amount of principal the owners
of class A certificates will be entitled to receive will vary depending on a
number of factors, including the payments received on the mortgage loans. Each
month, the trustee will calculate the amounts to be paid to the owners of the
class A certificates.
Distributions will be made on each payment date to the owners of the class A
certificates as of the record date. The record date for the class A-1
certificates is the business day immediately preceding the payment date, unless
the class A-1 certificates are issued in definitive form, in which case the
record date shall be the last business day of the prior calendar month. The
record date for the class A-2, A-3, A-4, A-5, and A-6 certificates is the last
business day of the prior calendar month.
Owners of class A certificates will receive payments on the 25th day of each
month, or, if such day is not a business day, on the next business day. The
first payment date is September 25, 2000.
In summary, on each payment date the funds available to be distributed will be
applied in the following order of priority:
- first, to pay fees due to the master servicer, the trustee and
the certificate insurer;
- second, to pay interest on the class A certificates;
- third, to pay principal of the class A certificates;
- fourth, to reimburse the certificate insurer;
S-4
<PAGE> 5
- fifth, to reimburse the master servicer for unreimbursed
advances and other expenses; and
- sixth, to make a distribution to the owners of the subordinate
certificates, a portion of which may be used to pay any
supplemental interest amounts on the class A-1 certificates.
CREDIT ENHANCEMENT
Credit enhancement refers to a mechanism that is intended to protect the owners
of the class A certificates against losses due to defaults on the mortgage
loans.
The class A certificates have the benefit of the following four types of credit
enhancement:
- the use of excess interest and, until the required level of
overcollateralization is reached, prepayment penalties to
cover losses and to distribute principal in order to create
overcollateralization;
- the subordination of distributions on the subordinate
certificates to the required distributions on the class A
certificates;
- the allocation of losses on the mortgage loans to the
subordinate certificates; and
- the certificate insurance policy.
OPTIONAL REDEMPTION
The master servicer or one of the master servicer affiliates will have the right
to exercise a clean-up call on any payment date that the outstanding principal
balance of the mortgage loans is less than or equal to 10% of the aggregate
initial principal balance of the class A certificates. The certificate insurer
must consent to the clean-up call if it would result in a draw on the
certificate insurance policy.
This clean-up call will result in the optional redemption of the class A
certificates at a price of par plus accrued interest.
DENOMINATIONS
The trust will issue the class A certificates in book-entry form in integral
multiples of $1,000.
RATINGS
The class A certificates will be rated Aaa by Moody's Investors Service, Inc.
and AAA by Standard & Poor's, a division of The McGraw-Hill Companies, Inc.
A security rating is not a recommendation to buy, sell or hold securities, and
may be subject to revision or withdrawal at any time by a rating agency.
FEDERAL TAX ASPECTS
Dewey Ballantine LLP acted as special tax counsel to the trust and is of the
opinion that:
- the trust will be treated as a real estate mortgage investment
conduit, or REMIC, for federal income tax purposes, and
- the class A certificates will be regular interests in the
REMIC and will be treated as debt instruments of the REMIC for
federal income tax purposes.
ERISA CONSIDERATIONS
The class A certificates may be offered to pension, profit sharing and other
employee benefit plans subject to ERISA.
LEGAL INVESTMENT CONSIDERATIONS
The class A certificates will not be mortgage related securities under the
Secondary Mortgage Market Enhancement Act of 1984. Some potential investors may
be limited in their legal investment authority only to first-lien mortgages or
mortgage related securities and will not be able to invest in the class A
certificates.
S-5
<PAGE> 6
RISK FACTORS
We suggest that you consider the following risk factors and the
information under "Risk Factors" in the accompanying prospectus prior to any
purchase of any of the class A certificates.
A MAJORITY OF THE MORTGAGE LOANS ARE BALLOON LOANS
More than half of the mortgage loans have balloon payments which
provide for the payment of a large remaining principal balance in a single
payment at maturity. Please see "Risk Factors - Mortgage loans with balloon
payment features may have greater default risk" in the prospectus for additional
information.
THE MORTGAGE LOANS MAY PREPAY AT ANY TIME, RESULTING IN UNCERTAINTY AS TO THE
AMORTIZATION RATE OF THE CLASS A CERTIFICATES
The mortgage loans are all fixed rate mortgage loans. The rate of
prepayments on fixed rate mortgage loans is sensitive to prevailing interest
rates. If prevailing interest rates fall significantly below the coupon rates on
the mortgage loans, the mortgage loans are likely to be subject to higher
prepayment rates than if prevailing interest rates remain at or above the coupon
rates on the mortgage loans. Conversely, if prevailing interest rates rise
significantly above the coupon rates on the mortgage loans, the rate of
prepayments is likely to decrease. The weighted average lives of the class A
certificates and, if purchased at other than par, the yields realized by owners
of the class A certificates will be sensitive to rates of payment of principal
on the mortgage loans. The yield on a class A certificate that is purchased at a
premium from its outstanding principal amount may be adversely affected by
higher than anticipated levels of prepayments on the mortgage loans. Conversely,
the yield on a class A certificate that is purchased at a discount from its
outstanding principal amount may be adversely affected by lower than anticipated
levels of prepayments on the mortgage loans.
THE EFFECT A CERTIFICATE INSURER DEFAULT WILL HAVE ON THE RATINGS OF CLASS A
CERTIFICATES
The ratings assigned to the class A certificates by the rating agencies
will be based on the credit characteristics of the mortgage loans and on ratings
assigned to the financial strength of the certificate insurer. Any reduction in
the ratings assigned to the certificate insurer by the rating agencies could
result in the reduction of the ratings assigned to the class A certificates.
This reduction in ratings could adversely affect the liquidity and market value
of the class A certificates.
CREDIT ENHANCEMENT DOES NOT APPLY TO PREPAYMENT RISK OR INTEREST RATE RISK
The protection afforded by the overcollateralization provisions and by
the certificate insurance policy is protection for credit risk and not for
prepayment risk or interest rate risk. The certificate insurance policy does not
guarantee or insure that any particular rate of prepayment is experienced by the
trust.
THE CLASS A-1, CLASS A-4, CLASS A-5 AND CLASS A-6 CERTIFICATES HAVE A CAP ON
THEIR PASS-THROUGH RATES, WHICH MAY LIMIT THE AMOUNT OF INTEREST YOU WILL
RECEIVE.
The class A-1, class A-4, class A-5 and class A-6 certificates are each
subject to an available funds cap on their pass-through rate, which is equal to
the weighted average coupon rate on the mortgage loans minus the fees of the
trust. This means that the interest that is payable to the investors in these
certificates may be limited to the net interest the trust receives on the
mortgage loans. If the weighted average interest rate of the mortgage loans was
reduced significantly, under a relatively high prepayment
S-6
<PAGE> 7
scenario, the pass-through rates on the class A-1, A-4, A-5 and A-6 certificates
could be subject to the limitation imposed by the available funds cap. This cap
may reduce the amount of interest you, as an investor in these classes of
certificates, are entitled to receive. Any shortfall in interest on the class
A-1 certificates will be carried forward to subsequent payment dates, but those
amounts are not guaranteed by the certificate insurer, the sponsor or the master
servicer. Any shortfall in interest on the class A-4, A-5 and A-6 certificates
is not subject to any carry-forward feature and will not be required to be
repaid on any subsequent payment date.
NON-OWNER OCCUPIED PROPERTIES MAY HAVE HIGHER RATES OF DEFAULT
As of the statistical calculation date, non-owner occupied properties
represent 2.35% by principal balance of the mortgage loans. Vacation homes and
second homes are considered owner occupied properties, and therefore are not
included in these percentages. It is possible that the rate of delinquencies,
foreclosures and losses on mortgage loans secured by non-owner occupied
properties could be higher than for loans secured by the primary residence of
the mortgagor because the mortgagor will be inclined to make payment on their
primary residence first.
SOME OF THE ORIGINATORS ARE SUBJECT TO FEDERAL BANKING REGULATIONS
Advanta National Bank and Advanta Bank Corp., two of the originators of
the mortgage loans, have entered into agreements with their bank regulatory
agencies whereby each bank has agreed to modify its practices and procedures
relating to sub-prime lending and to take other actions. Those agreements and
related matters are described below in the section entitled "The Sponsor and the
Master Servicer-Developments Concerning Advanta Corp. and its Subsidiaries" in
this prospectus supplement. The banks have begun to modify their practices and
procedures and to implement the restrictions imposed by the agreements. Although
the banks expect that such actions on their part will be sufficient to satisfy
the requirements and restrictions imposed by the agreements, the banks' plans
are subject to further review and potential modification by the bank regulatory
agencies. In addition, the bank regulatory agencies have the authority and
discretion to take any additional actions affecting the banks, including further
administrative action, that the agencies believe is legally appropriate.
------------------------
You can find a glossary of defined terms used in this prospectus
supplement beginning on page S-47.
THE SPONSOR AND THE MASTER SERVICER
The sponsor, Advanta Conduit Receivables, Inc., is a subsidiary of
Advanta Mortgage Corp. USA, the master servicer, and is an indirect subsidiary
of Advanta Corp., a Delaware corporation. Advanta Corp. is a publicly-traded
company with its principal executive offices located in Spring House,
Pennsylvania which as of June 30, 2000 had assets in excess of $4.0 billion and
consolidated managed assets in excess of $12.4 billion. See "The Sponsor" in the
prospectus.
As of June 30, 2000, the master servicer and its subsidiaries were
servicing
- approximately 106,000 closed-end, fixed rate and adjustable
rate mortgage loans in the owned and managed servicing
portfolio, representing an aggregate outstanding principal
balance of approximately $7.2 billion, and
S-7
<PAGE> 8
- approximately 193,700 mortgage loans which are serviced for
third parties on a contract servicing basis representing an
aggregate outstanding principal balance of approximately $13.6
billion.
As of June 30, 2000, the sponsor or its affiliates have issued 42
series of closed-end mortgage asset-backed securities with an original balance
of approximately $13.3 billion, not all of which are still outstanding, and 7
series of revolving home equity asset-backed securities with an original balance
of approximately $1.3 billion, all of which are still outstanding.
The master servicer may resign or be removed, in accordance with the
terms of the pooling and servicing agreement. No removal or resignation shall
become effective until the trustee or a successor servicer has assumed the
master servicer's responsibilities and obligations in accordance with the
pooling and servicing agreement. The master servicer may not assign its
obligations under the pooling and servicing agreement, in whole or in part,
unless it has first obtained the written consent of the trustee and the
certificate insurer, which consent will not be unreasonably withheld. Any
assignee must meet the eligibility requirements for a successor servicer set
forth in the pooling and servicing agreement. See "The Agreements -- Removal and
Resignation of the Master Servicer" in the prospectus.
The master servicer may enter into sub-servicing agreements with
qualified sub-servicers with respect to the servicing of all or any portion of
the mortgage loans. Affiliates of the master servicer which are qualified to
service mortgage loans are master servicer affiliates. No sub-servicing
agreements discharge the master servicer from its servicing obligations which
will include the obligation to make advances. See "Mortgage Loan Program and
Underwriting Guidelines -- The Master Servicer May Act Through Sub-Servicers" in
the prospectus.
The master servicer has the right, but not the obligation, to purchase
from the trust any mortgage loan which is in default or for which a default is
reasonably foreseeable.
DEVELOPMENTS CONCERNING ADVANTA CORP. AND ITS SUBSIDIARIES
Advanta Corp. is the parent of the sponsor and the master servicer. The
ability of Advanta Corp.'s subsidiaries to honor their financial and other
obligations is to some extent influenced by the financial condition of Advanta
Corp. Such obligations, as they are related to the trust and the offered
certificates, primarily consist of the sponsor's obligation to repurchase
mortgage loans which are inconsistent with representations and warranties in the
pooling and servicing agreement, as well as the obligations of the master
servicer pursuant to the pooling and servicing agreement. To the extent the
sponsor's and master servicer's ability to perform such obligations is adversely
affected, the mortgage loans may experience an increased level of delinquencies
and losses.
This prospectus supplement contains forward-looking statements that are
subject to risks and uncertainties that could cause actual results to materially
differ from those projected. Additional risks that may affect Advanta Corp.'s
performance are detailed in Advanta Corp.'s filings with the Securities and
Exchange Commission, including its most recent Annual Report on Form 10-K and
its Quarterly Reports on Form 10-Q.
Regulatory Developments.
On June 2, 2000, Advanta issued a press release announcing that its
banking subsidiaries, Advanta National Bank and Advanta Bank Corp., each of
which is an originator, had reached agreements with their respective bank
regulatory agencies. The agreements primarily relate to the banks' subprime
lending operations and also outline a series of steps to modify processes, many
of which have already
S-8
<PAGE> 9
begun. The agreements also formalize and document certain practices and
procedures of Advanta relating to sub-prime lending. Advanta anticipates that
limitations and restrictions imposed by the agreements and the changes to
existing processes and procedures will decrease Advanta's mortgage loan
origination volume in the near term.
The agreements establish temporary asset growth limits at Advanta
National Bank and deposit growth limits at Advanta Bank Corp. In addition, the
agreements contain restrictions on taking brokered deposits at Advanta National
Bank and require that by September 30, 2000, Advanta National Bank maintain
capital ratios at approximately the level that existed at March 31, 2000.
The agreements also provide that Advanta change its charge-off policy
for delinquent mortgage loans to 180 days, for which it is presently reserved.
However, the master servicer's charge-off policy for mortgage loans owned by
securitization trusts will remain unchanged. In addition, the agreements provide
that Advanta will modify its accounting processes and methodology for its
allowance for loan losses and valuation of residual assets.
On July 31, 2000, Advanta Corp. issued a press release stating that one
of its banking subsidiaries, Advanta National Bank, had reached an agreement
with its bank regulatory agency regarding the carrying value of the bank's
retained interests and contractual mortgage servicing rights in mortgage
securitizations and its allowance for loan losses. The agreement provides that
the carrying value for the bank's retained interests and contractual mortgage
servicing rights will be reduced by $201 million and $13 million, respectively.
In addition, pursuant to the agreement, Advanta National Bank recorded a $22
million non-cash charge to increase its allowance for mortgage loan loss
reserves at June 30, 2000. The agreement further provides that the bank will
maintain its allowance for loan losses at a level of at least 5.38% of the
unpaid principal balance of all loans owned by the bank or reported on its
books, less any loans held for sale.
On August 2, 2000, Advanta Corp. reported a net loss for the second
quarter of $192.7 million, largely because of these non-cash charges recorded by
Advanta National Bank.
During the second half of calendar year 2000, Advanta Corp. expects pro
forma operating earnings per share to be in the range of $0.90-$1.10. This
primarily reflects the impact of the regulatory agreements on the businesses
which operate through Advanta National Bank and Advanta Bank Corp. In
particular, this reflects lower mortgage loan originations partially offset by
the results of the business card unit. Together with the pro forma operating
results of $1.28 through June 30, 2000, the pro forma operating results for the
full year are expected to be in the range of $2.18-$2.38 per diluted share, a 7%
to 17% increase from the $2.04 earned in 1999.
Strategic Developments. On May 17, 2000, Advanta Corp. issued a press
release stating that it had retained Salomon Smith Barney to assist it in
studying possible strategic alternatives for Advanta's mortgage and leasing
business units. Although there are no specific actions contemplated at this
time, these strategic alternatives could include the sale of, or strategic
alliances or partnerships in respect of, all or a portion of Advanta's mortgage
loan origination and servicing businesses. Advanta has entered into preliminary
discussions with a number of parties and has begun the due diligence process.
The transaction documents do not prohibit the sale or merger of the
master servicer into another corporate entity, although they do place
restrictions on any such sale or merger, including the requirement that any such
sale or merger not cause a downgrade in the ratings of the offered certificates.
In the event that any strategic alternative involving the master servicer is
implemented in the future, the servicing of the mortgage loans could be
affected.
S-9
<PAGE> 10
Litigation Developments. On January 22, 1999, Fleet Financial Group,
Inc. and some of its affiliates filed a complaint against Advanta Corp. and some
of its subsidiaries in Delaware Chancery Court bringing a lawsuit relating to
the transaction between Advanta Corp. and some of its affiliates and Fleet
Financial Group, Inc. and some of its affiliates which closed on February 20,
1998. Pursuant to the transaction Advanta Corp. contributed substantially all of
its consumer credit card business to a limited liability company controlled by
Fleet Financial Group, Inc. Fleet's allegations, which Advanta denies, center
around Fleet's assertions that Advanta has failed to complete certain
post-closing adjustments to the value of the assets and liabilities that Advanta
contributed to the transaction. Fleet seeks damages of approximately $141
million.
On February 16, 1999, Advanta Corp. filed an answer to the complaint
denying the material allegations of the complaint. Advanta Corp. also filed
counterclaims against Fleet Financial Group, Inc. and some of its affiliates
seeking damages of approximately $101 million from Fleet. Formal discovery has
begun and is ongoing. Although the outcome of this litigation cannot be
determined, Advanta Corp. does not expect this litigation to have a material
adverse effect on the financial position or future operating results of Advanta
Corp. or Advanta Mortgage Corp. USA.
PENDING CONSUMER MORTGAGE LENDING PROPOSALS
Various legislative proposals and initiatives relating to the banking
and finance business have been or are expected to be introduced in the federal
and state legislatures. A number of these proposals may impact the sponsor's,
the originators' and the master servicer's origination and servicing procedures.
PENDING LEGISLATIVE PROPOSALS
Federal Proposals. Recently, an FDIC discussion draft proposal has been
made public relating to capital requirements of subprime lenders. Under the
proposal, regulatory capital required to be held for certain mortgage or other
loans that are considered subprime would be increased. At this time the sponsor,
the originators and the master servicer have not quantified the amount of their
respective mortgage loans that could be categorized as "subprime" under the
FDIC's proposal. If a substantial portion of these mortgage loans were to meet
the FDIC's proposed definition of "subprime" and the draft proposal were to be
adopted, the increased regulatory capital requirements could have negative
impact on the financial results of the originators or the master servicer.
Legislation has also been introduced in both houses of Congress to
extend the scope of HOEPA, the Home Ownership and Equity Protection Act. HOEPA
loans, or Section 32 loans, are subject to special disclosure requirements under
Section 129 of the federal Truth in Lending Act. Some of these bills would
prohibit the collection of certain fees, the financing of points or fees, the
inclusion of prepayment penalties, the making of balloon loans and the financing
of single premium credit insurance, and would add additional penalties for
mortgage loans that violate HOEPA. None of the current proposals are retroactive
in nature. In addition, state and federal credit protection laws describe
sanctions and damages that may be imposed for violations of various mortgage
lending laws. These sanctions and damages may be imposed on the owner of a HOEPA
mortgage loan, such as the trust, which may limit the collection of principal
and interest on the HOEPA mortgage loans.
The Secretary of Housing and Urban Development has established a
commission to study subprime lending practices and to recommend legislation. The
commission is made up of consumer advocates and representatives of relevant
government agencies and industry. The commission's recommendation is expected
before the end of the year.
S-10
<PAGE> 11
Other federal legislative proposals and initiatives that could impact
the sponsor's, the originators' and the master servicer's business include
financial privacy initiatives that would restrict the permissible use of
customer-specific financial and other credit information and statutory changes
to the Real Estate Settlement Procedures Act.
State Proposals. North Carolina has enacted legislation along the same
lines as HOEPA. Fifteen other states and the City of Chicago have, or are
considering, legislative or regulatory initiatives that are similar to the
Federal proposals. Also being considered are statutory requirements that all
HOEPA borrowers receive government approved counseling before taking out a loan.
These proposals are strongly opposed by the mortgage lending industry and are
likely to be substantially revised before passage.
The form in which any of the foregoing federal or state proposals will
be adopted, if at all, cannot be predicted. Accordingly, the originators and the
master servicer have no way to determine what, if any, impact they will have on
their origination and servicing procedures in the future.
As of the statistical calculation date, less than 8.50% of the mortgage
loans were subject to HOEPA or comparable state law. The originators have
procedures in place to ensure compliance with the requirements of HOEPA or
comparable state law for relevant mortgage loans, and the originators believe
that the mortgage loans were originated in compliance with such procedures and
requirements.
DELINQUENCY AND LOSS INFORMATION
The following tables contain information relating to the delinquency,
loan loss and foreclosure experience of the master servicer for its servicing
portfolio. The servicing portfolio consists of fixed-and adjustable-rate
mortgage loans serviced as of June 30, 2000 and for each of the five prior year
ends. This servicing portfolio, called the owned and managed servicing
portfolio, includes, but is not limited to, the mortgage loans originated or
purchased on or prior to June 30, 2000. In addition to this portfolio, the
master servicer serviced, as of June 30, 2000, approximately 193,700 mortgage
loans with an aggregate principal balance as of such date of approximately $13.6
billion; these loans were not originated or purchased by the sponsor or its
affiliated originators but are being serviced for third parties on a contract
servicing basis. No loans being serviced for third parties are included in the
tables below.
Neither the sponsor nor the master servicer have reason to believe that
the delinquency and loss experience of the mortgage loans will differ in any
material respect from that of the master servicer's portfolio of owned and
managed mortgage loans, although there can be no assurance that this will be the
case.
S-11
<PAGE> 12
DELINQUENCY AND FORECLOSURE EXPERIENCE OF THE
MASTER SERVICER'S OWNED AND MANAGED SERVICING PORTFOLIO
OF MORTGAGE LOANS
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31
------------------------------------------------------------------------
SIX MONTHS ENDING
JUNE 30, 2000 1999 1998 1997
------------- ---- ---- ----
(DOLLARS IN THOUSANDS)
-------------------------------------------------------------------------------------------------
NUMBER NUMBER NUMBER NUMBER
OF DOLLAR OF DOLLAR OF DOLLAR OF DOLLAR
LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT
----- ------ ----- ------ ----- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Portfolio 106,025 $7,220,017 109,091 $7,458,805 111,707 $7,664,919 74,525 $4,888,936
Delinquency
30-59 days 2.95% 2.81% 3.01% 2.79% 3.05% 2.76% 3.13% 2.99%
60-89 days 0.93% 0.87% 0.92% 0.85% 1.10% 1.08% 0.98% 0.98%
90 days or
more 2.21% 2.06% 2.15% 1.97% 1.45% 1.22% 1.39% 1.28%
------ --------- ------ -------- ------ --------- ------ ----------
Total 6.09% 5.74% 6.08% 5.61% 5.60% 5.06% 5.50% 5.25%
Foreclosure
rate 3.73% 3.17% 3.76% 3.57% 2.85% 2.98% 2.10% 2.32%
REO properties 1.24% -- 1.30% -- 0.78% -- 0.40% --
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31
---------------------------------------------
1996 1995
---- ----
(DOLLARS IN THOUSANDS)
---------------------------------------------
NUMBER NUMBER
OF DOLLAR OF DOLLAR
LOANS AMOUNT LOANS AMOUNT
----- ------ ----- ------
<S> <C> <C> <C> <C>
Portfolio 43,303 $2,595,981 32,592 $1,797,582
Delinquency
30-59 days 3.07% 2.90% 2.67% 2.44%
60-89 days 0.85% 0.90% 0.72% 0.71%
90 days or
more 1.45% 1.26% 1.69% 1.23%
------ ---------- ------ ----------
Total 5.37% 5.06% 5.08% 4.38%
Foreclosure
rate 1.62% 1.92% 1.29% 1.53%
REO properties 0.42% -- 0.52% --
</TABLE>
The period of delinquency is based on the number of days payments are
contractually past due. The delinquency statistics for the period exclude loans
in foreclosure. The 90 days or more delinquencies reflect the adoption of a new
charge-off policy which began in the second quarter of 2000. Under the new
policy, mortgage loans are generally charged off at the earlier of foreclosure
or 180 days delinquent. Under the previous policy, charge-off was at the earlier
of foreclosure or 12 months delinquent. If calculated under our prior
methodology, the information for June 30, 2000 would have indicated that 3.53%
of mortgage loans and 2.45% of the dollar amount were delinquent for 90 days or
more.
The foreclosure rate reflects the number of mortgage loans in
foreclosure as a percentage of the total number of mortgage loans or the dollar
amount of mortgage loans in foreclosure as a percentage of the total dollar
amount of mortgage loans, as the case may be, as of the date indicated. REO
properties are real estate owned properties which relate to foreclosed mortgages
or properties for which deeds in lieu of foreclosure have been accepted, and
held by the master servicer pending disposition. The percentages for REO
properties are calculated based on the number of loans, not the dollar amount.
LOAN LOSS EXPERIENCE
OF THE MASTER SERVICER'S OWNED AND MANAGED SERVICING
PORTFOLIO OF MORTGAGE LOANS
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31
------------------------------------------------------------------------------
SIX MONTHS ENDING
JUNE 30, 2000 1999 1998 1997 1996 1995
------------- ---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Average amount
outstanding $7,358,692 $7,641,960 $6,223,870 $3,677,342 $2,102,643 $1,540,238
Net losses $ 67,567 $ 60,350 $ 35,640 $ 18,435 $ 15,067 $ 13,830
Net losses as a
percentage of
average amount
outstanding 1.83% 0.79% 0.57% 0.50% 0.72% 0.90%
</TABLE>
The average amount outstanding during the period is the arithmetic
average of the principal balances of the mortgage loans outstanding on the last
business day of each month during the period. Net losses are amounts relating to
mortgage loans which have been determined by the master servicer to be
uncollectible, less amounts received by the master servicer as recoveries from
liquidation proceeds and deficiency judgements.
Net losses as a percentage of average amount outstanding reflects the
adoption of a new charge-off policy which began in the second quarter of 2000.
Under the new policy, mortgage loans are generally charged off at the earlier of
foreclosure or 180 days delinquent. Under the previous policy, charge-off was at
the earlier of foreclosure or 12 months delinquent. If calculated under our
prior
S-12
<PAGE> 13
methodology, the information for June 30, 2000 would have indicated that net
losses as a percentage of average amounts outstanding was 1.08%. The net loss
percentage is an annualized number.
The information above should not be considered as a basis for assessing
the likelihood, amount or severity of delinquencies, foreclosures or losses on
the mortgage loans. No assurances can be given that the delinquency, foreclosure
and loss experience presented in the tables above will be indicative of such
experience on the mortgage loans. The statistics shown above represent the
respective delinquency and foreclosure experiences only at the dates presented.
The aggregate delinquency, foreclosure and loss experience on the mortgage loans
will depend on the results obtained over the life of the trust. It should be
noted that if the residential real estate market should experience an overall
decline in property values, the actual rates of delinquencies, foreclosures and
losses could be higher than those previously experienced by the master servicer.
In addition, adverse economic conditions may effect the timely payment by
borrowers of scheduled payments of principal and interest on the mortgage loans
and, accordingly, the actual rates of delinquencies and foreclosures with
respect to the mortgage loans. The likelihood that borrowers will become
delinquent, the rate of foreclosures and the severity of any losses also may be
affected by a number of factors related to each borrower's personal
circumstances, including, but not limited to, unemployment or change in
employment and marital separation.
The changes in the delinquency and loss levels reported in the tables
above are the result of changes in the mix of origination sources offset by
changes in the seasoning of the owned and managed servicing portfolio. It is
expected that the owned and managed servicing portfolio will continue to season
due to slower expected rates of new originations. As a result, the master
servicer expects reported delinquency levels and loss levels to increase.
The master servicer reports borrower credit information to three credit
repositories routinely and in a timely manner.
USE OF PROCEEDS
Certificate net proceeds will be used by the sponsor to acquire the
mortgage loans from the originators or from temporary financing facilities. One
or more of the underwriters, or their respective affiliates, may have provided
temporary financing facilities to the sponsor or one or more of its affiliates
and may receive a portion of the proceeds as a repayment of the temporary
financing facilities.
THE MORTGAGE LOANS
The mortgage loans will be used predominantly to refinance an existing
mortgage loan on more favorable terms, to consolidate debt, or to obtain cash
proceeds by borrowing against the borrower's equity in the mortgaged property.
Each of the mortgage loans has a fixed coupon rate secured by either a
first or junior lien on the mortgaged property. The class A certificates
represent undivided ownership interests in all mortgage loans contained in the
mortgage loan pool.
The combined loan-to-value ratios and loan-to-value ratios described in
this prospectus supplement were calculated based upon the appraised values of
the mortgaged properties at the time of origination. Although, for purchase
money loans, the combined loan-to-value ratios and loan-to-value ratios may have
been calculated using the lower of the purchase price or appraised values of the
mortgaged properties at the time of origination. The appraised values may have
declined since the date of origination.
S-13
<PAGE> 14
Owner occupied properties include vacation homes and second homes.
The junior lien ratio of a mortgage loan which is in a junior lien
position is equal to the ratio of the original principal balance of the mortgage
loan to the sum of (1) the original principal balance of the junior lien
mortgage loan and (2) the outstanding principal balance of any lien on the
mortgaged property having priorities senior to that of the lien which secures
the junior lien mortgage loan at the time of origination of the junior lien
mortgage loan.
Difference Between the Statistical Calculation Date and the Closing
Date.
The statistical information presented in this prospectus supplement is
computed based on the pool of mortgage loans that existed on the opening of
business on August 1, 2000, the statistical calculation date. Prior to the
closing date, some mortgage loans may prepay in full or may be determined not to
meet the eligibility requirements for the final pool and as a result may not be
included in the final pool. Consequently, the statistical distribution of
characteristics as of the closing date will vary somewhat from the statistical
distribution of the characteristics computed as of the statistical calculation
date as presented in this prospectus supplement, although this variance will not
be greater than five percent. All percentages are calculated based on the
aggregate outstanding principal balance of all mortgage loans in the trust, as
of the statistical calculation date.
As of the statistical calculation date, the mortgage loans had an
aggregate outstanding principal balance of $656,291,736.97.
As of the statistical calculation date, the mortgage loans have
remaining terms to maturity of not greater than 30 years and no more than 1.43%
of the mortgage loans are 30-59 days delinquent. Interest on 4.33% of the
mortgage loans is calculated as simple interest or date of payment, and on
95.67% of the mortgage loans, interest is calculated as actuarial or
pre-computed.
As of the statistical calculation date, 94.35% of the mortgage loans
have prepayment penalty charges, although all of the prepayment penalty charges
for the mortgage loans expire within five years after the closing date. As of
the statistical calculation date, 64.49% of the mortgage loans have a five-year
prepayment penalty period; 0.30% of the mortgage loans have a four-year
prepayment penalty period; 16.87% of the mortgage loans have a three-year
prepayment penalty period; 1.82% of the mortgage loans have a two-year
prepayment penalty period; 2.98% of the mortgage loans have a one-year
prepayment penalty period, 7.89% of the mortgage loans have other types of
prepayment penalties; and 5.65% of the mortgage loans have no prepayment
penalties. The prepayment penalty charges are generally an amount equal to
either twelve-months' interest, six-months' interest or some specified
percentage of the prepayment amount.
As of the statistical calculation date the weighted average FICO score
of the mortgage loans, excluding mortgage loans with FICO scores of zero, was
604.
The following tables describe the mortgage loans as of the statistical
calculation date.
S-14
<PAGE> 15
GEOGRAPHIC DISTRIBUTION
(TOP TEN STATES)
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE % OF AGGREGATE
STATE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----- -------------- ----------------- -----------------
<S> <C> <C> <C>
California ...................... 585 $74,512,060.06 11.35%
Illinois ........................ 771 69,196,943.30 10.54
Ohio ............................ 658 45,708,313.18 6.96
Pennsylvania .................... 750 45,623,909.34 6.95
Florida ......................... 558 42,998,566.87 6.55
Maryland ........................ 392 36,931,901.21 5.63
Michigan ........................ 507 35,756,646.52 5.45
New York ........................ 374 29,602,724.07 4.51
New Jersey ...................... 264 28,785,144.58 4.39
Washington ...................... 212 24,522,722.18 3.74
Other ........................... 2,824 222,652,805.66 33.93
----- --------------- ------
TOTAL ....................... 7,895 $656,291,736.97 100.00%
===== =============== ======
</TABLE>
The mortgaged properties are located in a total of 49 states and the
District of Columbia.
DISTRIBUTION OF CLTVS
<TABLE>
<CAPTION>
RANGE OF NUMBER OF AGGREGATE % OF AGGREGATE
CLTV RATIOS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------- -------------- ----------------- -----------------
<S> <C> <C> <C>
0.01 - 60.00% ............ 732 $38,197,459.87 5.82%
60.01 - 70.00 ............. 706 47,144,577.66 7.18
70.01 - 75.00 ............. 823 65,657,029.98 10.00
75.01 - 80.00 ............. 1,668 147,799,541.89 22.52
80.01 - 85.00 ............. 1,994 169,466,440.40 25.82
85.01 - 90.00 ............. 1,841 176,677,433.61 26.93
90.01 - 95.00 ............. 10 837,449.66 0.13
95.01 - 100.00 ............. 121 10,511,803.90 1.60
----- --------------- ------
TOTAL ....................... 7,895 $656,291,736.97 100.00%
===== =============== ======
</TABLE>
<TABLE>
<S> <C>
Minimum CLTV: 7.41%
Maximum CLTV: 100.00%
Weighted Average CLTV: 80.62%
</TABLE>
DISTRIBUTION OF REMAINING TERM TO MATURITY
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE % OF AGGREGATE
MONTHS REMAINING MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
---------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
1 - 60 ................... 8 $137,617.68 0.02%
61 - 120 ................... 106 3,696,665.76 0.56
121 - 180 ................... 5,214 444,194,543.97 67.69
181 - 240 ................... 320 22,461,641.95 3.42
241 - 300 ................... 26 2,164,381.39 0.33
301 - 360 ................... 2,221 183,636,886.22 27.98
----- --------------- ------
TOTAL .......................... 7,895 $656,291,736.97 100.00%
===== =============== ======
</TABLE>
<TABLE>
<S> <C>
Minimum Remaining Term: 30 Months
Maximum Remaining Term: 360 Months
Weighted Average Remaining Term: 225 Months
</TABLE>
S-15
<PAGE> 16
DISTRIBUTION OF PRINCIPAL BALANCES
<TABLE>
<CAPTION>
RANGE OF NUMBER OF AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------------ -------------- ----------------- -----------------
<S> <C> <C> <C>
$ 1,000 - $ 25,000 436 $8,725,815.60 1.33%
25,001 - 50,000 1,924 73,538,358.13 11.21
50,001 - 75,000 2,037 126,323,601.80 19.25
75,001 - 100,000 1,262 108,941,835.76 16.60
100,001 - 150,000 1,406 170,464,631.72 25.96
150,001 - 200,000 525 89,866,213.70 13.69
200,001 - 250,000 183 40,815,455.20 6.22
250,001 - 300,000 72 19,860,523.59 3.03
300,001 - 350,000 27 8,606,885.97 1.31
350,001 - 400,000 15 5,625,036.62 0.86
400,001 - 450,000 7 3,030,035.36 0.46
450,001 - 500,000 1 493,343.52 0.08
----- --------------- ------
TOTAL 7,895 $656,291,736.97 100.00%
===== =============== ======
</TABLE>
<TABLE>
<S> <C>
Minimum Principal Balance: $ 9,010.35
Maximum Principal Balance: $ 493,343.52
Average Principal Balance: $ 83,127.52
</TABLE>
DISTRIBUTION OF CURRENT MORTGAGE COUPON RATES
<TABLE>
<CAPTION>
RANGE OF NUMBER OF AGGREGATE % OF AGGREGATE
MORTGAGE COUPON RATES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
--------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
5.001 - 6.000% 1 $98,279.24 0.01%
6.001 - 7.000 44 4,406,126.88 0.67
7.001 - 8.000 207 20,689,242.67 3.15
8.001 - 9.000 846 90,922,995.80 13.85
9.001 - 10.000 1,787 166,869,247.21 25.44
10.001 - 11.000 1,895 156,899,383.21 23.91
11.001 - 12.000 1,489 113,160,248.05 17.24
12.001 - 13.000 983 69,164,912.62 10.54
13.001 - 14.000 402 24,684,420.86 3.76
14.001 - 15.000 163 6,917,061.51 1.05
15.001 - 16.000 50 1,769,361.72 0.27
16.001 - 17.000 20 557,232.36 0.08
17.001 - 18.000 5 98,841.67 0.02
18.001 - 19.000 2 34,424.65 0.01
19.001 - 20.000 1 19,958.52 0.00
----- --------------- ------
TOTAL 7,895 $656,291,736.97 100.00%
===== =============== ======
</TABLE>
<TABLE>
<S> <C>
Minimum Current Mortgage Coupon Rate: 5.03%
Maximum Current Mortgage Coupon Rate: 19.20%
Weighted Average Current Mortgage Coupon Rate: 10.49%
</TABLE>
S-16
<PAGE> 17
LIEN POSITION
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE % OF AGGREGATE
LIEN POSITION MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
First Lien 7,456 $ 638,703,157.17 97.32%
Second Lien 439 17,588,579.80 2.68
----- ----------------- ------
TOTAL 7,895 $ 656,291,736.97 100.00%
===== ================= ======
</TABLE>
AMORTIZATION TYPE
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE % OF AGGREGATE
AMORTIZATION TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
Balloon 4,346 $ 401,520,115.32 61.18%
Fully Amortizing 3,549 254,771,621.65 38.82
----- ----------------- ------
TOTAL 7,895 $ 656,291,736.97 100.00%
===== ================= ======
</TABLE>
DISTRIBUTION OF JUNIOR LIEN RATIOS
<TABLE>
<CAPTION>
RANGE OF NUMBER OF AGGREGATE % OF AGGREGATE
JUNIOR LIEN RATIOS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------------ -------------- ----------------- -----------------
<S> <C> <C> <C>
0.01 - 10.00% 8 $ 146,775.77 0.83%
10.01 - 20.00 97 3,007,094.45 17.10
20.01 - 30.00 170 6,511,398.73 37.02
30.01 - 40.00 97 4,449,302.39 25.30
40.01 - 50.00 32 1,687,551.68 9.59
50.01 - 60.00 17 850,563.58 4.84
60.01 - 70.00 10 529,649.68 3.01
70.01 - 80.00 6 302,867.60 1.72
80.01 - 90.00 1 74,967.40 0.43
90.01 - 100.00 1 28,408.52 0.16
----- ----------------- ------
TOTAL 439 $ 17,588,579.80 100.00%
=== ================= ======
</TABLE>
<TABLE>
<S> <C>
Minimum Junior Lien Ratio: 5.88%
Maximum Junior Lien Ratio: 90.41%
Weighted Average Junior Lien Ratio: 31.03%
</TABLE>
DISTRIBUTION OF PROPERTY TYPES
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE % OF AGGREGATE
PROPERTY TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
SF Detached/DeMinimus PUD 6,523 $ 561,728,026.69 85.59%
SF Row House/Townhouse/Condo 664 39,130,313.80 5.96
Two to Four Family Home 437 38,253,969.51 5.83
Prefabricated Single Family 271 17,179,426.97 2.62
----- ----------------- ------
TOTAL 7,895 $ 656,291,736.97 100.00%
===== ================= ======
</TABLE>
S-17
<PAGE> 18
DISTRIBUTION OF OCCUPANCY STATUS
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE % OF AGGREGATE
OCCUPANCY STATUS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
---------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
Owner Occupied 7,632 $ 640,866,736.81 97.65%
Non-Owner Occupied 263 15,425,000.16 2.35
----- ----------------- ------
TOTAL 7,895 $ 656,291,736.97 100.00%
===== ================= ======
</TABLE>
DISTRIBUTION OF SEASONING
<TABLE>
<CAPTION>
MONTHS ELAPSED NUMBER OF AGGREGATE % OF AGGREGATE
SINCE ORIGINATION MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
0 - 6 4,052 $ 342,075,948.17 52.13%
7 - 12 2,681 220,341,947.80 33.57
13 - 24 735 64,600,026.60 9.84
25 - 142 427 29,273,814.40 4.46
----- ----------------- ------
TOTAL 7,895 $ 656,291,736.97 100.00%
===== ================= ======
</TABLE>
<TABLE>
<S> <C>
Minimum Seasoning: 0 Months
Maximum Seasoning: 136 Months
Weighted Average Seasoning: 8 Months
</TABLE>
DISTRIBUTION OF PREPAYMENT PENALTIES
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE % OF AGGREGATE
TYPES OF PREPAYMENT PENALTIES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
5 Year Period
12 Months Interest 3,615 $ 306,712,024.75 46.74%
6 Months Interest 1,189 96,078,973.30 14.64
Other 281 20,422,698.06 3.11
4 Year Period
6 Months Interest 9 1,212,025.44 0.18
Other 7 783,128.15 0.12
3 Year Period
12 Months Interest 609 62,421,065.66 9.51
6 Months Interest 323 26,036,535.25 3.97
Other 324 22,264,389.09 3.39
2 Year Period
6 Months Interest 101 10,190,369.49 1.55
Other 20 1,740,777.84 0.27
1 Year Period
6 Months Interest 156 14,885,614.79 2.27
Other 51 4,666,066.15 0.71
Other 652 51,808,569.70 7.89
No Prepayment Penalty 558 37,069,520.30 5.65
----- ----------------- ------
TOTAL 7,895 $ 656,291,736.97 100.00%
===== ================= ======
</TABLE>
S-18
<PAGE> 19
DESCRIPTION OF THE CERTIFICATES
The class A certificates will be issued by the trust under a pooling
and servicing agreement, among the sponsor, the master servicer and the trustee.
The trust will also issue one or more classes of subordinate certificates which
are not being offered by this prospectus supplement. The subordinate
certificates will be retained initially by the sponsor or its affiliates.
