As filed with the Securities and Exchange Commission on April 28, 1999
Registration Statement No. 333-_______
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
REGISTRATION STATEMENT
ON FORM S-3
UNDER
THE SECURITIES ACT OF 1933
-------------------
J.P. MORGAN ACCEPTANCE CORPORATION I
(Exact name of registrant as specified in its charter)
Delaware 13-3475488
(State of incorporation) (I.R.S. Employer
Identification No.)
60 Wall Street
New York, New York 10260
(212) 648-7741
(Address, including zip code, and telephone number,
including area code, of principal executive offices)
----------------
David M. Duzyk, President
60 Wall Street
New York, New York 10260
(212) 648-7741
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
----------------
With a copy to:
Siegfried Knopf, Esq.
Brown & Wood LLP
One World Trade Center
New York, New York 10048
Approximate date of commencement of proposed sale to the public: From
time to time after this Registration Statement becomes effective.
If the only securities being registered on this form are being
offered pursuant to dividend or interest reinvestment plans, please check the
following box. [ ]
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, please check the following box. [X]
If this form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to
Rule 434, please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
===========================================================================================================================
Proposed Proposed
Maximum Maximum
Amount Aggregate Aggregate Amount of
Title of to be Price Offering Price* Registration
Securities to Be Registered Registered Per Unit* Fee
===========================================================================================================================
<S> <C> <C> <C> <C>
Asset Backed Securities..................... $1,656,379,452(1) 100% $1,656,379,452(1) $140,191,278.89(2)
===========================================================================================================================
</TABLE>
* Estimated for the purpose of calculating the registration fee.
(1) $956,379,452 aggregate principal amount of securities registered
under Registration No. 33-23597 referred to below and not previously
sold is carried forward in this Registration Statement pursuant to
Rule 429. A registration fee of $191,275.89 in connection with such
unsold amount of securities was paid previously under the foregoing
Registration Statement. In addition, $700,000,000 aggregate principal
amount of securities registered under Registration No. 33-23761
referred to below and not previously sold is carried forward in this
Registration Statement pursuant to Rule 429. A registration fee of
$140,000,000 in connection with such unsold amount of securities was
paid previously under the foregoing Registration Statement.
(2) Previously paid, as noted above.
Pursuant to Rule 429 and Rule 414, the prospectus and forms of the
prospectus supplement contained in this Registration Statement also relate to,
and this Registration Statement constitutes a post-effective amendment to,
Registration Statement No. 33-23597, which was filed on August 9, 1988 on Form
S-11, by J.P. Morgan Mortgage Pass-Through Corporation, as a result of a
merger of J.P. Morgan Mortgage Pass-Through Corporation into the Registrant.
The merger was effective as of April 14, 1999. The Registrant expressly adopts
Registration Statement No. 33-23597 as its own registration statement for all
purposes of the Securities Act of 1933 and the Securities Exchange Act of
1934.
In addition, pursuant to Rule 429, the prospectus and forms of
prospectus supplement contained in this Registration Statement also relate to,
and the Registration Statement constitutes a post-effective amendment to,
Registration Statement No. 33-23761, which was filed by the Registrant on
August 24, 1988 on Form S-3 and Form S-11, and any unsold securities
registered thereunder.
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment that specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
==============================================================================
The information in this prospectus supplement is not complete and may be
changed. We may not sell these securities until the registration statement
filed with the Securities and Exchange commission is effective. This prospectus
is not an offer to sell these securities and is not soliciting an offer to buy
these securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED APRIL 28, 1999
PROSPECTUS SUPPLEMENT
To Prospectus dated _____________________
$___________ (approximate)
HOME EQUITY LOAN TRUST 199_-_
HOME EQUITY LOAN ASSET-BACKED NOTES, SERIES 199_-_
J.P. MORGAN ACCEPTANCE CORPORATION I
DEPOSITOR
as Transferor and Master Servicer
The notes represent non-recourse obligations of the issuer only and do not
represent an inteest in or obligation of the Depositor, the trustee or any of
their affiliates.
This prospectus supplement may be used to offer and sell the certificates only
if accompanied by the prospectus.