Distributions on the class A certificates are required to be made on
each payment date. Payment dates are the 25th day of each calendar month, or if
the 25th day is not a business day, the next succeeding business day. The first
payment date will be September 25, 2000. Payments will be made to the owners of
record. The owners of record of the class A-1 certificates are the owners as of
the business day immediately preceding the payment date, unless the class A-1
certificates are issued in definitive form, in which case the owners of record
shall be the owners as of the last business day of the prior calendar month. The
owners of record of the class A-2, A-3, A-4, A-5 and A-6 certificates are the
owners as of the last day of the prior calendar month.
Distributions will be made in amounts equal to the product of (a) the
owner's percentage interest in the class and (b) the amount distributed to that
class of class A certificate on that payment date.
Persons in whose name a class A certificate is registered in the
register maintained by the trustee are the owners of the class A certificates.
For so long as the class A certificates are in book-entry form with DTC, the
only owner under the pooling and servicing agreement will be Cede. No person
acquiring a beneficial interest in a class A certificate will be entitled to
receive a definitive certificate representing that person's interest in the
trust, except in the event that physical certificates are issued because DTC
becomes unable or unwilling to act as depository and no suitable replacement can
be found. All references to the owners of class A certificates mean and include
the rights of the beneficial owners. See "Description of the Securities -- Form
of Securities" in the prospectus.
Each class A certificate will evidence the right to receive on each
payment date, payments of interest and specified amounts of principal, in each
case until the principal balance of the class has been reduced to zero. The
owners of the subordinate certificates will be entitled to receive distributions
of residual cashflow not required to be applied to other purposes.
PASS-THROUGH RATES
The pass-through rates applicable to the class A certificates for any
payment date are as follows:
CLASS A-1 PASS-THROUGH RATE: The lesser of
(1) LIBOR plus 0.14% per annum, this
rate being the Class A-1 Formula
Pass-Through Rate, and
(2) the Available Funds Cap Rate for
that payment date.
CLASS A-2 PASS-THROUGH RATE: 7.61% per annum.
CLASS A-3 PASS-THROUGH RATE: 7.76% per annum.
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<PAGE> 20
CLASS A-4 PASS-THROUGH RATE: The lesser of
(1) for any payment date which occurs on
or prior to the Step-Up Payment Date,
7.93% per annum, and for any payment
date thereafter 8.68%, and
(2) the Available Funds Cap Rate for that
payment date.
CLASS A-5 PASS-THROUGH RATE: The lesser of
(1) for any payment date which occurs on
or prior to the Step-Up Payment Date,
8.25% per annum, and for any payment
date thereafter 9.00%, and
(2) the Available Funds Cap Rate for that
payment date.
CLASS A-6 PASS-THROUGH RATE: The lesser of
(1) for any payment date which occurs on
or prior to the Step-Up Payment Date,
7.72% per annum, and for any payment
date thereafter 8.47%, and
(2) the Available Funds Cap Rate for that
payment date.
The owners of class A-1 certificates may be entitled to Supplemental
Interest Amounts. The Supplemental Interest Amount for the class A-1
certificates is the excess of
(1) the interest due on the class A-1 certificates on any
payment date calculated at the Class A-1 Formula
Pass-Through Rate, over
(2) the interest due on the class A-1 certificates calculated
at the Available Funds Cap Rate.
If a Supplemental Interest Amount is due, the owner of one of the
subordinate certificates will agree to pay this amount from the sources of funds
specified in the pooling and servicing agreement, including amounts which would
otherwise be distributed to that owner on that payment date. If the full amount
of any Supplemental Interest Amount is not paid on any payment date, then the
unpaid amount will accrue interest at the Class A-1 Formula Pass-Through Rate,
until it is paid.
None of the certificate insurer, the sponsor or the master servicer
guarantee the payment of, nor do the ratings assigned to the class A-1
certificates address the likelihood of the payment of, any Supplemental Interest
Amount.
The Available Funds Cap Rate for any payment date is an amount,
expressed as a per annum rate and calculated (x) for the class A-1 certificates
on the basis of a 360-day year and the actual number of days elapsed in the
related Interest Accrual Period, and (y) for the class A-4, A-5 and A-6
certificates, on the basis of a 360-day year consisting of 12 months of 30 days
each, equal to
(1) the aggregate amount of interest accrued and
collected or advanced on all of the mortgage loans during the prior
calendar month -- net of any shortfalls arising due to the application
of the Soldiers' and Sailors' Civil Relief Act -- minus the aggregate
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<PAGE> 21
amount of the servicing fee, the trustee's fee and the premiums due to
the certificate insurer on that payment date, divided by
(2) the aggregate principal balance of the mortgage loans
as of the opening of business on the first day of the prior calendar
month.
The Step-Up Payment Date is the payment date immediately following the
calendar month in which the clean-up call is first permitted to occur.
DISTRIBUTIONS OF INTEREST
The interest due on the class A-1 certificates will be the interest
which has accrued at the pass-through rate for class A-1 from the preceding
payment date, or from the closing date in the case of the first payment date, to
and including the day prior to the current payment date. For each payment date,
the interest due on the class A-2, A-3, A-4, A-5 and A-6 certificates will be
the interest which has accrued at the pass-through rates for those classes
during the immediately preceding calendar month.
All calculations of interest on the class A-1 certificates will be made
on the basis of the actual number of days elapsed in the period from the prior
payment date to and including the day prior to the applicable payment date,
divided by 360. All calculations of interest on the class A-2, A-3, A-4, A-5 and
A-6 certificates will be made on the basis of a 360-day year consisting of 12
months of 30 days each.
DISTRIBUTIONS OF PRINCIPAL
The owners of the class A certificates will be entitled to receive
monthly distributions of principal on each payment date which reflect
collections of principal during the prior month on the mortgage loans.
The overcollateralization provisions of the trust result in a limited
acceleration of principal payments to the owners of the class A certificates.
These overcollateralization provisions are more fully described under "Credit
Enhancement -- Overcollateralization."
On each payment date, the owners of the class A certificates will
receive the Principal Distribution Amount, applied as set forth below under "--
Flow of Funds".
FLOW OF FUNDS
On each payment date, the Available Funds will be applied in the
following order of priority:
- to the payment of the Interest Distribution Amount, applied pro
rata among all classes of class A certificates;
- to the payment of the Base Principal Distribution Amount, applied
sequentially as described below;
- to the payment of the Overcollateralization Deficit, if any,
applied sequentially as described below;
- to reimburse the certificate insurer for amounts owed to it;
- to the payment of the Overcollateralization Increase Amount,
applied sequentially as described below;
S-21
<PAGE> 22
- to reimburse the servicer or the trustee for any advances and
expenses not previously reimbursed;
- to the payment of any Supplemental Interest Amounts owing on the
class A-1 certificates; and
- to the owner of the subordinate certificates, or otherwise as
provided in the pooling and servicing agreement.
The Principal Distribution Amount is required to be distributed on each
payment date in the following order of priority:
- first, to the class A-6 certificates, in an amount equal to the
lesser of (a) the Class A-6 Principal Distribution Amount for that
payment date and (b) the outstanding principal balance of the
class A-6 certificates on that payment date;
- second, to the class A-1 through the class A-5 certificates,
sequentially, in the amounts necessary to reduce their respective
principal balances to zero; and
- third, to the class A-6 certificates, without regard to the class
A-6 Principal Distribution Amount, any remaining amount of the
Principal Distribution Amount for that payment date, until the
class A-6 certificate principal balance has been reduced to zero.
However, if on any payment date a certificate insurer default has
occurred and an Overcollateralization Deficit exists, the Principal Distribution
Amount will be distributed proportionally, and not sequentially, to the owners
of the class A certificates.
The amount of each distribution guaranteed by the certificate insurer
under the policy is, for any payment date prior to August 25, 2030, the sum of
the Interest Distribution Amount and any Overcollateralization Deficit. On the
payment date occurring in August, 2030, the certificate insurer will also
guarantee the payment of the outstanding principal balance of each class of
class A certificates.
The certificate insurance policy does not require that the certificate
insurer fund realized losses until the time that the aggregate, cumulative
realized losses have created an Overcollateralization Deficit. The certificate
insurance policy does not cover the master servicer's failure to make
delinquency advances until the time that the aggregate, cumulative amount of the
unpaid delinquency advances, when added to realized losses, have created an
Overcollateralization Deficit.
OPTIONAL REDEMPTION
Clean-Up Call. The master servicer, and any of the master servicer
affiliates, will have the right to exercise a clean-up call, which would enable
them to purchase all the mortgage loans from the trust on any payment date after
the outstanding aggregate principal balance of the mortgage loans in the trust
has declined to 10% or less of the aggregate initial principal balance of the
class A certificates. The certificate insurer must consent to the clean-up call
if it would result in a draw on the certificate insurance policy. The clean-up
call will result in the redemption of the class A certificates at a price equal
to the outstanding principal amount of the class A certificates, plus accrued
interest.
Upon Loss of REMIC Status. If the trust loses its status as a REMIC, it
would then be in danger of becoming a taxable entity. This offering does not
contemplate that the trust would have to pay income taxes, and the trust, if it
were to become subject to income tax, might not have enough revenues to pay the
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<PAGE> 23
taxes and to make required payments on the class A certificates. Consequently,
if the trust loses its REMIC status, the master servicer, any of the master
servicer affiliates and the certificate insurer will each have an option to
redeem the class A certificates at a price equal to the outstanding principal
amount of the class A certificates, plus accrued interest.
CALCULATION OF LIBOR
On each interest determination date, which is the second business day
preceding each payment date or, in the case of the first payment date, the
second business day preceding the closing date, the trustee will determine the
London interbank offered rate for one-month U.S. dollar deposits, or LIBOR, for
the next accrual period for the class A-1 certificates. As used in this section,
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 which are engaged in transactions in Eurodollar deposits in the
international Eurocurrency market (1) with an established place of business in
London, (2) which have been designated by the trustee after consultation with
the master servicer and (3) which are not controlling, controlled by, or under
common control with the sponsor.
On each interest determination date, the trustee will determine LIBOR
for the next accrual period for the class A-1 certificates as follows:
first, on the basis of the offered rate for one-month United
States dollar deposits, as this rate appears on Telerate Page 3750, as
of 11:00 a.m., London time;
second, if the rate does not appear on Telerate Page 3750 as
of 11:00 a.m. London time, LIBOR will be the arithmetic mean of the
offered quotations of two or more reference banks, rounded to the
nearest whole multiple of 1/16%; and
third, if fewer than two reference banks provide offered
quotations, LIBOR will be the higher of:
- LIBOR as determined on the previous interest
determination date and
- the reserve interest rate.
The reserve interest rate is the rate per annum that the trustee
determines to be either the arithmetic mean, rounded to the nearest whole
multiple of 1/16%, of the one-month U.S. dollar lending rates which New York
City banks, selected by the trustee, are quoting on the interest determination
date to the principal London offices of leading banks in the London interbank
market or, in the event that the trustee cannot determine the arithmetic mean,
the lowest one-month U.S. dollar lending rate which New York City banks,
selected by the trustee, are quoting on the interest determination date to
leading European banks.
The establishment of LIBOR on each interest determination date by the
trustee and the trustee's calculation of the rate of interest applicable to the
class A-1 certificates for the accrual period will, in the absence of manifest
error, be final and binding. Each rate of interest may be obtained by
telephoning the trustee at 1-800-735-7777.
CREDIT ENHANCEMENT
The credit enhancement for the class A certificates is a combination of
the credit enhancement provided by the overcollateralization provisions of the
trust, the subordination of the subordinate certificates and the external credit
enhancement provided by the certificate insurance policy.
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<PAGE> 24
Overcollateralization. The excess of (a) the mortgage loans' aggregate
principal balance over (b) the class A certificates' aggregate outstanding
principal balance is the overcollateralization which is available to absorb
losses on the mortgage loans. The amount of overcollateralization must be
maintained at specified required levels, which are permitted to reduce or step
down over time.
Each class of class A certificates are secured by the pool of mortgage
loans. The mortgage loans have coupon rates which on average are higher than the
sum of the pass-through rates on the class A certificates and the fees payable
by the trust to the master servicer, the trustee and the certificate insurer. In
the absence of losses and delinquencies on the mortgage loans, the trust will
have excess cashflow which will be available to provide credit enhancement. In
addition, until such time as the overcollateralization amount initially reaches
its required levels, available funds will include all prepayment penalties
received on the mortgage loans. Using mortgage loan coupon payments and
prepayment penalties received by the trust to pay class A certificate principal
has the effect of amortizing the class A certificates more quickly, and to a
greater degree, than the mortgage loans amortize. However, after the
overcollateralization amount has initially reached its required levels, the
master servicer will be entitled to retain all prepayment penalties as part of
its servicing compensation.
The trust will use the excess cashflow, which will not include
prepayment penalties, described above to make payments of principal on the class
A certificates for the purpose of maintaining the overcollateralization at its
required amount. This feature thus builds up overcollateralization, or
replenishes overcollateralization which would otherwise be reduced as a result
of losses on the mortgage loans.
Subordination. Distributions on the subordinate certificates are
comprised of the excess cashflow remaining after payments in respect of the
class A certificates and the application of the overcollateralization provisions
of the trust. Therefore, in the event of losses or delinquencies on the mortgage
loans, distributions on the subordinate certificates will be reduced to zero
prior to any shortfall being applied to the class A certificates.
The Certificate Insurance Policy. If losses on the mortgage loan pool
are so severe as to result in an Overcollateralization Deficit, then the trustee
will make a claim on the certificate insurance policy for an amount equal to the
Overcollateralization Deficit. The amount claimed will then be passed-through as
a principal distribution to the class A certificates, reducing their aggregate
outstanding principal balance and re-establishing parity with the principal
balance of the mortgage loans. Prior to the payment date occurring on August 25,
2030, the certificate insurance policy can only be drawn upon for principal in
the event of an Overcollateralization Deficit; it cannot be drawn upon to
maintain the required positive level of overcollateralization.
Under extreme loss or delinquency scenarios applicable to the mortgage
loans, investors in the class A certificates may temporarily not receive
distributions of principal.
No later than the second business day prior to each payment date the
trustee will be required to determine the Available Funds. If the Required
Distributions exceed the Available Funds on any payment date, the trustee will
be required to draw the amount of the insufficiency from the certificate insurer
under the certificate insurance policy. Amounts which cannot be distributed to
the owners of the class A certificates as a result of proceedings under the
United States Bankruptcy Code or similar insolvency laws will not be considered
in determining the amount of Available Funds available on any payment date.
S-24
<PAGE> 25
THE POOLING AND SERVICING AGREEMENT
In addition to the provisions of the pooling and servicing agreement
summarized elsewhere in this prospectus supplement and the prospectus, the
following is a summary of other provisions of the pooling and servicing
agreement.
FORMATION OF THE TRUST
The trust will be created and established pursuant to the pooling and
servicing agreement on the closing date. On such date, the sponsor will cause
the trust to acquire the mortgage loans and the trust will issue the class A
certificates and the subordinated certificates.
The property of the trust shall include all money, instruments and
other property to the extent such money, instruments and other property are
subject or intended to be held in trust for the benefit of the owners of the
class A certificates, and all proceeds thereof.
SALE OF MORTGAGE LOANS
Not later than the closing date the sponsor will cause the originators
to transfer the mortgage loans under one or more mortgage loan transfer
agreements between the originators and the sponsor. In these transfer agreements
the originators will make representations and warranties and the sponsor will
assign its rights to enforce the representations and warranties to the trustee.
The sponsor on the closing date will cause the trust to acquire all
right, title and interest of the originators in each mortgage loan listed on the
schedule delivered to the trustee on the closing date and all their right, title
and interest in all principal collected and all interest accrued on or after the
initial cut-off date on each of those mortgage loans, excluding any premium
recapture.
TERMINATION OF THE TRUST
The pooling and servicing agreement will provide that the trust will
terminate upon the payment to the owners of all certificates of all amounts
required to be paid to those owners and to the certificate insurer of all
amounts required to be paid to the certificate insurer as reimbursement for any
prior drawings on the certificate insurance policy after the latest to occur of
(a) the final payment or other liquidation of the last mortgage loan or (b) the
disposition of all property acquired in respect of any mortgage loan remaining
in the trust estate or (c) at any time when a qualified liquidation of the trust
estate is effected as described in the next paragraph.
To effect a qualified liquidation of the trust, the owners of all class
A certificates then outstanding will be required (1) unanimously to direct the
trustee on behalf of the trust to adopt a plan of complete liquidation, as
contemplated by section 860F(a)(4) of the Internal Revenue Code and (2) to
furnish to the trustee an opinion of counsel reasonably acceptable to the
trustee to the effect that such liquidation constitutes a qualified liquidation.
PREPAYMENT AND YIELD CONSIDERATIONS
PROJECTED PREPAYMENTS AND YIELDS FOR CLASS A CERTIFICATES
If purchased at other than par, the yield to maturity on the class A
certificates will be affected by the rate of the payment of principal of the
mortgage loans. If the actual rate of payments on the mortgage loans is slower
than the rate anticipated by an investor who purchases a class A certificate at
a discount,
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<PAGE> 26
the actual yield to the investor will be lower than that investor's anticipated
yield. If the actual rate of payments on the mortgage loans is faster than the
rate anticipated by an investor who purchases a class A certificate at a
premium, the actual yield to that investor will be lower than the investor's
anticipated yield.
The rate of prepayments with respect to conventional fixed rate
mortgage loans has fluctuated significantly in recent years. If prevailing
interest rates fall significantly below the coupon rates on fixed rate mortgage
loans, the mortgage loans are likely to be subject to higher prepayment rates
than if prevailing rates remain at or above the coupon rate on the mortgage
loans. Conversely, if prevailing interest rates rise appreciably above the
coupon rates on fixed rate mortgage loans, the mortgage loans are likely to
experience a lower prepayment rate than if prevailing rates remain at or below
the interest rates on these mortgage loans.
Mortgage loans which have prepayment penalties may be less likely to
prepay, at least for those periods when the penalties are in effect. As of the
statistical calculation date, prepayment penalties are in effect for 94.35% of
the mortgage loans.
The final scheduled payment dates for the class A certificate have been
calculated assuming that each mortgage loan amortizes according to its terms and
no prepayments are received.
Weighted average life is the average amount of time that will elapse
from the date of issuance of a security until each dollar of principal of the
security is repaid to the investor. The weighted average life of each class of
certificate will be influenced by the rate at which principal payments on the
mortgage loans are paid, which may be in the form of scheduled amortization,
accelerated amortization or prepayments, liquidation due to default, or as a
result of an early termination of the trust.
The model used in this prospectus supplement for the class A
certificates, called the prepayment assumption, represents an assumed rate of
prepayment each month relative to the then outstanding principal balance of the
mortgage loan pool for the life of the mortgage loans. The 100% prepayment
assumption assumes a conditional prepayment rate of 3% per annum of the then
outstanding principal balance of the mortgage loans in the first month of their
life and an additional 17/11% per annum until the twelfth month. Beginning in
the twelfth month and in each month thereafter during their life, the 100%
prepayment assumption assumes a conditional prepayment rate of 20% per annum. As
used in the table below, 0% prepayment assumption assumes prepayment rates equal
to 0% of the prepayment assumption; i.e., no prepayments on the synthetic
mortgage loans having the characteristics described below. Correspondingly, 100%
prepayment assumption assumes prepayment rates equal to 100% of the prepayment
assumption, and so forth.
Investors in the class A-6 certificates, also known as the NAS or
lockout class, should be aware that the class A-6 certificates are not scheduled
to receive any portion of principal payments prior to the payment date occurring
in September 2003 and thereafter, they will receive a disproportionately small
or large portion of principal payments unless the principal balances of the
class A-1, A-2, A-3, A-4 and A-5 certificates have been paid off.
The tables below were prepared on the basis of the assumptions in the
following paragraph and there are discrepancies between the characteristics of
the actual mortgage loans and the characteristics of the mortgage loans assumed
in preparing the tables. Any discrepancy may have an effect upon the percentages
of the initial principal balances outstanding and the weighted average lives of
the class A certificates in the tables. In addition, since the actual mortgage
loans have characteristics which differ from those assumed in preparing the
tables set forth below, the distributions of principal on the class A
certificates may be made earlier or later than as indicated in the tables.
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<PAGE> 27
For the purpose of the tables below, we have assumed that:
- the mortgage loans have the characteristics set forth
below,
- the closing date is August 22, 2000,
- distributions on the class A certificates are made on the
25th day of each month regardless of the day on which the
payment actually occurs, commencing on September 25, 2000,
- all prepayments are prepayments in full and include 30
days' interest,
- no early termination of the trust occurs, unless otherwise
specified,
- no mortgage loan is ever delinquent,
- servicing fees, trustee's fees and the certificate insurer
premium are paid in accordance with the pooling & servicing
agreement and insurance agreement, as applicable, and
- the class A certificates have the pass-through rates and
original principal balances described in this prospectus
supplement.
The weighted average life of each indicated class of class A
certificates has been determined by:
- multiplying the amount of each principal payment by the
number of years from the date of issuance to the payment
date of receipt;
- adding the results; and
- dividing the sum by the original principal balance of the
class A certificates of that class.
PREPAYMENT SCENARIOS
<TABLE>
<CAPTION>
Scenario Scenario Scenario Scenario Scenario Scenario Scenario
1 2 3 4 5 6 7
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Percentage of the
prepayment assumption..... 0% 50% 100% 120% 150% 200% 250%
</TABLE>
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<PAGE> 28
REPRESENTATIVE MORTGAGE LOANS
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
WEIGHTED WEIGHTED AVERAGE AVERAGE
WEIGHTED AVERAGE AVERAGE STATED STATED
AVERAGE ORIGINAL REMAINING ORIGINAL REMAINING
GROSS AMORTIZATION AMORTIZATION TERM TO TERM TO
PRINCIPAL COUPON TERM TERM MATURITY MATURITY
BALANCE RATE (MONTHS) (MONTHS) (MONTHS) (MONTHS)
--------------- -------- ------------ ------------- ---------- ---------
<S> <C> <C> <C> <C> <C>
$ 10,941,581.31 11.970% 360 354 180 174
65,506,333.57 11.515 359 352 180 173
59,037,958.39 10.921 360 353 180 173
52,402,498.62 10.567 360 356 180 176
186,267,293.10 10.311 360 355 180 175
15,218,373.28 10.899 360 350 180 170
1,113,318.52 10.552 360 349 180 169
6,367,743.69 11.156 360 351 180 171
4,665,014.84 10.520 360 348 180 168
10,018,567.04 10.380 312 306 312 306
3,944,033.48 10.571 297 283 297 283
37,041,014.91 9.990 316 304 316 304
3,828,413.36 10.523 321 304 321 304
3,822,625.80 9.760 325 307 325 307
61,266,181.82 10.348 306 288 306 288
2,375,866.18 10.229 336 313 336 313
120,444,731.65 10.027 318 312 318 312
12,030,187.41 10.205 327 312 327 312
</TABLE>
<TABLE>
<CAPTION>
PREPAYMENT
PENALTY PREPAYMENT
PRINCIPAL AMORTIZATION PERIOD PENALTY
BALANCE METHOD (YEARS) THRESHOLD PREPAYMENT PENALTY
--------------- ------------ ---------- ---------- -------------------
<S> <C> <C> <C> <C>
$ 10,941,581.31 Balloon 1 20% 6 months' interest
65,506,333.57 Balloon none none none
59,037,958.39 Balloon 5 20% 6 months' interest
52,402,498.62 Balloon 3 20% 12 months' interest
186,267,293.10 Balloon 5 20% 12 months' interest
15,218,373.28 Balloon 3 20% 6 months' interest
1,113,318.52 Balloon 5 none 1% of prepaid amount
6,367,743.69 Balloon 2 20% 6 months' interest
4,665,014.84 Balloon 3 none 1% of prepaid amount
10,018,567.04 Fixed 3 20% 12 months' interest
3,944,033.48 Fixed 1 20% 6 months' interest
37,041,014.91 Fixed 5 20% 6 months' interest
3,828,413.36 Fixed 3 none 1% of prepaid amount
3,822,625.80 Fixed 2 20% 6 months' interest
61,266,181.82 Fixed none none none
2,375,866.18 Fixed 5 none 1% of prepaid amount
120,444,731.65 Fixed 5 20% 12 months' interest
12,030,187.41 Fixed 3 20% 6 months' interest
</TABLE>
------------------
The prepayment penalty period is the term in years for which the prepayment
penalty is in effect, starting at the first month of scheduled
amortization, to be adjusted for age. The prepayment penalty threshold
represents the assumed percentage of the prepaid amount that is not subject
to the prepayment penalty. The prepayment penalty is either (i) the number
of months' interest due at the loan coupon rate times the product of (a)
the prepaid amount and (b) the sum of one minus the prepayment penalty
threshold, or (ii) the percentage prepayment penalty due times the prepaid
amount.
The following tables set forth the percentages of the initial principal
amount of the class A certificates that would be outstanding after each of the
dates shown, based on prepayment scenarios described in the table entitled
Prepayment Scenarios. The percentages have been rounded to the nearest 1%.
S-28
<PAGE> 29
TO 10% CALL AND TO MATURITY
<TABLE>
<CAPTION>
PERCENTAGE OF INITIAL CLASS A-1 CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
SCENARIO 1 SCENARIO 2 SCENARIO 3 SCENARIO 4 SCENARIO 5 SCENARIO 6 SCENARIO 7
DATES 0% 50% 100% 120% 150% 200% 250%
----------------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage 100 100 100 100 100 100 100
8/25/2001 92 68 45 36 22 0 0
8/25/2002 89 44 2 0 0 0 0
8/25/2003 87 22 0 0 0 0 0
8/25/2004 85 3 0 0 0 0 0
8/25/2005 83 0 0 0 0 0 0
8/25/2006 80 0 0 0 0 0 0
8/25/2007 77 0 0 0 0 0 0
8/25/2008 75 0 0 0 0 0 0
8/25/2009 72 0 0 0 0 0 0
8/25/2010 69 0 0 0 0 0 0
8/25/2011 66 0 0 0 0 0 0
8/25/2012 62 0 0 0 0 0 0
8/25/2013 58 0 0 0 0 0 0
8/25/2014 52 0 0 0 0 0 0
8/25/2015 0 0 0 0 0 0 0
8/25/2016 0 0 0 0 0 0 0
8/25/2017 0 0 0 0 0 0 0
8/25/2018 0 0 0 0 0 0 0
8/25/2019 0 0 0 0 0 0 0
8/25/2020 0 0 0 0 0 0 0
8/25/2021 0 0 0 0 0 0 0
8/25/2022 0 0 0 0 0 0 0
8/25/2023 0 0 0 0 0 0 0
8/25/2024 0 0 0 0 0 0 0
8/25/2025 0 0 0 0 0 0 0
8/25/2026 0 0 0 0 0 0 0
8/25/2027 0 0 0 0 0 0 0
8/25/2028 0 0 0 0 0 0 0
8/25/2029 0 0 0 0 0 0 0
8/25/2030 0 0 0 0 0 0 0
Weighted Average Life
to 10% Call and to
Maturity (years): 10.95 1.90 1.01 0.85 0.69 0.53 0.43
First Principal Payment
to 10% Call and to
Maturity (date): 9/25/00 9/25/00 9/25/00 9/25/00 9/25/00 9/25/00 9/25/00
Last Principal Payment
to 10% Call and to
Maturity (date): 3/25/15 11/25/04 9/25/02 5/25/02 1/25/02 8/25/01 6/25/01
Payment Window to 10%
Call and to Maturity
(months): 175 51 25 21 17 12 10
Modified Duration to
10% Call and to
Maturity (years) 7.05 1.69 0.93 0.80 0.65 0.50 0.41
</TABLE>
The weighted average life of each indicated class of class A
certificates has been determined by (i) multiplying the amount of each principal
payment by the number of years from the date of issuance to the related payment
dates, (ii) adding the results and (iii) dividing the sum of the respective
principal balance for the related class A certificates as of the closing date.
S-29
<PAGE> 30
TO 10% CALL AND TO MATURITY
<TABLE>
<CAPTION>
PERCENTAGE OF INITIAL CLASS A-2 CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
SCENARIO 1 SCENARIO 2 SCENARIO 3 SCENARIO 4 SCENARIO 5 SCENARIO 6 SCENARIO 7
DATES 0% 50% 100% 120% 150% 200% 250%
----------------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage 100 100 100 100 100 100 100
8/25/2001 100 100 100 100 100 93 0
8/25/2002 100 100 100 40 0 0 0
8/25/2003 100 100 0 0 0 0 0
8/25/2004 100 100 0 0 0 0 0
8/25/2005 100 37 0 0 0 0 0
8/25/2006 100 0 0 0 0 0 0
8/25/2007 100 0 0 0 0 0 0
8/25/2008 100 0 0 0 0 0 0
8/25/2009 100 0 0 0 0 0 0
8/25/2010 100 0 0 0 0 0 0
8/25/2011 100 0 0 0 0 0 0
8/25/2012 100 0 0 0 0 0 0
8/25/2013 100 0 0 0 0 0 0
8/25/2014 100 0 0 0 0 0 0
8/25/2015 0 0 0 0 0 0 0
8/25/2016 0 0 0 0 0 0 0
8/25/2017 0 0 0 0 0 0 0
8/25/2018 0 0 0 0 0 0 0
8/25/2019 0 0 0 0 0 0 0
8/25/2020 0 0 0 0 0 0 0
8/25/2021 0 0 0 0 0 0 0
8/25/2022 0 0 0 0 0 0 0
8/25/2023 0 0 0 0 0 0 0
8/25/2024 0 0 0 0 0 0 0
8/25/2025 0 0 0 0 0 0 0
8/25/2026 0 0 0 0 0 0 0
8/25/2027 0 0 0 0 0 0 0
8/25/2028 0 0 0 0 0 0 0
8/25/2029 0 0 0 0 0 0 0
8/25/2030 0 0 0 0 0 0 0
Weighted Average Life
to 10% Call and to
Maturity (years): 14.59 4.89 2.41 2.00 1.59 1.16 0.91
First Principal Payment
to 10% Call and to
Maturity (date): 3/25/15 11/25/04 9/25/02 5/25/02 1/25/02 8/25/01 6/25/01
Last Principal Payment
to 10% Call and to
Maturity (date): 3/25/15 3/25/06 5/25/03 11/25/02 5/25/02 12/25/01 8/25/01
Payment Window to 10%
Call and to Maturity
(months): 1 17 9 7 5 5 3
Modified Duration to
10% Call and to
Maturity (years): 8.55 3.95 2.13 1.80 1.45 1.08 0.85
</TABLE>
The weighted average life of each indicated class of class A
certificates has been determined by (i) multiplying the amount of each principal
payment by the number of years from the date of issuance to the related payment
dates, (ii) adding the results and (iii) dividing the sum of the respective
principal balance for the related class A certificates as of the closing date.
S-30
<PAGE> 31
TO 10% CALL AND TO MATURITY
<TABLE>
<CAPTION>
PERCENTAGE OF INITIAL CLASS A-3 CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
SCENARIO 1 SCENARIO 2 SCENARIO 3 SCENARIO 4 SCENARIO 5 SCENARIO 6 SCENARIO 7
DATES 0% 50% 100% 120% 150% 200% 250%
----------------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage 100 100 100 100 100 100 100
8/25/2001 100 100 100 100 100 100 92
8/25/2002 100 100 100 100 73 6 0
8/25/2003 100 100 79 44 0 0 0
8/25/2004 100 100 31 0 0 0 0
8/25/2005 100 100 0 0 0 0 0
8/25/2006 100 87 0 0 0 0 0
8/25/2007 100 64 0 0 0 0 0
8/25/2008 100 50 0 0 0 0 0
8/25/2009 100 36 0 0 0 0 0
8/25/2010 100 21 0 0 0 0 0
8/25/2011 100 7 0 0 0 0 0
8/25/2012 100 0 0 0 0 0 0
8/25/2013 100 0 0 0 0 0 0
8/25/2014 100 0 0 0 0 0 0
8/25/2015 14 0 0 0 0 0 0
8/25/2016 6 0 0 0 0 0 0
8/25/2017 0 0 0 0 0 0 0
8/25/2018 0 0 0 0 0 0 0
8/25/2019 0 0 0 0 0 0 0
8/25/2020 0 0 0 0 0 0 0
8/25/2021 0 0 0 0 0 0 0
8/25/2022 0 0 0 0 0 0 0
8/25/2023 0 0 0 0 0 0 0
8/25/2024 0 0 0 0 0 0 0
8/25/2025 0 0 0 0 0 0 0
8/25/2026 0 0 0 0 0 0 0
8/25/2027 0 0 0 0 0 0 0
8/25/2028 0 0 0 0 0 0 0
8/25/2029 0 0 0 0 0 0 0
8/25/2030 0 0 0 0 0 0 0
Weighted Average Life
to 10% Call and to
Maturity (years): 14.81 8.22 3.68 3.00 2.33 1.68 1.29
First Principal Payment
to 10% Call and to
Maturity (date): 3/25/15 3/25/06 5/25/03 11/25/02 5/25/02 12/25/01 8/25/01
Last Principal Payment
to 10% Call and to
Maturity (date): 5/25/17 3/25/12 7/25/05 7/25/04 8/25/03 9/25/02 3/25/02
Payment Window to 10%
Call and to Maturity
(months): 27 73 27 21 16 10 8
Modified Duration to
10% Call and to
Maturity (years): 8.53 5.82 3.09 2.59 2.06 1.52 1.18
</TABLE>
The weighted average life of each indicated class of class A
certificates has been determined by (i) multiplying the amount of each principal
payment by the number of years from the date of issuance to the related payment
dates, (ii) adding the results and (iii) dividing the sum of the respective
principal balance for the related class A certificates as of the closing date.
S-31
<PAGE> 32
TO 10% CALL AND TO MATURITY
<TABLE>
<CAPTION>
PERCENTAGE OF INITIAL CLASS A-4 CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
SCENARIO 1 SCENARIO 2 SCENARIO 3 SCENARIO 4 SCENARIO 5 SCENARIO 6 SCENARIO 7
DATES 0% 50% 100% 120% 150% 200% 250%
----------------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage 100 100 100 100 100 100 100
8/25/2001 100 100 100 100 100 100 100
8/25/2002 100 100 100 100 100 100 23
8/25/2003 100 100 100 100 97 6 0
8/25/2004 100 100 100 95 31 0 0
8/25/2005 100 100 92 43 0 0 0
8/25/2006 100 100 54 10 0 0 0
8/25/2007 100 100 26 0 0 0 0
8/25/2008 100 100 17 0 0 0 0
8/25/2009 100 100 3 0 0 0 0
8/25/2010 100 100 0 0 0 0 0
8/25/2011 100 100 0 0 0 0 0
8/25/2012 100 90 0 0 0 0 0
8/25/2013 100 71 0 0 0 0 0
8/25/2014 100 52 0 0 0 0 0
8/25/2015 100 0 0 0 0 0 0
8/25/2016 100 0 0 0 0 0 0
8/25/2017 96 0 0 0 0 0 0
8/25/2018 82 0 0 0 0 0 0
8/25/2019 66 0 0 0 0 0 0
8/25/2020 49 0 0 0 0 0 0
8/25/2021 30 0 0 0 0 0 0
8/25/2022 9 0 0 0 0 0 0
8/25/2023 0 0 0 0 0 0 0
8/25/2024 0 0 0 0 0 0 0
8/25/2025 0 0 0 0 0 0 0
8/25/2026 0 0 0 0 0 0 0
8/25/2027 0 0 0 0 0 0 0
8/25/2028 0 0 0 0 0 0 0
8/25/2029 0 0 0 0 0 0 0
8/25/2030 0 0 0 0 0 0 0
Weighted Average Life
to 10% Call and to
Maturity (years): 19.86 13.65 6.49 5.00 3.76 2.55 1.89
First Principal Payment
to 10% Call and to
Maturity (date): 5/25/17 3/25/12 7/25/05 7/25/04 8/25/03 9/25/02 3/25/02
Last Principal Payment
to 10% Call and to
Maturity (date) 1/25/23 3/25/15 11/25/09 2/25/07 4/25/05 10/25/03 10/25/02
Payment Window to 10%
Call and to Maturity
(months): 69 37 53 32 21 14 8
Modified Duration to
10% Call and to
Maturity (years): 9.67 8.06 4.87 3.98 3.14 2.23 1.69
</TABLE>
The weighted average life of each indicated class of class A
certificates has been determined by (i) multiplying the amount of each principal
payment by the number of years from the date of issuance to the related payment
dates, (ii) adding the results and (iii) dividing the sum of the respective
principal balance for the related class A certificates as of the closing date.
S-32
<PAGE> 33
TO 10% CALL
<TABLE>
<CAPTION>
PERCENTAGE OF INITIAL CLASS A-5 CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
SCENARIO 1 SCENARIO 2 SCENARIO 3 SCENARIO 4 SCENARIO 5 SCENARIO 6 SCENARIO 7
DATES 0% 50% 100% 120% 150% 200% 250%
----------------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage 100 100 100 100 100 100 100
8/25/2001 100 100 100 100 100 100 100
8/25/2002 100 100 100 100 100 100 100
8/25/2003 100 100 100 100 100 100 23
8/25/2004 100 100 100 100 100 44 0
8/25/2005 100 100 100 100 83 0 0
8/25/2006 100 100 100 100 54 0 0
8/25/2007 100 100 100 85 0 0 0
8/25/2008 100 100 100 79 0 0 0
8/25/2009 100 100 100 0 0 0 0
8/25/2010 100 100 0 0 0 0 0
8/25/2011 100 100 0 0 0 0 0
8/25/2012 100 100 0 0 0 0 0
8/25/2013 100 100 0 0 0 0 0
8/25/2014 100 100 0 0 0 0 0
8/25/2015 100 0 0 0 0 0 0
8/25/2016 100 0 0 0 0 0 0
8/25/2017 100 0 0 0 0 0 0
8/25/2018 100 0 0 0 0 0 0
8/25/2019 100 0 0 0 0 0 0
8/25/2020 100 0 0 0 0 0 0
8/25/2021 100 0 0 0 0 0 0
8/25/2022 100 0 0 0 0 0 0
8/25/2023 0 0 0 0 0 0 0
8/25/2024 0 0 0 0 0 0 0
8/25/2025 0 0 0 0 0 0 0
8/25/2026 0 0 0 0 0 0 0
8/25/2027 0 0 0 0 0 0 0
8/25/2028 0 0 0 0 0 0 0
8/25/2029 0 0 0 0 0 0 0
8/25/2030 0 0 0 0 0 0 0
Weighted Average Life
to 10% Call (years): 22.67 14.59 9.95 8.00 5.93 3.95 2.72
First Principal Payment
to 10% Call (date): 1/25/23 3/25/15 11/25/09 2/25/07 4/25/05 10/25/03 10/25/02
Last Principal Payment
to 10% Call (date): 4/25/23 3/25/15 8/25/10 11/25/08 2/25/07 3/25/05 1/25/04
Payment Window to 10%
Call (date): 4 1 10 22 23 18 16
Modified Duration to
10% Call (date): 9.94 8.21 6.56 5.65 4.52 3.25 2.35
</TABLE>
The weighted average life of each indicated class of class A
certificates has been determined by (i) multiplying the amount of each principal
payment by the number of years from the date of issuance to the related payment
dates, (ii) adding the results and (iii) dividing the sum of the respective
principal balance for the related class A certificates as of the closing date.
S-33
<PAGE> 34
TO 10% CALL
<TABLE>
<CAPTION>
PERCENTAGE OF INITIAL CLASS A-6 CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
SCENARIO 1 SCENARIO 2 SCENARIO 3 SCENARIO 4 SCENARIO 5 SCENARIO 6 SCENARIO 7
DATES 0% 50% 100% 120% 150% 200% 250%
----------------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage 100 100 100 100 100 100 100
8/25/2001 100 100 100 100 100 100 100
8/25/2002 100 100 100 100 100 100 100
8/25/2003 100 100 100 100 100 100 100
8/25/2004 100 95 90 88 85 79 0
8/25/2005 99 90 81 78 72 0 0
8/25/2006 98 81 67 62 54 0 0
8/25/2007 97 72 53 46 0 0 0
8/25/2008 92 50 26 19 0 0 0
8/25/2009 88 35 12 0 0 0 0
8/25/2010 83 24 0 0 0 0 0
8/25/2011 78 16 0 0 0 0 0
8/25/2012 72 11 0 0 0 0 0
8/25/2013 66 7 0 0 0 0 0
8/25/2014 58 5 0 0 0 0 0
8/25/2015 0 0 0 0 0 0 0
8/25/2016 0 0 0 0 0 0 0
8/25/2017 0 0 0 0 0 0 0
8/25/2018 0 0 0 0 0 0 0
8/25/2019 0 0 0 0 0 0 0
8/25/2020 0 0 0 0 0 0 0
8/25/2021 0 0 0 0 0 0 0
8/25/2022 0 0 0 0 0 0 0
8/25/2023 0 0 0 0 0 0 0
8/25/2024 0 0 0 0 0 0 0
8/25/2025 0 0 0 0 0 0 0
8/25/2026 0 0 0 0 0 0 0
8/25/2027 0 0 0 0 0 0 0
8/25/2028 0 0 0 0 0 0 0
8/25/2029 0 0 0 0 0 0 0
8/25/2030 0 0 0 0 0 0 0
Weighted Average Life
to 10% Call (years): 12.80 8.37 6.84 6.39 5.61 4.35 3.40
First Principal Payment
to 10% Call (date): 9/25/03 9/25/03 9/25/03 9/25/03 9/25/03 9/25/03 9/25/03
Last Principal Payment
to 10% Call (date): 3/25/15 3/25/15 8/25/10 11/25/08 2/25/07 3/25/05 1/25/04
Payment Window to 10%
Call (months): 139 139 84 63 42 19 5
Modified Duration to
10% Call (years): 7.78 5.83 5.07 4.83 4.38 3.57 2.90
</TABLE>
The weighted average life of each indicated class of class A
certificates has been determined by (i) multiplying the amount of each principal
payment by the number of years from the date of issuance to the related payment
dates, (ii) adding the results and (iii) dividing the sum of the respective
principal balance for the related class A certificates as of the closing date.
S-34
<PAGE> 35
TO MATURITY
<TABLE>
<CAPTION>
PERCENTAGE OF INITIAL CLASS A-5 CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
SCENARIO 1 SCENARIO 2 SCENARIO 3 SCENARIO 4 SCENARIO 5 SCENARIO 6 SCENARIO 7
DATES 0% 50% 100% 120% 150% 200% 250%
----------------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage 100 100 100 100 100 100 100
8/25/2001 100 100 100 100 100 100 100
8/25/2002 100 100 100 100 100 100 100
8/25/2003 100 100 100 100 100 100 23
8/25/2004 100 100 100 100 100 44 0
8/25/2005 100 100 100 100 83 10 0
8/25/2006 100 100 100 100 54 2 0
8/25/2007 100 100 100 85 37 1 0
8/25/2008 100 100 100 79 37 1 0
8/25/2009 100 100 100 66 30 1 0
8/25/2010 100 100 85 51 20 1 0
8/25/2011 100 100 69 38 13 0 0
8/25/2012 100 100 54 27 7 0 0
8/25/2013 100 100 41 19 3 0 0
8/25/2014 100 100 31 13 1 0 0
8/25/2015 100 52 5 0 0 0 0
8/25/2016 100 43 2 0 0 0 0
8/25/2017 100 35 * 0 0 0 0
8/25/2018 100 28 0 0 0 0 0
8/25/2019 100 22 0 0 0 0 0
8/25/2020 100 17 0 0 0 0 0
8/25/2021 100 11 0 0 0 0 0
8/25/2022 100 7 0 0 0 0 0
8/25/2023 81 3 0 0 0 0 0
8/25/2024 48 0 0 0 0 0 0
8/25/2025 20 0 0 0 0 0 0
8/25/2026 0 0 0 0 0 0 0
8/25/2027 0 0 0 0 0 0 0
8/25/2028 0 0 0 0 0 0 0
8/25/2029 0 0 0 0 0 0 0
8/25/2030 0 0 0 0 0 0 0
Weighted Average Life
to Maturity (years): 24.05 16.77 12.42 10.36 7.44 4.12 2.73
First Principal Payment
to Maturity (date): 1/25/23 3/25/15 11/25/09 2/25/07 4/25/05 10/25/03 10/25/02
Last Principal Payment
to Maturity (date): 6/25/26 6/25/24 12/25/17 5/25/15 11/25/14 11/25/10 3/25/04
Payment Window to
Maturity (months): 42 112 98 100 116 86 18
Modified Duration to
Maturity (years): 10.14 8.74 7.47 6.63 5.24 3.35 2.35
</TABLE>
The weighted average life of each indicated class of class A
certificates has been determined by (i) multiplying the amount of each principal
payment by the number of years from the date of issuance to the related payment
dates, (ii) adding the results and (iii) dividing the sum of the respective
principal balance for the related class A certificates as of the closing date.
An * indicates a percentage of greater than zero but less than 0.5%.
S-35
<PAGE> 36
TO MATURITY
<TABLE>
<CAPTION>
PERCENTAGE OF INITIAL CLASS A-6 CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
SCENARIO 1 SCENARIO 2 SCENARIO 3 SCENARIO 4 SCENARIO 5 SCENARIO 6 SCENARIO 7
DATES 0% 50% 100% 120% 150% 200% 250%
----------------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage 100 100 100 100 100 100 100
8/25/2001 100 100 100 100 100 100 100
8/25/2002 100 100 100 100 100 100 100
8/25/2003 100 100 100 100 100 100 100
8/25/2004 100 95 90 88 85 79 61
8/25/2005 99 90 81 78 72 63 28
8/25/2006 98 81 67 62 54 40 11
8/25/2007 97 72 53 46 37 22 3
8/25/2008 92 50 26 19 14 11 0
8/25/2009 88 35 12 8 4 4 0
8/25/2010 83 24 6 3 1 * 0
8/25/2011 78 16 3 1 * 0 0
8/25/2012 72 11 1 * * 0 0
8/25/2013 66 7 1 * * 0 0
8/25/2014 58 5 * * * 0 0
8/25/2015 0 0 0 0 0 0 0
8/25/2016 0 0 0 0 0 0 0
8/25/2017 0 0 0 0 0 0 0
8/25/2018 0 0 0 0 0 0 0
8/25/2019 0 0 0 0 0 0 0
8/25/2020 0 0 0 0 0 0 0
8/25/2021 0 0 0 0 0 0 0
8/25/2022 0 0 0 0 0 0 0
8/25/2023 0 0 0 0 0 0 0
8/25/2024 0 0 0 0 0 0 0
8/25/2025 0 0 0 0 0 0 0
8/25/2026 0 0 0 0 0 0 0
8/25/2027 0 0 0 0 0 0 0
8/25/2028 0 0 0 0 0 0 0
8/25/2029 0 0 0 0 0 0 0
8/25/2030 0 0 0 0 0 0 0
Weighted Average Life
to Maturity (years): 12.80 8.37 6.91 6.56 6.18 5.71 4.56
First Principal Payment
to Maturity (date): 9/25/03 9/25/03 9/25/03 9/25/03 9/25/03 9/25/03 9/25/03
Last Principal Payment
to Maturity (date): 3/25/15 3/25/15 3/25/15 1/25/15 10/25/14 9/25/10 4/25/08
Payment Window to
Maturity (months): 139 139 139 137 134 85 56
Modified Duration to
Maturity (years): 7.78 5.83 5.10 4.91 4.69 4.40 3.69
</TABLE>
The weighted average life of each indicated class of class A
certificates has been determined by (i) multiplying the amount of each principal
payment by the number of years from the date of issuance to the related payment
dates, (ii) adding the results and (iii) dividing the sum of the respective
principal balance for the related class A certificates as of the closing date.
An * indicates a percentage of greater than zero but less than 0.5%.
S-36
<PAGE> 37
PAYMENT LAG FEATURE OF THE FIXED RATE CERTIFICATES
Interest on the class A-2, A-3, A-4, A-5 and A-6 certificates accrues
during the calendar month immediately preceding the month in which the related
payment date occurs. Because the date that investors actually receive their
distributions can be 25 days or more after the calendar month during which
interest accrues, the effective yield to the owners of the class A-2, A-3, A-4,
A-5 and A-6 certificates will be below that otherwise produced by the
pass-through rates for their certificates.
THE CERTIFICATE INSURER
The following information has been supplied by Ambac Assurance Corporation
for inclusion in this prospectus supplement. No representation is made by the
sponsor, the master servicer, the underwriter or any of their affiliates as to
the accuracy or completeness of this information.
Ambac Assurance Corporation is a Wisconsin-domiciled stock insurance
corporation regulated by the Office of the Commissioner of Insurance of the
State of Wisconsin and licensed to do business in 50 states, the District of
Columbia, the Commonwealth of Puerto Rico and the Territory of Guam. Ambac
Assurance Corporation primarily insures newly issued municipal and structured
finance obligations. Ambac Assurance Corporation is a wholly-owned subsidiary of
Ambac Financial Group, Inc., a 100% publicly-held company. Moody's Investors
Service, Inc., Standard & Poor's, a division of The McGraw-Hill Companies, Inc.
and Fitch, Inc. have each assigned a triple-A financial strength rating to Ambac
Assurance Corporation.
The consolidated financial statements of the certificate insurer and its
subsidiaries as of December 31, 1999 and December 31, 1998 and for each of the
years in the three-year period ended December 31, 1999, prepared in accordance
with generally accepted accounting principles, included in the Annual Report on
Form 10-K of Ambac Financial Group, Inc. -- which was filed with the Securities
and Exchange Commission on March 30, 2000; Securities and Exchange Commission
File No. 1-10777 -- and the unaudited consolidated financial statements of the
certificate insurer and subsidiaries as of June 30, 2000 and for the periods
ending June 30, 2000 and June 30, 1999, included in the Quarterly Report on Form
10-Q of Ambac Financial Group, Inc. for the period ended June 30, 2000 -- which
was filed with the Securities and Exchange Commission on August 11, 2000 -- are
incorporated by reference into this prospectus supplement and are deemed to
constitute a part of this prospectus supplement. Any statement contained in a
document incorporated by reference shall be modified or superseded for the
purposes of this prospectus supplement to the extent that a statement contained
by reference in this prospectus supplement also modifies or supersedes that
statement. Any statement so modified or superseded shall not be deemed, except
as so modified or superseded, to constitute a part of this prospectus
supplement.
All financial statements of the certificate insurer and its subsidiaries
included in documents filed by Ambac Financial Group, Inc. with the Securities
and Exchange Commission under section 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934, subsequent to the date of this prospectus
supplement and prior to the termination of the offering of the class A
certificates are 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 the financial statements.
S-37
<PAGE> 38
The following table sets forth the capitalization of the certificate
insurer as of December 31, 1998, December 31, 1999 and June 30, 2000,
respectively, in conformity with generally accepted accounting principles.
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30, 2000
1998 1999 (UNAUDITED)
---- ---- -----------
<S> <C> <C> <C>
Unearned premiums ..................... $ 1,303 $ 1,442 $ 1,452
Other liabilities ..................... 548 524 504
------- ------- -------
Total liabilities ..................... $ 1,851 $ 1,966 $ 1,956
======= ======= =======
Stockholder's equity:
Common stock ........................ $ 82 $ 82 $ 82
Additional paid-in capital .......... 541 752 753
Accumulated other comprehensive
income .............................. 138 (92) (46)
Retained earnings ................... 1,405 1,674 1,834
------- ------- -------
Total stockholder's equity ............ 2,166 2,416 2,623
------- ------- -------
Total liabilities and
stockholder's equity .................. $ 4,017 $ 4,382 $ 4,579
======= ======= =======
</TABLE>
For additional financial information concerning the certificate insurer,
see the audited and unaudited financial statements of the certificate insurer
incorporated by reference in this prospectus supplement. Copies of the financial
statements of the certificate insurer incorporated by reference in this
prospectus supplement and copies of the certificate insurer's annual statement
for the year ended December 31, 1999, prepared in accordance with statutory
accounting standards are available, without charge, from the certificate
insurer. The address of the certificate insurer's administrative offices and its
telephone number are One State Street Plaza, 17th Floor, New York, New York
10004 and (212) 668-0340.
The certificate insurer makes no representation regarding the class A
certificates or the advisability of investing in the class A certificates and
makes no representation regarding, nor has it participated in the preparation
of, this prospectus supplement other than the information supplied by the
certificate insurer and presented under the headings "The Certificate Insurer"
and "The Certificate Insurance Policy" and in the financial statements
incorporated in this prospectus supplement by reference.
THE CERTIFICATE INSURANCE POLICY
The following information has been supplied by Ambac Assurance Corporation
for inclusion in this prospectus supplement. No representation is made by the
sponsor, the master servicer, the underwriter or any of their affiliates as to
the accuracy or completeness of this information.
The certificate insurer, in consideration of the payment of the premium
and subject to the terms of the certificate insurance policy, agrees
unconditionally and irrevocably to pay to the trustee for the benefit of the
applicable owners of the class A certificates, that portion of the Insured
Amounts which shall become Due for Payment but shall be unpaid by reason of
Nonpayment.
The certificate insurer will make such payments to the trustee from its
own funds on the later of (a) the business day following receipt of the Notice
to the certificate insurer of Nonpayment or (b) the business day on which the
Insured Amounts are Due for Payment. The certificate insurer shall be subrogated
to all the owners' rights to payment on the class A certificates to the extent
of the insurance disbursements so made. Once payments of the Insured Amounts
have been made to the trustee, the certificate insurer shall have no further
obligation in respect of such Insured Amounts. Payment of Insured Amounts shall
be made only at the time set forth in the certificate insurance policy and no
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<PAGE> 39
accelerated payment of Insured Amounts shall be made regardless of any
acceleration of any of the class A certificates.
The certificate insurance policy does not cover shortfalls, if any,
attributable to the liability of the trust, any REMIC or the trustee for
withholding taxes, if any, including interest and penalties related to that
liability. The certificate insurance policy does not cover, and Insured Payments
do not include, any shortfalls due to the application of the Soldiers' and
Sailors' Civil Relief Act, shortfalls due to prepayments of principal in full or
any Supplemental Interest Amounts.
The certificate insurer will pay any Insured Payment that is a Preference
Amount on the business day following receipt on a business day by the
certificate insurer of a final non-appealable copy of the order requiring the
return of a preference payment, and other documentation as is reasonably
required by the certificate insurer. This documentation shall be in a form
satisfactory to the certificate insurer, provided that if the documents are
received after 12:00 noon New York City time on that business day, they will be
deemed to be received on the following business day.
Insured Payments due under the certificate insurance policy unless
otherwise stated in the certificate insurance policy will be disbursed by the
certificate insurer to the trustee on behalf of the owners of the class A
certificates by wire transfer of immediately available funds in the amount of
the Insured Payment.
Any notice under the certificate insurance policy may be made at the
address listed below for the certificate insurer or such other address as the
certificate insurer shall specify in writing to the trustee.
The notice address of the certificate insurer is One State Street Plaza,
New York, New York 10004, Attention: General Counsel, or such other address as
the certificate insurer shall specify to the trustee in writing. The certificate
insurance policy is being issued under and pursuant to, and shall be construed
under, the laws of the State of New York, without giving effect to the conflict
of laws principles thereof.
IN THE EVENT THAT THE CERTIFICATE INSURER WERE TO BECOME INSOLVENT, ANY
CLAIMS ARISING UNDER THE CERTIFICATE INSURANCE POLICY WOULD BE EXCLUDED FROM
COVERAGE BY THE CALIFORNIA INSURANCE GUARANTY ASSOCIATION, ESTABLISHED PURSUANT
TO THE LAWS OF THE STATE OF CALIFORNIA.
The certificate insurance policy is not cancelable for any reason. The
premium on the certificate insurance policy is not refundable for any reason.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
Investors may wish to review the following discussion of the material
anticipated federal income tax consequences of the purchase, ownership and
disposition of the Supplemental Interest Amounts and the class A certificates
together with the information in the section "Material Federal Income Tax
Consequences" in the prospectus.
The discussion in this section and in the prospectus is based upon laws,
regulations, rulings and decisions now in effect, all of which are subject to
change. The discussion below and in the prospectus does not purport to deal with
all federal tax consequences applicable to all categories of investors, some of
which may be subject to special rules. Investors may wish to consult their own
tax advisors in determining the federal, state, local and any other tax
consequences to them of the purchase, ownership and disposition of the
Supplemental Interest Amounts and the class A certificates. References in this
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<PAGE> 40
section and in the "ERISA Considerations" section to the code and sections are
to the Internal Revenue Code.
REMIC ELECTIONS
The trustee will cause one or more REMIC elections to be made with respect
to specified assets of the trust for federal income tax purposes. Dewey
Ballantine LLP, special tax counsel, will advise that, in its opinion, for
federal income tax purposes, assuming the REMIC elections are made and
compliance with the pooling and servicing agreement, the trust will be treated
as a REMIC for federal income tax purposes. Each of the class A certificates
will be a regular interest in a REMIC.
For federal income tax purposes, regular interests in a REMIC are treated
as debt instruments issued by the REMIC on the date on which those interests are
created, and not as ownership interests in the REMIC or its assets. Owners of
class A certificates that otherwise report income under a cash method of
accounting will be required to report income with respect to the class A
certificates under an accrual method.
It is anticipated that the class A certificates will not have any original
issue discount other than possibly original issue discount within a de minimus
exception and that accordingly, the provisions of sections 1271 through 1273 and
1275 of the Code generally will not apply to the class A certificates. Original
issue discount will be considered de minimus if it is less than 0.25% of the
principal amount of a class A certificate multiplied by its expected weighted
average life. Because rules regarding the accrual of income on prepayable debt
instruments such as the class A certificates have not yet been issued by the
Internal Revenue Service, the proper treatment regarding possible original issue
discount and the accrual of income on the class A certificates is not clear.
Potential investors may wish to consult their own tax advisors regarding an
investment in the class A certificates. The prepayment assumption that will be
used in determining the rate of accrual of original issue discount on the class
A certificates is 120% of the prepayment assumption. No representation is made
that any of the mortgage loans will prepay at these rates or any other rate. See
"Prepayment and Yield Considerations -- Projected Prepayments and Yields for
Class A Certificates" in this prospectus supplement and "Material Federal Income
Tax Consequences -- Discount and Premium" in the prospectus.
SPECIAL TAX ATTRIBUTES
The class A certificates possess special tax attributes by virtue of the
REMIC provisions of the code. See "Material Federal Income Tax Consequences --
REMIC Securities -- Special Tax Attributes" in the prospectus.
SUPPLEMENTAL INTEREST AMOUNTS
The owners of the class A-1 certificates and the rights to receive
Supplemental Interest Amounts will be treated for tax purposes as owning two
separate investments:
- the class A-1 certificates without the right to receive Supplemental
Interest Amounts; and
- the right to receive the Supplemental Interest Amounts.
The owners of the class A-1 certificates must allocate the purchase price
of their certificates between these two investments based on their relative fair
market values. The purchase price allocated to the first investment will be the
issue price of the class A-1 certificates for calculating accruals of original
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<PAGE> 41
issue discount. See "Material Federal Income Tax Consequences -- Discount and
Premium" in the prospectus.
The proper federal income tax treatment of the Supplemental Interest
Amounts is not clear and tax counsel can not make a reliable estimation of the
degree of certainty of treatment among several possible treatments and unknown
other treatments the Internal Revenue Service may apply to the Supplemental
Interest Amounts. Special tax counsel believes that a likely treatment of the
Supplemental Interest Amounts is as a notional principal contract. The trust
intends to treat the Supplemental Interest Amounts for federal income tax
purposes as a notional principal contract. Treasury Regulations under section
446 relating to notional principal contracts provide that taxpayers, regardless
of their method of accounting, generally must recognize the ratable daily
portion of a periodic payment for the taxable year to which that portion
relates. Assuming treatment as a notional principal contract, any Supplemental
Interest Amounts will be periodic payments. Income with respect to periodic
payments under a notional principal contract for a taxable year should
constitute ordinary income. The purchase price allocated to the right to receive
the Supplemental Interest Amounts will be treated as a nonperiodic payment under
these regulations. This nonperiodic payment may be amortized using several
methods, including the level payment method described in these regulations.
Alternative federal income tax characterization of the Supplemental
Interest Amounts is possible, including treatment of the Supplemental Interest
Amounts as indebtedness or an interest in a partnership. Foreign holders of the
class A-1 certificates may be subject to withholding in respect of payments of
Supplemental Interest Amounts in the event that such payments are treated as
indebtedness or an interest in a partnership. The amount, timing and character
of the income and deductions for an owner of Supplemental Interest Amounts would
differ if the Supplemental Interest Amounts were held to constitute indebtedness
or an interest in a partnership, but for most investors in most circumstances,
those differences would not be material. Because the trust will treat the
Supplemental Interest Amounts as a notional principal contract, the master
servicer will not attempt to satisfy the tax reporting requirements that would
apply under these alternative characterizations of the Supplemental Interest
Amounts. Investors that are foreign persons may wish to consult their own tax
advisors in determining the federal, state, local and other tax consequences to
them of the purchase, ownership and disposition of the Supplemental Interest
Amounts.
The right to receive the Supplemental Interest Amounts will not
constitute: a real estate asset within the meaning of section 856(c)(5)(B) if
held by a real estate investment trust; a qualified mortgage within the meaning
of section 860G(a)(3) or a permitted investment within the meaning of section
860G(a)(5) if held by a REMIC; or assets described in section 7701(a)(19)(C)(xi)
if held by a thrift. Moreover, other special rules may apply to some categories
of investors, including dealers in securities and dealers in notional principal
contracts.
If the master servicer, acting directly or through a permitted designee,
exercises its right to an optional termination, the Supplemental Interest Amount
might not be paid in full.
TAXATION OF FOREIGN INVESTORS
Foreign investors will not be subject to U.S. withholding on income from
the Supplemental Interest Amounts, if this income is not connected with a U.S.
trade or business and the foreign investor certifies its foreign status. The
Treasury Department has issued new regulations which make modifications to the
requirements set forth in Annex I to the prospectus. These new regulations will
generally be effective for payments made after December 31, 2000. We suggest
that prospective investors consult their tax advisors regarding these new
regulations.
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INFORMATION REPORTING AND BACKUP WITHHOLDING
The trustee will furnish or make available, within a reasonable time after
the end of each calendar year, to each person who held a class A certificate at
any time during such year, the information required by applicable rules to
assist the holders in preparing their federal income tax returns, or to enable
holders to make the information available to beneficial owners or financial
intermediaries that hold the certificates on behalf of beneficial owners. In
particular, this information will include a statement of the adjusted issue
price of the class A certificate at the beginning of each accrual period. In
addition, the reports will include information necessary to compute the accrual
of any market discount that may arise upon secondary trading of class A
certificates.
Distributions of interest and principal as well as distributions of
proceeds from the sale of the class A certificates, may be subject to the backup
withholding requirement under section 3406 at a rate of 31% if the recipients of
these distributions fail to furnish to the payor information, including their
taxpayer identification numbers, or otherwise fail to establish an exemption
from this tax. Any amounts deducted and withheld from a distribution to a
recipient would be allowed as a credit against the recipient's federal income
tax. Furthermore, penalties may be imposed by the Internal Revenue Service on a
recipient of distributions that is required to supply information but does not
do so in the proper manner. See "Material Federal Income Consequences -- Backup
Withholding" in the prospectus.
STATE TAXES
The sponsor makes no representations regarding the tax consequences of
purchase, ownership or disposition of the class A certificates and Supplemental
Interest Amounts under tax laws of any state. Investors considering an
investment in the class A certificates and Supplemental Interest Amounts may
wish to consult their own tax advisors regarding these tax consequences.
All investors should consult their own tax advisors regarding the federal,
state, local or foreign tax consequences of the purchase, ownership and
disposition of the class A certificates and the Supplemental Interest Amounts.
ERISA CONSIDERATIONS
Investors may wish to review the material set forth in this section
together with the information in the section "ERISA Considerations" in the
prospectus.
The class A certificates may be offered to pension, profit sharing and
other employee benefit plans subject to ERISA. A fiduciary of any such plan or
any other person investing plan assets of any such plan, including an insurance
company investing through its general or separate accounts, may wish to review
with its legal advisors whether the purchase or holding of class A certificates
could give rise to a transaction prohibited or not otherwise permissible under
ERISA or section 4975 of the code.
The Department of Labor has issued to the underwriters individual
prohibited transaction exemptions which, as described under the section "ERISA
Considerations -- Certificates" in the prospectus, provide exemptive relief for
certain transactions relating to investments in pass-through certificates issued
by trusts which hold obligations such as the mortgage loans. As of the initial
cut-off date, there is no single mortgage loan included in the trust that
constitutes more than five percent of the aggregate unamortized principle
balance of the assets of the trust. Before purchasing a class A certificate
based on the underwriters' exemptions, a fiduciary of a plan should itself
confirm (1) that such certificate
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constitutes a certificate for purposes of the underwriters' exemptions and (2)
that the conditions and other requirements set forth in the underwriters'
exemptions would be satisfied.
Any person purchasing a class A-1 certificate and the right to receive
Supplemental Interest Amounts will have acquired, for purposes of ERISA and for
federal income tax purposes, the class A-1 certificate without the right to
receive the Supplemental Interest Amounts, together with the right to receive
the Supplemental Interest Amounts. The underwriters' exemptions do not apply to
the acquisition, holding or resale of the right to receive the Supplemental
Interest Amounts. Accordingly, the acquisition of the right to receive the
Supplemental Interest Amounts by a plan could result in a prohibited transaction
unless another administrative exemption to ERISA's prohibited transaction rules
is applicable. One or more alternative exemptions may be available with respect
to the initial purchase, holding and resale of the right to receive the
Supplemental Interest Amounts, including, but not limited to:
- Prohibited Transaction Class Exemption 95-60, Part I, regarding
investments by insurance company general accounts;
- Prohibited Transaction Class Exemption 91-38, regarding investments
by bank collective investment funds;
- Prohibited Transaction Class Exemption 90-1, regarding investments
by insurance company pooled separate accounts;
- Prohibited Transaction Class Exemption 84-14, regarding transactions
negotiated by qualified professional asset managers;
- Prohibited Transaction Class Exemption 96-23, regarding transactions
negotiated by in-house asset managers; or
- Prohibited Transaction Class Exemption 75-1, Part II, regarding
principal transactions by broker-dealers.
The sponsor believes that the conditions of Prohibited Transaction Class
Exemption 75-1, Part II will be met with respect to the acquisition of a right
to receive the Supplemental Interest Amounts by a plan, so long as no
underwriter is a fiduciary with respect to the plan and no underwriter is a
party in interest with respect to the plan by reason of being a participating
employer or affiliate.
Any plan fiduciary considering the purchase of class A certificates may
wish to consult with its counsel as to the potential applicability of ERISA, the
Internal Revenue Code, underwriters' exemptions and, with respect to the class
A-1 certificates, other administrative exemptions prior to making an investment
in the certificates. Moreover, each plan fiduciary may wish to determine
whether, under the general fiduciary standards of investment prudence and
diversification, an investment in the class A 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.
The sale of the class A certificates to a plan is in no respect a
representation by the sponsor or the underwriters that this investment meets all
relevant legal requirements with respect to investments by plans generally or by
any particular plan or that this investment is appropriate for plans generally
or any particular plan.
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RATINGS
It is a condition of the original issuance of the class A certificates
that they receive ratings of "AAA" by Standard & Poor's, and "Aaa" by Moody's.
The ratings assigned to the class A certificates will be based on the mortgage
loans, as well as the financial strength of the certificate insurer. These
ratings will be the views of the rating agencies only.
Explanations of the significance of these ratings may be obtained from
Standard & Poor's, whose principal offices are located at 55 Water Street, New
York, New York 10041 and Moody's, whose principal offices are located at 99
Church Street, New York, New York 10007. There is no assurance that these
ratings will continue for any period of time or that these ratings will not be
revised or withdrawn. Any revision or withdrawal of the ratings may have an
adverse effect on the market price of the class A certificates. A security
rating is not a recommendation to buy, sell or hold securities.
The ratings assigned to the class A certificates do not address the
likelihood of the payment of any Supplemental Interest Amounts.
Moody's ratings on mortgage loan pass-through certificates address the
likelihood of the receipt by the owners of all distributions to which the owners
are entitled. Moody's rating opinions address the structural and legal issues
associated with the class A certificates, including the nature of the mortgage
loans and the credit quality of the credit enhancement provider. Moody's ratings
on pass-through certificates do not represent any assessment of the likelihood
that principal prepayments may differ from those originally anticipated.
The ratings do not address the possibility that, as a result of principal
prepayments, certificateholders may receive a lower than anticipated yield.
The ratings of the class A certificates should be evaluated independently
from similar ratings on other types of securities.
The sponsor has not requested a rating of the class A certificates by any
rating agency other than Moody's and Standard & Poor's. There can be no
assurance as to whether any other rating agency will rate the class A
certificates or, if another rating agency rates them, what rating would be
assigned by that rating agency. Any unsolicited rating assigned by another
rating agency to the class A certificates may be lower than the rating assigned
to the class A certificates by Moody's and Standard & Poor's.
LEGAL INVESTMENT CONSIDERATIONS
No class of the class A certificates will constitute mortgage related
securities for purposes of the Secondary Mortgage Market Enhancement Act of
1984.
UNDERWRITING
The sponsor has agreed to cause the trust to sell the class A certificates
to the underwriters, and the underwriters have agreed to purchase the class A
certificates.
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In the underwriting agreement, the underwriters have agreed to purchase
the entire principal amount of the class A certificates in the following
amounts:
<TABLE>
<CAPTION>
Principal
Amount of
Underwriter Class A-1
----------- ---------
<S> <C>
Bear, Stearns & Co. Inc. $104,419,500
Morgan Stanley & Co. $104,419,500
Incorporated
Prudential Securities $ 50,000,000
------------
Incorporated
Total....................... $258,839,000
============
</TABLE>
<TABLE>
<CAPTION>
Principal Principal Principal
Amount of Amount of Amount of
Underwriter Class A-2 Class A-3 Class A-4
----------- --------- --------- ---------
<S> <C> <C> <C>
Bear, Stearns & Co. Inc. $ 27,323,000 $ 61,625,000 $ 41,569,500
Morgan Stanley & Co. $ 27,323,000 $ 61,625,000 $ 41,569,500
Incorporated ------------ ------------ ------------
Total ....................... $ 54,646,000 $123,250,000 $ 83,139,000
============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Principal Principal
Amount of Amount of
Underwriter Class A-5 Class A-6
----------- --------- ---------
<S> <C> <C>
Bear, Stearns & Co. Inc. $32,427,000 $32,500,000
Morgan Stanley & Co. $32,427,000 $32,500,000
Incorporated ----------- -----------
Total ...................... $64,854,000 $65,000,000
=========== ===========
</TABLE>
The underwriters have informed the sponsor that they propose initially to
offer the class A certificates to the public at the price set forth on the cover
page hereof, and to specified dealers at a price less a selling concession not
in excess of the following amounts; the underwriters may allow, and these
dealers may reallow, a reallowance concession not in excess of the following
amounts:
<TABLE>
<CAPTION>
Selling Reallowance
Class Concession Concession
----- ---------- ----------
<S> <C> <C>
A-1 0.1050% 0.075%
A-2 0.1500% 0.100%
A-3 0.1650% 0.125%
A-4 0.1950% 0.150%
A-5 0.2250% 0.150%
A-6 0.1650% 0.125%
</TABLE>
After the initial public offering, the public offering price and the
selling concessions and reallowance concessions may be changed.
The sponsor and Advanta Mortgage Holding Corporation, an affiliate of the
sponsor, have agreed to indemnify the underwriters against liabilities under the
Securities Act of 1933.
In connection with this offering and in compliance with applicable law and
industry practice, the underwriters may overallot or effect transactions which
stabilize, maintain or otherwise affect the market price of the class A
certificates at a level above that which might otherwise prevail in the open
market, including stabilizing bids, effecting syndicate covering transactions or
imposing penalty bids. A stabilizing bid means the placing of any bid, or the
effecting of any purchase, for the purpose of pegging, fixing or maintaining the
price of a security. A syndicate covering transaction means the placing of any
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bid on behalf of the underwriting syndicate or the effecting of any purchase to
reduce a short position created in connection with the offering. A penalty bid
means an arrangement that permits the managing underwriter to reclaim a selling
concession from a syndicate member in connection with the offering when class A
certificates originally sold by the syndicate member are purchased in syndicate
covering transactions. The underwriters are not required to engage in any of
these activities, which, if commenced, may be discontinued at any time.
The sponsor has been advised by the underwriters that the underwriters
presently intend to make a market in the class A certificates, as permitted by
applicable laws and regulations. The underwriters are not obligated, to make a
market in the class A certificates and any market making may be discontinued at
any time at the sole discretion of the underwriters. Accordingly, no assurance
can be given as to the liquidity of, or trading markets for, the class A
certificates.
EXPERTS
The consolidated balance sheets of Ambac Assurance Corporation and its
subsidiaries as of December 31, 1999 and December 31, 1998 and for each of the
years in the three-year period ended December 31, 1999 are incorporated by
reference in this prospectus supplement and in the registration statement in
reliance on the report of KPMG LLP, independent certified public accountants,
incorporated by reference herein, and upon the authority of said firm as experts
in accounting and auditing.
LEGAL MATTERS
Legal matters relating to the validity of the issuance of the class A
certificates will be passed upon for the sponsor by Dewey Ballantine LLP, New
York, New York, and for the underwriters by Brown & Wood LLP, New York, New
York.
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<PAGE> 47
GLOSSARY
"AVAILABLE FUNDS" is the amount available to the trustee for distribution
to the owners on a payment date after deducting the servicing fees, trustee's
fees and the premiums due to the certificate insurer on that payment date.
Available Funds shall include all collections of principal and interest on the
mortgage loans, including any advances of interest made by the master servicer.
In addition, until such time as the overcollateralization amount initially
reaches its required level, Available Funds shall also include all prepayment
penalties actually collected by the master servicer. After the
overcollateralization reaches its required levels, the master servicer will be
entitled to retain all prepayment penalties as part of its servicing
compensation.
"AVAILABLE FUNDS CAP RATE" means, for any payment date, an amount,
expressed as a per annum rate and calculated (x) for the class A-1 certificates,
on the basis of a 360-day year and the actual number of days elapsed in the
related Interest Accrual Period, and (y) for the class A-4, A-5 and A-6
certificates, on the basis of a 360-day year consisting of 12 months of 30 days
each, equal to
(1) the aggregate amount of interest accrued and collected or
advanced on all of the mortgage loans in the pool during the prior
calendar month -- net of any shortfalls arising due to the application of
the Soldiers' and Sailors' Civil Relief Act -- minus the aggregate amount
of the servicing fee, the trustee's fee and the premiums due to the
certificate insurer, on that payment date, divided by
(2) the aggregate principal balance of the mortgage loans as of the
opening of business on the first day of the prior calendar month.
"BASE PRINCIPAL DISTRIBUTION AMOUNT" for any payment date is the lesser
of:
(a) the Available Funds, plus any Insured Payment and minus the Interest
Distribution Amount, and
(b) (1) the sum, without duplication of:
(A) the principal actually collected by the master servicer with respect
to the mortgage loans during the prior month;
(B) the proceeds in the amount equal to the principal balance of each
mortgage loan which either was repurchased by the sponsor or an
originator or purchased by the master servicer or any sub-servicer
in connection with that payment date;
(C) any amounts delivered by the sponsor or an originator in connection
with that payment date because of a substitution of a mortgage loan;
(D) all net liquidation proceeds related to principal and actually
collected by the master servicer with respect to the mortgage loans
during the prior month;
(E) the proceeds related to principal received by the trustee from any
termination;
minus
(2) the amount, if any, by which the level of overcollateralization
exceeds the amount of overcollateralization required to be
maintained for that payment date.
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<PAGE> 48
"CLASS A-6 PRINCIPAL DISTRIBUTION AMOUNT" for any payment date will be the
applicable percentage of the Class A-6 Pro Rata Principal Distribution Amount
with respect to that payment date as follows:
<TABLE>
<CAPTION>
Payment Dates Applicable Percentage
------------- ---------------------
<S> <C>
September 2000 - August 2003 0%
September 2003 - August 2005 45%
September 2005 - August 2006 80%
September 2006 - August 2007 100%
September 2007 and thereafter 300%
</TABLE>
"CLASS A-6 PRO RATA PRINCIPAL DISTRIBUTION AMOUNT" for a payment date is
the product of (x) Principal Distribution Amount for that payment date and (y) a
fraction, the numerator of which is the class A-6 certificate principal balance
immediately prior to that payment date and the denominator of which is the
aggregate principal balance of all class A certificates immediately prior to
that payment date.
"COMBINED LOAN-TO-VALUE RATIO" or "CLTV" means, for any mortgage loan, the
ratio of (A) the sum of the original principal balance of the mortgage loan plus
any outstanding principal balances of mortgage loans senior to the mortgage
loan, calculated at the date of origination of the mortgage loan to (B) the
lower of (i) the appraised value of the mortgaged property at the time of
origination of the mortgage loans or (ii) the purchase price of the mortgaged
property, if the mortgaged property was purchased within twelve months of the
date of origination.
"DEFICIENCY AMOUNT" means, for any payment date, the excess, if any, of
Required Distributions over the Available Funds.
"DUE FOR PAYMENT" shall mean with respect to an Insured Amount, the
payment date on which Insured Amounts are due or, with respect to an Insured
Payment which is a Preference Amount, the business day on which the
documentation required by the certificate insurer referred to above has been
received by the certificate insurer.
"EXCESS CASHFLOW" is equal to the Available Funds minus the aggregate
Interest Distribution Amount and the Base Principal Distribution Amount.
"INSURED AMOUNTS" shall mean, for any payment date, any Deficiency Amount
for that payment date.
"INSURED PAYMENTS" shall mean, the aggregate amount actually paid by the
certificate insurer to the trustee in respect of (i) Insured Amounts for a
payment date and (ii) Preference Amounts for any given business day.
"INTEREST ACCRUAL PERIOD" for each payment date and (x) for the class A-1
certificates is the period from the preceding payment date, or, in the case of
the first payment date, from the closing date, through the day preceding the
payment date and (y) for the class A-2, A-3, A-4, A-5 and A-6 certificates is
the prior calendar month. All calculations of interest on the class A-1
certificates will be made on the basis of the actual number of days elapsed in
the period from the prior payment date to and including the day prior to the
applicable payment date, divided by 360; all calculations of interest on the
class A-2, A-3, A-4, A-5 and A-6 certificates will be made on the basis of a
360-day year consisting of 12 months of 30 days each.
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<PAGE> 49
"INTEREST DETERMINATION DATE" the second business day preceding each
payment date or, in the case of the first payment date, on the second business
day preceding the closing date.
"INTEREST DISTRIBUTION AMOUNT" means, for each class and payment date, the
interest due with respect to that class, together with any unpaid interest
shortfall relating to that class from prior payment dates. The Interest
Distribution Amount for the class A-1 certificates does not include any
Supplemental Interest Amount.
"LOAN-TO-VALUE RATIO" or "LTV" means, for any mortgage loan, the ratio of
(A) the original principal balance of the mortgage loan to (B) the lower of (i)
the appraised value of the mortgaged property at the time of origination of the
mortgage loans or (ii) the purchase price of the mortgaged property, if the
mortgaged property was purchased within twelve months of the date of
origination.
"NONPAYMENT" shall mean, with respect to any payment date, a Deficiency
Amount owing in respect of such payment date.
"NOTICE" means the notice sent in writing by telecopy, in the form
acceptable to the certificate insurer, the original of which is subsequently
delivered by registered or certified mail, from the trustee specifying the
Insured Amount which shall be due and owing on the applicable payment date.
"OVERCOLLATERALIZATION DEFICIT" for any payment date is the amount, if
any, by which:
(1) the aggregate principal balance of the class A certificates,
after taking into account all distributions to be made on that payment
date, except for any payment in respect of the Overcollateralization
Deficit, exceeds
(2) the aggregate principal balance of the mortgage loans as of the
close of business on the last day of the prior month.
"OVERCOLLATERALIZATION INCREASE AMOUNT" means, for any payment date, the
amount of Excess Cashflow applied as a payment of principal on the class A
certificates to reach and maintain the required levels of overcollateralization
on the class A certificates.
"PREFERENCE AMOUNT" means any payment of principal or interest on a class
A certificate which has become Due for Payment and which is made to an owner of
a class A certificate by or on behalf of the trustee which has been deemed a
preferential transfer and was previously recovered from its owner pursuant to
the United States Bankruptcy Code in accordance with a final, nonappealable
order of a court of competent jurisdiction.
"PRINCIPAL DISTRIBUTION AMOUNT" is the sum, without duplication, of:
- the Base Principal Distribution Amount for that payment date;
- the Overcollateralization Deficit, but only to the extent that
it can be funded on that payment date from Excess Cashflow;
- any remaining Overcollateralization Deficit for that payment
date, to the extent funded by the certificate insurer as an
Insured Payment; and
- the Overcollateralization Increase Amount.
S-49
<PAGE> 50
"REQUIRED DISTRIBUTIONS" means (1) any payment date occurring prior to the
payment date in August, 2030, the sum of the Interest Distribution Amounts --
net of any shortfalls arising due to the application of the Soldiers' and
Sailors' Civil Relief Act, any interest shortfalls due to principal prepayments
in full and any Supplemental Interest Amounts -- and any Overcollateralization
Deficit and (2) the payment date occurring in August, 2030, the aggregate
outstanding principal balance, if any, of each class of class A certificates,
after giving effect to all other payments of principal on those classes of class
A certificates on that payment date.
"STEP-UP PAYMENT DATE" means, the payment date following the calendar
month in which the clean-up call is first permitted to occur.
"SUPPLEMENTAL INTEREST AMOUNT" means, for the class A-1 certificates and
any payment date, the amount of interest that would otherwise be paid on the
class A-1 certificates on that payment date if not for the application of the
Available Funds Cap Rate.
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PROSPECTUS
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
[ADVANTA LOGO] [ADVANTA LOGO]
ADVANTA CONDUIT RECEIVABLES, INC. ADVANTA MORTGAGE CORP. USA
SPONSOR MASTER SERVICER
</TABLE>
MORTGAGE LOAN ASSET-BACKED SECURITIES,
ISSUABLE IN SERIES
--------------------------------------------------------------------------------
Advanta Conduit Receivables, Inc. may sell, from time to time, a series of
mortgage loan asset-backed securities backed solely by the assets of the issuing
trust. The assets of each trust consist primarily of a pool of mortgage loans.
WE SUGGEST THAT YOU READ THE
SECTION ENTITLED "RISK FACTORS"
STARTING ON PAGE 8 OF THIS
PROSPECTUS AND CONSIDER THESE
FACTORS BEFORE MAKING A DECISION
TO INVEST IN THESE SECURITIES.
These securities are mortgage
loan asset-backed securities
which represent interests in or
obligations of the trust issuing
that series of securities and
are not interests in or
obligations of any other person
or entity.
Neither these securities nor the
mortgage loans will be insured
or guaranteed by any
governmental agency or
instrumentality.
Retain this prospectus for
future reference. This
prospectus may not be used to
consummate sales of securities
unless accompanied by the
prospectus supplement relating
to the offering of these
securities.