THE TRUST
o is a Delaware business trust formed pursuant to a trust agreement
between J.P. Morgan Acceptance Corporation I and ________
o will issue [___] class of senior Notes, which are offered hereby
o will issue a single Transferor Interest, which is not offered hereby
THE NOTES
o are principally secured by the assets of the trust which consist of a
pool of [adjustable rate home equity revolving credit line loan
agreements and fixed rate closed-end home equity loans]
o currently have no trading market
CREDIT ENHANCEMENT
o A spread account will fund shortfalls in payments due on the Notes.
o The Transferor Interest will absorb up to a certain percentage of all
losses on the mortgage loans.
o An irrevocable and unconditional guaranty insurance policy issued by
[________] will guarantee payments on the Notes.
o If _____ defaults, certain payments to the holder of the Transferor
Interest will only be paid after payments due on the Notes are made.
REVIEW THE INFORMATION IN "RISK FACTORS" ON PAGE S-10 IN THIS PROSPECTUS
SUPPLEMENT AND ON PAGE 5 IN THE PROSPECTUS.
o For complete information about the Notes, read both this prospectus
supplement and the prospectus.
J.P. Morgan Securities Inc., the Underwriter, will buy the Notes from the
Depositor at the price specified below.
PER $1,000 OF
NOTES TOTAL
Price to Public................................... $ $
Underwriting Discount............................. $ $
Proceeds, before expenses, to the Depositor....... $ $
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE NOTES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
J.P. Morgan & Co.
_________________, 199_
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE
SECURITIES. SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE
OFFERING, AND MAY BID FOR, AND PURCHASE, THE SECURITIES IN THE OPEN MARKET. SEE
"UNDERWRITING".
THIS PROSPECTUS SUPPLEMENT DOES NOT CONTAIN COMPLETE INFORMATION ABOUT
THE OFFERING OF THE NOTES. ADDITIONAL INFORMATION IS CONTAINED IN THE
PROSPECTUS, DATED _______, 199_ AND ATTACHED HERETO. PURCHASERS ARE URGED TO
READ BOTH THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS IN FULL. SALES OF THE
NOTES OFFERED HEREBY MAY NOT BE CONSUMMATED UNLESS THE PURCHASER HAS RECEIVED
BOTH THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS.
No dealer, salesman, or any other person has been authorized to give
any information or to make any representations other than those contained in
this prospectus supplement and the accompanying prospectus and if given or
made, such information or representations must not be relied upon as having
been authorized by the Depositor or the Underwriter. This prospectus supplement
and the accompanying prospectus shall not constitute an offer to sell or a
solicitation of an offer to buy any of the securities offered hereby in any
jurisdiction in which, or to any person to whom, it is unlawful to make such
offer or solicitation in such jurisdiction. The delivery of this prospectus
supplement and the accompanying prospectus at any time does not imply that the
information herein or therein is correct as of any time subsequent to the date
hereof.
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL
DEALERS EFFECTING TRANSACTIONS IN THE NOTES, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS TO WHICH IT RELATES. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN
ACTING AS UNDERWRITER AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
TABLE OF CONTENTS
Page
PROSPECTUS SUPPLEMENT
Summary.............................................................S-3
Risk Factors.......................................................S-10
The Insurer........................................................S-13
The Trust..........................................................S-13
The Transferor.....................................................S-14
Description of the Mortgage Loans..................................S-16
Descripton of the Notes............................................S-24
Pool Factor........................................................S-39
Maturity and Prepayment considerations.............................S-39
Description of the Agreements......................................S-41
Use of Proceeds....................................................S-48
Certain Federal Income Tax Consequences............................S-48
State Taxes........................................................S-51
ERISA Considerations...............................................S-51
Legal Investment Considerations....................................S-53
Underwriting.......................................................S-53
Legal Matters......................................................S-53
Experts............................................................S-54
Ratings............................................................S-54
PROSPECTUS
Risk Factors..................................................... 5
The Trust Fund................................................... 7
Use of Proceeds.................................................. 25
The Depositor.................................................... 25
Credit Enhancement............................................... 43
Yield and Prepayment Considerations.............................. 50
The Agreements................................................... 52
Certain Legal Aspects of the Loans............................... 68
Federal Income Tax Consequences.................................. 84
State Tax Considerations......................................... 111
ERISA Considerations............................................. 111
Legal Investment................................................. 118
Method of Distribution........................................... 119
Legal Matters.................................................... 120
Financial Information............................................ 120
Rating........................................................... 120
Index of Defined Terms........................................... 122
SUMMARY
This summary highlights selected information from this document and
does not contain all of the information that you need to consider in making
your investment decision. Please read this entire prospectus supplement and the
accompanying prospectus for additional information about the Notes.