THE SECURITIES --
- will be issued from time to time in
series.
- will be issued by trusts established
by Advanta Conduit Receivables, Inc.
- will be backed by one or more pools
of mortgage loans held by the issuing
trust.
- will be rated in one of the four
highest rating categories by at least
one nationally recognized statistical
rating organization.
- may have the benefit of one or more
forms of credit enhancement, such as
insurance policies,
overcollateralization, subordination
or reserve funds.
THE ASSETS --
The assets of each trust will
primarily consist of a pool of
mortgage loans, funds on deposit in
one or more accounts and forms of
credit support described in this
prospectus and in the prospectus
supplement.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
THE DATE OF THIS PROSPECTUS IS DECEMBER 28, 1999
<PAGE> 52
IMPORTANT INFORMATION ABOUT THE INFORMATION PRESENTED IN THIS PROSPECTUS
AND THE ACCOMPANYING PROSPECTUS SUPPLEMENT
We provide information to you about the securities in two separate
documents that progressively provide more detail: (1) this prospectus, which
provides general information, some of which may not apply to a particular series
of securities, and (2) the prospectus supplement, which describes the specific
terms of your series of securities.
This prospectus by itself does not contain complete information about the
offering of your securities; the balance of that information is contained in the
prospectus supplement. We suggest that you read both this prospectus and the
prospectus supplement in full. We cannot sell the securities to you unless you
have received both this prospectus and the prospectus supplement.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
SUMMARY OF PROSPECTUS .................................................. 4
RISK FACTORS ........................................................... 8
THE TRUSTS ............................................................. 13
THE MORTGAGE LOANS ..................................................... 13
Interest Payments on the Mortgage Loans ............................ 15
Prepayment Fees; Due on Sale Clauses; Assumable Mortgage Loans ..... 15
Statistical Information Concerning the Mortgage Loans .............. 15
MORTGAGE LOAN PROGRAM AND UNDERWRITING GUIDELINES ...................... 16
Description of Underwriting Guidelines ............................. 16
Representations and Warranties Concerning the Mortgage Loans ....... 19
The Master Servicer May Act Through Sub-Servicers .................. 19
DESCRIPTION OF THE SECURITIES .......................................... 20
General Payment Terms of Securities ................................ 21
Payment Date Distributions ......................................... 21
Determination of Principal and Interest on the Securities .......... 21
Yield Considerations ............................................... 22
Maturity And Prepayment Considerations ............................. 22
Form of Securities ................................................. 23
Assignment of Mortgage Loans ....................................... 25
Pre-Funding Feature; Mandatory Prepayment .......................... 25
Payments on Mortgage Loans; Deposits to Accounts ................... 26
Withdrawals from the Principal and Interest Account ................ 27
Delinquency Advances and Servicing Advances ........................ 27
Reports to Securityholders ......................................... 29
DESCRIPTION OF CREDIT ENHANCEMENT ...................................... 29
Financial Guaranty Insurance Policies .............................. 29
Cross Support Among Classes ........................................ 30
Overcollateralization .............................................. 30
Subordination of Classes ........................................... 30
Letter of Credit ................................................... 30
Reserve Accounts ................................................... 30
Derivative Contracts ............................................... 31
Reduction or Substitution of Credit Enhancement .................... 31
SERVICING PROCEDURES ................................................... 31
Collection and Other Servicing Procedures .......................... 31
Realization Upon Defaulted Mortgage Loans .......................... 33
Hazard Insurance Policies .......................................... 33
THE SPONSOR ............................................................ 34
THE MASTER SERVICER .................................................... 34
AVAILABLE INFORMATION; INCORPORATION OF INFORMATION BY REFERENCE ....... 35
THE AGREEMENTS ......................................................... 35
Servicing and Other Compensation and Payment of Expenses ........... 35
Evidence as to Compliance .......................................... 36
Removal and Resignation of the Master Servicer ..................... 36
Amendments to the Agreements ....................................... 37
Retirement of Securities; Redemption ............................... 37
The Trustee ........................................................ 38
LEGAL ASPECTS OF MORTGAGE LOANS ........................................ 38
Enforcement of the Mortgage Note ................................... 38
Deeds of Trust or Mortgages ........................................ 40
Cooperative Loans .................................................. 40
Foreclosure of Mortgage Loans ...................................... 40
Foreclosure on Cooperative Loans ................................... 41
Rights of Redemption ............................................... 41
Environmental Legislation .......................................... 42
Enforceability of Mortgage Loans Provisions ........................ 42
California Deeds of Trust .......................................... 42
</TABLE>
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<PAGE> 53
<TABLE>
<S> <C>
Applicability of Usury Laws ........................................ 43
Soldiers' and Sailors' Civil Relief Act of 1940 .................... 43
MATERIAL FEDERAL INCOME TAX CONSEQUENCES ............................... 44
Grantor Trust Securities ........................................... 44
REMIC Securities ................................................... 46
Special Tax Attributes ............................................. 46
Debt Securities .................................................... 52
Partnership Interests .............................................. 52
FASIT Securities ................................................... 54
Discount and Premium ............................................... 56
Backup Withholding ................................................. 59
Foreign Investors .................................................. 59
STATE TAX CONSIDERATIONS ............................................... 60
ERISA CONSIDERATIONS ................................................... 60
Certificates ....................................................... 61
Notes .............................................................. 62
Consultation With Counsel .......................................... 63
REPORTS ................................................................ 63
INVESTMENT MATTERS ..................................................... 63
USE OF PROCEEDS ........................................................ 64
METHODS OF DISTRIBUTION ................................................ 64
LEGAL MATTERS .......................................................... 64
FINANCIAL INFORMATION .................................................. 64
ADDITIONAL INFORMATION ................................................. 64
ANNEX I ................................................................ A-1
</TABLE>
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<PAGE> 54
SUMMARY OF PROSPECTUS
- This summary highlights selected information from this prospectus and does not
contain all of the information that you need to consider in making your
investment decision. To understand all of the terms of the offering of the
securities, carefully read this entire prospectus and the accompanying
prospectus supplement.
- This summary provides an overview of the structural elements, calculations,
cash flows and other information to aid your understanding and is qualified by
the full description of these calculations, cash flows and other information in
this prospectus and the accompanying prospectus supplement.
SECURITIES
Mortgage loan asset-backed certificates and mortgage loan asset-backed notes
issuable from time to time in series, in fully registered form or book entry
only form, in authorized denominations, as described in the prospectus
supplement.
THE SPONSOR
Advanta Conduit Receivables, Inc. is a Nevada corporation whose principal
offices are located at 10790 Rancho Bernardo Road, San Diego, California 92127
and its telephone number is (858) 676-3099.
THE MASTER SERVICER
Advanta Mortgage Corp. USA or its successors and assigns.
THE SUB-SERVICERS
The master servicer may appoint sub-servicers, who may be affiliates, to
perform its servicing duties.
ISSUER OF SECURITIES
The issuer of each series of securities will be a trust established by the
sponsor or one of its affiliates. The securities will either be notes or
certificates. Notes will represent indebtedness of the trust. Certificates will
represent beneficial ownership interests in the trust.
THE MORTGAGE LOANS
Each trust will hold one or more pools of mortgage loans, which may include:
- conventional, non-government insured mortgage loans secured by one-to-four
family residential properties;
- mortgage loans secured by condominiums or security interests in shares in
cooperative housing corporations;
- mortgage loans on manufactured homes;
- mortgage loans secured by junior liens on mortgaged properties;
- non-conforming mortgage loans;
- mortgage loans with loan-to-value ratios in excess of 100% of the appraised
value of the related mortgaged property but not in excess of 125%; and
- revolving home equity lines of credit.
The mortgage loans may be located in any one of the 50 states, the
District of Columbia or the Commonwealth of Puerto Rico.
The sponsor will direct each trust to acquire the mortgage loans from
affiliated originators, unaffiliated originators or warehouse trusts.
- Mortgage loans originated by affiliated originators will have been originated
in accordance with the sponsor's underwriting guidelines.
- Mortgage loans originated by unaffiliated originators and purchased by the
sponsor or its affiliates will have been originated either in accordance with
the sponsor's guidelines or in accordance with guidelines approved by the
sponsor.
- Mortgage loans may have been purchased by the sponsor in bulk acquisitions
and those loans will have been originated in accordance with the original
originator's guidelines.
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<PAGE> 55
The majority of the mortgage loans will be non-conforming mortgage loans in
that they have credit characteristics or principal balances that do not meet
Fannie Mae or Freddie Mac underwriting guidelines.
THE SECURITIES
The securities of a series may be issued in one or more classes, as specified
in the prospectus supplement. One or more classes of securities of each series:
- may be entitled to receive distributions allocable only to principal, only to
interest or to any combination of principal and interest;
- may only be entitled to receive distributions of prepayments of principal
throughout the lives of the securities or during specified periods;
- may be subordinated in its right to receive distributions of scheduled
payments of principal, prepayments of principal, and payments of principal
and interest to one or more other classes of the same series throughout the
life of the securities or during specified periods;
- may be entitled to receive distributions only after a specified period of
time has passed, a specified amount of principal has been paid down, or a
specified percentage of credit enhancement has built up: this could take the
form of a lockout feature, in which a class receives no principal
distributions for an initial period, then receives all principal
distributions for a period: subordinated classes could be entitled to receive
payments of principal only after a specified overcollaterization target had
been met;
- may be entitled to receive distributions in accordance with a schedule or
formula or on the basis of collections from designated portions of the assets
in the issuing trust;
- may be entitled to receive interest at a fixed rate or a rate that is subject
to change from time to time;
- may accrue, and not pay, interest until other classes of the series have been
paid in full; the accrued interest will be added to the principal or notional
amount of the securities and will be payable only after the other classes
have been paid; and
- may be entitled to distributions allocable to interest only after the
occurrence of specified events; the accrued interest will be added to the
principal or notional amount of the securities until the specified events
occur.
The timing and amounts of distributions may vary among classes, over time, or
otherwise as specified in the prospectus supplement.
Interest only and principal only securities are subject to investment risks
that are a function of the prepayment speed of the underlying pool of mortgage
loans, optional or mandatory prepayment features of the securities, and the
price paid for the securities. Some investors in these securities could lose
their investment. The ratings assigned to these securities frequently will not
address these risks, so a substantial loss may not be inconsistent with a high
rating. These interest only and principal only securities are appropriate
investments only for sophisticated investors who are able to independently
assess the risks of their investment.
DISTRIBUTIONS ON THE SECURITIES
Owners of securities will be entitled to receive payments in the manner
described in the prospectus supplement. The prospectus supplement will specify:
- whether distributions will be made monthly, quarterly, semi-annually or at
other intervals;
- the amount allocable to payments of principal and the amount allocable to
payments of interest on any distribution date; and
- the priorities which govern the distributions of principal and interest.
PRE-FUNDING FEATURE
A trust may enter into agreements with the sponsor, in which the sponsor will
request or direct the trust to acquire mortgage loans after the securities are
issued. The transfer of mortgage loans after the date the securities are issued
is known as the pre-funding feature. Any subsequent mortgage loans will be
required to conform to the requirements described in the prospectus supplement.
If the pre-funding feature is used, the trustee or indenture trustee will be
required to deposit all or a portion of the proceeds of the sale of the
securities of the series in a segregated account. The subsequent mortgage loans
will be transferred to the trust in exchange for money
5
<PAGE> 56
released from the segregated account. These transfers must occur within a
specified period, not to exceed one year. If a trust elects federal income
treatment as a REMIC or as a grantor trust, the pre-funding period will be
limited to three months. If all of the monies originally deposited in the
account are not used by the end of the specified period, all remaining monies
will be applied as a mandatory prepayment of a class or classes of securities.
OPTIONAL REDEMPTION
The master servicer or any of its affiliated sub-servicers or, if applicable,
the credit enhancement provider may, at their respective options, cause the
early redemption of a series of securities through the purchase of the mortgage
loans in the trust. The optional redemption may only occur on a date following
the date when the aggregate outstanding principal balance of either the
securities or the mortgage loans is reduced below a specified percentage of
their respective original balances.
MANDATORY REDEMPTION
The trustee or the indenture trustee, as applicable, the master servicer or
any of its affiliated sub-servicers or other persons specified in the prospectus
supplement may be required to cause the early redemption of a series of
securities by soliciting competitive bids for the purchase of the assets of the
trust or otherwise.
If a pre-funding feature is used for any series of securities, at the end of
the pre-funding period any unused amounts will be applied as a mandatory
redemption of a class or classes of securities.
ADVANCES
The servicer of the mortgage loans may be obligated to advance delinquent
installments of interest, or principal and interest, less applicable servicing
fees, on the mortgage loans. The obligation to make advances may be limited to
amounts due to the owners of securities of the series, amounts deemed to be
recoverable from late payments or liquidation proceeds, specified periods or to
any combination of these considerations. The extent of the obligation to make
advances will be specified in the prospectus supplement. The advance will be
recoverable as specified in the prospectus supplement.
In addition, the servicer may be obligated, in some months to pay interest
shortfalls which arise due to prepayments on the mortgage loans in the month in
which the prepayment occurs. The payment must come from the servicer's own funds
without any right of reimbursement but are limited to the servicing fee the
master servicer collected that month.
CREDIT ENHANCEMENT
Credit enhancement refers to a mechanism that is intended to protect the
owners of securities against losses due to defaults on the mortgage loans. A
series of securities, or some of the classes within the series, may have the
benefit of one or more types of credit enhancement including but not limited to,
the following:
- the use of excess interest to cover losses and to distribute as principal to
create overcollateralization; o the subordination of distributions on the
lower classes of securities to the required distributions in more senior
classes of securities;
- the allocation of losses on the mortgage loans to the lower classes of
securities; and
- the use of cross support, reserve funds, financial guarantee insurance
policies, guarantees, letters of credit and similar instruments and
arrangements.
The protection against losses afforded by any credit enhancement will be
limited in the manner described in the prospectus supplement.
BOOK ENTRY REGISTRATION
One or more classes of a series of securities may be issued in book entry
form in the name of a clearing agency registered with the Securities and
Exchange Commission or its nominee. Transfers and pledges of book entry
securities may be made only through entries on the books of the clearing agency.
All references to the holders or owners of securities mean the beneficial
owners, unless the context specifically requires otherwise.
FEDERAL INCOME
TAX CONSEQUENCES
The securities of each series will, for federal income tax purposes,
constitute one of the following:
6
<PAGE> 57
- interests in a trust treated as a grantor trust under applicable provisions
of the Internal Revenue Code,
- regular interests or residual interests in a trust treated as a real estate
mortgage investment conduit or REMIC under Sections 860A through 860G of the
Internal Revenue Code,
- debt issued by a trust,
- interests in a trust which is treated as a partnership, or
- regular interests or high-yield interests in a trust treated as a financial
asset securitization investment conduit or FASIT under Sections 860H through
860L of the Internal Revenue Code.
We suggest that you review Material Federal Income Tax Consequences
beginning on page 56 in this prospectus and in the prospectus supplement. In
addition, you may wish to consult your own tax advisor concerning your
investment.
ERISA CONSIDERATIONS
A fiduciary of a pension, profit sharing or other employee benefit plan may
wish to review with its legal advisors whether the purchase, holding or
disposition of securities could give rise to a prohibited transaction under
ERISA, or Section 4975 of the Internal Revenue Code, and whether an exemption
from the prohibited transaction rules is available. We suggest that you review
ERISA Considerations beginning on page 79 in this prospectus and in the
prospectus supplement.
LEGAL INVESTMENT MATTERS
The prospectus supplement will state whether or not the securities will
constitute mortgage related securities under the Secondary Mortgage Market
Enhancement Act of 1984.
RATING
Each class of securities offered by a prospectus supplement will be rated in
one of the four highest rating categories of at least one nationally recognized
statistical rating agency.
RISK FACTORS
Investment in the securities will be subject to one or more risk factors,
including declines in the value of mortgaged properties, prepayment of mortgage
loans, higher risks of defaults on particular types of mortgage loans,
limitations on security for the mortgage loans, limitations on credit
enhancement and various other factors. We suggest that you read Risk Factors
beginning on page 9 in this prospectus and in the prospectus supplement for a
discussion of these and other risk factors that you may wish to consider before
investing in the securities.
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<PAGE> 58
RISK FACTORS
You may wish to consider the following risk factors prior to any purchase
of any class of securities. You may also wish to consider the information under
the caption "Risk Factors" in the accompanying prospectus supplement.
YOU MAY NOT BE ABLE TO SELL YOUR SECURITIES, AND MAY HAVE TO HOLD YOUR
SECURITIES TO MATURITY EVEN THOUGH YOU MAY WANT TO SELL IT.
A secondary market for these securities is unlikely to develop. If it does
develop, it may not provide you with sufficient liquidity of investment or
continue for the life of these securities. The underwriters may establish a
secondary market in the securities, although no underwriter will be obligated to
do so. The securities are not expected to be listed on any securities exchange
or quoted in the automated quotation system of a registered securities
association.
Issuance of the securities in book-entry form may also reduce the liquidity in
the secondary trading market, since some investors may be unwilling to purchase
securities for which they cannot obtain definitive physical securities.
PREPAYMENTS ON THE MORTGAGE LOANS COULD CAUSE YOU TO BE PAID EARLIER THAN YOU
EXPECT, WHICH MAY ADVERSELY AFFECT YOUR YIELD TO MATURITY.
- The yield to maturity of the securities may be adversely affected by a higher
or lower than anticipated rate of prepayments on the mortgage loans. If you
purchase a security at a premium based on your expectations as to its
maturity or weighted average life, and the security pays principal more
quickly than you expected, your yield will be reduced and you may not recover
the premium you paid.
- The yield to maturity on interest only securities will be extremely sensitive
to the rate of prepayments on the mortgage loans. If the mortgage loans
prepay very quickly the yield on an interest only security could be
dramatically reduced.
- The mortgage loans may be prepaid in full or in part at any time, although
prepayment may require the borrower to pay a prepayment penalty or premium.
These penalties will generally not be property of the trust, and will not be
available for distributions to you.
- We cannot predict the rate of prepayments of the loans, which is influenced
by a wide variety of economic, social and other factors, including prevailing
mortgage market interest rates, the availability of alternative financing,
local and regional economic conditions and homeowner mobility. Therefore, we
can give no assurance as to the level of prepayments that a trust will
experience.
- Prepayments may result from mandatory redemptions relating to unused monies
held in pre-funding accounts, voluntary early payments by borrowers, payments
in connection with refinancings of the first mortgages, sales of mortgaged
properties subject to due-on-sale provisions and liquidations due to default,
as well as the receipt of proceeds from mortgage insurance policies, credit
life and disability insurance policies. In addition, repurchases or purchases
of mortgage loans from the trust or the payment of substitution adjustments
will have the same effect on the securities as a prepayment of the loans.
- One or more classes of securities of any series may be subject to optional or
mandatory redemption in whole or in part, on or after a specified date, or on
or after the time when the aggregate outstanding principal amount of the
mortgage loans or the securities is less than a specified amount or
percentage.
Any of the foregoing principal prepayments may adversely affect the yield to
maturity of the prepaid securities. Since prevailing interest rates are subject
to fluctuation, there can be no assurance that you will be able to reinvest
these prepaid amounts at a yield equaling or exceeding the yield on your
securities. You will bear the risk of reinvesting unscheduled distributions
resulting from a redemption.
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CREDIT ENHANCEMENT, IF PROVIDED, WILL BE LIMITED IN BOTH AMOUNT AND SCOPE OF
COVERAGE, AND MAY NOT BE SUFFICIENT TO COVER ALL LOSSES OR RISKS ON YOUR
INVESTMENT.
Credit enhancement may be provided in limited amounts to cover some, but not
all, types of losses on the mortgage loans and may reduce over time in
accordance with a schedule or formula. Furthermore, credit enhancement may
provide only very limited coverage as to some types of losses, and may provide
no coverage as to other types of losses. Credit enhancement does not directly or
indirectly guarantee to the investors any specified rate of prepayments, which
is one of the principal risks of your investment. The amount and types of credit
enhancement coverage, the identification of any entity providing the credit
enhancement, the terms of any subordination and any other information will be
described in the accompanying prospectus supplement.
PROPERTY VALUES MAY DECLINE, LEADING TO HIGHER LOSSES ON THE MORTGAGE LOANS.
An investment in securities which are backed by residential real estate loans
may be affected by a decline in real estate values and changes in the borrowers'
financial condition. If property values decline, the rates of delinquencies and
foreclosures could rise, increasing the likelihood of loss. If these losses are
not covered by any credit enhancement, you will bear the risk of these losses
and will have to look primarily to the value of the mortgaged properties for
recovery of the outstanding principal and unpaid interest on the defaulted
loans.
MORTGAGE LOANS WITH BALLOON PAYMENT FEATURES MAY HAVE GREATER DEFAULT RISK.
Some of the mortgage loans may be balloon loans that provide for the payment of
a large remaining principal balance in a single payment at maturity. The
mortgagor on this type of loan may not be able to pay the large payment, and may
also be unable to refinance the mortgage loan at maturity. As a result, the
default risk associated with balloon loans may be greater than that associated
with fully amortizing loans because of the large payment at maturity.
MORTGAGE LOANS WITH HIGH LOAN-TO-VALUE RATIOS MAY NOT HAVE ADEQUATE SECURITY IN
THE EVENT OF A DEFAULT, WHICH MAY RESULT IN MORE SEVERE LOSSES.
Even though all of the mortgage loans will be secured by residential real
estate, in some cases the value of the real estate may be close to, or even less
than, the amount of the mortgage loan. As a result, the mortgaged properties may
not provide adequate security for these high loan-to-value loans. The
underwriting analysis for high loan-to-value loans relies more heavily on the
mortgagor's creditworthiness than on the protection afforded by the security
interest in the mortgaged property.
Additionally, there is also the risk that if mortgagor sells the property, he or
she may be unable to pay the mortgage loan in full from the proceeds of the sale
and may default. The costs incurred by the servicer in the collection and
liquidation of high loan-to-value loans may be higher than for other loans,
because the servicer may be required to pursue collection solely against the
mortgagor and not the property. Consequently, the losses on defaulted high
loan-to-value loans may be more severe as there is no assurance that proceeds
from the sale will be sufficient to repay the mortgage loan.
MORTGAGE LOANS SECURED BY JUNIOR LIENS MAY EXPERIENCE HIGHER RATES OF
DELINQUENCIES AND LOSSES.
Some of the mortgage loans will be secured by second, or even more junior, liens
which are subordinate to the rights of the more senior mortgagees. As a result,
the proceeds from any liquidation, insurance or condemnation proceedings will be
available to satisfy the principal balance of a mortgage loan only to the extent
that the claims of all senior mortgagees have been satisfied in full. In
addition, a mortgagee secured by a junior lien may not foreclose on the
mortgaged property unless it either pays off the senior mortgage or undertakes
to make payments on the senior mortgage. The trust will not have any source of
funds to satisfy any senior mortgage or make payments due to any senior
mortgagee. This lack of funds could prevent the trust from foreclosing on a
junior lien mortgage in a timely manner which may lead to increased loss.
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FORECLOSURE OF MORTGAGED PROPERTIES INVOLVE DELAYS AND EXPENSE AND COULD CAUSE
LOSSES ON THE MORTGAGE LOANS.
Even if the mortgaged properties provide adequate security for the mortgage
loans, substantial delays could be encountered and substantial costs could be
incurred in connection with the foreclosure of defaulted loans, and
corresponding delays in the receipt of the foreclosure proceeds could occur. The
master servicer will have limited discretion to permit delinquent loans to
remain delinquent for an extended period of time prior to instituting
foreclosure proceedings, which will delay the receipt of net proceeds to the
trust. Foreclosures are regulated by state statutes, rules and judicial
decisions and are subject to many of the delays and expenses of other lawsuits,
sometimes requiring several years to complete. The master servicer will in most
cases be entitled to reimburse itself for any expenses it has paid in attempting
to recover amounts due on the liquidated loans, including payments to prior
lienholders, accrued fees of the master servicer, legal fees and costs of legal
action, real estate taxes, and maintenance and preservation expenses, all which
will reduce the amount of the net proceeds to the trust and the amount available
to make distributions to you.
GEOGRAPHIC CONCENTRATION OF MORTGAGED PROPERTIES MAY RESULT IN HIGHER LOSSES, IF
PARTICULAR REGIONS EXPERIENCE DOWNTURNS.
Some geographic regions from time to time will experience weaker regional
economic conditions and housing markets than will other regions, and,
consequently, will experience higher rates of loss and delinquency. The mortgage
loans series of securities may be concentrated in these weaker regions, and
these concentrations may present risks in addition to those present for similar
asset-backed securities without these concentrations. Information about
geographic concentration of mortgaged properties will be specified in the
accompanying prospectus supplement.
ENVIRONMENTAL CONDITION OF THE MORTGAGED PROPERTY MAY GIVE RISE TO LIABILITY FOR
THE TRUST, WHICH COULD REDUCE THE AMOUNTS AVAILABLE TO PAY YOU ON YOUR
SECURITIES.
Real property pledged as security to the trust may be subject to environmental
risks which could cause losses on your securities. Under the laws of some
states, contamination of a mortgaged property may give rise to a lien on the
mortgaged property to assure the costs of clean up. In several states, this type
of lien has priority over the lien of an existing mortgage or owner's interest
against the property. In addition, under the laws of some states and under
federal law, a lender may be liable for costs of addressing releases or
threatened releases of hazardous substances that require remedy at a property,
if agents or employees of the lender have become sufficiently involved in the
operations of the borrower, regardless of whether or not the environmental
damage or threat was caused by a prior owner. A lender such as a trust also will
increase its risk of environmental liability upon the foreclosure of the
mortgaged property, since the trust may then become the legal owner of the
property.
SECURITY INTERESTS IN MANUFACTURED HOMES MAY NOT BE PERFECTED AND THE TRUST MAY
NOT REALIZE UPON THE FULL AMOUNT DUE UNDER THE MORTGAGE LOAN.
Some of the mortgage loans may be secured by manufactured homes and, in some
cases, the real estate on which the manufactured home is located. Some federal
and state laws, which do not apply to other types of mortgage loans, limit the
master servicer's ability to foreclose on manufactured homes or may limit the
amount realized to less than the amount due under the mortgage loan. These
limitations could cause losses on your securities.
STATE AND FEDERAL CREDIT PROTECTION LAWS MAY LIMIT COLLECTION OF PRINCIPAL AND
INTEREST ON THE MORTGAGE LOANS.
Residential mortgage lending is highly regulated at both the federal and state
levels and violations of these laws, policies and principles may limit the
ability of the servicer to collect all or part of the amounts due on the
mortgage loans, may entitle the borrower to a refund of amounts previously paid
and, in addition, could subject the trust, as the owner of the mortgage loan, to
claims for damages and to administrative enforcement. The occurrence of any of
the foregoing could cause losses on your securities.
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THE SOLDIERS' AND SAILORS' CIVIL RELIEF ACT MAY LIMIT THE MASTER SERVICER'S
ABILITY TO COLLECT ON THE MORTGAGE LOANS.
The terms of the Soldiers' and Sailors' Civil Relief Act of 1940, or similar
state mortgage legislation, benefit mortgagors who enter military service,
including a mortgagor who is a member of the National Guard or is in reserve
status at the time of the origination of the mortgage loan and is later called
to active duty. These mortgagors may not be charged interest, including fees and
charges, above an annual rate of 6% during the period of the mortgagor's active
duty status, unless a court orders otherwise upon application of the lender. The
implementation of the Soldiers' and Sailors' Civil Relief Act could have an
adverse effect, for an indeterminate period of time, on the ability of the
servicer to collect full amounts of interest on these mortgage loans.
In addition, the Soldiers' and Sailors' Civil Relief Act imposes limitations
that would impair the ability of the master servicer to foreclose on loans
during the mortgagor's period of active duty status. Thus, in the event that
these mortgage loans go into default, there may be delays and losses occasioned
by the inability to foreclose on the mortgaged property in a timely fashion.
THE RATINGS ASSIGNED TO YOUR SECURITIES BY THE RATING AGENCIES MAY BE LOWERED OR
WITHDRAWN AT ANYTIME, WHICH MAY AFFECT YOUR ABILITY TO SELL YOUR SECURITIES.
The ratings assigned to the securities will be based on, among other things, the
adequacy of the assets of the trust and any credit enhancement for a series of
securities. Any rating which is assigned may not remain in effect for any given
period of time or may be lowered or withdrawn entirely by the rating agencies
if, in their judgment, circumstances in the future so warrant. Ratings may also
be lowered or withdrawn because of an adverse change in the financial or other
condition of a provider of credit enhancement or a change in the rating of a
credit enhancement provider's long term debt at anytime, which may affect your
ability to sell your securities.
THE SPONSOR'S UNDERWRITING STANDARDS ARE LESS STRINGENT THAN THOSE USED BY
FEDERAL AGENCIES, WHICH MAY INCREASE RISK OF DEFAULT.
The sponsor's and its affiliates' underwriting standards consider, among other
things, a mortgagor's credit history, repayment ability and debt-to-income
ratio, as well as the value of the mortgaged property. The sponsor's and its
affiliates' mortgage loan program provides for the origination of mortgage loans
with credit characteristics that do not meet Fannie Mae or Freddie Mac
underwriting guidelines. These mortgage loans may be more likely to become
delinquent or go into default than mortgage loans which are eligible under
Fannie Mae or Freddie Mac guidelines, and may experience higher rates of
delinquency and default.
A TRUST WITH A PRE-FUNDING FEATURE MAY NOT BE ABLE TO ACQUIRE ENOUGH ADDITIONAL
MORTGAGE LOANS, LEADING TO AN UNEXPECTED PREPAYMENT.
In the event that the sponsor does not have enough subsequent mortgage loans to
deliver to a trust on or before the end of the pre-funding period, the
securityholders will receive a prepayment of principal. Any principal prepayment
may adversely affect the yield to maturity of your securities if you purchased
them at a premium. Prevailing interest rates are subject to fluctuation, so you
may not be able to reinvest a prepayment at yields at or above the yields on
your securities.
A TRUST MAY INCLUDE MORTGAGE LOANS PURCHASED IN BULK FROM ANOTHER ORIGINATOR,
THESE MORTGAGE LOANS MAY NOT PERFORM AS WELL AS THE MORTGAGE LOANS ORIGINATED BY
THE SPONSOR OR ITS AFFILIATES.
A trust may include mortgage loans acquired in a bulk purchase. These mortgage
loans may be of a different credit quality than the sponsor's and its
affiliates' own mortgage loans, and may only be reviewed by the sponsor on a
sample basis. These mortgage loans may experience higher rates of delinquencies
and defaults.
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ADJUSTABLE RATE MORTGAGE LOANS MAY BE MORE LIKELY TO DEFAULT WHEN THE LOAN
PAYMENTS INCREASE.
Adjustable rate mortgage loans may be underwritten on the basis of an low
initial interest rate and an assessment that mortgagors will have the ability to
make higher payments as a result of a higher interest rate after relatively
short periods of time. In some instances, mortgagors' income may not be
sufficient to enable them to continue to make their loan payments as the amount
of the payments increase, therefore the likelihood of default will increase.
PAY-FOR-PERFORMANCE MORTGAGE LOANS MAY REDUCE AMOUNT OF COLLECTIONS ON THE
MORTGAGE LOANS WHICH MAY ADVERSELY AFFECT INVESTMENT.
Some of the mortgage loans may constitute pay-for-performance mortgage loans
which are originated with a stated coupon rate which may decrease if the
mortgagor maintains a steady history of timely payments over a specified period
of time. A decrease in coupon rate, although indicative of good payment
performance, may result in decreased cash proceeds received by the trust and as
a result, less cash will be available for distribution to securityholders.
INTEREST ONLY FEATURE OF REVOLVING HOME EQUITY LINES OF CREDIT MAY ADVERSELY
AFFECT INVESTMENT.
The home equity lines of credit have an interest only feature during the initial
three or five year draw period, and borrowers are only required to pay the
greater of $50.00 or the finance charge that accrued on the outstanding balance
of the home equity line of credit during the billing period. No principal
payments are required during the draw period. As a result, amounts collected by
the trust attributable to principal payments may be minimal during the draw
period and little or no principal will be paid to holders of securities issued
by the trust during the draw period.
The master servicer or the originator may each extend the draw period of a
revolving home equity line of credit in accordance with the terms of the loan
agreement. The decision to extend the draw period may include a review of
specific credit criteria. The ability to postpone the amortization of principal
by extending the draw period may have the additional effect of increasing the
combined loan-to-value ratio of the mortgage loan which in turn may increase the
likelihood of default.
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THE TRUSTS
From time to time, Advanta Conduit Receivables, Inc., in its capacity as
the sponsor of the trusts, will cause a separate trust to issue one or more
series of mortgage loan asset-backed certificates or mortgage loan asset-backed
notes. The primary assets of each trust will consist of a segregated pool of
one- to four-family residential mortgage loans, acquired by that trust from one
or more originators, the sponsor, its affiliates or from trusts created by the
sponsor or its affiliates to finance the origination of mortgage loans. The
certificates issued by a trust will represent beneficial ownership interests in
the mortgage loans held by that trust, and the notes will represent debt secured
by the mortgage loans.
Each trust will be established by to a trust agreement between the sponsor
and the designated trustee.
Securities that represent debt of a trust will be issued under an
indenture and securities that represent beneficial ownership interests in a
trust will be issued under a trust agreement.
The mortgage loans held by each trust will be master serviced by Advanta
Mortgage Corp. USA.
Each security will be backed only by the assets of the trust that issued
the security, and not the assets of any other trust except that in limited
situations, collections on mortgage loans in one trust in excess of amounts
needed to pay the securities may be used to make payments on securities issued
by other trusts, or may be reallocated as directed by the sponsor.
In the case of any individual trust, the contractual arrangements relating
to the establishment of the trust, the servicing of the mortgage loans and the
issuance of the securities may be contained in a single agreement, or in several
agreements which combine aspects of the trust agreement, the servicing agreement
and the indenture. For purposes of this prospectus, the term agreements means
all of the agreements relating to the establishment of the trust, the servicing
of the mortgage loans held by the trust and the issuance of the securities by
the trust.
THE MORTGAGE LOANS
TYPES OF MORTGAGE LOANS WHICH WILL BE HELD BY THE TRUSTS.
Each pool will consist primarily of mortgage loans, minus any portion of
the accrued interest payments due that may have been retained by any originator
or broker, or any other interest retained by the sponsor or any affiliate of the
sponsor, including interest accrued and principal collected prior to the cut-off
date. The mortgage loans will be evidenced by mortgage notes secured by
mortgages or deeds of trust or other similar security instruments creating a
lien on one- to four-family residential properties. The mortgaged properties
will consist primarily of attached or detached single-family dwelling units,
two- to four-family dwelling units, condominiums, townhouses, row houses,
individual units in planned-unit developments, cooperative apartment loans
secured by security interests in shares issued by cooperatives, small mixed use
properties, and manufactured houses. The mortgaged properties may be owner
occupied properties, which includes second and vacation homes, and non-owner
occupied properties. A mortgage loan may also be secured by the pledge of a
limited amount of non real estate collateral, such as fixtures or personal
property that includes, but is not limited to, furniture and appliances.
The mortgaged properties may be located in any one of the fifty states,
the District of Columbia, Puerto Rico or any other territories of the United
States. The mortgage loans will be what are commonly referred to as conventional
loans, meaning loans that are not insured or guaranteed by any governmental
agency. Mortgage loans with loan-to-value ratios or principal balances greater
than a specified amount may be covered wholly or partially by primary mortgage
insurance policies.
Each mortgage loan will be selected by the sponsor for inclusion in a
trust from among mortgage loans originated by one or more institutions
affiliated with the sponsor, or purchased by affiliates of the sponsor from
banks, savings and loan associations, mortgage bankers, mortgage brokers and
other mortgage loan originators or
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purchasers not affiliated with the sponsor. The characteristics of the mortgage
loans in a trust will be described in the prospectus supplement.
All of the mortgage loans will have payments that are due monthly or
bi-weekly, and will consist of one or more of the following types:
- Fixed-rate, fully-amortizing mortgage loans which may include mortgage loans
converted from adjustable-rate mortgage loans or otherwise modified providing
for level monthly payments of principal and interest and terms at origination
or modification of generally not more than 30 years;
- Adjustable rate mortgage loans having original or modified terms to maturity
of generally not more than 30 years with a coupon rate that adjusts
periodically, at the intervals described in the mortgage note over the term
of the mortgage loan. The adjustable coupon rate is equal to the sum of a
fixed margin and a specified index such as, by way of example:
(i) U.S. treasury securities of a specified constant maturity,
(ii) weekly auction average investment yield of U.S. treasury bills of
specified maturities,
(iii) prime,
(iv) the cost of funds of member institutions for the Federal Home Loan
Bank of San Francisco, or
(v) London Interbank Offered Rate.
The prospectus supplement will describe the relevant index, and aggregate
information regarding the highest, lowest and weighted average margins with
respect to the adjustable rate loans in the trust.
- Fixed-rate, graduated payment mortgage loans having original or modified
terms to maturity of generally not more than 30 years with monthly payments
during the first year calculated on the basis of an assumed coupon rate that
will be lower than the coupon rate for to the mortgage loan in subsequent
years. Deferred interest, if any, will be added to the principal balance of
the mortgage loans;
- Fixed-rate, graduated payment mortgage loans having original or modified
terms to maturity of generally not more than 30 years with monthly payments
in subsequent years that are calculated on the basis of an assumed coupon
rate that will be lower than the coupon rate for the loan in the first year
or first two years. These mortgage loans require that the mortgagor qualify
under certain positive criteria, including, but not limited to, a good
payment history;
- Balloon mortgage loans, which are mortgage loans having original or modified
terms to maturity of generally 5 to 15 years, which may have level monthly
payments of principal and interest based generally on a 10- to 30-year
amortization schedule. The amount of the monthly payment may remain constant
until the maturity date, upon which date the full outstanding principal
balance on the balloon loan will be due and payable;
- Modified mortgage loans, which are fixed or adjustable rate mortgage loans
providing for terms at the time of modification of generally not more than 30
years. Modified mortgage loans may have been consolidated or have had various
terms changed, or construction loans which have been converted to permanent
mortgage loans;
- Hybrid mortgage loans which are originated having original or modified terms
to maturity of not more than 30 years with monthly payments during the first
two, three, four, or five years, as applicable, calculated at a fixed coupon
rate, which fixed coupon rate then converts to an adjustable rate for the
remainder of the term of the loan. Hybrid loans are included in adjustable
rate mortgage loan pools in most instances;
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- Revolving home equity loans. Interest on each revolving home equity loan may
be computed and payable monthly on the average daily outstanding principal
balance of the loan. From time to time prior to the expiration of the draw
period, additional principal amounts on the revolving home equity loan may be
borrowed up to a maximum amount set forth in the credit line agreement. Under
a revolving home equity loan, during the draw period, the borrower is
obligated to pay only the amount of interest which accrues on the loan during
the billing cycle, but may also elect to pay all or a portion of the
principal. Following the conclusion of the draw period, the borrower must
begin to make regular scheduled payments of principal and interest;
- Mortgage loans which contain a feature permitting the coupon rate to be
adjusted one or more times, but not below a specified floor, depending on the
mortgagor's history of payments over a specified period or periods of time;
or
- Convertible mortgage loans, which allow the mortgagors to convert the
adjustable rates to a fixed rate at some point during the life of the
mortgage loan or fixed rate mortgage loans, which allow the mortgagors to
convert the fixed rates to an adjustable rate at some point during the life
of the mortgage loan.
INTEREST PAYMENTS ON THE MORTGAGE LOANS
Interest will be calculated on each mortgage loan by one of three methods:
Date of Payment or Simple Interest. This method provides that interest is
charged to the mortgagor at the applicable coupon rate on the outstanding
principal balance of the mortgage note and calculated based on the number of
days elapsed between receipt of the mortgagor's last payment through receipt of
the mortgagor's most current payment. The interest is deducted from the
mortgagor's payment amount and the remainder, if any, of the payment is applied
as a reduction to the outstanding principal balance of the mortgage note.
Actuarial Loans. This method provides that interest is charged to the
mortgagor, and payments are due from the mortgagor, as of a scheduled day of
each month which is fixed at the time of origination.
Rule of 78's Loans. This method provides for the payment by the mortgagor
of a specified total amount of payments, payable in equal monthly installments
on each due date, which total represents the principal amount financed and
add-on interest in an amount calculated on the basis of the stated coupon rate
for the term of the mortgage loan. The rate at which the amount of add-on
interest is earned and, correspondingly, the amount of each fixed monthly
payment allocated to reduction of the outstanding principal are calculated in
accordance with the rule of 78's.
PREPAYMENT FEES; DUE ON SALE CLAUSES; ASSUMABLE MORTGAGE LOANS
Prepayments of principal may be subject to a prepayment fee, which may be
fixed for the life of the mortgage loan, may decline over time or may be
prohibited for a period of time. The mortgage loans may include due-on-sale
clauses which permit the mortgagee to demand payment of the entire mortgage loan
in connection with the sale or transfer of the mortgaged property. Other
mortgage loans may be assumable by persons meeting the then applicable
underwriting standards of the originator.
STATISTICAL INFORMATION CONCERNING THE MORTGAGE LOANS
The prospectus supplement for each series of securities will contain
statistical information on the characteristics of the mortgage loans held by the
trust. This statistical information may be based on a sample of the mortgage
loans, and will be presented as of a statistical calculation date, which may
also be the cut-off date. The statistical information may include, among other
things, to the extent applicable to the particular trust:
- the aggregate outstanding principal balance;
- the average outstanding principal balance;
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- the range of loan-to-value ratios and combined loan-to-value ratios;
- the range of the coupon rates; and
- the geographical distribution of the mortgage loans.
If the statistical information presented in a prospectus supplement is
calculated as of a date earlier than the cut-off date for the trust, the actual
statistical characteristics as of the cut-off date will not deviate by more than
5% from the information that is presented.
Preliminary or more general information about the mortgage loans may be
included in the prospectus supplement, and specific or final information about
the mortgage loans may be contained in the agreements, which will be filed with
the Securities and Exchange Commission and will be made available to holders of
the series within fifteen days after the initial issuance of the securities.
The loan-to-value ratio of a mortgage loan is equal to the ratio,
expressed as a percentage, of the original principal balance of the mortgage
loan to the appraised value of the mortgaged property at the time of origination
of the mortgage loan. 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 plus, if applicable, the then current
principal balance of all mortgage loans secured by liens on the mortgaged
property having priorities senior to that of the lien which secures the mortgage
loan to the appraised value of the mortgaged property at the time of origination
of the mortgage loan. In general, for purchase money mortgage loans, the
loan-to-value and the combined loan-to-value ratios are calculated using the
lower of the purchased price or appraised values of the mortgaged properties at
the time of origination.
MORTGAGE LOAN PROGRAM AND UNDERWRITING GUIDELINES
As a general matter, the sponsor's mortgage loan program will consist of
the origination and purchase of mortgage loans to mortgagors with non-conforming
credit. A borrower with non-conforming credit is a borrower who does not meet
the standard underwriting guidelines of Fannie Mae or Freddie Mac. However, each
trust may contain mortgage loans which do conform to Fannie Mae or Freddie Mac
standard underwriting guidelines.
The mortgagors generally will have obtained the mortgage loans for one or
more of four reasons:
- to purchase the mortgaged property,
- to refinance an existing mortgage loan on more favorable terms,
- to consolidate debt, or
- to obtain cash proceeds by borrowing against the mortgagor's equity in the
mortgaged property.
It is the sponsor's practice to solicit existing mortgagors for the
possible refinancing of their existing mortgages if the mortgagors indicate that
they are looking for more favorable terms.
DESCRIPTION OF UNDERWRITING GUIDELINES
The following is a description of the underwriting guidelines customarily
employed by the sponsor and its affiliates in originating or acquiring mortgage
loans. The sponsor's and its affiliates' underwriting guidelines are less
stringent than the standards generally acceptable to Fannie Mae and Freddie Mac
with regard to the mortgagor's credit standing and repayment ability. Mortgagors
who qualify under the sponsor's underwriting guidelines may not satisfy Fannie
Mae and Freddie Mac underwriting guidelines for any number of reasons,
including, without limitation, unsatisfactory payment histories or
debt-to-income ratios, or a record of derogatory credit items such as
outstanding judgments or prior bankruptcies.
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The underwriting guidelines to be used in originating or acquiring the
mortgage loans are primarily intended to assess the creditworthiness of the
mortgagor, the value of the mortgaged property and the adequacy of the property
as collateral for the mortgage loans.
Originators' underwriting procedures customarily utilize one of two types
of underwriting guidelines: the sponsor guidelines, which are guidelines of the
sponsor and its affiliated originators and approved guidelines, which are
guidelines of approved unaffiliated originators.
Mortgage loans that are originated by the sponsor and its affiliated
originators are underwritten using the sponsor's guidelines. Mortgage loans that
are purchased by the sponsor and its affiliated originators are underwritten
utilizing either the sponsor's guidelines or the approved guidelines.
SPONSOR'S GUIDELINES
The sponsor's guidelines consider the value and adequacy of the mortgaged
property as collateral for the proposed mortgage loan but also takes into
consideration the mortgagor's credit standing and repayment ability. There are
three major steps in the sponsor's underwriting process: (1) identify the
eligibility and appropriate credit grade of the mortgagor, (2) evaluate the
eligibility and lendable equity of the mortgaged property, and (3) ensure the
loan terms meet those acceptable for that credit grade. On a case by case basis
the sponsor may determine that, based on compensating factors, a prospective
mortgagor may not strictly qualify under a particular underwriting credit grade
risk category but warrants an underwriting exception. Compensating factors may
include, without limitation, relatively low loan-to-value ratio, relatively low
debt-to-income ratio, stable employment and amount of time borrower has lived in
the same residence. It is anticipated that a number of the mortgage loans
underwritten in accordance with the sponsor's guidelines will have been
originated based on underwriting exceptions. The sponsor's guidelines are
revised continuously based on opportunities and prevailing conditions in the
nonconforming credit residential mortgage market, as well as the expected market
for the securities.
In addition to mortgage loans originated by the sponsor and its affiliated
originators, the sponsor and its affiliated originators may purchase mortgage
loans from unaffiliated originators which were underwritten in accordance with
the sponsor's guidelines. The sponsor generally will review or cause to be
reviewed only a limited portion of the mortgage loans purchased from
unaffiliated originators for conformity with the sponsor's guidelines.
The sponsor's guidelines permit the origination and purchase of mortgage
loans with multi-tiered credit characteristics tailored to individual credit
profiles. In general, the sponsor's guidelines require an analysis of the equity
in the mortgaged property, the payment history of the borrower, the borrower's
ability to repay debt, the property type, and the characteristics of the
underlying first mortgage, if any. A lower maximum combined loan-to-value ratio
is required for lower gradations of credit quality and higher property values.
The mortgage loans generally are secured by either owner occupied
properties, including second and vacation homes, or non-owner occupied
properties which, in either case are single-family residences, which may be
detached, part of a two- to four-family dwelling, a condominium unit, coop or a
unit in a planned unit development. The sponsor's guidelines generally require
that the combined loan-to-value ratio of a mortgage loan not exceed 100%, after
taking into account the amount of any primary mortgage insurance applicable to
the mortgage loan.
One of the sponsor's programs specifically relates to mortgage loans with
combined loan-to-value ratios in excess of 100%, but with a maximum of 125%.
This program is known as the high LTV program. Under this high LTV program,
relatively more emphasis in the underwriting analysis is placed on the
borrower's payment history and ability to repay debt, rather than on the
property value of the mortgaged property. High LTV loans are generally targeted
as debt consolidation loans for borrowers with generally strong credit ratings.
Lending decisions for these loans are based on an analysis of the prospective
mortgagor's documented cash flow and credit history supplemented by a property
value evaluation deemed appropriate by the sponsor.
For high LTV loans which are senior liens, the sponsor requires hazard
insurance. For high LTV loans which are in a junior lien position, the sponsor
requires verification of the existence of hazard insurance at the time of
origination, but does not generally track hazard insurance after origination.
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The value of each property proposed as security for a mortgage loan is
determined by either a full appraisal, a limited appraisal conducted on a
drive-by basis, or a statistical valuation. Two appraisals are generally
required for properties valued over $500,000.
The sponsor's guidelines provide for the origination of loans under three
general loan programs:
- a full verification program for salaried or self-employed borrowers,
- a lite documentation program for borrowers who may have income which cannot
be verified by traditional methods and
- a non-income verification program for salaried and self-employed borrowers.
However, the sponsor's guidelines allow for some borrowers with existing loans
to refinance loans with either limited, or no, verification of income. The
sponsor may also purchase pools of mortgage loans which may include some
mortgage loans originated under a non-income verification program for non
salaried or self-employed borrowers.
A credit report by an independent, nationally recognized credit reporting
agency is required reflecting the applicant's complete credit history. The
credit report should reflect delinquencies of 30 days or more, repossessions,
judgments, foreclosures, garnishments, bankruptcies and similar instances of
adverse credit that can be discovered by a search of public records. All taxes
and assessments not included in the payment are required to be verified as
current. For junior loan mortgages, verification of the outstanding balance, the
payment status and whether local taxes, interest, insurance and assessments are
included in the applicant's monthly payment is required.
In connection with purchase-money loans, the sponsor's guidelines
generally require an acceptable source of funds for downpayment, verification of
the source of the downpayment and adequate cash reserves for owner occupied
second homes and non-owner occupied homes. Adequate equity in the mortgaged
property is used as a countervailing consideration to the first three
requirements.
Loan applicants are protected by laws which offer them a time frame after
loan documents are signed during which the applicant has the right to cancel the
mortgage loan. This time frame is known as the rescission period. The rescission
period must have expired prior to funding a loan and may not be waived by the
applicant except as permitted by law.
The sponsor's guidelines generally require title insurance coverage issued
by an approved ALTA or CLTA title insurance company on each mortgage loan it
purchases. Any of the sponsor, the originator, or their assignees must be named
as the insured party. Where title insurance is not required the sponsor's
guidelines require a property report and title search to evidence that the title
or lien position is as indicated on the mortgage loan application.
The applicant is required to secure property insurance in an amount
sufficient to cover the mortgage loan and any senior mortgage. If the sum of any
outstanding senior mortgage and the mortgage loan exceeds the cost of rebuilding
the mortgaged property, which generally does not include land value, insurance
equal to replacement value may be accepted. The respective originator or its
designee is required to ensure that its name and address is properly added to
the mortgagee clause of the insurance policy. In the event the sponsor or the
originator's name is added to a loss payee clause and the policy does not
provide for written notice of policy changes or cancellation, an endorsement
adding the provision is required.
APPROVED GUIDELINES
The sponsor and its affiliated originators may purchase mortgage loans or
pools of mortgage loans, in whole or in part, from originators that are not
affiliated with the sponsor, unaffiliated originators. The underwriting
guidelines employed by unaffiliated originators may deviate from the sponsor's
guidelines but are approved by the sponsor prior to their purchasing the
mortgage loans or pools of mortgage loans and are documented as part of the loan
sale purchase agreement. The sponsor or its affiliated originators will
reunderwrite a representative sample of the mortgage loans to ensure that the
mortgage loans, on a sample basis, are in conformity with the approved
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guidelines. There can be no assurance that every mortgage loan was originated in
conformity with the approved guidelines, or that the quality or performance of
mortgage loans underwritten under to the approved guidelines will be equivalent
under all circumstances.
BULK PURCHASES
Mortgage loans purchased in bulk may be originated by a variety of
originators under several different underwriting guidelines. The purchase of
bulk mortgage loans may not conform to either the requirements of the sponsor's
guidelines or the approved guidelines. The sponsor will reunderwrite the
mortgage loans acquired in a bulk purchase on a sample basis. This
reunderwriting may be performed by the sponsor or its affiliated originators or
a third party acting at the direction of the sponsor.
REPRESENTATIONS AND WARRANTIES CONCERNING THE MORTGAGE LOANS
The sponsor will make a number of representations and warranties to the
trust regarding the mortgage loans. The assignment of the mortgage loans to the
trustee will be without recourse, except in the event of a breach of one of
these representations or warranties. The material representations and warranties
state that the schedule of mortgage loans is correct, all material loan
documentation has been provided, not more than a specified amount of loans are
delinquent, and that the mortgage loans were originated in accordance with
applicable laws.
If a breach of any representation or warranty occurs in respect of a
mortgage loan, that materially and adversely affects the interests of the
securityholders in the mortgage loan, the sponsor or the originator may be
obligated to purchase, or cause to be purchased, unqualified mortgage loan from
the trust.
To a limited extent the sponsor, or the originator, may substitute a
qualifying replacement mortgage loan for an unqualified mortgage loan, rather
than repurchase it.
The master servicer will be required to enforce the purchase or
substitution obligations for the benefit of the trustee and the securityholders,
following the practices it would employ in its good faith business judgment if
it were the owner of the mortgage loan. This purchase or substitution obligation
will not, however, become an obligation of the master servicer in the event the
sponsor or the originator fails to honor the obligation. The foregoing will
constitute the sole remedy available to securityholders or the trustee for a
breach of representation.
THE MASTER SERVICER MAY ACT THROUGH SUB-SERVICERS
An originator of a mortgage loan that is affiliated with the sponsor may
act as the sub-servicer for its mortgage loans. A third party acting as a
sub-servicer for the mortgage loans will be required to meet additional
standards concerning its mortgage loan servicing portfolio, including a minimum
tangible net worth under generally accepted accounting principles and other
qualifications.
A sub-servicer may be obligated to make advances to the trust for
- delinquent installments of principal or interest or principal and interest,
net of any sub-servicing or other compensation, on mortgage loans,
- taxes and insurance premiums not paid by the mortgagor on a timely basis,
- interest shortfalls resulting from prepayments of the outstanding principal
balance of a mortgage loan to zero.
The sub-servicer will be entitled to reimbursement for servicing-related
expenditures that it makes to the same extent that the master servicer would be
reimbursed.
No assurance can be given that the sub-servicers will be able to, or will,
carry out their advancing or payment obligations, however the master servicer
will remain obligated as if they were servicing the mortgage loans.
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As compensation for its servicing duties, the sub-servicer may be entitled
to receive a fee. The sub-servicer may also be entitled to collect and retain,
as part of its servicing compensation, any late charges or prepayment penalties.
See "The Agreements -- Servicing and Other Compensation and Payment of Expenses"
and "Description of the Securities -- Delinquency Advances and Servicing
Advances" for more information.
A sub-servicer may transfer its servicing obligations to another entity
but only with the prior written approval of the master servicer.
DESCRIPTION OF THE SECURITIES
The securities will be issued in series. The following summaries describe
the material provisions of the securities.
The securities may be offered in the form of certificates representing
beneficial ownership interests in the mortgage loans held by the trust or in the
form of notes representing debt secured by the mortgage loans held by the trust.
Each series or class of securities may have a different rate of interest,
which may be fixed or adjustable. The prospectus supplement will specify the
interest rate for each series or class of securities, or the initial interest
rate and the method for determining subsequent changes to the interest rate.
A series may include one or more classes of interest only or principal
only securities. In addition, a series may include two or more classes that
differ as to timing, sequential order, priority of payment, interest rate or
amount of distributions of principal or interest or both. Distributions of
principal or interest or both on any class may be made upon the occurrence of
specified events, in accordance with a schedule or formula, or on the basis of
collections from designated assets of the trust. A series may include one or
more classes of securities, as to which accrued interest will not be distributed
but rather will be added to the principal or notional balance of the security on
each payment date.
A series of securities may include one or more classes of securities that
are senior to one or more classes of subordinate securities in respect of
distributions of principal and interest and allocations of losses on the
mortgage loans.
Each trust may also issue classes of subordinated equity securities which
will represent the right to receive the proceeds of the trust property after all
required payments have been made to the holders of all of the senior and
subordinate notes or certificates issued by the trust, and following any
required deposits to any reserve account that may be established for the benefit
of the holders of the notes or certificates. These subordinated classes may
constitute what are commonly referred to as the residual interest, seller's
interest or the general partnership interest, depending upon the treatment of
the trust for federal income tax purposes. These subordinated classes generally
will not have principal and interest components. Any losses suffered by the
trust will first be absorbed by the residual class of securities, or as
described in the prospectus supplement.
The prospectus supplement relating to a series of securities will describe
the following specific terms of that series:
- the aggregate principal amount, interest rate, and authorized denominations
of each class of securities;
- a statistical profile of the mortgage loans backing that series;
- the terms of any credit enhancement for that series;
- a description of other material assets in the trust, including any reserve
fund;
- the final scheduled distribution date of each class of securities;
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- the method used to calculate the rate at which interest on each class of
securities will accrue, the time period during which interest on each class
of securities will accrue, the order of priority of the application of
interest to the respective classes and the manner of distribution of interest
among each class of securities;
- the method to be used to calculate the amount of principal required to be
applied to each class of securities of each series on each payment date, the
timing of the application of principal and the order of priority of the
application of principal to the respective classes of securities;
- additional information about the plan of distribution of the securities; and
- the federal income tax characterization of the securities.
GENERAL PAYMENT TERMS OF SECURITIES
Securityholders will be entitled to receive payments on their securities
on specified payment dates. Payment dates will occur monthly, quarterly or
semi-annually, as described in the prospectus supplement.
The prospectus supplement will describe a record date for each payment
date, as of which the trustee or its paying agent will fix the identity of the
securityholders for the purpose of receiving payments on that payment date. The
prospectus supplement and the agreements will describe a period, known as the
remittance period, prior to each payment date. Interest accrued and principal
collected on the mortgage loans during a remittance period will be required to
be remitted by the master servicer to the trustee prior to the payment date and
will be used to distribute payments to securityholders on that payment date.
The agreements may provide that all or a portion of the principal
collected on the mortgage loans may be applied by the trustee to the acquisition
of subsequent mortgage loans during a specified period rather than used to
distribute payments of principal to securityholders during that period. These
securities would then possess an interest only period, also commonly referred to
as a revolving period, which will be followed by an amortization period. Any
interest only or revolving period may terminate prior to the end of the
specified period and result in an earlier than expected amortization of the
securities.
None of the securities or the mortgage loans will be guaranteed or insured
by any governmental agency or instrumentality, the sponsor, the master servicer,
any sub-servicer, the trustee, any originator or any of their respective
affiliates.
PAYMENT DATE DISTRIBUTIONS
On each payment date, distributions of principal and accrued interest or,
where applicable, of principal only or interest only, on each class of
securities will be made either by the trustee or a paying agent appointed by the
trustee, to the persons who are registered as securityholders at the close of
business on the record date. Interest that accrues and is not payable on a class
of securities may be added to the principal balance of each security of the
class. Distributions will be made in immediately available funds, by wire
transfer or otherwise, to the account of a securityholder. If the securityholder
has notified the trustee or the paying agent, as the case may be, and the
agreements provide, payment may be in the form of a check mailed to the address
of the person entitled thereto as it appears on the register. The final payment
distribution upon retirement of the securities will be made only upon
presentation and surrender of the securities at the office or agency of the
trustee specified in the notice to securityholders of the final distribution.
DETERMINATION OF PRINCIPAL AND INTEREST ON THE SECURITIES
The method of determining, and the amount of, distributions of principal
and interest or, principal only or interest only, on a particular series of
securities will be described in the prospectus supplement. Each class of
securities, except for principal only securities, may bear interest at a
different interest rate. Interest on the securities will be calculated either on
the basis of a 360-day year consisting of twelve 30-day months, on the basis of
the actual number of days in the accrual period over 360 or on the basis of the
actual number of days in the accrual period over 365 or as described in the
prospectus supplement.
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On each payment date for a series of securities, the trustee or the paying
agent will distribute to each securityholder of record an amount equal to the
percentage interest represented by the security held by the holder multiplied by
the total amount to be distributed on that payment date on account of that
class.
For a series of securities that includes two or more classes, the timing,
sequential order, priority of payment, amount of distributions in respect of
principal, any schedule or formula or other provisions applicable to the
determination of distributions among multiple classes of senior securities or
subordinate securities will be described in the prospectus supplement.
Prior to each payment date the trustee will determine the amounts of
principal and interest which will be due to securityholders on that payment
date. If the amount then available to the trustee is insufficient to cover the
amount due to securityholders, the trustee will be required to notify the credit
enhancement provider, and the credit enhancement provider, in most instances,
will be required to fund the deficiency.
YIELD CONSIDERATIONS
The yield to maturity of a security will depend on the price paid, its
interest rate and the rate of payment of principal on the security or on its
notional amount, if the security is not entitled to payments of principal, as
well as other factors.
A class of securities may be entitled to payments of interest at a fixed,
variable maximum interest rate, commonly referred to as an available funds cap,
which is calculated based on the weighted average of the mortgage loan coupon
rates minus any interest strips retained by the originator and all trust fees,
if so specified in the prospectus supplement, or at another maximum interest
rate as may be described in the prospectus supplement.
The yield on the securities also will be affected by liquidations of
mortgage loans following mortgagor defaults and by purchases of mortgage loans
in the event of breaches of representations. The yield to maturity on some types
of securities, including interest only and principal only securities, and
securities in a series including more than one class, may be relatively more
sensitive to the rate of prepayment on the mortgage loans than other classes of
securities. See "Mortgage Loan Program and Underwriting Guidelines --
Representations and Warranties Concerning the Mortgage Loans" above and
"Description of the Securities -- Assignment of Mortgage Loans" below.
The timing of changes in the rate of principal payments on or repurchases
of the mortgage loans may significantly affect an investor's actual yield to
maturity, even if the average rate of principal payments experienced over time
is consistent with an investor's expectation. As a result, the effect on an
investor's yield of principal payments and repurchases occurring at a rate
higher, or lower, than the rate anticipated by the investor during the period
immediately following the issuance of a series of securities would not be fully
offset by a subsequent like reduction or increase in the rate of principal
payments.
For some of the adjustable rate loans, the coupon rate at origination may
be a teaser rate which is below the rate that would result if the index and
margin were applied at origination. The repayment of any mortgage loan with a
teaser rate may be dependent on the ability of the mortgagor to make larger
monthly payments following the adjustment of the coupon rate.
MATURITY AND PREPAYMENT CONSIDERATIONS
The original terms to maturity of the mortgage loans in a given trust will
vary depending upon the type of mortgage loans included in the trust. The
prospectus supplement for a series of securities will contain information
concerning the types and maturities of the mortgage loans in the trust. The
mortgage loans may be prepaid in full or in part at any time although the
mortgagor may be required to pay a prepayment penalty or premium. These
prepayment penalties will generally not be property of the trust. The prepayment
experience of the mortgage loans in a trust will affect the maturity, average
life and yield of the securities.
Payment of the full outstanding principal balance of a balloon loan will
generally depend on the mortgagor's ability to obtain refinancing of the
mortgage loan or to sell the mortgaged property prior to the maturity
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of the balloon loan. The ability to obtain refinancing will depend on a number
of factors prevailing at the time refinancing or sale is required, including,
without limitation, real estate values, the mortgagor's financial situation,
prevailing mortgage loan coupon rates, the mortgagor's equity in the mortgaged
property, tax laws and prevailing general economic conditions. Neither the
sponsor, the master servicer, nor any of their affiliates will be obligated to
refinance or repurchase any mortgage loan or to sell any mortgaged property
because of a maturing balloon payment.
A number of factors, including homeowner mobility, economic conditions,
enforceability of due-on-sale clauses, mortgage market interest rates and the
availability of mortgage funds, affect prepayment experience. The mortgage loans
that contain due-on-sale provisions permitting the mortgagee to accelerate the
maturity of the mortgage loan upon transfer of the underlying mortgaged
property. The master servicer will enforce any due-on-sale clause to the extent
it has knowledge of the transfer if it is entitled to do so under applicable
law. The master servicer will not take any action to enforce a due-on-sale
provision which would adversely affect or jeopardize coverage under any
applicable insurance policy. The extent to which adjustable rate loans are
assumed by purchasers of the mortgaged properties rather than prepaid by the
mortgagors in connection with the sales of the mortgaged properties will affect
the weighted average life of the series of securities. For a description of
provisions of the agreements and certain legal developments that may affect the
prepayment experience on the mortgage loans. See "Serving Procedures --
Collection and Other Servicing Procedures" and "Legal Aspects of the Mortgage
Loans -- Enforceability of Mortgage Loan Provisions".
There can be no assurance as to the rate of prepayment of the mortgage
loans. The sponsor is not aware of any reliable, publicly available statistics
relating to the principal prepayment experience of diverse portfolios of
mortgage loans over an extended period of time. All statistics known to the
sponsor for prepayment experience on mortgage loans indicates that while some
mortgage loans may remain outstanding until their stated maturities, a
substantial number will be paid prior to their respective stated maturities.
Although the coupon rates on adjustable rate loans will be subject to
periodic adjustments, these adjustments will not increase or decrease the coupon
rates by more than a fixed percentage amount on each adjustment date, not
increase the coupon rates over a fixed percentage amount and be based on an
index which may not rise and fall consistently with mortgage market interest
rate rates plus the margin. As a result, the coupon rates on the adjustable rate
loans in a trust at any time may not equal the prevailing rates for similar,
newly originated adjustable rate mortgage loans. In some rate environments, the
prevailing rates on fixed-rate mortgage loans may be sufficiently low in
relation to the then current coupon rates on adjustable rate loans that the rate
of prepayment of adjustable rate loans may increase as a result of refinancings.
There can be no certainty as to the rate of prepayments on the mortgage loans
during any period or over the life of any series of securities.
All or a portion of the collected principal may be retained by the
trustee, and held in temporary investments, including mortgage loans, for a
specified period prior to being distributed payments of principal to
securityholders. The result of the retention and temporary investment by the
trustee of principal would be to slow the amortization rate of the securities
relative to the amortization rate of the mortgage loans, or to attempt to match
the amortization rate of the securities to an amortization schedule established
at the time the securities are issued. Those features may terminate upon the
occurrence of events to be described in the prospectus supplement, resulting in
the need to make principal payments to the securityholders and an acceleration
of the amortization of the securities.
FORM OF SECURITIES
We expect that the securities of each series will be issued in
uncertificated book-entry form, and will be registered in the name of Cede, the
nominee of the DTC. The prospectus supplement will state if the securities will
be in physical rather than book-entry form. DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a clearing corporation within the meaning of the Uniform
Commercial Code and a clearing agency registered under the Securities Exchange
Act. DTC was created to hold securities for its participants and facilitate the
clearance and settlement of securities transactions between its participants
through electronic book-entry changes in their accounts, eliminating the need
for physical movement of certificates. DTC's participants include securities
brokers and dealers, banks, trust companies and clearing corporations and may
include other organizations. Indirect access to the DTC system also is available
to indirect
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participants such as brokers, dealers, banks and trust companies that clear
through or maintain a custodial relationship with a DTC participant, either
directly or indirectly.
Under a book-entry format, securityholders that are not DTC participants
or indirect participants but desire to purchase, sell or otherwise transfer
ownership of securities registered in the name of Cede, as nominee of DTC, may
do so only through participants and indirect participants. In addition, these
securityholders will receive all distributions of principal of and interest on
the securities from the trustee through DTC and its participants.
Securityholders may receive payments after the payment date because DTC will
forward these payments to its participants, which thereafter will be required to
forward these payments to indirect participants or securityholders. Unless and
until physical securities are issued, it is anticipated that the only
securityholder will be Cede, as nominee of DTC, and that the beneficial holders
of securities will not be recognized by the trustee as securityholders under the
agreements. Securityholders which are not DTC participants will only be
permitted to exercise their rights under the agreements through DTC or through
its participants.
Under the rules, regulations and procedures creating and affecting DTC and
its operations, DTC is required to make book-entry transfers among its
participants and is required to receive and transmit payments of principal of
and interest on the securities. DTC's participants and indirect participants are
required to make book-entry transfers and receive and transmit payments on
behalf of their respective securityholders. Accordingly, although
securityholders will not possess physical securities, the rules provide a
mechanism by which securityholders will receive distributions and will be able
to transfer their interests.
Unless and until physical securities are issued, securityholders who are
not DTC participants may transfer ownership of securities only through DTC
participants by instructing those participants to transfer securities, through
DTC for the account of the purchasers of the securities, which account is
maintained with their respective participants. Under DTC's 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 respective participants will
make debits or credits, as the case may be, on their records on behalf of the
selling and purchasing securityholders.
Because DTC can only act on behalf of its participants, who in turn act on
behalf of indirect participants and some banks, the ability of a securityholder
to pledge securities to persons or entities that do not participate in the DTC
system, or otherwise take actions in respect of the securities may be limited
due to the lack of a physical certificate for the securities.
DTC in general advises that it will take any action permitted to be taken
by a securityholder under the agreements only at the direction of one or more of
its participants to whose account the securities are credited. Additionally, DTC
advises that it will take actions only at the direction of and on behalf of its
participants whose holdings include current principal amounts of outstanding
securities that satisfy the minimum percentage established in the agreements.
DTC may take conflicting actions if directed by its participants.
Any securities initially registered in the name of Cede, as nominee of
DTC, will be issued in fully registered, certificated form to securityholders or
their nominees, rather than to DTC or its nominee only under the events
specified in the agreements and described in the prospectus supplement. Upon the
occurrence of any of the events specified in the agreements and the prospectus
supplement, DTC will be required to notify its participants of the availability
through DTC of physical certificates. Upon surrender by DTC of the securities
and receipt of instruction for reregistration, the trustee will issue the
securities in the form of physical certificates, and thereafter the trustee will
recognize the holders of the physical certificates as securityholders.
Thereafter, payments of principal of and interest on the securities will be made
by the trustee directly to securityholders in accordance with the procedures set
forth in the agreements. The final distribution of any security whether physical
certificates or securities registered in the name of Cede, however, will be made
only upon presentation and surrender of the securities on the final payment date
at the office or agency specified in the notice of final payment to
securityholders.
None of the sponsor, the originators, the master servicer or the trustee
will have any liability for any actions taken by DTC or its nominee or Cedel or
Euroclear, including, without limitation, actions for any aspect of the
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records relating to or payments made on account of the securities held by Cede,
as nominee for DTC, or for maintaining, supervising or reviewing any records
relating to the securities.
ASSIGNMENT OF MORTGAGE LOANS
At the time of issuance of a series of securities, the sponsor will direct
or request the mortgage loans to be acquired by the trust to be assigned to the
trustee together with all interest accrued and principal collected in respect of
the mortgage loans on or after the cut-off date. Each mortgage loan will be
identified in a schedule appearing as an exhibit to the agreements.
In connection with the establishment of a trust, the sponsor may first
transfer the mortgage loan to an affiliate and the affiliate will then transfer
the mortgage loan to the trust. The prospectus supplement will describe any
requirements for the delivery of mortgage documents, such as mortgage notes and
assignments of mortgage, in connection with the establishment of the trust.
The trustee will be authorized to appoint a custodian to maintain
possession of and, if applicable, to review the documents relating to the
mortgage loans as the agent of the trustee.
PRE-FUNDING FEATURE; MANDATORY PREPAYMENT
A trust may contain a feature which allows the sponsor or its affiliates
to transfer subsequent mortgage loans to the trust following the date the trust
is established and the securities are issued. Any mortgage loans subsequently
transferred to a trust will be required to conform to required mortgage loan
characteristics, and satisfaction of the conditions in the agreements.
If the pre-funding feature is to be used, then the trustee will be
required to deposit a portion of the net proceeds received in connection with
the sale of one or more classes of securities in a segregated account. The
subsequent mortgage loans will be transferred to the trust in exchange for money
released by the trustee from this segregated pre-funding account. These
transfers must occur within a specified period, not to exceed one year, from the
date the trust was established. If a trust elects federal income treatment as a
REMIC or as a grantor trust, the pre-funding period will be limited to three
months.
During the pre-funding period, the monies deposited to the pre-funding
account will be invested in one or more of the following eligible investments:
- Direct general obligations of the United States or the obligations of any
agency or instrumentality of the United States fully and unconditionally
guaranteed, the timely payment or the guarantee of which constitutes a full
faith and credit obligation of the United States.
- Federal Housing Administration debentures rated Aa2 or higher by Moody's and
AA or better by Standard & Poor's.
- Freddie Mac senior debt obligations rated Aa2 or higher by Moody's and AA or
better by Standard & Poor's.
- Federal Home Loan Banks' consolidated senior debt obligations rated Aa2 or
higher by Moody's and AA or better by Standard & Poor's.
- Federal funds, certificates of deposit, time and demand deposits, and
bankers' acceptances which have original maturities of not more than 365 days
of any domestic bank, the short-term debt obligations of which are rated A-1
or better by Standard & Poor's and P-1 by Moody's.
- Investment agreements approved by the credit enhancement provider or the
trustee.
- Commercial paper which has an original maturities of not more than 365 days
rated A-1 or better by Standard & Poor's and P-1 or better by Moody's.
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- Investments in money market funds rated AAAm or AAAM-G by Standard & Poor's
and Aaa by Moody's.
- Other investments approved in writing by the credit enhancement provider or
the trustee and acceptable to the rating agencies.
The agreements will require that, if all monies originally deposited to a
pre-funding account are not used by the end of the pre-funding period, then any
remaining monies will be applied as a mandatory prepayment of principal on the
securities.
PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO ACCOUNTS
As set forth in the agreements, the master servicer will deposit or will
cause to be deposited into one or more accounts, known as the principal and
interest account, the following amounts for the mortgage loans:
- all payments on account of principal, including principal prepayments;
- all payments on account of interest collected and in some cases accrued, net
of the portion of each payment thereof retained by the master servicer, if
any, as its servicing fee or other compensation and any interest collected
and in some cases accrued prior to the cut-off date;
- all net liquidation proceeds received and retained, if any, in connection
with the liquidation of any defaulted mortgage loan, by foreclosure, deed in
lieu of foreclosure or otherwise. All proceeds of any mortgage insurance
policy and proceeds from any alternative arrangements established in lieu of
any insurance, other than proceeds to be applied to the restoration of the
mortgaged property or released to the mortgagor in accordance with the master
servicer's normal servicing procedures. The deposit shall be net of
unreimbursed liquidation expenses, insured expenses incurred and unreimbursed
advances by the master servicer or by the sub-servicer and net of the
premiums paid for, or the proceeds of, credit life insurance policies;
- all proceeds of any mortgage loan purchased from the trust or, in the case of
a mortgage loan substitution, amounts representing a principal adjustment;
- any amounts required to be deposited by the master servicer in connection
with losses realized on investments of funds held in the principal and
interest account;
- any amounts required to be deposited in connection with the liquidation of
the trust property; and
- any amounts required to be transferred from the distribution account to the
principal and interest account.
All deposits shall be made on a daily basis, but no later than two
business days following receipt of those amounts.
The portion of any payment received by the master servicer in respect of a
mortgage loan that is allocable to any interest strip retained by the originator
or other person will not be deposited into the principal and interest account,
but will be paid over to the parties entitled to those amounts.
In addition to the principal and interest account, the sponsor shall cause
to be established and the trustee will maintain, at the corporate trust office
of the trustee, in the name of the trust for the benefit of the holders of each
series of securities a distribution account to be used for the disbursement of
payments on each series of securities. The principal and interest account and
the distribution account each must be maintained with an institution whose
deposits are insured by the Bank Insurance Fund or the Savings Association
Insurance Fund of the FDIC, which is acceptable to the rating agencies.
In addition, the trustee will cause all payments received by it from any
credit enhancement provider to be deposited in the distribution account not
later than the payment date.
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All funds in the distribution account will be invested and reinvested by
the trustee for the benefit of the securityholders and any credit enhancement
provider, as directed by the master servicer, in designated eligible
investments. The principal and interest account may contain funds relating to
more than one series of securities as well as payments received on other
mortgage loans serviced or master serviced by it that have been deposited into
the principal and interest account. All funds in the principal and interest
account will be required to be held either uninvested, up to limits insured by
the FDIC or invested by the master servicer in the designated eligible
investments. The master servicer will be entitled to net investment proceeds on
the funds in the principal and interest account and the distribution account
held by the trustee.
WITHDRAWALS FROM THE PRINCIPAL AND INTEREST ACCOUNT
On a day preceding each payment date, the master servicer will withdraw
from the principal and interest account and remit to the trustee for deposit in
the distribution account;
- the amount to be distributed to securityholders on that payment date;
- any amounts required to be transferred to any reserve account established for
that series;
- any amounts required to be paid by the master servicer out of its own funds
due to the operation of a deductible clause in any blanket insurance policies
maintained by the master servicer to cover losses on the mortgage loans;
- any other amounts as specifically set forth in the agreements; and
- the amount of any advances made by the master servicer.
In addition, the master servicer may from time to time make withdrawals
from the principal and interest account for the following purposes:
- to reimburse itself or any sub-servicer for any accrued and unpaid servicing
fees and for reimbursable advances, out of late payments or collections on
the mortgage loan, including liquidation proceeds, mortgage insurance
proceeds and other amounts collected by the master servicer from the
mortgagor or otherwise relating to the mortgage loan;
- to reimburse itself from any funds for any advances determined in good faith
not to be recoverable from the mortgage loan;
- to withdraw investment earnings on amounts on deposit in the account;
- to pay the sponsor or its assignee all amounts allocable to any interest
strip retained by the originator out of collections or payments which
represent interest on the mortgage loan;
- to pay to the sponsor interest accrued and principal collected prior to the
cut-off date only if these amounts were previously deposited;
- to withdraw amounts that have been deposited in error;
- to clear and terminate the account in connection with the termination of the
trust; and
- to invest in eligible investments as defined in the "Pre-Funding; Mandatory
Repayment" section.
DELINQUENCY ADVANCES AND SERVICING ADVANCES
In the event of a delinquency, the master servicer or any sub-servicer
will be required to deposit into the principal and interest account an advance
in an amount equal to delinquent interest, net of the servicing fees and any
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interest strips retained by an originator. This advance is known as a
delinquency advance. Delinquency advances are only required if, in its good
faith business judgment, the master servicer believes that this amount will
ultimately be recovered from the mortgage loan. The master servicer may also be
required to advance delinquent payments of principal. The master servicer will
be permitted to fund its payment of delinquency advances from collections of
another mortgage loan deposited into the principal and interest account after
the remittance period. A delinquency advance later determined by the master
servicer not to be recoverable will be reimbursable from any amounts on deposit
in the principal and interest account prior to any distributions to the
securityholders. A sub-servicer will be permitted to fund its payment of
delinquency advances as set forth in the sub-servicing agreement.
A mortgage loan is delinquent if any payment due on the mortgage loan is
not made by the close of business on the day the payment is scheduled to be due
plus any applicable grace period.
If a full principal prepayment occurs, the master servicer or sub-servicer
will be required to deposit in the principal and interest account an amount of
interest equal to the difference between (1) 30 days' interest at the mortgage
loan's coupon rate, less the related servicing fees and the amount of any
interest strip retained by an originator, on the principal balance of the
mortgage loan as of the first day of the remittance period and (2) to the extent
not previously advanced, the interest paid by the mortgagor during that
remittance period, less the servicing fee and the amount of any interest strip
retained by an originator. This interest advance is known as compensating
interest. The master servicer is not required to pay compensating interest
during any remittance period in an amount in excess of the aggregate servicing
fees received by it for trust.
Neither delinquency advances nor compensating interest will be paid by the
master servicer or any sub-servicer for revolving home equity loans.
The master servicer or sub-servicer will also be obligated to make
servicing advances for any out-of-pocket costs and expenses, incurred in the
performance of its servicing obligations, including, but not limited to,
- expenditures in connection with a foreclosed mortgage loan prior to the
liquidation thereof, including expenditures for real estate property taxes,
hazard insurance premiums and property restoration or preservation,
- the cost of any enforcement or judicial proceedings, including foreclosures
and other legal actions and costs that potentially affect the existence,
validity, priority, enforceability or collectibility of the mortgage loan,
including collection agency fees and costs of pursuing or obtaining personal
judgments, garnishments, levies, attachment and similar actions,
- the cost of the conservation, management, liquidation, sale or other
disposition of any mortgaged property acquired in satisfaction of the
mortgage loan, including reasonable fees paid to any independent contractor
in connection therewith, and
- advances to keep liens current, unless the master servicer has determined
that the advance would not be recoverable.
No servicing advance will be required to be made by the master servicer or
sub-servicer, if in its good faith judgment it would not be recoverable from the
mortgage loan. Any nonrecoverable servicing advance made by the master servicer
or sub-servicer will be reimbursable from any amounts on deposit in the
principal and interest account prior to any distribution being made to
securityholders.
If the master servicer or one of its affiliated sub-servicers exercises
its option to purchase the assets of a trust under a clean-up call, the master
servicer or sub-servicer will net from the purchase price all advances
previously made by it and not theretofore reimbursed.
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REPORTS TO SECURITYHOLDERS
With each distribution to securityholders of a particular class of
securities the trustee will forward or cause to be forwarded to each holder a
statement or statements setting forth the information specifically described in
the prospectus supplement.
In addition, on each payment date the trustee will forward or cause to be
forwarded additional information concerning the trust, as of the close of
business on the last day of the remittance period, as more specifically
described in the prospectus supplement, which generally will include information
about the number and percentage of delinquent mortgage loans, the number of
mortgage loans in foreclosure, or the number of mortgagors in bankruptcy
proceedings and the number of real estate owned properties.
DESCRIPTION OF CREDIT ENHANCEMENT
Various forms of credit enhancement may be provided for one or more
classes of a series of securities or for the mortgage loans in the trust. Credit
enhancement may be in the form of:
- one or more classes of subordinate securities which provide credit support to
one or more classes of senior securities,
- a financial guaranty insurance policy, surety bond, reserve account, letter
of credit or other third party guarantees,
- a cross support feature or overcollateralization, or
- any combination of the foregoing.
Credit Enhancement may be provided in only a limited amount and may not
provide protection against all risks of loss. If losses occur that exceed the
amount covered by credit enhancement or are not covered by the credit
enhancement, holders of one or more classes of securities will bear their
allocable share of losses.
The following sections describe the material provisions of the various
types of credit enhancement.
FINANCIAL GUARANTY INSURANCE POLICIES
A financial guaranty insurance policy or surety bond may be obtained and
maintained for each class or series of securities. A description, including
financial information, of the issuer of any financial guaranty insurance policy
will be included in the prospectus supplement.
A financial guaranty insurance policy will unconditionally and irrevocably
guarantee to securityholders that an amount equal to each full and complete
insured payment will be received by the trustee on behalf of securityholders,
for distribution by the trustee to each securityholder. The insured payment will
be defined in the prospectus supplement, and in most instances will be equal to
the minimum distribution of interest due to securityholders.
Financial guaranty insurance policies may apply only to some classes, or
may apply at the mortgage loan level and only to specified mortgage loans.
Financial guaranty insurance policies may have limitations on the
financial guaranty insurer's duty to guarantee the obligations of the
originators to repurchase or substitute for any mortgage loans. Financial
guaranty insurance policies will not guarantee any specified rate of
prepayments. In addition, amounts payable under financial guaranty insurance
policies will generally not be available to cover interest shortfalls arising
from the application of the Soldier's and Sailors' Civil Relief Act, or from any
failure of the master servicer to fund compensating interest.
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Subject to the terms of the agreements, the financial guaranty insurer may
be subrogated to the rights of each securityholder to receive payments under the
securities to the extent of any payment by the financial guaranty insurer under
the financial guaranty insurance policy.
CROSS SUPPORT AMONG CLASSES
A trust may contain groups of mortgage loans which provide support for
separate classes of securities. In this case, credit support would be in the
form of a cross support feature which allows distribution for one class of
securities to be made from excess amounts available from other groups of
mortgage loans within the same trust. The prospectus supplement for a series
that includes a cross support feature will describe the manner and conditions
for applying the cross support feature.
The credit enhancement provided by one or more forms of cross support may
apply concurrently to two or more separate trusts. The prospectus supplement
will identify the trusts benefiting from any cross support, the manner of
determining the amount and application of the cross support.
OVERCOLLATERALIZATION
Provisions of a trust may allow for the acceleration of the amortization
of one or more classes of securities relative to the amortization of the group
of mortgage loans. The accelerated amortization is achieved by the application
of excess interest to the payment of principal of one or more classes of
securities. This acceleration feature creates overcollateralization which
results from the excess of the aggregate principal balance of the group of
mortgage loans over the principal balance of the class of securities. This
acceleration may continue for the life of the security, or may be limited. In
the case of limited acceleration, once the required level of
overcollateralization is reached, this limited acceleration feature may cease.
The acceleration feature may be activated again if necessary to maintain the
required level of overcollateralization.
SUBORDINATION OF CLASSES
The subordination of one or more classes of securities provides credit
support to the senior classes of the same securities. In a senior/subordinate
structure, the total amount available for distribution on each payment date, as
well as the method for allocating this amount among the various classes of
securities included in the series, will be as set forth in the prospectus
supplement. The amount available for contribution will be allocated first to the
senior securities up to the amounts determined as specified in the prospectus
supplement, prior to allocation of interest or principal to the subordinate
securities of the series. In the event of any realized losses on mortgage loans,
the rights of the subordinate securityholders to receive distributions will be
subordinate to the rights of the senior securityholders.
LETTER OF CREDIT
If any component of credit enhancement as to any series of securities is
to be provided by a letter of credit, the bank issuing the letter of credit will
deliver it to the trustee. The letter of credit may provide direct coverage on
the securities or support the sponsor's or any other person's obligation to make
payments to the trustee. The letter of credit bank, the amount available under
the letter of credit and the expiration date of the letter of credit will be
specified in the prospectus supplement. On or before each payment date, either
the letter of credit bank or the trustee may be required to make the payments
specified in the prospectus supplement after notification from the trustee. The
payments required to be made under the terms of the letter of credit shall be
deposited in the distribution account.
RESERVE ACCOUNTS
A trust may create a reserve account to hold any combination of cash, one
or more irrevocable letters of credit or one or more eligible investments in
specified amounts, amounts otherwise distributable to subordinate
securityholders or owners of the residual interest. The amounts held in a
reserve account will be applied to fund shortfalls in amounts due on the
securities in the manner and under the conditions specified in the prospectus
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supplement. Reserve account monies may also be applied to reimburse the master
servicer for outstanding advances or may be used for other purposes.
DERIVATIVE CONTRACTS
A trust may hold an interest rate swap contract, an interest rate cap
agreement or similar contract providing limited protection against interest rate
risks. These derivate contracts may provide the trust with additional amounts
which will be available to pay interest on the securities, to build up
overcollateralization, or both.
REDUCTION OR SUBSTITUTION OF CREDIT ENHANCEMENT
In most cases, the amount available under any credit enhancement will be
subject to periodic reduction in accordance with a schedule or formula on a
nondiscretionary basis as the aggregate outstanding principal balance of the
mortgage loans declines. Additionally, credit support may be replaced, reduced
or terminated upon the written assurance from each applicable rating agency that
the then current rating of the series of securities will not be adversely
affected. In the event that the credit rating of the issuer of any applicable
credit enhancement is downgraded, the credit rating of the securities may be
downgraded to a corresponding level, and the sponsor will not be obligated to
obtain replacement credit support in order to restore the rating of the
securities.
The sponsor may be permitted to replace one form of credit enhancement
with another form of credit enhancement, or credit enhancement of the same form
but from a different provider, but only if the then current rating of the series
of securities is maintained.
Where the credit support is in the form of a reserve account, a permitted
reduction in the amount of credit enhancement will result in a release of all or
a portion of the assets in the reserve account to any of the holders of the
residual interest in the trust, the sponsor, the master servicer, one or more
originators or the other person that is entitled to receive those amounts. Any
assets so released will not be available to fund distribution obligations in
future periods.
SERVICING PROCEDURES
COLLECTION AND OTHER SERVICING PROCEDURES
The master servicer will service the mortgage loans, either directly or
through sub-servicers, who may be affiliates of the master servicer, and will
receive a fee for its services. If any mortgage loans are serviced by the master
servicer through a sub-servicer, the master servicer will remain liable for its
servicing obligations as if the master servicer alone were servicing the
mortgage loans.
The master servicer's obligations will consist principally of its
contractual servicing obligations under the agreements, including its obligation
to enforce the obligations of sub-servicers and of originators. The master
servicer or sub-servicer may also be obligated to make advances of interest
payments in the event of delinquencies and interest shortfalls due to prepayment
of mortgage loans. The obligation of the master servicer to make delinquency
advances will be limited to the extent, in its good faith business judgment that
the delinquency advances would be ultimately recoverable from the mortgage
loans. See "Description of the Securities -- Delinquency Advances and Serving
Advances" for more information concerning the advancing obligation.
The master servicer acting directly or through one or more sub-servicers
is required to service and administer the mortgage loans in accordance with the
agreements and with reasonable care, and using that degree of skill and
attention that the master servicer exercises for comparable mortgage loans that
it services for itself or others.
The duties of the master servicer include collecting and posting all
payments, responding to inquiries of mortgagors or federal, state or local
government authorities, investigating delinquencies, reporting tax information
to mortgagors, accounting for collections, furnishing monthly and annual
statements to the trustee, and making
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advances to the extent described in the agreements. The master servicer is
required to follow its customary standards, policies and procedures in
performing its duties as master servicer.
The master servicer is authorized and empowered to execute and deliver, on
behalf of itself, the securityholders, any credit enhancement provider, and the
trustee or any of them, any and all instruments of satisfaction or cancellation,
or of partial or full release or discharge and all other comparable instruments;
The agreements will require the master servicer or sub-servicer to follow
the collection procedures it follows from time to time for mortgage loans in its
servicing portfolio that are comparable to the mortgage loans. The master
servicer or sub-servicer, however, is always required to follow collection
procedures that are consistent with or better than standard industry practices.
The master servicer may in its discretion:
- consent to any modification of the terms of any mortgage note not expressly
prohibited by the agreements if the effect of the modification (1) will not
materially and adversely affect the security afforded by the mortgaged
property or the timing of receipt of any payments required thereunder except
for a modification or forbearance permitted by the agreements; and (2) will
not cause a trust which is a REMIC to fail to qualify as a REMIC.
- waive any assumption fees, late payment charges, charges for checks returned
for insufficient funds, prepayment fees, if any, or the fees which may be
collected in the ordinary course of servicing the mortgage loans,
- if a mortgagor is in default or about to be in default because of a
mortgagor's financial condition, arrange with the mortgagor a schedule for
the payment of delinquent payments due on the mortgage loan; in most
instances the master servicer will not be permitted to reschedule the payment
of delinquent payments more than one time in any twelve consecutive months
for any single mortgagor.
When a mortgaged property has been or is about to be transferred by the
mortgagor, the master servicer will be required, to the extent it has knowledge
of the prospective transfer, to exercise its rights to accelerate the maturity
of the mortgage loan under any due-on-sale clause contained in the mortgage or
note. The master servicer will not, however, be required to exercise this right
if the due-on-sale clause, in the reasonable belief of the master servicer, is
not enforceable under applicable law or if the master servicer reasonably
believes that to permit an assumption of the mortgage loan would not materially
and adversely affect the interests of securityholders, any credit enhancement
provider, or jeopardize coverage under any primary insurance policy or
applicable credit enhancement arrangements. In this event, the master servicer
will be required to enter into an assumption and modification agreement with the
person to whom the mortgaged property has been or is about to be transferred.
Under the assumption agreement, the transferee becomes liable under the mortgage
note and, unless prohibited by applicable law or the agreements, the original
mortgagor remains liable. If the foregoing is not permitted under applicable
law, the master servicer or sub-servicer will be authorized to enter into a
substitution of liability agreement with the transferee, under which the
original mortgagor is released from liability and the transferee is substituted
as mortgagor and becomes liable under the mortgage note. The assumed loan must
conform in all respects to the requirements and representations and warranties
of the agreement and may require the consent of any credit enhancement provider.
Any fee collected by the master servicer or sub-servicer for entering into
an assumption or substitution of liability agreement will be retained by the
master servicer or sub-servicer as additional servicing compensation. See "Legal
Aspects of Mortgage Loans -- Enforceability of Mortgage Loan Provisions".
The master servicer or sub-servicer will generally have the right to
approve applications of mortgagors seeking consent for partial releases of
mortgages, removal, demolition or division of mortgaged properties.
No application for consent may be approved by the master servicer unless:
- the provisions of the mortgage note and mortgage have been complied with;
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- the credit profile of the mortgage loan after any release is generally
consistent with the sponsor's guidelines then applicable to the mortgage
loan; and
- the lien priority of the mortgage is not reduced.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
The master servicer will be required to foreclose upon or otherwise
comparably effect the ownership of mortgaged properties relating to defaulted
mortgage loans as to which no satisfactory arrangements can be made for
collection of delinquent payments and which the Master Servicer has not acquired
as an REO property on behalf of the trust. In connection with this foreclosure
or other conversion, the master servicer shall exercise the rights and powers
vested in it, and use the same degree of care and skill in their exercise or use
that prudent mortgage lenders would exercise or use under the circumstances in
the conduct of their own affairs, including, but not limited to, making
servicing advances for the payment of taxes, amounts due on senior liens, and
insurance premiums. The master servicer will be required to sell any foreclosure
property within three years of its acquisition by the trust. The master servicer
generally will be permitted to charge-off a mortgage loan, and to cease further
collection and foreclosure activity on a mortgage loan if it reasonably
determines that further activity would not increase collections or recoveries to
be received by the trust. In addition the master servicer may sell delinquent
mortgage loans to third parties, if they believe that this method of disposition
will generate maximum recoveries. In the case of revolving home equity mortgage
loans, the master servicer's policy is to charge off mortgage loans, in most
instances, after they have become 180 day delinquent. In addition, any required
advancing may be permitted to cease at this point.
For trusts treated as REMICs, the master servicer will be required to
manage, conserve, protect and operate each foreclosure property for the
securityholders solely for the purpose of its prompt disposition and sale as
foreclosure property within the meaning of Section 860G(a)(8) of the Internal
Revenue Code or to prevent the receipt by the trust of any income from
non-permitted assets within the meaning of Section 860F(a)(2)(B) of the Internal
Revenue Code or any net income from foreclosure property which is subject to
taxation under the REMIC provisions.
The master servicer will, either itself or through an agent protect and
conserve any foreclosure property in the same manner and to the extent as is
customary in the locality where the foreclosure property is located and may,
incident to its conservation and protection of the interests of the
securityholders, rent the same, or any part thereof, as the master servicer
deems to be in the best interest of the securityholders for the period prior to
the sale of the foreclosure property.
The master servicer will take into account the existence of any hazardous
substances, hazardous wastes or solid wastes, as these terms are defined in the
Comprehensive Environmental Response Compensation and Liability Act, the
Resource Conservation and Recovery Act of 1976, or other federal, state or local
environmental legislation, on a mortgaged property in determining whether to
foreclose upon or acquire ownership of the mortgaged property.
If, upon the final liquidation of a defaulted mortgage loan or a
foreclosure property a loss is realized that is not covered by any applicable
form of credit enhancement or other insurance, the securityholders will bear the
loss. However, if a gain results from the final liquidation of a foreclosure
property that is not required by law to be remitted to the mortgagor, the master
servicer will generally be entitled to retain the gain as additional servicing
compensation. For a description of the master servicer's obligations to maintain
and make claims under applicable forms of credit enhancement and insurance
relating to the mortgage loans, see "Description of Credit Enhancement."
HAZARD INSURANCE POLICIES
The terms of the mortgage loans require each mortgagor to maintain a
hazard insurance policy for the mortgage loan. If a high LTV mortgage loan is in
a junior lien position, the sponsor requires that a hazard insurance policy
exists at the time the high LTV mortgage loan is originated; however, the master
servicer may not track hazard insurance after origination. Additionally, the
master servicer will cause to be maintained for each mortgage loan, except for
certain high LTV and condominium mortgage loans, a hazard insurance policy with
a generally acceptable carrier that provides for fire and extended coverage
relating to the mortgage loan in an amount not less
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than the least of the outstanding principal balance of the mortgage loan, the
minimum amount required to compensate for damage or loss on a replacement cost
basis and the full insurable value of the premises. The master servicer may
obtain a blanket policy to satisfy the requirement for hazard insurance.
If a mortgage loan at the time of origination relates to a mortgaged
property in an area identified in the federal register by the Federal Emergency
Management Agency as having special flood hazards, the master servicer will
maintain with respect thereto a flood insurance policy in a form meeting the
requirements of the then current guidelines of the Federal Insurance
Administration with a generally acceptable carrier. The flood insurance policy
should provide for recovery by the master servicer on behalf of the trust of
insurance proceeds relating to the mortgage loan of not less than the least of
the outstanding principal balance of the mortgage loan, the minimum amount
required to compensate for damage or loss on a replacement cost basis and the
maximum amount of insurance that is available under the Flood Disaster
Protection Act of 1973. The master servicer will be required to indemnify the
trust out of the master servicer's own funds for any loss to the trust resulting
from the master servicer's failure to maintain the flood insurance if the
mortgage loan is not covered by the master servicer's blanket policy.
In the event that the master servicer obtains and maintains a blanket
policy insuring against fire with extended coverage and against flood hazards on
all of the mortgage loans, then, to the extent the policy names the master
servicer as loss payee and provides coverage in an amount equal to the aggregate
unpaid principal balance on the mortgage loans without co-insurance, and
otherwise complies with specified requirements, the master servicer shall be
deemed conclusively to have satisfied its obligations to maintain fire, flood
and hazard insurance coverage. The blanket policy may contain a deductible
clause, in which case the master servicer will be required, in the event that
there shall not have been maintained on the mortgaged property a complying
policy, and there shall have been a loss that would have been covered by the
policy, to deposit in the principal and interest account from the master
servicer's own funds the difference, if any, between the amount that would have
been payable under a separate policy and the amount paid under the blanket
policy.
THE SPONSOR
The sponsor, Advanta Conduit Receivables, Inc., was incorporated in the
State of Nevada in March, 1994. It is a direct subsidiary of Advanta Mortgage
Conduit Services, Inc., and an affiliate of Advanta Mortgage Corp. USA. The
sponsor was formed as a special purpose finance subsidiary to facilitate the
issuance of these securities.
The sponsor maintains its principal office at 10790 Rancho Bernardo Road,
San Diego, California 92127. Its telephone number is (858) 676-3099.
THE MASTER SERVICER
Advanta Mortgage Corp. USA or its affiliates will act as the master
servicer for a series of securities. Advanta Mortgage Corp. USA is a Delaware
corporation incorporated in 1983. It is a nationwide servicer of first and
junior lien loans. Advanta Mortgage Corp. USA has centralized servicing
functions located in San Diego, California.
Advanta Mortgage Corp. USA was acquired by Advanta Corp., a Delaware
corporation in September, 1986 and is an indirect subsidiary of Advanta Corp.
The master servicer is an affiliate of Advanta National Bank, a national banking
association domiciled in Delaware and Advanta Bank Corp., a Utah industrial loan
corporation, and the parent of Advanta Mortgage Corp. Midatlantic, Advanta
Mortgage Corp. Midatlantic II, Advanta Mortgage Corp. Midwest, Advanta Mortgage
Corp. Northeast, Advanta Finance Corp. and Advanta Mortgage Conduit Services,
Inc.
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AVAILABLE INFORMATION; INCORPORATION OF INFORMATION BY REFERENCE
The sponsor has filed a registration statement under the Securities Act of
1933, with the Securities and Exchange Commission with respect to these
securities. This prospectus contains, and the prospectus supplement for each
series of securities will contain, a summary of the material terms of the
securities, but neither contains nor will contain all of the information
contained in the registration statement of which this prospectus is a part. For
further information, we suggest that you read the registration statement and any
amendments thereof and exhibits to the registration statement. You may obtain a
copy of the registration statement from the Public Reference Section of the
Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C.
20549 upon payment of the prescribed charges, or you may examine the
registration statement free of charge at the Securities and Exchange
Commission's offices, 450 Fifth Street, N.W., Washington, D.C. 20549 or at the
regional offices of the Securities and Exchange Commission located at Room 1400,
75 Park Place, New York, New York 10007 and Northwestern Atrium Center, 500 West
Madison Street, Suite 400, Chicago, Illinois 60661-2511. In addition, the
Securities and Exchange Commission maintains a site on the World Wide Web
containing reports, proxy and information statements and other items. The
address is http://www.sec.gov.
We suggest that, in making your investment decision, you rely only on the
information contained in this document and the prospectus supplement. We have
not authorized anyone to provide any information that is different. This
prospectus and any 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 that prospectus supplement nor an offer of the securities
to any person in any state or other jurisdiction in which the offer would be
unlawful.
This prospectus incorporates by reference all documents and reports filed
for a series under Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange
Act after the date of this prospectus and prior to the termination of the
offering for that series. Information in this prospectus, the accompanying
prospectus supplement or any document that is subsequently incorporated by
reference may modify or supercede information incorporated by reference in this
prospectus. The modified or superceded information will be a part of this
prospectus only in its modified or superceded form.
The sponsor will provide or cause to be provided without charge to each
person to whom this prospectus is delivered in connection with the offering of
one or more classes of securities, a list identifying all filings for that
series under Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act
since the trust's latest fiscal year covered by its annual report on Form 10-K
and a copy of any or all documents or reports incorporated by reference in this
prospectus for that series, excluding any exhibits to those documents or
reports.
We include cross references in this prospectus to captions where you can
find further discussions. The table of contents located on page 2 of this
prospectus provides the pages on which these captions appear.
You can obtain from the sponsor, free of charge, a copy of the financial
information incorporated by reference by making an oral or written request to
Advanta Conduit Receivables, Inc., Attention: General Counsel, Welsh & McKean
Roads, Spring House, Pennsylvania 19477, (215) 657-4000.
THE AGREEMENTS
Each series of securities will be issued under one or more agreements
which will establish the trust, pool the mortgage loans, provide for the
servicing of the mortgage loans and issue the securities. The following
paragraphs describe the material provisions common to the agreements but are
subject to the more detailed discussion in the prospectus supplement.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
Each servicer, whether the master servicer or any sub-servicer, will
retain a servicing fee in connection with its servicing activities equal to the
percentage per annum specified in the prospectus supplement. The servicing fee
is payable monthly and is based on the outstanding principal amount of the
mortgage loans.
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In addition to the servicing fee, the master servicer will be entitled to
retain additional servicing compensation in the form of prepayment charges,
release fees, bad check charges, assumption fees, modification fees, late
payment charges, any other servicing type fees, net liquidation proceeds not
required to be deposited in the principal and interest account and similar
items.
The master servicer will pay or cause to be paid some of the ongoing
expenses associated with each trust and incurred by it in connection with its
servicing responsibilities including, without limitation:
- the fees and disbursements of the trustee, any firm of independent,
nationally recognized certified public accountants, the custodian appointed
by the trustee, the security registrar, any paying agent,
- expenses incurred in enforcing the obligations of sub-servicers and
originators and
- any fee or other amount payable in respect of any alternative credit
enhancement arrangements.
The master servicer may be entitled to reimbursement of expenses incurred
in enforcing the obligations of sub-servicers and originators under some limited
circumstances. In addition, the master servicer will be entitled to
reimbursements for some of the expenses incurred by it in connection with
liquidated mortgage loans and in connection with the restoration of mortgaged
properties, the right of reimbursement being prior to the rights of
securityholders to receive any liquidation proceeds, including insurance
proceeds.
EVIDENCE AS TO COMPLIANCE
The agreements will require the master servicer to deliver annually to the
trustee and any credit enhancement provider:
- an annual officers' certificate to the effect that the master servicer has
fulfilled its obligations under the agreements throughout the preceding
calendar year, and
- a letter or letters of a firm of independent, nationally recognized certified
public accountants reasonably acceptable to the credit enhancement provider,
if applicable, stating that it has examined a sample of the documents and
records of the master servicer and that, based on the examination, it is of
the opinion that the servicing has been conducted in compliance with the
agreements except for immaterial exceptions and any other exceptions set
forth in the letter.
Copies of the annual accountants' statement and the annual officer's
certificate may be obtained by securityholders without charge upon written
request to the master servicer.
REMOVAL AND RESIGNATION OF THE MASTER SERVICER
The master servicer may not resign from its obligations and duties, except
in connection with a permitted transfer of servicing, unless the 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. No resignation of the master servicer will
become effective until the trustee or a successor master servicer has assumed
the master servicer's obligations and duties.
The trustee, the securityholders or any credit enhancement provider, will
have the right to remove the master servicer upon the occurrence of any of the
following
- events of insolvency, readjustment of debt, marshalling of assets and
liabilities or similar proceedings regarding the master servicer and actions
by the master servicer indicating its insolvency or inability to pay its
obligations;
- the failure of the master servicer to perform any one or more of its material
obligations under the agreements as to which the master servicer shall
continue in default with respect thereto for a period, after notice of this
failure; or
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- the failure of the master servicer to cure any breach of any of its
representations and warranties set forth in the agreements which materially
and adversely affects the interests of the securityholders or any credit
enhancement provider, for a period, after the master servicer's discovery or
receipt of notice.
The agreements may also provide that the credit enhancement provider may
remove the master servicer upon the occurrence of any of these events, subject
to the applicable cure periods:
- on any payment date, if the total available funds are less than the amount of
any required distribution then due on the credit enhanced securities, unless
the master servicer can demonstrate to the reasonable satisfaction of the
credit enhancement provider that the event was due to circumstances beyond
the control of the master servicer;
- the failure by the master servicer to make any required advance, or to pay
any required compensating interest; or
- the failure of the master servicer to perform one or more of its material
obligations under the agreements.
AMENDMENTS TO THE AGREEMENTS
The trustee, the sponsor and the master servicer may amend the agreements,
for the purposes of (1) curing any ambiguity, or correcting or supplementing any
provision of the agreements which may be inconsistent with any other provision
of the agreements, (2) allowing transfers, or complying with the requirements of
the Internal Revenue Code or (3) adding to the trust property, or further
perfecting the trustee's interests in the trust property, with the prior consent
of the trustee or any credit enhancement provider, but without the giving of
notice to or the receipt of the consent of the securityholders under the
agreements. No amendment adopted without securityholder consent will, as
evidenced by an opinion of counsel delivered to the trustee, materially and
adversely affect the interests of any securityholder.
The agreements may also be amended by the trustee, the sponsor and the
master servicer with the prior written consent of any credit enhancement
provider, and not less than a majority of the securityholders represented by
each class of securities then outstanding or, if the amendment does not affect
all classes, then just the affected classes, for the purpose of (1) adding or
changing any provisions, (2) eliminating any of the provisions of the agreements
or (3) modifying in any manner the rights of the securityholders. No amendment
can change the amount of, or delay the timing of, payments which are required to
be distributed to any securityholders without the consent of the
Securityholders. In addition, no amendment can change the percentages of
securityholders which are required to consent to amendments, without the
unanimous consent of the holders of all the effected class or classes of
securities then outstanding.
RETIREMENT OF SECURITIES; REDEMPTION
Each trust will terminate upon the earlier of:
- the payment to the securityholders and any credit enhancement provider of all
amounts due to them;
- receipt by the trust of the final payment or other liquidation of the last
mortgage loan in the trust, or following the disposition of all property
acquired in respect of any mortgage loan remaining in the trust; and
- any time when a liquidation of the trust is effected.
In no event, will any trust continue beyond the expiration of 21 years
from the death of the survivor of persons named in the agreements. Written
notice of termination of a trust will be given to each securityholder of that
series, and the final distribution will be made only upon surrender and
cancellation of the securities at an office or agency designated by the trustee
of that trust. If the securityholders are permitted to terminate the trust under
the applicable agreements, a penalty may be imposed upon the securityholders
based upon the fee that would be foregone by the master servicer because of the
termination.
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Each trust may also allow for an early redemption or clean-up call. The
clean-up call may occur at the option of the master servicer or any of its
affiliated sub-servicers or, if applicable, the credit enhancement provider, and
will result in the early redemption of the securities at a price at least equal
to the outstanding principal balance of the securities plus accrued interest.
The holders of any interest only security may not receive any payment in
connection with a clean-up call. The exercise of these rights may cause the
securities to prepay earlier than expected on any date the aggregate principal
balance of the mortgage loans or the securities, as applicable, for a given
series is less than a specified percentage of the initial balance.
THE TRUSTEE
The trustee under the agreements will be named in the prospectus
supplement. The trustee will have no obligation to exercise any of the rights or
powers vested in it by the agreements at the request or direction of any of the
securityholders, unless the securityholders shall have offered to the trustee
reasonable security or indemnity against the costs, expenses and liabilities
which might be incurred by it in compliance with the request or direction.
The trustee may execute any of the trusts or powers granted by the
agreements or perform any duties thereunder either directly or by or through
agents or attorneys. The trustee will not be responsible for any misconduct or
negligence on the part of any agent or attorney appointed and supervised with
due care by it.
The trustee will not be liable for any action it takes or omits to take in
good faith which it reasonably believes to be authorized by an authorized
officer of any person or within its rights or powers under the agreements.
Each agreement will permit the removal of the trustee if the upon the
occurrence and continuance of events listed in the agreement , including the
failure of the trustee to satisfy the relevant eligibility requirements, the
trustee's becoming insolvent or the trustee breaches any representation or
warranty made by it.
If an event permitting the removal of the trustee occurs and is
continuing, then, the sponsor, the securityholders, acting on the terms of the
agreements, or any credit enhancement provider may, whether or not the trustee
has resigned, appoint a successor trustee.
The trustee will be liable under the agreements only to the extent of the
obligations specifically imposed upon and undertaken by it. Neither the trustee
nor any of the directors, officers, employees or agents will be under any
liability on any security or to the sponsor, the master servicer or any
securityholder for any action taken or for refraining from the taking of any
action in good faith under the agreements, or for errors in judgment. The
trustee, however, will not be protected against any liability it incurs by
reason of negligent action, negligent failure to act or willful misconduct in
the performance of its duties or by reason of reckless disregard of its duties.
LEGAL ASPECTS OF MORTGAGE LOANS
The following discussion contains summaries of the material legal aspects
of mortgage loans that are general in nature. These legal aspects are governed
in part by state laws, which may be different in the various states.
Consequently, these summaries are not complete, do not reflect the laws of any
particular state and do not encompass the laws of all states in which the
mortgaged properties may be located.
The mortgage loans will be represented by a mortgage note and an
accompanying mortgage. According to the mortgage note, the mortgagor is
personally liable to repay the indebtedness evidenced by the mortgage loan. The
mortgage secures the indebtedness by a lien on the mortgaged property.
ENFORCEMENT OF THE MORTGAGE NOTE
In some states, the lender on a note secured by a lien on real property
has the option of bringing a personal action against the borrower on the debt
without first exhausting all remedies against the mortgaged property, such as
foreclosure. In some of these states the lender, after it has received a
personal judgment, may be deemed to have elected a remedy and may be precluded
from exercising remedies against the mortgaged property. Consequently,
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the practical effect of the election requirement, in those states permitting
this election, is that lenders will usually proceed against the property first
rather than bringing a personal action against the borrower on the note.
Some states have imposed statutory prohibitions that limit the remedies of
a beneficiary under a deed of trust or a mortgagee under a mortgage for example:
- statutes that limit the right of the beneficiary or mortgagee, to obtain a
deficiency judgment against the borrower following foreclosure; a deficiency
judgment is a personal judgment against the former borrower equal in most
cases to the difference between the amount due to the lender and the net
amount realized upon the public sale of the real property;
- other statutes require the beneficiary or mortgagee to exhaust all remedies
against the mortgaged property in an attempt to satisfy the full debt before
bringing a personal action against the borrower;
- statutory provisions limit any deficiency judgment against the former
borrower following a foreclosure to the excess of the outstanding debt over
the fair value of the property at the time of the public sale.
The purpose of these statutes is generally to prevent a beneficiary or mortgagee
from obtaining a large deficiency judgment against the former borrower as a
result of low or no bids at the judicial sale.
In addition to laws limiting or prohibiting deficiency judgments, numerous
other federal and state statutory provisions, including the federal bankruptcy
laws and state laws affording relief to debtors, may interfere with or affect
the ability of a trust to realize upon collateral or enforce a deficiency
judgment. For example, a federal bankruptcy law may permit a debtor through his
or her Chapter 11 or Chapter 13 rehabilitative plan to cure a monetary default
in respect of a mortgage loan on a debtor's residence by paying arrearages
within a reasonable time period and reinstating the original mortgage loan
payment schedule even though the lender accelerated the mortgage loan and final
judgment of foreclosure had been entered in state court prior to the filing of
the debtor's bankruptcy petition, if no sale of the residence had yet occurred.
Some courts with federal bankruptcy jurisdiction have approved plans, based on
the particular facts of the reorganization case, that effected the curing of a
mortgage loan default by paying arrearages over a number of years.
Courts with federal bankruptcy jurisdiction also have held that the terms
of a mortgage loan secured by property of the debtor may be modified. These
courts have allowed modifications that include reducing the amount of each
monthly payment, changing the rate of interest, altering the repayment schedule,
forgiving all or a portion of the debt and reducing the lender's security
interest to the value of the residence, thus leaving the lender a general
unsecured creditor for the difference between the value of the residence and the
outstanding balance of the loan.
A number of states have imposed general equitable principles upon judicial
foreclosure. These equitable principles are generally designed to relieve the
borrower from the legal effect of the borrower's default under the loan
documents. Examples of judicial remedies that have been fashioned include
judicial requirements that the lender undertake affirmative and expensive
actions to determine the causes for the borrower's default and the likelihood
that the borrower will be able to reinstate the loan. In some cases, lenders
have been required to reinstate loans or recast payment schedules in order to
accommodate borrowers who are suffering from temporary financial disabilities.
In other cases, the courts have limited the right of the lender to foreclose if
the default under the loan is not monetary, such as the borrower failing to
adequately maintain the property or the borrower executing a second deed of
trust affecting the property.
Tax liens arising under the Internal Revenue Code may be prior to the lien
of a mortgage or deed of trust. In addition, substantive requirements are
imposed upon mortgage lenders in connection with the origination and the
servicing of mortgage loans by numerous federal and some state consumer
protection laws. These laws include, by example, the federal Truth-in-Lending
Act, Real Estate Settlement Procedures Act, Equal Credit Opportunity Act, Fair
Credit Billing Act, Fair Credit Reporting Act and other statutes and state laws,
such as the California Fair Debt Collection Practices Act. These laws and
regulations impose specific statutory liabilities upon lenders who originate
mortgage loans and fail to comply with the provisions of the law. In some cases,
this liability may affect assignees of the mortgage loans.
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DEEDS OF TRUST OR MORTGAGES
The mortgage loans will be secured by either deeds of trust or mortgages,
depending upon the prevailing practice in the state in which the mortgaged
property subject to a mortgage loan is located. In some states, a mortgage
creates a lien upon the real property encumbered by the mortgage. In other
states, the mortgage conveys legal title to the property to the mortgagee
subject to the payment of the indebtedness. The mortgage is not prior to the
lien for real estate taxes and assessments and other charges imposed under
governmental police powers. Priority between mortgages depends on their terms in
some cases or on the terms of separate subordination or intercreditor
agreements, and generally on the order of recordation of the mortgage in the
appropriate recording office. There are two parties to a mortgage, the
mortgagor, who is the borrower and homeowner, and the mortgagee, who is the
lender. Under the mortgage instrument, the mortgagor delivers to the mortgagee a
note or bond and the mortgage. In the case of a land trust, there are three
parties because title to the property is held by a land trustee under a land
trust agreement of which the borrower is the beneficiary; at origination of a
mortgage loan, the borrower executes a separate undertaking to make payments on
the mortgage note. Although a deed of trust is similar to a mortgage, a deed of
trust has three parties; the borrower and homeowner called the trustor, a lender
called the beneficiary, and a third-party grantee called the trustee. Under a
deed of trust, the borrower grants the property, irrevocably until the debt is
paid, in trust, generally with a power of sale, to the trustee to secure payment
of the obligation. The trustee's authority under a deed of trust and the
mortgagee's authority under a mortgage are governed by law, the express
provisions of the deed of trust or mortgage, and, in some cases, the directions
of the beneficiary.
COOPERATIVE LOANS
If specified in the prospectus supplement of a series of securities, the
mortgage loans may consist of cooperative loans evidenced by cooperative notes
secured by security interests in shares issued by cooperatives and in any leases
or occupancy agreements allowing the mortgagor the right to occupy specific the
cooperative unit. The security agreement will create a lien upon, or grant a
title interest in, the property which it covers, the priority of which will
depend on the terms of the particular security agreement as well as the order of
recordation of the agreement in the appropriate recording office. These liens or
title interests are not prior to the lien for real estate taxes and assessments
and other charges imposed under governmental police powers.
Each cooperative owns or leases the real property and owns or leases the
building and all separate units. The cooperative is directly responsible for
property management and, in most cases, payment of real estate taxes, other
governmental impositions and hazard and liability insurance. If there is a
blanket mortgage or blanket lease on the cooperative apartment building or
underlying land, the cooperative, as mortgagor or lessee also is responsible for
meeting these mortgage or rental obligations. If the cooperative is unable to
meet the payment obligations under a blanket mortgage, the mortgagee holding a
blanket mortgage could foreclose on that mortgage and terminate all subordinate
proprietary leases and occupancy agreements. Similarly, if the cooperative is
unable to meet the payment obligations under a land lease, the holder of the
landlord's interest under the land lease could terminate it and all subordinate
proprietary leases and occupancy agreements. A foreclosure by the holder of a
blanket mortgage or the termination of the underlying lease could eliminate or
significantly diminish the value of any collateral held by the lender who
financed the purchase by an individual tenant-stockholder of cooperative shares
or, in the case of the mortgage loans, the collateral securing the cooperative
loans.
FORECLOSURE OF MORTGAGE LOANS
Foreclosure of a deed of trust is generally accomplished by a non judicial
trustee's sale under the deed of trust and state laws which authorize the
trustee to sell the property upon default by the borrower under the terms of the
note or deed of trust. Beside the non judicial remedy, a deed of trust may be
judicially foreclosed. In addition to any notice requirements contained in a
deed of trust, in some states, the trustee must record a notice of default and
within a period of time send a copy to the trustor and to any person who has
recorded a request for a copy of notice of default and notice of sale. In
addition, the trustee must provide notice in some states to any other individual
having an interest of record in the real property, including any junior
lienholders. If the deed of trust is not reinstated within a specified period, a
notice of sale must be posted in a public place and, in most states, published
for a specific period of time in one or more local newspapers. In addition, some
state laws require that a copy of the notice of sale be posted on the property
and sent to all parties having an interest of record in the real property.
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Foreclosure of a mortgage is generally accomplished by judicial action.
Typically, the action is initiated by the service of legal pleadings upon all
parties having an interest of record in the real property. Delays in completion
of the foreclosure may occasionally result from difficulties in locating
necessary parties. Judicial foreclosure proceedings are often not contested by
any of the applicable parties. If the mortgagee's right to foreclose is
contested, the legal proceedings necessary to resolve the issue can be time
consuming.
In some states, the trustor has the right to reinstate the loan at any
time following default until shortly before the trustee's sale. In these states,
the borrower, or any other person having a junior encumbrance on the real
estate, may, during a reinstatement period, cure the default by paying the
entire amount in arrears plus the costs and expenses incurred in enforcing the
obligation.
In the case of foreclosure under either a mortgage or a deed of trust,
the sale by the referee or other designated officer or by the trustee is a
public sale. However, because of the difficulty a potential buyer at the sale
would have in determining the exact status of title and because the physical
condition of the property may have deteriorated during the foreclosure
proceedings, it is uncommon for a third party to purchase the property at a
foreclosure sale unless there is a great deal of economic incentive for the new
purchaser. It is more common for the lender to purchase the property from the
trustee or referee for an amount that is less than or equal to the sum of the
unpaid principal amount of the mortgage loan, plus accrued and unpaid interest
and the expense of foreclosure. Typically, state law controls the amount of
foreclosure costs and expenses, including attorneys' fees, which may be
recovered by a lender.
Subject to the right of the borrower in some states to remain in
possession during the redemption period, the lender will assume the burdens of
ownership, including obtaining hazard insurance and making 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 and, in some states, the lender may be
entitled to a deficiency judgment. Any loss may be reduced by the receipt of any
mortgage insurance proceeds.
FORECLOSURE ON COOPERATIVE LOANS
If a cooperative loan must be foreclosed on, the cooperative will
usually recognize the lender's lien against proceeds from a sale of the
cooperative apartment, subject, however, to the cooperative's right to sums due
or sums that have become liens on the shares relating to the proprietary lease
or occupancy agreement. The total amount owed to the cooperative by the borrower
could reduce the amount realized upon a sale of the cooperative mortgage loan
below the outstanding principal balance of the cooperative mortgage loan plus
accrued and unpaid interest.
The documentation governing cooperative loans generally also provide
that, in the event of a foreclosure, the lender must obtain the approval or
consent of the cooperative before transferring the cooperative shares to a new
buyer. Typically, the lender is not limited in any rights it may have to
dispossess the tenant stockholder.
RIGHTS OF REDEMPTION
In some states, after the foreclosure of a mortgage, the mortgagor and
foreclosed junior lienors are given a statutory period to redeem the property
from the foreclosure sale. In some states, redemption may occur only upon
payment of the entire principal balance plus accrued interest and expenses of
foreclosure. 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 rights of redemption would defeat the title of any purchaser
subsequent to foreclosure or sale under a deed of trust. Consequently, the
practical effect of the redemption right is to force the lender to maintain the
property and pay the expenses of ownership until the redemption period has
expired. In some states, there is no right to redeem property after a trustee's
sale under a deed of trust.
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ENVIRONMENTAL LEGISLATION
A number of states impose a statutory lien for associated costs on
property that is the subject of a cleanup action by the state on account of
hazardous wastes or hazardous substances released or disposed of on the
property. This lien may have priority over all subsequent liens on the property
and, in some states, will have priority over prior recorded liens including the
lien of a mortgage. In some states this lien will not have priority over prior
recorded liens of a deed of trust. In addition, under federal environmental
legislation and under state law in a number of states, a secured party which
takes a deed in lieu of foreclosure or acquires a mortgaged property at a
foreclosure sale or assumes active control over the operation or management of a
property may be liable for the costs of cleaning up a contaminated site.
Although these costs could be substantial, it is unclear whether they would be
imposed on a lender such as a trust, secured by residential real property. In
the event that a trust acquired a mortgaged property through foreclosure or
otherwise, and cleanup costs were incurred in respect of the mortgaged property,
the holders of the securities might realize a loss if these costs were required
to be paid by the trust.
ENFORCEABILITY OF MORTGAGE LOANS PROVISIONS
Generally all of the mortgage loans contain due-on-sale clauses. These
clauses permit the lender to accelerate the maturity of the loan if the borrower
sells, transfers or conveys the property. The enforceability of these clauses
has been the subject of legislation or litigation in many states including
California, and in some cases the enforceability of these clauses was limited or
denied. However, federal law preempts state constitutional, statutory and case
law that prohibits the enforcement of due-on-sale clauses and permits lenders to
enforce these clauses in accordance with their terms, subject to limited
exceptions. This federal law encourages 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.
This federal law also provides for specific instances in which a
mortgage lender may not exercise a due-on-sale clause, notwithstanding the fact
that a transfer of the property may have occurred. These include intra-family
transfers, transfers by operation of law, leases of fewer than three years and
the creation of a junior encumbrance. Regulations also prohibit the imposition
of a prepayment penalty upon the acceleration of a loan under a due-on-sale
clause.
The inability to enforce a due-on-sale clause may result in a mortgage
loan bearing a coupon rate below the current market rate being assumed by a new
home buyer rather than being paid off, that may have an impact upon the average
life of the mortgage loans and the number of mortgage loans that may be
outstanding until maturity.
Upon foreclosure, courts have imposed general equitable principles.
These equitable principles generally are designed to relieve the borrower from
the legal effect of his defaults under the loan documents. Examples of judicial
remedies that have been fashioned include judicial requirements that the lender
undertake affirmative and expensive actions to determine the causes for the
borrower's default and the likelihood that the borrower will be able to
reinstate the loan. In some cases, courts have substituted their judgment for
the lender's judgment and have required that lenders reinstate loans or recast
payment schedules in order to accommodate borrowers who are suffering from
temporary financial disability. In other cases, courts have limited the right of
the lender to foreclose if the default under the mortgage instrument is not
monetary, such as the borrower failing to adequately maintain the property or
the borrower executing a second mortgage or deed of trust affecting the
property. Finally, some courts have been faced with the issue of whether or not
federal or state constitutional provisions reflecting due process concerns for
adequate notice require that borrowers under deeds of trust or mortgages receive
notices in addition to the statutorily prescribed minimum. For the most part,
these cases have upheld the notice provisions as being reasonable or have found
that the sale by a trustee under a deed of trust, or under a mortgage having a
power of sale, does not involve sufficient state action to afford constitutional
protections to the borrower.
CALIFORNIA DEEDS OF TRUST
Most institutional lenders in California use a form of deed of trust
that confers on the beneficiary the right both to receive all proceeds collected
under any hazard insurance policy and all awards made in connection with any
condemnation proceedings, and to apply these proceeds and awards to any debt
secured by the deed of trust, in the order specified by the beneficiary.
California law prohibits the beneficiary from applying insurance and
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condemnation proceeds to the debt secured by the deed of trust unless the
beneficiary's security has been impaired by the casualty or condemnation. If the
security has been impaired, California law permits these proceeds to be applied
to the extent of the impairment. In the event improvements on the property are
damaged or destroyed by fire or other casualty, or if the property is taken by
condemnation, and the beneficiary's security is impaired, the beneficiary under
the first deed of trust will have the prior right to collect any insurance
proceeds and any damage award from the condemnation. Proceeds in excess of the
amount of debt secured by a first deed of trust will, in most cases, be applied
to the indebtedness of a junior deed of trust.
Another provision typically found in California deeds of trust
obligates the mortgagor to pay all taxes and assessments on the property, to
provide and maintain fire insurance on the property, and to maintain and repair
the property. Upon a failure of the mortgagor to perform any of these
obligations, the beneficiary is given the right under the deed of trust to
perform those obligations, and the mortgagor agrees to reimburse the beneficiary
for any sums expended by the beneficiary on behalf of the mortgagor. All sums
expended by the beneficiary become part of the indebtedness secured by the deed
of trust.
APPLICABILITY OF USURY LAWS
Federal law provides that state usury limitations do not apply to some
types of residential first mortgage loans. The federal law authorized any state
to reimpose interest rate limits by adopting, before April 1, 1983, a law or
constitutional provision which expressly rejects application of the federal law.
In addition, even where this federal law is not rejected, any state is
authorized by the law to adopt a provision limiting discount points or other
charges on mortgage loans covered by the law. A number of states have taken
action to reimpose interest rate limits or to limit discount points or other
charges.
The sponsor will represent that each mortgage loan was originated in
compliance with applicable state laws in effect at the time of origination,
including usury laws, in all material respects. However, the coupon rates on the
mortgage loans will be subject to applicable usury laws as in effect from time
to time.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940,
members of all branches of the military on active duty, including draftees and
reservists on active duty:
- are entitled to have interest rates reduced and capped at 6% per annum on
obligations, including mortgage loans, incurred prior to the commencement
of active duty and for the duration of active duty,
- may be entitled to a stay of proceedings on any kind of foreclosure or
repossession action in the case of defaults on the obligations entered into
prior to active duty for the duration of active duty and
- may have the maturity of the obligations incurred prior to active duty
extended, the payments lowered and the payment schedule readjusted for a
period of time after the completion of active duty.
These benefits are subject to challenge by creditors and if, in the
opinion of the court, the ability of a person to comply with the obligations is
not materially impaired by active duty, the court may apply equitable
principles. If a mortgagor's obligation to repay amounts otherwise due on a
mortgage loan is relieved by the Soldiers' and Sailors' Civil Relief Act,
neither the trust, the master servicer, the sponsor, any credit enhancement
provider nor the trustee will be required to advance the amounts that would
otherwise be due. Any loss resulting from the Soldiers' and Sailors' Civil
Relief Act may reduce the amounts available to be paid to the securityholders.
In the event that the Soldiers' and Sailors' Civil Relief Act or similar
legislation or regulations apply to any mortgage loan which goes into default,
there may be delays in payment and losses on the securities. Any interest
shortfalls, deferrals or forgiveness of payments on the mortgage loans resulting
from similar legislation or regulations may result in delays in payments or
losses to securityholders of the series.
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MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following discussion describes the material federal income tax
consequences to the original purchasers of the securities of the purchase,
ownership and disposition of the securities. The discussion below does not
purport to deal with all federal tax considerations applicable to all categories
of investors. The tax consequences to holders subject to special rules,
including insurance companies, tax-exempt organizations, financial institutions
or broker dealers, taxpayers subject to the alternative minimum tax, and holders
that will hold the securities as other than capital assets, are not discussed.
In particular, this discussion applies only to investors that purchase
securities directly from the sponsor and hold the securities as capital assets.
The discussion is based upon laws, regulations, rulings and decisions now in
effect, all of which are subject to change. Investors may wish to consult their
own tax advisors in determining the federal, state, local and any other tax
consequences to them of the purchase, ownership and disposition of the
securities. As used in this section and the "ERISA Considerations" section, code
means the Internal Revenue Code of 1986 and IRS means the Internal Revenue
Service.
We will file an unqualified tax opinion for a series with the
Securities and Exchange Commission on Form 8-K prior to the sale of the
securities.
The following discussion addresses securities of five general types:
- grantor trust securities,
- REMIC securities,
- debt securities,
- partnership interests, and
- FASIT securities.
The prospectus supplement for each series of securities will indicate
whether a REMIC or FASIT election or elections will be made for the trust and,
if a REMIC or FASIT election is to be made, will identify all regular interests
and residual interests in the REMIC or all regular interests, high-yield
interests or ownership interests in the FASIT.
The Taxpayer Relief Act of 1997 adds provisions to the code that
require the recognition of gain upon the constructive sale of an appreciated
financial position. A constructive sale of an appreciated financial position
occurs if a taxpayer enters into transactions involving a financial instrument
that have the effect of substantially eliminating the taxpayer's risk of loss
and opportunity for gain. These provisions apply only to classes of securities
that do not have a principal balance.
GRANTOR TRUST SECURITIES
If a series of securities is being issued by a grantor trust, special
tax counsel to the sponsor will deliver its opinion to the sponsor that the
trust will be classified as a grantor trust and not as a partnership or an
association taxable as a corporation. Accordingly, each beneficial owner of a
grantor trust security will generally be treated as the owner of an interest in
the loans included in the grantor trust.
For purposes of the following discussion, a grantor trust security
representing an undivided equitable ownership interest in the principal of the
mortgage loans together with interest at a pass-through rate, will be referred
to as a grantor trust fractional interest security. A grantor trust security
representing ownership of all or a portion of the difference between interest
paid on the mortgage loans and interest paid on grantor trust fractional
interest securities will be referred to as a grantor trust strip security.
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SPECIAL TAX ATTRIBUTES
Special tax counsel to the sponsor will deliver its opinion to the
sponsor that (a) grantor trust fractional interest securities will represent
interests in (1) loans . . . secured by an interest in real property within the
meaning of section 7701(a)(19)(C)(v) of the code; and (2) obligations, including
any participation or certificate of beneficial ownership, which . . . are
principally secured by an interest in real property within the meaning of
section 860G(a)(3)(A) of the code; and (b) interest on grantor trust fractional
interest securities will be considered 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. In addition, the grantor trust strip
securities will be obligations, including any participation or certificate of
beneficial ownership therein . . . principally secured by an interest in real
property within the meaning of section 860G(a)(3)(A) of the code.
TAXATION OF BENEFICIAL OWNERS OF GRANTOR TRUST SECURITIES
Beneficial owners of grantor trust fractional interest securities
generally will be required to report on their federal income tax returns their
respective shares of the income from the loans, including amounts used to pay
reasonable servicing fees and other expenses but excluding amounts payable to
beneficial owners of any corresponding grantor trust strip securities, and, will
be entitled to deduct their shares of any reasonable servicing fees and other
expenses. If a beneficial owner acquires a grantor trust fractional interest
security for an amount that differs from its outstanding principal amount, the
amount includible in income on a grantor trust fractional interest security may
differ from the amount of interest distributable. Individuals holding a grantor
trust fractional interest security directly or through pass-through entities
will be allowed a deduction for reasonable servicing fees and expenses only to
the extent that the aggregate of the beneficial owner's miscellaneous itemized
deductions exceeds 2% of the beneficial owner's adjusted gross income. Further,
beneficial owners, other than corporations, subject to the alternative minimum
tax may not deduct miscellaneous itemized deductions in determining alternative
minimum taxable income.
Beneficial owners of grantor trust strip securities generally will be
required to treat the securities as stripped coupons under section 1286 of the
code. Accordingly, the beneficial owner will be required to treat the excess of
the total amount of payments on the security over the amount paid for the
security as original issue discount and to include the discount in income as it
accrues over the life of the security.
Grantor trust fractional interest securities may also be subject to the
coupon stripping rules if a class of grantor trust strip securities is issued as
part of the same series of securities. The consequences of the application of
the coupon stripping rules would appear to be that any discount arising upon the
purchase of the security, and perhaps all stated interest, would be classified
as original issue discount and includible in the beneficial owner's income as it
accrues, regardless of the beneficial owner's method of accounting. The coupon
stripping rules will not apply, however, if (1) the pass-through rate is no more
than 100 basis points lower than the gross rate of interest payable on the
underlying loans and (2) the difference between the outstanding principal
balance on the security and the amount paid for the security is less than 0.25%
of the principal balance times the weighted average remaining maturity of the
security. See " -- Discount and Premium."
Sales of Grantor Trust Securities
Any gain or loss recognized on the sale of a grantor trust security,
which equal to the difference between the amount realized on the sale and the
adjusted basis of the grantor trust security, will be capital gain or loss,
except to the extent of accrued and unrecognized market discount, which will be
treated as ordinary income, and in the case of banks and other financial
institutions except as provided under section 582(c) of the code. The adjusted
basis of a grantor trust security will generally equal its cost, increased by
any income reported by the seller, including original issue discount and market
discount income, and reduced, but not below zero, by any previously reported
losses, any amortized premium and by any distributions of principal.
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Grantor Trust Reporting
The trustee will furnish to each beneficial owner of a grantor trust
fractional interest security with each distribution a statement detailing the
amount of the distribution allocable to principal on the underlying loans and to
interest, based on the interest rate on the security. In addition, within a
reasonable time after the end of each calendar year, based on information
provided by the servicer, the trustee will furnish to each beneficial owner
during the year the customary factual information that the servicer deems
necessary or desirable to enable beneficial owners of grantor trust securities
to prepare their tax returns and will furnish comparable information to the IRS
as and when required to do so by law.
REMIC SECURITIES
If described in a prospectus supplement, an election will be made to
treat a trust as a REMIC under the code. Qualification as a REMIC requires
ongoing compliance with a number of conditions. If a series of securities is
being issued by a REMIC, special tax counsel to the sponsor will deliver its
opinion to the sponsor that, assuming compliance with the agreements, the trust
will be treated as a REMIC for federal income tax purposes. The securities of
each class will be designated as regular interests in the REMIC trust except
that a separate class will be designated as the residual interest in the REMIC
trust. The prospectus supplement for each series of securities will state
whether the securities of each class will constitute a REMIC regular interest or
a REMIC residual interest.
A REMIC trust will not be subject to federal income tax except with
respect to income from prohibited transactions and in other instances.
Generally, the total income from the loans in a REMIC trust will be taxable to
the beneficial owners of the securities of that series. See " -- Taxes on a
REMIC Trust."
The REMIC regulations issued by the Treasury Department on December 23,
1992 provide some guidance regarding the federal income tax consequences
associated with the purchase, ownership and disposition of REMIC securities.
While certain material provisions of the REMIC regulations are discussed below,
investors may wish to consult their own tax advisors regarding the possible
application of the REMIC regulations in their specific circumstances.
SPECIAL TAX ATTRIBUTES
REMIC regular interests and REMIC residual interests will be regular or
residual interests in a REMIC within the meaning of section 7701(a)(19)(C)(xi)
of the code and real estate assets within the meaning of section 856(c)(5)(A) of
the code. If at any time during a calendar year less than 95% of the assets of a
REMIC trust consist of qualified mortgages within the meaning of section
860G(a)(3) of the code then the portion of the REMIC regular interests and REMIC
residual interests that are qualifying assets under those sections during the
calendar year may be limited to the portion of the assets of the REMIC trust
that are qualified mortgages. Similarly, income on the REMIC regular interests
and REMIC residual interests will be treated as interest on obligations secured
by mortgages on real property within the meaning of section 856(c)(3)(B) of the
code, subject to the same limitation as set forth in the preceding sentence. For
purposes of applying this limitation, a REMIC trust should be treated as owning
the assets represented by the qualified mortgages. The assets of the trust will
include, in addition to the loans, payments on the loans held pending
distribution on the REMIC regular interests and REMIC residual interests and any
reinvestment income. REMIC regular interests and REMIC residual interests held
by a financial institution to which section 585, 586 or 593 of the code applies
will be treated as evidences of indebtedness for purposes of section 582(c)(1)
of the code. REMIC regular interests will also be qualified mortgages suitable
for investment by other REMICs and FASITs.
TAXATION OF BENEFICIAL OWNERS OF REMIC REGULAR INTERESTS
Except as indicated below in this federal income tax discussion, the
REMIC regular interests will be treated for federal income tax purposes as debt
instruments issued by the REMIC trust on the date the securities are first sold
to the public and not as ownership interests in the REMIC trust or its assets.
beneficial owners of REMIC regular interests that otherwise report income under
a cash method of accounting will be required to report income with respect to
the securities under an accrual method. For additional tax consequences relating
to REMIC regular interests purchased at a discount or with premium, see " --
Discount and Premium."
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TAXATION OF BENEFICIAL OWNERS OF REMIC RESIDUAL INTERESTS
Daily Portions.
Except as indicated below, a beneficial owner of a REMIC residual
interest for a REMIC trust generally will be required to report its daily
portion of the taxable income or net loss of the REMIC trust for each day during
a calendar quarter that the beneficial owner owned the REMIC residual interest.
For this purpose, the daily portion shall be determined by allocating to each
day in the calendar quarter its ratable portion of the taxable income or net
loss of the REMIC trust for the quarter and by allocating the amount so
allocated among the residual beneficial owners, on this day, in accordance with
their percentage interests on this day. Any amount included in the gross income
or allowed as a loss of any residual beneficial owner by virtue of this
paragraph will be treated as ordinary income or loss.
The requirement that each beneficial owner of a REMIC residual interest
report its daily portion of the taxable income or net loss of the REMIC trust
will continue until there are no securities of any class outstanding, even
though the beneficial owner of the REMIC residual interest may have received
full payment of the stated interest and principal on its REMIC residual
interest.
The trustee will provide to beneficial owners of REMIC residual
interests of each series of securities (1) the information as is necessary to
enable them to prepare their federal income tax returns and (2) any reports
regarding the Securities of a series that may be required under the Code.
Taxable Income or Net Loss of a REMIC Trust.
The taxable income or net loss of a REMIC trust will be the income from
the qualified mortgages it holds and any reinvestment earnings less deductions
allowed to the REMIC trust. This taxable income or net loss for a given calendar
quarter will be determined in the same manner as for an individual having the
calendar year as the taxable year and using the accrual method of accounting,
with the following four modifications. The first modification is that a
deduction will be allowed for accruals of interest, including any original issue
discount, but without regard to the investment interest limitation in section
163(d) of the code, on the REMIC regular interests, but not the REMIC residual
interests, even though REMIC regular interests are for non-tax purposes
evidences of beneficial ownership rather than indebtedness of a REMIC trust.
Second, market discount or premium equal to the difference between the total
stated principal balances of the qualified mortgages and the basis to the REMIC
trust generally will be included in income, in the case of discount, or
deductible, in the case of premium, by the REMIC trust as it accrues under a
constant yield method, taking into account the prepayment assumption specified
in the prospectus supplement. The basis to a REMIC trust in the qualified
mortgages is the aggregate of the issue prices of all the REMIC regular
interests and REMIC residual interests in the REMIC trust on the settlement
date. If, however, a substantial amount of a class of REMIC regular interests or
REMIC residual interests has not been sold to the public, then the fair market
value of all the REMIC regular interests or REMIC residual interests in that
class as of the date of the prospectus supplement should be substituted for the
issue price. See " -- Discount and Premium -- Original Issue Discount."
The third modification is that no item of income, gain, loss or
deduction allocable to a prohibited transaction will be taken into account.
Fourth, a REMIC trust generally may not deduct any item that would not be
allowed in calculating the taxable income of a partnership by virtue of section
703(a)(2) of the code. Finally, the limitation on miscellaneous itemized
deductions imposed on individuals by section 67 of the code will not be applied
at the REMIC trust level to any servicing and guaranty fees. In addition, under
the REMIC regulations, any expenses that are incurred in connection with the
formation of a REMIC trust and the issuance of the REMIC regular interests and
REMIC residual interests are not treated as expenses of the REMIC trust for
which a deduction is allowed. If the deductions allowed to a REMIC trust exceed
its gross income for a calendar quarter, this excess will be a net loss for the
REMIC trust for that calendar quarter. The REMIC regulations also provide that
any gain or loss to a REMIC trust from the disposition of any asset, including a
qualified mortgage or permitted investment, as defined in section 860G(a)(5) of
the code, will be treated as ordinary gain or loss. See " -- Taxes on a REMIC
Trust -- Prohibited Transactions" and " -- Pass-Through of Servicing and
Guaranty Fees to Individuals."
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A beneficial owner of a REMIC residual interest may be required to
recognize taxable income without being entitled to receive a corresponding
amount of cash. This could occur, for example, if the qualified mortgages are
considered to be purchased by the REMIC trust at a discount, some or all of the
REMIC regular interests are issued at a discount, and the discount included as a
result of a prepayment on a loan that is used to pay principal on the REMIC
regular interests exceeds the REMIC trust's deduction for unaccrued original
issue discount relating to the REMIC regular interests. Taxable income may also
be greater in earlier years because interest expense deductions, expressed as a
percentage of the outstanding principal amount of the REMIC regular interests,
may increase over time as the earlier classes of REMIC regular interests are
paid, although the interest income on any given loan expressed as a percentage
of the outstanding principal amount of that loan will remain constant over time.
BASIS RULES AND DISTRIBUTIONS.
A beneficial owner of a REMIC residual interest has an initial basis in
its security equal to the amount paid for the REMIC residual interest. This
basis is increased by amounts included in the income of the beneficial owner and
decreased by distributions and by any net loss taken into account on the REMIC
residual interest. A distribution on a REMIC residual interest to a beneficial
owner is not included in gross income to the extent it does not exceed the
beneficial owner's basis in the REMIC residual interest, adjusted as described
above, and, to the extent it exceeds the adjusted basis of the REMIC residual
interest, shall be treated as gain from the sale of the REMIC residual interest.
A beneficial owner of a REMIC residual interest is not allowed to take
into account any net loss for any calendar quarter if the net loss exceeds the
beneficial owner's adjusted basis in its REMIC residual interest as of the close
of the calendar quarter, determined without regard to the net loss. Any loss
disallowed by reason of this limitation may be carried forward indefinitely to
future calendar quarters and, subject to the same limitation, may be used only
to offset income from the REMIC residual interest.
EXCESS INCLUSIONS.
Excess inclusions on a REMIC residual interest are subject to special
tax rules. Beneficial owner of a REMIC residual interest, the excess inclusion
for any calendar quarter is defined as the excess, if any, of the daily portions
of taxable income over the sum of the daily accruals for each day during the
quarter that the REMIC residual interest was held by the beneficial owner. The
daily accruals are determined by allocating to each day during a calendar
quarter its ratable portion of the product of the adjusted issue price of the
REMIC residual interest at the beginning of the calendar quarter and 120% of the
federal long-term rate in effect on the settlement date, based on quarterly
compounding, and properly adjusted for the length of the quarter. For this
purpose, the adjusted issue price of a REMIC residual interest as of the
beginning of any calendar quarter is equal to the issue price of the REMIC
residual interest, increased by the amount of daily accruals for all prior
quarters and decreased by any distributions made on the REMIC residual interest
before the beginning of the quarter. The issue price of a REMIC residual
interest is the initial offering price to the public, excluding bond houses and
brokers, at which a substantial number of the REMIC residual interests was sold.
The federal long-term rate is a blend of current yields on Treasury securities
having a maturity of more than nine years, computed and published monthly by the
IRS.
In general, beneficial owners of REMIC residual interests with excess
inclusion income cannot offset the income by losses from other activities. For
beneficial owners that are subject to tax only on unrelated business taxable
income, as defined in section 511 of the code, an excess inclusion of the
beneficial owner is treated as unrelated business taxable income. The REMIC
regulations indicate that if a beneficial owner of a REMIC residual interest is
a member of an affiliated group filing a consolidated income tax return, the
taxable income of the affiliated group cannot be less than the sum of the excess
inclusions attributable to all residual interests in REMICS held by members of
the affiliated group. For a discussion of the effect of excess inclusions on
foreign investors that own REMIC residual interests, see " -- Foreign
Investors."
The Treasury Department also has the authority to issue regulations
that would treat all taxable income of a REMIC trust as excess inclusions if the
REMIC residual interest does not have significant value. Although the Treasury
Department did not exercise this authority in the REMIC regulations, future
regulations may contain that rule. If that rule were adopted, it is unclear how
significant value would be determined for these purposes. If no rule is
applicable, excess inclusions should be calculated as discussed above.
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In the case of any REMIC residual interests that are held by a real
estate investment trust, the aggregate excess inclusions on REMIC residual
interests reduced, but not below zero, by the real estate investment trust
taxable income, within the meaning of section 857(b)(2) of the code, excluding
any net capital gain, will be allocated among the shareholders of the REIT in
proportion to the dividends received by the shareholders from the REIT, and any
allocated amounts will be treated as an excess inclusion on a REMIC residual
interest as if held directly by the shareholder. Similar rules will apply in the
case of regulated investment companies, common trust funds and some cooperatives
that hold a REMIC residual interest.
PASS-THROUGH OF SERVICING AND GUARANTY FEES TO INDIVIDUALS.
A beneficial owner of a REMIC residual interest who is an individual
will be required to include in income a share of any servicing and guaranty
fees. A deduction for these fees will be allowed to a beneficial owner only to
the extent that the fees, along with of the beneficial owner's other
miscellaneous itemized deductions exceed 2% of the beneficial owner's adjusted
gross income. In addition, a beneficial owner of a REMIC residual interest may
not be able to deduct any portion of the fees in computing the beneficial
owner's alternative minimum tax liability. A beneficial owner's share of the
fees will generally be determined by (1) allocating the amount of the expenses
for each calendar quarter on a pro rata basis to each day in the calendar
quarter, and (2) allocating the daily amount among the beneficial owners in
proportion to their respective holdings on this day.
TAXES ON A REMIC TRUST
Prohibited Transactions.
The code imposes a tax on a REMIC equal to 100% of the net income
derived from prohibited transactions. In general, a prohibited transaction means
the disposition of a qualified mortgage other than under specified exceptions,
the receipt of investment income from a source other than a loan or other
permitted investments, the receipt of compensation for services, or the
disposition of an asset purchased with the payments on the qualified mortgages
for temporary investment pending distribution on the regular and residual
interests.
Contributions to a REMIC after the Startup Day.
The code imposes a tax on a REMIC equal to 100% of the value of any
property contributed to the REMIC after the startup day, which is usually the
same day that settlement occurs. Exceptions are provided for cash contributions
to a REMIC (1) during the three month period beginning on the startup day, (2)
made to a qualified reserve fund by a beneficial owner of a residual interest,
(3) in the nature of a guarantee, (4) made to facilitate a qualified liquidation
or clean-up call, and (5) as otherwise permitted by treasury regulations.
Net Income from Foreclosure Property.
The Code imposes a tax on a REMIC equal to the highest corporate rate
on net income from foreclosure property. The terms foreclosure property, which
includes property acquired by deed in lieu of foreclosure, and net income from
foreclosure property are defined by reference to the rules applicable to real
estate investment trusts. Generally, foreclosure property would be treated as
such for a period of three years, with possible extensions. Net income from
foreclosure property generally means gain from the sale of foreclosure property
that is inventory property and gross income from foreclosure property other than
qualifying rents and other qualifying income for a real estate investment trust.
SALES OF REMIC SECURITIES
If a regular or residual interest is sold, the seller will recognize
gain or loss equal to the difference between the amount realized in the sale and
its adjusted basis, except in the case of multiple sales of REMIC residual
interests within six months, and sales of noneconomic residual interests. The
adjusted basis of a REMIC regular interest generally will equal the cost of the
security to the seller, increased by any original issue discount or market
discount included in the seller's gross income from the security and reduced by
distributions on the security previously received by the seller of amounts
included in the stated redemption price at maturity and by any premium
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that has reduced the seller's interest income from the security. Except as
described in the following paragraph or under section 582(c) of the code, this
gain or loss will be capital gain or loss if the security is held as a capital
asset, generally, property held for investment, within the meaning of section
1221 of the code.
Gain from the sale of a REMIC regular interest that might otherwise be
capital gain will be treated as ordinary income to the extent that the gain does
not exceed the excess, if any, of (1) the amount that would have been includible
in the income of the beneficial owner of a REMIC regular interest had income
accrued at a rate equal to 110% of the applicable federal rate, generally, an
average of current yields on Treasury securities, as of the date of purchase
over (2) the amount actually includible in the beneficial owner's income. In
addition, gain recognized on this sale by a beneficial owner of a REMIC regular
interest who purchased a security at a market discount would also be taxable as
ordinary income in an amount not exceeding the portion of the discount that
accrued during the period the security was held by the beneficial owner, reduced
by any market discount includible in income under the rules described under " --
Discount and Premium."
If a beneficial owner of a REMIC residual interest sells its REMIC
residual interest at a loss, the loss will not be recognized if, within six
months before or after the sale of the REMIC residual interest, the beneficial
owner purchases another residual interest in any REMIC or any interest in a
taxable mortgage pool, as defined in section 7701(i) of the Code, comparable to
a residual interest in a REMIC. This disallowed loss would be allowed upon the
sale of the other residual interest, or comparable interest, if the rule
referred to in the preceding sentence does not apply to that sale. While this
rule may be modified by Treasury regulations, no regulations have yet been
published.
Transfers of REMIC Residual Securities.
Section 860E(e) of the Code imposes a substantial tax, payable by the
transferor, or, if a transfer is through a broker, nominee, or other middleman
as the transferee's agent, payable by that agent, upon any transfer of a REMIC
residual interest to a disqualified organization and upon a pass-through entity,
including regulated investment companies, real estate investment trusts, common
trust funds, partnerships, trusts, estates, some cooperatives, and nominees,
that owns a REMIC residual interest if the pass-through entity has a
disqualified organization as a record-holder. A transfer includes any transfer
of record or beneficial ownership.
The term disqualified organization includes the United States, any
state or political subdivision thereof, any foreign government, any
international organization, or any agency or instrumentality of the foregoing,
other than some taxable instrumentalities, any cooperative organization
furnishing electric energy or providing telephone service to persons in rural
areas, or any organization, other than a farmers' cooperative, that is exempt
from federal income tax, unless the organization is subject to the tax on
unrelated business income. Moreover, an entity will not qualify as a REMIC
unless there are reasonable arrangements designed to ensure that (1) residual
interests in the entity are not held by disqualified organizations and (2)
information necessary for the application of the tax will be made available.
Restrictions on the transfer of a REMIC residual interest are described in the
agreements, and will be discussed more fully in the prospectus supplement
relating to the offering of any REMIC residual interest. In addition, a
pass-through entity, including a nominee, that holds a REMIC residual interest
may be subject to additional taxes if a disqualified organization is an owner of
the pass-through entity. A transferor of a REMIC residual interest, or an agent
of a transferee of a REMIC residual interest will be relieved of this tax
liability if (1) the transferee furnishes to the transferor, or the transferee's
agent, an affidavit that the transferee is not a disqualified organization, and
(2) the transferor, or the transferee's agent, does not have actual knowledge
that the affidavit is false at the time of the transfer. Similarly, this tax
will not be imposed on a pass-through entity in which a disqualified
organization is an owner if (1) the owner furnishes to the pass-through entity
an affidavit that it is not a disqualified organization, and (2) during the
period, the pass-through entity has no actual knowledge that the affidavit is
false.
The Taxpayer Relief Act of 1997 adds provisions to the Code that will
apply to an electing large partnership. If an electing large partnership holds a
residual interest, all interests in the electing large partnership are treated
as held by disqualified organizations for purposes of the tax imposed upon a
pass-through entity by section 860E(e) of the Code. An exception to this tax,
otherwise available to a pass-through entity that receives affidavits from its
owners and that does not know the affidavits are false, is not available to an
electing large partnership.
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Under the REMIC regulations, a transfer of a noneconomic residual
interest to a U.S. person will be disregarded for all federal tax purposes
unless no significant purpose of the transfer is to impede the assessment or
collection of tax. A REMIC residual interest would be treated as constituting a
noneconomic residual interest unless, at the time of the transfer, (1) the
present value of the expected future distributions on the REMIC residual
interest is no less than the product of the present value of the anticipated
excess inclusions and the highest corporate rate of tax for the year in which
the transfer occurs, and (2) the transferor reasonably expects that the
transferee will receive distributions from the applicable REMIC trust in an
amount sufficient to satisfy the liability for income tax on any excess
inclusions at or after the time when the liability accrues. Anticipated excess
inclusions are the excess inclusions that are anticipated to be allocated to
each calendar quarter, or portion thereof, following the transfer of a REMIC
residual interest, determined as of the date the security is transferred and
based on events that have occurred as of that date and on the prepayment
assumption. See " -- Discount and Premium" and " -- Taxation of beneficial
owners of REMIC Residual Interests -- Excess Inclusions;" and" -- Foreign
Investors -- Grantor Trust Securities and REMIC regular interests".
The REMIC regulations provide that a significant purpose to impede the
assessment or collection of tax exists if, at the time of the transfer, a
transferor of a REMIC residual interest has improper knowledge, which means that
the transferor, either knew, or should have known, that the transferee would be
unwilling or unable to pay taxes due on its share of the taxable income of the
REMIC trust. A transferor is presumed not to have improper knowledge if (1) the
transferor conducts, at the time of a transfer, a reasonable investigation of
the financial condition of the transferee and, as a result of the investigation,
the transferor finds that the transferee has historically paid its debts as they
come due and finds no significant evidence to indicate that the transferee will
not continue to pay its debts as they come due in the future; and (2) the
transferee makes representations to the transferor in its affidavit relating to
disqualified organizations. Transferors of a REMIC residual interest may wish to
consult with their own tax advisors for further information regarding these
transfers.
Reporting and Other Administrative Matters.
For purposes of the administrative provisions of the code, each REMIC
trust will be treated as a partnership and the beneficial owners of REMIC
residual interests will be treated as partners. The trustee will prepare, sign
and file federal income tax returns for each REMIC trust, which returns are
subject to audit by the IRS. Moreover, within a reasonable time after the end of
each calendar year, the trustee will furnish to each beneficial owner that
received a distribution during the year a statement describing the portions of
any distributions that constitute interest distributions, original issue
discount, and any other information as is required by Treasury regulations and,
for owners of REMIC residual interests, information necessary to compute the
daily portions of the taxable income or net loss of the REMIC trust for each day
during the year. The trustee may also act as the tax matters partner for each
REMIC trust, either in its capacity as a beneficial owner of a REMIC residual
interest or in a fiduciary capacity. Each beneficial owner of a REMIC residual
interest, by the acceptance of its REMIC residual interest, agrees that the
trustee will act as its fiduciary in the performance of any duties required of
it in the event that it is the tax matters partner.
Each beneficial owner of a REMIC residual interest is required to treat
items on its return consistently with the treatment on the return of the REMIC
trust, unless the beneficial owner either files a statement identifying the
inconsistency or establishes that the inconsistency resulted from incorrect
information received from the REMIC trust. The IRS may assert a deficiency
resulting from a failure to comply with the consistency requirement without
instituting an administrative proceeding at the REMIC trust level.
TERMINATION
In general, no special tax consequences will apply to a beneficial
owner of a REMIC regular interest upon the termination of a REMIC trust by
virtue of the final payment or liquidation of the last loan remaining in the
trust estate. If a beneficial owner of a REMIC residual interest's adjusted
basis in its REMIC residual interest at the time the termination occurs exceeds
the amount of cash distributed to the beneficial owner in liquidation of its
interest, although the matter is not entirely free from doubt, it would appear
that the beneficial owner of the REMIC residual interest is entitled to a loss
equal to the amount of the excess.
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DEBT SECURITIES
For each series of debt securities, special tax counsel to the sponsor
will deliver its opinion to the sponsor that the securities will be classified
as debt of the sponsor secured by the mortgage loans. Consequently, debt
securities will not be treated as ownership interests in the loans or the trust.
Beneficial owners will be required to report income received on debt securities
in accordance with their normal method of accounting. It is the opinion of the
special tax counsel to the sponsor that a trust issuing debt securities will not
be treated as an association separately taxable as a corporation, a publicly
traded partnership or a taxable mortgage pool. For additional tax consequences
relating to debt securities purchased at a discount or with premium, see " --
Discount and Premium."
SPECIAL TAX ATTRIBUTES
As described above, grantor trust securities will possess special tax
attributes by virtue of their being ownership interests in the mortgage loans.
Similarly, REMIC regular and residual interests will possess similar attributes
by virtue of the REMIC provisions of the Code. In general, debt securities will
not possess these special tax attributes. Investors to whom such attributes are
important may wish to consult their own tax advisors regarding investment in
debt securities.
SALE OR EXCHANGE OF DEBT SECURITIES
If a beneficial owner of a debt security sells or exchanges the
security, the beneficial owner will recognize gain or loss equal to the
difference, if any, between the amount received and the beneficial owner's
adjusted basis in the security. The adjusted basis in the security generally
will equal its initial cost, increased by any original issue discount or market
discount previously included in the seller's gross income from the security and
reduced by the payments previously received on the security, other than payments
of qualified stated interest, and by any amortized premium.
In general, except for certain financial institutions subject to
section 582(c) of the code, any gain or loss on the sale or exchange of a debt
security recognized by an investor who holds the security as a capital asset
within the meaning of section 1221 of the code, will be capital gain or loss and
will be long-term or short-term depending on whether the security has been held
for more than one year. See " -- Discount and Premium -- Market Discount."
DEBT SECURITIES REPORTING
The trustee will furnish to each beneficial owner of a debt security
with each distribution a statement setting forth the amount of the distribution
allocable to principal on the underlying loans and to interest at the interest
rate. In addition, within a reasonable time after the end of each calendar year,
based on information provided by the servicer, the trustee will furnish to each
beneficial owner during the year the customary factual information that the
master servicer deems necessary or desirable to enable beneficial owners of debt
securities to prepare their tax returns and will furnish comparable information
to the IRS as and when required to do so by law.
PARTNERSHIP INTERESTS
For each series of partnership interests, special tax counsel to the
sponsor will deliver its opinion to the sponsor that the trust will be treated
as a partnership and not an association taxable as a corporation for federal
income tax purposes. Accordingly, each beneficial owner a partnership interest
will generally be treated as the owner of an interest in the loans.
SPECIAL TAX ATTRIBUTES
As described above, REMIC securities will possess special tax
attributes by virtue of the REMIC provisions of the Code. In general,
partnership interests will not possess these special tax attributes. Investors
to whom the special attributes are important may wish to consult their own tax
advisors regarding investment in partnership interests.
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TAXATION OF BENEFICIAL OWNERS OF PARTNERSHIP INTERESTS
If the trust is treated as a partnership for federal income tax
purposes, the trust will not be subject to federal income tax. Instead, each
beneficial owner of a partnership interest will be required to separately take
into account its allocable share of income, gains, losses, deductions, credits
and other tax items of the trust. These partnership allocations are made in
accordance with the code, Treasury regulations and the partnership agreement.
The trust's assets will be the assets of the partnership. The trust's
income will consist primarily of interest and finance charges earned on the
underlying loans. The trust's deductions will consist primarily of interest
accruing on any indebtedness issued by the trust, servicing and other fees, and
losses or deductions upon collection or disposition of the trust's assets.
In some instances, the trust could have an obligation to make payments
of withholding tax on behalf of a beneficial owner of a partnership interest.
See " -- Backup Withholding" and " -- Foreign Investors" below.
Substantially all of the taxable income allocated to a beneficial owner
of a partnership interest 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 a holder
under the code.
Under Section 708 of the code, the trust will be deemed to terminate
for federal income tax purposes if 50% or more of the capital and profits
interests in the trust are sold or exchanged within a 12-month period. Under
Treasury regulations issued on May 9, 1997 if this termination occurs, the trust
is deemed to contribute all of its assets and liabilities to a newly formed
partnership in exchange for a partnership interest. Immediately thereafter, the
terminated partnership distributes interests in the new partnership to the
purchasing partner and remaining partners in proportion to their interests in
liquidation of the terminated partnership.
Sale or Exchange of Partnership Interests
In most cases, capital gain or loss will be recognized on a sale or
exchange of partnership interests in an amount equal to the difference between
the amount realized and the seller's tax basis in the partnership interests
sold. A beneficial owner's tax basis in a partnership interest will generally
equal the beneficial owner's cost increased by the beneficial owner's share of
trust income and decreased by any distributions received on this partnership
interest. In addition, both the tax basis in the partnership interest and the
amount realized on a sale of a partnership interest would take into account the
beneficial owner's share of any indebtedness of the trust. A beneficial owner
acquiring partnership interests at different prices may be required to maintain
a single aggregate adjusted tax basis in the partnership interest, and upon sale
or other disposition of some of the partnership interests, allocate a portion of
the aggregate tax basis to the partnership interests sold, rather than
maintaining a separate tax basis in each partnership interest for purposes of
computing gain or loss on a sale of that partnership interest.
Any gain on the sale of a partnership interest attributable to the
beneficial owner's share of unrecognized accrued market discount on the assets
of the trust would generally be treated as ordinary income to the holder and
would give rise to special tax reporting requirements. If a beneficial owner of
a partnership interest is required to recognize an aggregate amount of income
over the life of the partnership interest that exceeds the aggregate cash
distributions with respect thereto, this excess will generally give rise to a
capital loss upon the retirement of the partnership interest. If a beneficial
owner sells its partnership interest at a profit or loss, the transferee will
have a higher or lower basis in the partnership interests than the transferor
had. The tax basis of the trust's assets will not be adjusted to reflect that
higher or lower basis unless the trust files an election under Section 754 of
the code.
Partnership Reporting
The trustee is required to (1) keep complete and accurate books of the
trust, (2) file IRS form 1065, a partnership information return, with the IRS
for each taxable year of the trust and (3) report each beneficial owner's
allocable share of items of trust income and expense to beneficial owners and
the IRS on Schedule K-1. The trust will provide the Schedule K-1 information to
nominees that fail to provide the trust with the information statement described
in the next paragraph and the nominees will be required to forward the
information to the beneficial
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owners of the partnership interests. Generally, beneficial owners of a
partnership interest must file tax returns that are consistent with the
information return filed by the trust or be subject to penalties unless the
beneficial owner of a partnership interest notifies the IRS of all
inconsistencies.
Under Section 6031 of the code, any person that holds partnership
interests as a nominee at any time during a calendar year is required to furnish
the trust with a statement containing information on the nominee, the beneficial
owners and the partnership interests so held. This information includes (1) the
name, address and taxpayer identification number of the nominee and (2) 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) information on
partnership interests that were held, bought or sold on behalf of the person
throughout the year. In addition, brokers and financial institutions that hold
partnership interests through a nominee are required to furnish directly to the
trust information as to themselves and their ownership of partnership interests.
A clearing agency registered under Section 17A of the Securities Exchange Act is
not required to furnish any information statement to the trust. Nominees,
brokers and financial institutions that fail to provide the trust with the
information described above may be subject to penalties.
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 years after the
date the partnership information return is filed. Any adverse determination
following an audit of the return of the trust by the appropriate taxing
authorities could result in an adjustment of the returns of the beneficial owner
of a partnership interests, and, under some circumstances, a beneficial owner of
a partnership interest may be precluded from separately litigating a proposed
adjustment to the items of the trust. An adjustment could also result in an
audit of the beneficial owner of a partnership interest's returns and
adjustments of items not connected with the trust.
FASIT SECURITIES
If described in a prospectus supplement, an election will be made to
treat the trust as a FASIT within the meaning of Code Section 860L(a).
Qualification as a FASIT requires ongoing compliance with a number conditions.
If a FASIT election is made, special tax counsel to the sponsor will deliver its
opinion to the sponsor that, assuming compliance with the agreements, the trust
will be treated as a FASIT for federal income tax purposes. It is the opinion of
the special tax counsel to the sponsor that a trust issuing FASIT securities
will not be treated as an association separately taxable as a corporation, a
publicly traded partnership or a taxable mortgage pool. The securities of each
class will be designated as regular interests or high-yield regular interests in
the FASIT trust except that one separate class will be designated as the
ownership interest in the FASIT trust. The prospectus supplement for each series
of securities will state whether securities of each class will be a regular
interest, a high-yield regular interest or an ownership interest.
Special Tax Attributes
FASIT securities held by a real estate investment trust will constitute
real estate assets within the meaning of code sections 856(c)(5)(A) and
856(c)(6) and interest on the FASIT regular 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) in the same
proportion that, for both purposes, the assets of the FASIT trust and the income
on those assets would be so treated. FASIT regular securities held by a domestic
building and loan association will be treated as regular interest[s] in a FASIT
under code section 7701(a)(19)(C)(xi), but only in the proportion that the FASIT
trust holds loans . . . secured by an interest in real property which is . . .
residential real property within the meaning of code section 7701(a)(19)(C)(v).
If at all times 95% or more of the assets of the FASIT trust or the income
qualify for the foregoing treatments, the FASIT regular securities will qualify
for the corresponding status in their entirety. For purposes of code section
856(c)(5)(A), payments of principal and interest on a loan that are reinvested
pending distribution to holders of FASIT regular securities should qualify for
this treatment. FASIT regular securities held by a regulated investment company
will not constitute government securities within the meaning of Code Section
851(b)(4)(A)(i). FASIT regular securities held by some financial institutions
will constitute an evidence of indebtedness within the meaning of code section
582(c)(1).
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Taxation of Beneficial Owners of FASIT Regular Interests
A FASIT trust will not be subject to federal income tax except with
respect to income from prohibited transactions and in other instances. The FASIT
regular interests generally will be treated for federal income tax purposes as
newly-originated debt instruments. In general, interest, original issue discount
and market discount on a FASIT regular interest will be treated as ordinary
income to the beneficial owner, and principal payments, other than principal
payments that do not exceed accrued market discount, on an FASIT regular
interest will be treated as a return of capital to the extent of the beneficial
owner's basis. Beneficial owners must use the accrual method of accounting on
their FASIT regular interests, regardless of the method of accounting otherwise
used by the beneficial owners. See " -- Discount and Premium" below.
In order for the FASIT trust to qualify as a FASIT, there must be
ongoing compliance with the requirements set forth in the code. The FASIT must
fulfill an asset test, which requires that substantially all the assets of the
FASIT, after an initial three month period must consist of cash or cash
equivalents, debt instruments, other than debt instruments issued by the owner
of the FASIT or a related party, and hedges, and contracts to acquire the same,
foreclosure property and regular interests in another FASIT or in a REMIC. Based
on identical statutory language applicable to REMICs, it appears that the
substantially all requirement should be met if at all times the aggregate
adjusted basis of the nonqualified assets is less than one percent of the
aggregate adjusted basis of all the FASIT's assets. The FASIT provisions of the
code also require the FASIT ownership interest and some of the high-yield
regular interests to be held only by fully taxable domestic corporations.
In addition to the foregoing requirements, the various interests in a
FASIT also must meet a number of requirements. All of the interests in a FASIT
must be either one or more classes of regular interests or a single class of
ownership interest. A regular interest is an interest in a FASIT that is issued
on or after the startup day with fixed terms, is designated as a regular
interest, and:
(1) unconditionally entitles the holder to receive a specified
principal amount, or other similar amount,
(2) provides that interest payments, or other similar amounts,
if any, at or before maturity either are payable based on a fixed rate
or a qualified variable rate,
(3) has a stated maturity of not longer than 30 years,
(4) has an issue price not greater than 125% of its stated
principal amount, and
(5) has a yield to maturity not greater than five percentage
points higher than the applicable federal rate.
A regular interest that is described in the preceding sentence except
that if fails to meet one or more of requirements (1), (2), (3), (4) or (5) is a
high-yield regular interest. A high-yield regular interest that fails
requirement (2) must consist of a specified, nonvarying portion of the interest
payments on the permitted assets, by reference to the REMIC rules. An ownership
interest is an interest in a FASIT other than a regular interest that is issued
on the startup day, is designated an ownership interest and is held by a single,
fully-taxable, domestic corporation. An interest in a FASIT may be treated as a
regular interest even if payments of principal on that interest are subordinated
to payments on other regular interests or the ownership interest in the FASIT,
and are dependent on the absence of defaults or delinquencies on permitted
assets lower than reasonably expected returns on permitted assets, unanticipated
expenses incurred by the FASIT or prepayment interest shortfalls.
If an entity fails to comply with one or more of the ongoing
requirements of the Code for status as a FASIT during any taxable year, the Code
provides that the entity or applicable potion thereof will not be treated as a
FASIT thereafter. In this event, any entity that holds mortgage loans and is the
obligor on debt obligations with two or more maturities, may be treated as a
separate association taxable as a corporation, and the FASIT regular securities
may be treated as equity interests. The legislative history to the FASIT
provisions indicates, however, that an entity can continue to be a FASIT if loss
of its status was inadvertent, it takes prompt steps to requalify and other
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requirements mandated Treasury regulations are met. Loss of FASIT status results
in retirement of all regular interests and their reissuance. If the resulting
instruments would be treated as equity under general tax principles,
cancellation of debt income may result.
DISCOUNT AND PREMIUM
A security purchased for an amount other than its outstanding principal
amount will be subject to the rules governing original issue discount, market
discount or premium. In addition, all grantor trust strip securities and grantor
trust fractional interest securities will be treated as having original issue
discount by virtue of the coupon stripping rules in section 1286 of the code. In
very general terms, (1) original issue discount is treated as a form of interest
and must be included in a beneficial owner's income as it accrues using a
constant yield method; (2) market discount is treated as ordinary income and
must be included in a beneficial owner's income as principal payments are made
on the security or upon a sale of a security; and (3) if a beneficial owner
elects, premium may be amortized over the life of the security and offset
against inclusions of interest income. These tax consequences are discussed in
greater detail below.
Original Issue Discount
In general, a security will be considered to be issued with original
issue discount equal to the excess, if any, of its stated redemption price at
maturity over its issue price The issue price of a security is the initial
offering price to the public, excluding bond houses and brokers, at which a
substantial number of the securities was sold. The issue price also includes any
accrued interest attributable to the period between the beginning of the first
remittance period and the settlement date. The stated redemption price at
maturity of a security that has a notional principal amount or receives
principal only or that is or may be an accrual security is equal to the sum of
all distributions to be made under the security. The stated redemption price at
maturity of any other security is its stated principal amount, plus an amount
equal to the excess, if any, of the interest payable on the first payment date
over the interest that accrues for the period from the settlement date to the
first payment date. The trustee will supply, required information the original
issue discount accruing on the securities.
Original issue discount will be treated as zero if the discount is less
than 0.25% of the stated redemption price at maturity multiplied by its weighted
average life. The weighted average life of a security is apparently computed for
this purpose as the sum, for all distributions included in the stated redemption
price at maturity of the amounts determined by multiplying (1) the number of
complete years, rounding down for partial years, from the settlement date until
the date each distribution is expected to be made under the assumption that the
mortgage loans prepay at the rate specified in the prospectus supplement by (2)
a fraction, the numerator of which is the amount of the distribution and the
denominator of which is the security's stated redemption price at maturity. If
original issue discount is treated as zero under this rule, the actual amount of
original issue discount must be allocated to the principal distributions on the
security and, when each the distribution is received, gain equal to the discount
allocated to the distribution will be recognized.
Section 1272(a)(6) of the code contains special original issue discount
rules directly applicable to REMIC securities and debt securities. The Taxpayer
Relief Act of 1997 extends application of section 1272(a)(6) to the grantor
trust securities for tax years beginning after August 5, 1997. Under these
rules, described in greater detail below, (1) the amount and rate of accrual of
original issue discount on each series of securities will be based on the
prepayment assumption, and in the case of a security having a variable rate of
interest, an assumption that the value of the index upon which the variable rate
is based remains equal to the value of that rate on the settlement date, and (2)
adjustments will be made in the amount of discount accruing in each taxable year
in which the actual prepayment rate differs from the prepayment assumption.
Section 1272(a)(6)(B)(iii) of the code requires that the prepayment
assumption used to calculate original issue discount be determined in the manner
prescribed in Treasury regulations. To date, no regulations have been
promulgated. The legislative history of this code provision indicates that the
assumed prepayment rate must be the rate used by the parties in pricing the
particular transaction. The sponsor anticipates that the prepayment assumption
for each series of securities will be consistent with this standard. The sponsor
makes no representation, however, that the mortgage loans for a given series
will prepay at the rate reflected in the prepayment assumption for that
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series or at any other rate. We suggest that each investor make its own decision
as to the appropriate prepayment assumption to be used in deciding whether or
not to purchase any of the securities.
Each securityholder must include in gross income the sum of the daily
portions of original issue discount on its security for each day during its
taxable year it held the security. For this purpose, in the case of an original
beneficial owner, the daily portions of original issue discount will be
determined as follows. A calculation will first be made of the portion of the
original issue discount that accrued during each accrual period. The trustee
will supply, at the time and in the manner required by the IRS, to
securityholders, brokers and middlemen information with respect to the original
issue discount accruing on the securities. The trustee will report original
issue discount based on accrual periods of one month, each beginning on a
payment date, or, in the case of the first period, the settlement date, and
ending on the day before the next payment date.
Under section 1272(a)(6) of the code, the portion of original issue
discount treated as accruing for any accrual period will equal the excess, if
any, of (1) the sum of the present values of all the distributions remaining to
be made on the security, if any, as of the end of the accrual period and the
distribution made on the security during the accrual period of amounts included
in the stated redemption price at maturity, over (2) the adjusted issue price of
the security at the beginning of the accrual period. The present value of the
remaining distributions referred to in the preceding sentence will be calculated
based on:
(1) the yield to maturity of the security, calculated as of
the settlement date, giving effect to the prepayment assumption,
(2) events, including actual prepayments, that have occurred
prior to the end of the accrual period,
(3) the prepayment assumption, and
(4) in the case of a security calling for a variable rate of
interest, an assumption that the value of the index upon which the
variable rate is based remains the same as its value on the settlement
date over the entire life of the security.
The adjusted issue price of a security at any time will equal the issue
price of the security, increased by the aggregate amount of previously accrued
original issue discount on the security, and reduced by the amount of any
distributions made on the security as of that time of amounts included in the
stated redemption price at maturity. The original issue discount accruing during
any accrual period will then be allocated ratably to each day during the period
to determine the daily portion of original issue discount.
In the case of grantor trust strip securities and some REMIC
securities, the calculation described in the preceding paragraph may produce a
negative amount of original issue discount for one or more accrual periods. No
definitive guidance has been issued regarding the treatment of the negative
amounts. The legislative history to section 1272(a)(6) indicates that the
negative amounts may be used to offset subsequent positive accruals but may not
offset prior accruals and may not be allowed as a deduction item in a taxable
year in which negative accruals exceed positive accruals. beneficial owners of
the securities may wish to consult their own tax advisors concerning the
treatment of the negative accruals.
A subsequent purchaser of a security that purchases the security at a
cost less than its remaining stated redemption price at maturity also will be
required to include in gross income for each day it holds the security, the
daily portion of original issue discount on the security, but reduced, if the
cost of the security to the purchaser exceeds its adjusted issue price, by an
amount equal to the product of the daily portion and a constant fraction, the
numerator of which is the excess and the denominator of which is the sum of the
daily portions of original issue discount on the security for all days on or
after the day of purchase.
Market Discount
A beneficial owner that purchases a security at a market discount, that
is, at a purchase price less than the remaining stated redemption price at
maturity of the security, or, in the case of a security with original issue
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discount, its adjusted issue price, will be required to allocate each principal
distribution first to accrued market discount on the security, and recognize
ordinary income to the extent the distribution does not exceed the aggregate
amount of accrued market discount on the security not previously included in
income. If securities have unaccrued original issue discount, the market
discount must be included in income in addition to any original issue discount.
A beneficial owner that incurs or continues indebtedness to acquire a security
at a market discount may also be required to defer the deduction of all or a
portion of the interest on the indebtedness until the corresponding amount of
market discount is included in income. In general terms, market discount on a
security may be treated as accruing either (1) under a constant yield method or
(2) in proportion to remaining accruals of original issue discount, if any, or
if none, in proportion to remaining distributions of interest on the security,
in any case taking into account the prepayment assumption. The trustee will make
available, as required by the IRS, to beneficial owners of securities
information necessary to compute the accrual of market discount.
Market discount on a security will be considered to be zero if the
discount is less than 0.25% of the remaining stated redemption price at maturity
of the security multiplied by its weighted average remaining life. Weighted
average remaining life presumably would be calculated in a manner similar to
weighted average life, taking into account payments, including prepayments,
prior to the date of acquisition of the security by the subsequent purchaser. If
market discount on a security is treated as zero under this rule, the actual
amount of market discount must be allocated to the remaining principal
distributions on the security and, when each distribution is received, gain
equal to the discount allocated to the distribution will be recognized.
Securities Purchased at a Premium
A purchaser of a security that purchases the security at a cost greater
than its remaining stated redemption price at maturity will be considered to
have purchased the security at a premium. A purchaser need not include in income
any remaining original issue discount and may elect, under section 171(c)(2) of
the code, to treat the premium as amortizable bond premium. If a beneficial
owner makes this election, the amount of any interest payment that must be
included in the beneficial owner's income for each period ending on a payment
date will be reduced by the portion of the premium allocable to the period based
on the security's yield to maturity. The legislative history of the Tax Reform
Act of 1986 states that the premium amortization should be made under principles
analogous to those governing the accrual of market discount. If the election is
made by the beneficial owner, the election will also apply to all fully taxable
bonds, the interest on which is not excludible from gross income, held by the
beneficial owner at the beginning of the first taxable year to which the
election applies and to all the fully taxable bonds thereafter acquired by it,
and is irrevocable without the consent of the IRS. If this election is not made,
a beneficial owner must include the full amount of each interest payment in
income as it accrues, and the premium must be allocated to the principal
distributions on the security and, when each distribution is received, a loss
equal to the premium allocated to the distribution will be recognized. Any tax
benefit from the premium not previously recognized will be taken into account in
computing gain or loss upon the sale or disposition of the security.
Some securities may provide for only nominal distributions of principal
in comparison to the distributions of interest. It is possible that the IRS or
the Treasury Department may issue guidance excluding the securities from the
rules generally applicable to debt instruments issued at a premium. In
particular, it is possible that this security will be treated as having original
issue discount equal to the excess of the total payments to be received thereon
over its issue price. In this case, section 1272(a)(6) of the code would govern
the accrual of original issue discount, but a beneficial owner would recognize
substantially the same income in any given period as would be recognized if an
election were made under section 171(c)(2) of the code. Unless and until the
Treasury Department or the IRS publishes specific guidance relating to the tax
treatment of the securities, the trustee intends to furnish tax information to
beneficial owners of the securities in accordance with the rules described in
the preceding paragraph.
Special Election
For any security acquired on or after April 4, 1994, a beneficial owner
may elect to include in gross income all interest that accrues on the security
by using a constant yield method. For purposes of the election, the term
interest includes stated interest, acquisition discount, original issue
discount, de minimis original issue discount, market discount, de minimis market
discount and unstated interest as adjusted by any amortizable bond premium or
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acquisition premium. A beneficial owner may wish to consult its own tax advisor
regarding the time and manner of making and the scope of the election and the
implementation of the constant yield method.
BACKUP WITHHOLDING
Distributions of interest and principal, as well as distributions of
proceeds from the sale of securities, may be subject to the backup withholding
tax under section 3406 of the code at a rate of 31% if recipients of the
distributions fail to furnish to the payor required information, including their
taxpayer identification numbers, or otherwise fail to establish an exemption
from the tax. Any amounts deducted and withheld from a distribution to a
recipient would be allowed as a credit against the recipient's federal income
tax. Furthermore, penalties may be imposed by the IRS on a recipient of
distributions that is required to supply information but that does not do so in
the proper manner.
The IRS has issued withholding regulations, which make certain
modifications to withholding, backup withholding and information reporting
rules. The withholding regulations attempt to unify certification requirements
and modify certain reliance standards. The withholding regulations will
generally be effective for payments made after December 31, 2000, although
taxpayers may begin compliance with the withholding regulations immediately.
Prospective investors are urged to consult their own tax advisors regarding the
withholding regulations.
FOREIGN INVESTORS
The withholding regulations would require, in the case of securities
held by a foreign partnership, that the certification described above be
provided by the partners rather than by the foreign partnership and the
partnership provide required information, including a United States taxpayer
identification number. A look-through rule would apply in the case of tiered
partnerships. Non-U.S. persons may wish to consult their own tax advisors
regarding the application to them of the withholding regulations.
Grantor Trust Securities and REMIC Regular Interests
Distributions made on a grantor trust security or a REMIC regular
interest to, or on behalf of, a beneficial owner that is not a U.S. person
generally will be exempt from U.S. federal income and withholding taxes. A U.S.
person means a citizen or resident of the United States, a corporation,
partnership or other entity created or organized in or under the laws of the
United States or any political subdivision thereof, an estate that is subject to
U.S. federal income tax regardless of the source of its income, or a trust if a
court within the United States can exercise primary supervision over its
administration and at least one United States fiduciary has the authority to
control all substantial decisions of the trust. This exemption is applicable if
- the beneficial owner is not subject to U.S. tax as a result of a connection
to the United States other than ownership of the security,
- the beneficial owner signs a statement under penalties of perjury that
certifies that the beneficial owner is not a U.S. person, and provides the
name and address of the beneficial owner, and
- the last U.S. person in the chain of payment to the beneficial owner
receives the statement from the beneficial owner or a financial institution
holding on its behalf and does not have actual knowledge that the statement
is false.
The IRS might take the position that this exemption does not apply to a
beneficial owner that also owns 10% or more of the REMIC residual interests of
any REMIC trust, or to a beneficial owner that is a controlled foreign
corporation described in section 881(c)(3)(C) of the code.
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REMIC Residual Securities
Amounts distributed to a beneficial owner of a REMIC residual interest
that is a not a U.S. person generally will be treated as interest for purposes
of applying the 30%, or lower treaty rate, withholding tax on income that is not
effectively connected with a U.S. trade or business. Temporary Treasury
Regulations clarify that amounts not constituting excess inclusions that are
distributed on a REMIC residual interest to a beneficial owner that is not a
U.S. person generally will be exempt from U.S. federal income and withholding
tax, subject to the same conditions applicable to distributions on grantor trust
securities and REMIC regular interests, as described above, but only to the
extent that the mortgage loans underlying the REMIC trust that issued the REMIC
residual interest were issued after July 18, 1984. REMIC income that constitutes
an excess inclusion is not entitled to any exemption from the withholding tax or
a reduced treaty rate for withholding. See " -- REMIC Securities -- Taxation of
beneficial owners of REMIC Residual Securities -- Excess Inclusions."
Partnership Interests
A trust may be considered to be engaged in a trade or business in the
United States for purposes of non-U.S. persons subject to federal withholding
taxes. If the trust is considered to be engaged in a trade or business in the
United States for these purposes and the trust is treated as a partnership, the
income of the trust distributable to a non-U.S. person would be subject to
federal withholding tax. Also, in these cases, a non-U.S. beneficial owner of a
partnership interest that is a corporation may be subject to the branch profits
tax. If the trust is notified that a beneficial owner of a partnership interest
is a foreign person, the trust may withhold as if it were engaged in a trade or
business in the United States in order to protect the trust from possible
adverse consequences of a failure to withhold. A foreign holder generally would
be entitled to file with the IRS a claim for refund for withheld taxes, taking
the position that no taxes were due because the trust was not in a U.S. trade or
business.
FASIT Regular Interests
High-yield FASIT regular interests may not be sold to or beneficially
owned by non-U.S. persons. Any purported transfer will be null and void and,
upon the trustee's discovery of any purported transfer in violation of this
requirement, the last preceding owner of the high-yield FASIT regular interests
will be restored to ownership. The last preceding owner will, in any event, be
taxable on all income on the high-yield FASIT regular securities for federal
income tax purposes. The agreements will provide that, as a condition to
transfer of a high-yield FASIT regular security, the proposed transferee must
furnish an affidavit as to its status as a U.S. person and otherwise as a
permitted transferee.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences, we suggest that
potential investors 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 may wish to consult
their own tax advisors the various state and local tax consequences of an
investment in the securities.
The federal income tax discussions are included for general information
only and may not be applicable depending upon an investor's particular tax
situation. Prospective purchasers may wish to consult their tax advisers the tax
consequences to them of the purchase, ownership and disposition of the
securities, including the tax consequences under state, local, foreign and other
tax laws and the possible effects of changes in federal or other tax laws.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, commonly referred
to as ERISA and the code prohibit a pension, profit sharing or other employee
benefit plan and some individual retirement arrangements from
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engaging in a number of transactions involving plan assets with persons that are
parties in interest or disqualified persons with respect to the plan, unless a
statutory or administrative exemption applies to the transaction. ERISA and the
code also prohibit some actions involving conflicts of interest by persons who
are fiduciaries of plans or arrangements. A violation of these rules may
generate excise tax and other liabilities under ERISA and the code for these
persons. In addition, 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. Employee benefit plans that
are governmental plans and church plans are not subject to ERISA or these
sections of the code. Accordingly, assets of those plans may be invested in
securities without regard to the ERISA considerations, subject to the provisions
of other applicable federal, state and local law. Any of these types of plans
which are qualified and exempt from taxation under section 401(a) and 501(a) of
the code, however, are subject to the prohibited transaction rules set forth in
Section 503 of the code.
Some of the transactions involving a trust might constitute prohibited
transactions under ERISA and the code for a plan, including an individual
retirement arrangement, that purchased securities if the assets of the trust
were deemed to be assets of the plan. Under a regulation issued by the United
States Department of Labor, the assets of the trust would be treated as assets
of a plan for the purposes of ERISA and the code only if the plan acquired an
equity interest in the trust and none of the exceptions contained in the
regulation were applicable. An equity interest is defined under the regulation
as an interest other than an instrument which is treated as indebtedness under
applicable local law and which has no substantial equity features. In addition,
the United States Supreme Court has ruled that assets held in an insurance
company's general account may be deemed to be plan assets for ERISA purposes
under certain circumstances. Therefore, in the absence of an exemption, the
purchase, sale or holding of a security by a plan, including some individual
retirement arrangements, subject to ERISA or the code might result in prohibited
transactions and the imposition of excise taxes and civil penalties.
CERTIFICATES
The Department of Labor has issued to various underwriters individual
prohibited transaction exemptions, which generally exempt from the application
of the prohibited transaction provisions of Section 406(a), Section 406(b)(1),
Section 406(b)(2) and Section 407(a) of ERISA and the excise taxes imposed
pursuant to Sections 4975(a) and (b) of the code, a number of transactions
concerning the initial purchase, the holding and the subsequent resale by plans
of asset-backed securities meet the conditions and requirements of these
underwriter exemptions. These underwriter exemptions will only be available for
securities that are certificates.
Among the conditions that must be satisfied in order for these
underwriter exemptions to apply to offered certificates are the following:
- 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;
- 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;
- the certificates acquired by the plan have received a rating at the time of
the acquisition that is one of the three highest generic rating categories
from Standard & Poor's, Moody's Investors Service, Duff & Phelps Credit
Rating Co. or Fitch IBCA, Inc.;
- the trustee is not an affiliate of any other member of the restricted group
defined below;
- 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 originators and the sponsor
pursuant to the assignment of the obligations to the trust estate
represents not more than the fair market value of these obligations; the
sum of all payments made to and retained by any servicer represents not
more than reasonable compensation for the person's services under the
agreements and reimbursement of the person's reasonable expenses in
connection therewith;
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<PAGE> 112
- the plan investing in the certificates is an accredited investor as defined
in Rule 501(a)(1) of Regulation D of the Commission under the Securities
Act; and
- if all of the obligations used to fund the trust have not been transferred
to the trust on the closing date, additional obligations of the types
specified in the prospectus supplement or the agreements having an
aggregate value equal to no more than 25% of the total principal amount of
the certificates being offered by the trust may be transferred to the
trust, in exchange for amounts credited to the account funding the
additional obligations, within a funding period of no longer than 90 days
or 3 months following the closing date.
The trust must also meet the following requirements:
- the corpus of the trust estate must consist solely of assets of the type
that have been included in other investment pools;
- certificates in the other investment pools must have been rated in one of
the three highest rating categories of a rating agency for at least one
year prior to the plan's acquisition of certificates; and
- certificates evidencing interests in the other investment pools must have
been purchased by investors other than plans for at least one year prior to
the plan's acquisition of certificates.
Moreover, these underwriter exemptions provide relief from some of the
self-dealing/conflict of interest prohibited transactions that may occur when
the plan fiduciary causes a plan to acquire certificates in a trust in which the
fiduciary, or its affiliate, is an obligor on the receivables held in the trust;
if, among other requirements:
- in the case of an acquisition in connection with the initial issuance of
certificates, at least fifty percent of each class of certificates in which
plans have invested is acquired by persons independent of the restricted
group and at least fifty percent of the aggregate interest in the trust is
acquired by persons independent of the restricted group;
- the fiduciary, or its affiliate, is an obligor under five percent 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 of all of the certificates of that class outstanding at
the time of the acquisition;
- immediately after the acquisition, no more than twenty-five percent of the
assets of the plan for which the person is a fiduciary are invested in
certificates representing an interest in one or more trusts containing
assets sold or serviced by the same entity.
These underwriter exemptions do not apply to plans sponsored by the
restricted group, which means the sponsor, the underwriters, the trustee, the
master servicer, any other servicer, any credit enhancement provider, any
obligor under mortgage loans included in the trust constituting more than five
percent of the aggregate unamortized principal balance of the assets in the
trust, or any affiliate of these parties.
In addition to these underwriter exemptions, the Department of Labor
has issued an exemption for some transactions involving the sale or exchange of
residential mortgage pool pass-through certificates by plans and for
transactions in connection with the servicing and operation of the mortgage
pool.
NOTES
The underwriter exemptions will not be available for securities which
are notes. However, under the plan assets regulation, if the notes are treated
as indebtedness without substantial equity features, the trust's assets would
not be deemed assets of a plan. If the notes are treated as having substantial
equity features, the purchase, holding and resale of the notes could result in a
transaction that is prohibited under ERISA or the code. Even if the notes were
treated as debt for purposes of the plan assets regulation, the acquisition or
holding of the notes by or on behalf
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<PAGE> 113
of a plan could give rise to a prohibited transaction if the acquisition or
holding were deemed to be a loan to a party in interest of the plan. Exemptions
from the prohibited transaction rules could be applicable to the purchase and
holding of notes by a plan, depending on the type and circumstances of the plan
fiduciary making the decision to acquire the notes. Included among these
exemptions are:
- PTCE 84-14, regarding transactions effected by qualified professional asset
managers;
- PTCE 90-1, regarding transactions entered into by insurance company pooled
separate accounts;
- PTCE 91-38, regarding transactions entered into by bank collective
investment funds; PTCE 95-60,
- regarding transactions entered into by insurance company general accounts;
and
- PTCE 96-23, regarding transactions effected by in-house asset managers.
Each purchaser and each transferee of a note that is treated as debt for
purposes of the plan assets regulation may be required to represent and
warrant that its purchase and holding of the note will be covered by one of
these exemptions or by another Department of Labor exemption.
CONSULTATION WITH COUNSEL
The prospectus supplement for each series of securities will provide
further information which plans may wish to consider before purchasing the
securities. A plan fiduciary considering the purchase of securities may wish to
consult its tax and legal advisors regarding whether the assets of the trust
would be considered plan assets, the possibility of exemptive relief from the
prohibited transaction rules and other ERISA issues and their potential
consequences. Moreover, we suggest that each plan fiduciary determine for itself
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.
REPORTS
Each trust will be required to file reports with the Commission under
the requirements of the Securities Exchange Act. The sponsor intends to cause
each trust to suspend filing the reports if and when the reports are no longer
required under the Securities Exchange Act.
In connection with each distribution made to the holders of a series,
the trustee will furnish the securityholders with statements which will describe
the amount of the distribution, its allocation to principal and to interest, and
information regarding the performance of the mortgage loans. The master servicer
will furnish the trustee periodic compliance statements and, an annual statement
from a firm of independent public accountants concerning the accountants' the
examination of documents and records relating to the servicing of the mortgage
loans in the trust. Copies of the monthly and annual statements will be sent to
securityholders if requested and addressed to Advanta Conduit Receivables, Inc.,
10790 Rancho Bernardo Road, San Diego, California 92127, (858)676-3099.
INVESTMENT MATTERS
The prospectus supplement will state whether a series of Securities
will constitute mortgage related securities for purposes of the Secondary
Mortgage Market Enhancement Act of 1984, commonly referred to as SMMEA.
Investors whose investment authority is subject to legal restrictions may wish
to consult with their own legal advisors to determine whether and to what extent
the securities constitute legal investments for them.
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<PAGE> 114
USE OF PROCEEDS
Substantially all of the net proceeds to be received from the sale of
securities will be used by the sponsor to finance the purchase of mortgage
loans, or to repay short-term financings utilized to fund the purchase of the
mortgage loans general corporate purposes. The sponsor expects that it will sell
securities similar to these securities from time to time. The timing and amount
of any additional sales will be dependent upon a number of factors, including
the volume of mortgage loans originated and purchased by the sponsor, prevailing
interest rates, availability of funds and general market conditions.
METHODS OF DISTRIBUTION
The prospectus supplement relating to each series of securities will
set forth the specific terms of the offering of the series of securities, the
names of the underwriters, the proceeds to the sponsor or its affiliates from
the sale and, if applicable, the initial public offering prices, the discounts
and commissions to the underwriters and any discounts and concessions allowed or
reallowed to dealers.
LEGAL MATTERS
Legal matters in connection with the securities will be passed upon for
the sponsor by Dewey Ballantine LLP, New York, New York, by the general counsel
of the sponsor or other counsel identified in the prospectus supplement.
FINANCIAL INFORMATION
The sponsor has determined that its financial statements are not
material to this offering. Any prospective investor who desires to review
financial information of the sponsor may request a copy of the Sponsor's most
recent financial statements from the sponsor.
A new trust will be formed to own the trust property for that trust,
and to issue each series of securities. Each trust will have no assets or
obligations prior to the issuance of the securities and will not engage in any
activities other than those described in this prospectus and in the prospectus
supplement. Accordingly, no financial statements of a trust will be included in
this prospectus or in any prospectus supplement, unless the trust is a business
trust.
A prospectus supplement and a Current Report on Form 8-K, which will be
incorporated by reference to the registration statement, will contain any
required financial statements of the credit enhancement provider.
ADDITIONAL INFORMATION
This prospectus, together with the prospectus supplement for each
series of securities, contains a summary of the material terms of the applicable
exhibits to the registration statement and the agreements under which the
securities will be issued. Copies of the exhibits are on file at the offices of
the Securities and Exchange Commission in Washington, D.C., and may be obtained
at rates prescribed by the Commission upon request to the Commission or may be
inspected, without charge, at the Commission's offices.
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<PAGE> 115
ANNEX I
CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in limited circumstances, the securities will be available only
in book-entry form. Investors in the securities may hold the securities through
any of DTC, Cedelbank or Euroclear. The 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 through Cedelbank and
Euroclear will be conducted in the ordinary way in accordance with the normal
rules and operating procedures of Cedelbank and Euroclear and in accordance with
conventional eurobond practice, which is seven calendar day settlement.
Secondary market trading between investors through DTC will be
conducted according to DTC's rules and procedures applicable to U.S. corporate
debt obligations.
Secondary cross-market trading between Cedelbank or Euroclear and DTC
participants holding securities will be effected on a delivery-against-payment
basis through the respective Depositaries of Cedelbank and Euroclear and as DTC
participants.
Non-U.S. holders of global securities will be subject to U.S.
withholding taxes unless the holders meet a number of requirements and deliver
appropriate U.S. tax documents to the securities clearing organizations or their
participants.
INITIAL SETTLEMENT
All securities will be held in book-entry form by DTC in the name of
Cede & Co. as nominee of DTC. Investors' interests in the securities will be
represented through financial institutions acting on their behalf as direct and
indirect participants in DTC. As a result, Cedelbank and Euroclear will hold
positions on behalf of their participants through their relevant depository
which in turn will hold these positions in their accounts as DTC participants.
Investors electing to hold their securities through DTC will follow DTC
settlement practices. Investor securities custody accounts will be credited with
their holdings against payment in same-day funds on the settlement date.
Investors electing to hold their securities through Cedelbank or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary security and no
lock-up or restricted period. Securities will be credited to the securities
custody accounts on the settlement date against payment in same-day funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important
to establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
participants will be settled using the procedures applicable to asset-back
securities issues in same-day funds.
Trading between Cedelbank or Euroclear Participants. Secondary market
trading between Cedelbank participants or Euroclear participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
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Trading between DTC, Seller and Cedelbank or Euroclear Participants.
When securities are to be transferred from the account of a DTC participant to
the account of a Cedelbank participant or a Euroclear participant, the purchaser
will send instructions to Cedelbank or Euroclear through a Cedelbank participant
or Euroclear participant at least one business day prior to settlement.
Cedelbank or Euroclear will instruct the relevant depository, as the case may
be, to receive the securities against payment. Payment will include interest
accrued on the securities from and including the last coupon payment date to and
excluding the settlement date, on the basis of the actual number of days in the
accrual period and a year assumed to consist of 360 days. For transactions
settling on the 31st of the month, payment will include interest accrued to and
excluding the first day of the following month. Payment will then be made by the
relevant depository to the DTC participant's account against delivery of the
securities. After settlement has been completed, the securities will be credited
to the respective clearing system and by the clearing system, in accordance with
its usual procedures, to the Cedelbank participant's or Euroclear participant's
account. The securities credit will appear the next day, European time and the
cash debt will be back-valued to, and the interest on the global securities will
accrue from, the value date, which would be the preceding day when settlement
occurred in New York. If settlement is not completed on the intended value date
and the trade fails, the Cedelbank or Euroclear cash debt will be valued instead
as of the actual settlement date.
Cedelbank participants and Euroclear participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within Cedelbank or Euroclear. Under
this approach, they may take on credit exposure to Cedelbank or Euroclear until
the securities are credited to their account one day later.
As an alternative, if Cedelbank or Euroclear has extended a line of
credit to them, Cedelbank participants or Euroclear participants can elect not
to preposition funds and allow that credit line to be drawn upon to finance
settlement. Under this procedure, Cedelbank participants or Euroclear
participants purchasing securities would incur overdraft charges for one day,
assuming they cleared the overdraft when the securities were credited to their
accounts. However, interest on the securities would accrue from the value date.
Therefore, in many cases the investment income on the global securities earned
during that one-day period may substantially reduce or offset the amount of the
overdraft charges, although the result will depend on each Cedelbank
participant's or Euroclear participant's particular cost of funds.
Since the settlement is taking place during New York business hours,
DTC participants can employ their usual procedures for crediting global
securities to the respective European depository for the benefit of Cedelbank
participants or Euroclear participants. The sale proceeds will be available to
the DTC seller on the settlement date. Thus, to the DTC participants a
cross-market transaction will settle no differently than a trade between two DTC
participants.
Trading between Cedelbank or Euroclear Seller and DTC Purchaser. Due to
time zone differences in their favor, Cedelbank participants and Euroclear
participants may employ their customary procedures for transactions in which
securities are to be transferred by the respective clearing system, through the
respective depository, to a DTC participant. The seller will send instructions
to Cedelbank or Euroclear through a Cedelbank participant or Euroclear
participant at least one business day prior to settlement. In these cases
Cedelbank or Euroclear will instruct the respective depository, as appropriate,
to credit the securities to the DTC participant's account against payment.
Payment will include interest accrued on the securities from and including the
last interest payment to and excluding the settlement date on the basis of the
actual number of days in the accrual period and a year assumed to consist of 360
days. For transactions settling on the 31st of the month, payment will include
interest accrued to and excluding the first day of the following month. The
payment will then be reflected in the account of Cedelbank participant or
Euroclear participant the following day, and receipt of the cash proceeds in the
Cedelbank participant's or Euroclear participant's account would be back-valued
to the value date, which would be the preceding day, when settlement occurred in
New York. In the event that the Cedelbank participant or Euroclear participant
has a line of credit with its respective clearing system and elects to be in
debt in anticipation of receipt of the sale proceeds in its account, the
back-valuation will extinguish any overdraft incurred over that one-day period.
If settlement is not completed on the intended value date and the trade fails,
receipt of the cash proceeds in the Cedelbank participant's or Euroclear
participant's account would instead be valued as of the actual settlement date.
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Finally, day traders that use Cedelbank or Euroclear and that purchase
global securities from DTC participants for delivery to Cedelbank participants
or Euroclear participants may wish to note that these trades would automatically
fail on the sale side unless affirmative action is taken. At least three
techniques should be readily available to eliminate this potential problem:
- borrowing through Cedelbank or Euroclear for one day, until the purchase
side of the trade is reflected in their Cedelbank or Euroclear accounts in
accordance with the clearing system's customary procedures;
- borrowing the securities in the U.S. from a DTC participant no later than
one day prior to settlement, which would give the securities sufficient
time to be reflected in their Cedelbank or Euroclear account in order to
settle the sale side of the trade; or
- staggering the value dates for the buy and sell sides of the trade so that
the value date for the purchase from the DTC participant is at least one
day prior to the value date for the sale to the Cedelbank participant or
Euroclear participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of securities holding securities through Cedelbank
or Euroclear, or through DTC if the holder has an address outside the U.S., will
be subject to the 30% U.S. withholding tax that generally applies to payments of
interest, including original issue discount, on registered debt issued by U.S.
persons, unless:
(1) each clearing system, bank or other financial institution
that holds customers' securities in the ordinary course of its trade or
business in the chain of intermediaries between the beneficial owner
and the U.S. entity required to withhold tax complies with applicable
certification requirements and
(2) the beneficial owner takes one of the steps described
below to obtain an exemption or reduced tax rate, as defined below,
The IRS recently issued withholding regulations, which make certain
modifications to withholding, backup withholding and information reporting
rules. The withholding regulations attempt to unify certification requirements
and modify certain reliance standards. The withholding regulations will
generally be effective for payments made after December 31, 2000, although
taxpayers may begin compliance with the withholding regulations immediately.
This summary does not deal with all aspects of U.S. federal income tax
withholding that may be relevant to foreign holders of the securities as well as
the application of the withholding regulations. Prospective investors are urged
to consult their own tax advisors for specific advice regarding their holding
and disposing of the securities.
- Exemption for Non-U.S. Persons. Under the existing rules, beneficial owners
of global securities that are non-U.S. persons, as defined below can obtain
a complete exemption from the withholding tax by filing a signed Form W-8,
Certificate of Foreign Status. Under the withholding regulations, a
non-U.S. person may claim beneficial owner status by filing Form W-8BEN,
Certificate of Foreign Status of Beneficial Owner for United States Tax
Withholding. The old Form W-8 is valid until the earlier of (i) three years
beginning on the date that the form is signed, or (ii) December 31, 2000.
The new Form W-8BEN is valid for a period of three years beginning on the
date that the form is signed. If the information shown on Form W-8 changes,
a new Form W-8 or Form W-8BEN must be filed within 30 days of the change.
- Exemption for Non-U.S. Persons with effectively connected income. Under the
existing rules, a non-U.S. person, as defined below, 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. Under the
withholding regulations, a non-U.S. person may claim an exemption from U.S.
withholding on income effectively connected with the conduct of a trade or
business in the United States by filing Form W-8ECI, Certificate of Foreign
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<PAGE> 118
Person's Claim for Exemption From Withholding on Income Effectively
Connected With the Conduct of a Trade or Business in the United States. The
old Form 4224 is valid until the earlier of (i) one year beginning on the
date that the form is signed, or (ii) December 31, 2000. The new Form
W-8ECI is valid for a period of three years beginning on the date that the
form is signed.
- Exemption or reduced rate for non-U.S. Persons resident in treaty
countries. Under the existing rules, non-U.S. persons residing in a country
that has a tax treaty with the United States can obtain an exemption or
reduced tax rate, depending on the treaty terms, by filing Form 1001,
Ownership, Exemption or Reduced Rate Certificate. If the treaty provides
only for a reduced rate, withholding tax will be imposed at that rate
unless the filer alternatively files Form W-8. Under the withholding
regulations, a non-U.S. person may claim treaty benefits by filing Form
W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States
Tax Withholding. The old Form 1001 is valid until the earlier of (i) three
years beginning on the date that the form is signed, or (ii) December 31,
2000. The new Form W-8BEN is valid for a period of three years beginning on
the date that the form is signed.
- 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. Under the existing rules,
the Owner of a global security or 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. The withholding
regulations revise the procedures that withholding agents and payees must follow
to comply with, or to establish an exemption from, withholding for payments made
after December 31, 2000. Each foreign holder of securities should consult its
own tax advisor regarding compliance with these procedures under the withholding
regulations.
A U.S. person is:
(1) a citizen or resident of the United States,
(2) a corporation, partnership or other entity organized in or
under the laws of the United States or any political subdivision
thereof,
(3) an estate that is subject to U.S. federal income tax
regardless of the source of its income or
(4) a trust if a court within the United States can exercise
primary supervision over its administration and at least one United
States person has the authority to control all substantial decisions of
the trust.
A non-U.S. person is any person who is not a U.S. person.
This summary does not deal with all aspects of U.S. federal
income tax withholding that may be relevant to foreign holders of the
securities. Investors are advised to consult their own tax advisors for
specific tax advice concerning their holding and disposing of the
securities.
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--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
$649,728,000
(APPROXIMATE)
ADVANTA MORTGAGE LOAN TRUST 2000-2
MORTGAGE LOAN ASSET-BACKED CERTIFICATES, SERIES 2000-2
[ADVANTA LOGO]
ADVANTA MORTGAGE CORP. USA
MASTER SERVICER
[ADVANTA LOGO]
ADVANTA CONDUIT RECEIVABLES, INC.
SPONSOR
------------------------
PROSPECTUS SUPPLEMENT
------------------------
Underwriters of the class A-1 certificates
BEAR, STEARNS & CO. INC.
MORGAN STANLEY DEAN WITTER
PRUDENTIAL SECURITIES
------------------------
Underwriters of the class A-2, A-3, A-4, A-5 and A-6 certificates
BEAR, STEARNS & CO. INC.
MORGAN STANLEY DEAN WITTER
------------------------
August 16, 2000
We suggest that you 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 securities offered hereby in any state where the offer
is not permitted.
Dealers will be required to deliver a prospectus supplement and prospectus when
acting as underwriters of the securities offered hereby and with respect to
their unsold allotments or subscriptions. In addition, all dealers selling the
securities, whether or not participating in this offering, may be required to
deliver a prospectus supplement and prospectus until November 14, 2000.
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