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HOME EQUITY LOAN ASSET-BACKED NOTES, SERIES 199_-_
- --------------------------------------------------------------------------------------------------
- ----------------------- ------------------ --------------------------- ---------------------------
<S> <C> <C> <C>
INITIAL CLASS
CLASS/INTEREST NOTE RATE PRINCIPAL BALANCE1 MATURITY DATE2
- ----------------------- ------------------ --------------------------- ---------------------------
- ----------------------- ------------------ --------------------------- ---------------------------
Notes LIBOR + ___%3 $________________ ____________
- ----------------------- ------------------ --------------------------- ---------------------------
- ----------------------- ------------------ --------------------------- ---------------------------
Transferor4 N.A. N.A. N.A.
- ----------------------- ------------------ --------------------------- ---------------------------
</TABLE>
1 This amount is subject to a variance of ___%.
2 We expect the actual maturity date for the Notes will be significantly
earlier than its maturity date stated above.
3 If this rate exceeds the weighted average of the net loan rates on any
payment date, you will receive interest at the weighted average net loan
rate. We refer you to "Description of the Notes--Payments on the Notes" for
more information regarding the weighted average net loan rate and other
limitations on the payment of interest on the Notes.
4 The Transferor Interest is not being offered pursuant to this
prospectus supplement and the prospectus.
THE TRANSFEROR AND MASTER SERVICER
o ________________________
o _________________________maintains its principal office at
_____________________. Its telephone number is ____________.
o The master servicer will receive a monthly fee from the interest
payments on the mortgage loans equal to ___% per annum on the
principal balance of each mortgage loan.
WE REFER YOU TO "THE TRANSFEROR" IN THIS PROSPECTUS SUPPLEMENT FOR
ADDITIONAL INFORMATION.
THE DEPOSITOR
o J.P.Morgan Acceptance Corporation I
o J.P.Morgan Acceptance Corporation I maintains its principal office at
60 Wall Street, New York, New York 10260. Its telephone number is
(212) 648-7741.
WE REFER YOU TO "THE DEPOSITOR" IN THE PROSPECTUS FOR ADDITIONAL
INFORMATION.
TRUST
o Home Equity Loan Trust, 199_-_.
INDENTURE TRUSTEE
o [__________________________]
OWNER TRUSTEE
o [__________________________]
INSURER
o [________________________]
WE REFER YOU TO "THE INSURER" IN THIS PROSPECTUS SUPPLEMENT FOR
ADDITIONAL INFORMATION.
CUT-OFF DATE
o ______________, 199_.
CLOSING DATE
o ______________, 199_.
PAYMENT DATE
o The __th day of each month, or if such day is not a business day, the
next business day. The first payment date is ____________, 199_.
COLLECTION PERIOD
o The calendar month preceding the month of a payment date.
REGISTRATION OF NOTES
We will issue the Notes in book-entry form. You will hold your
interests either through a depository in the United States or through
one of two depositories in Europe. While the notes are book-entry,
they will be registered in the name of the applicable depository, or
in the name of the depository's nominee.
Transfers within any depository system will be made in accordance with
the usual rules and operating procedures of that system. Cross-market
transfers between two different depository systems may be made through
a third-party bank and/or the related depositories. The limited
circumstances under which definitive notes will replace the book-entry
notes are described in this prospectus supplement.
WE REFER YOU TO "RISK FACTORS-- CONSEQUENCES ON LIQUIDITY AND PAYMENT
DELAY BECAUSE OF OWNINg BOOK-ENTRY NOTES", "DESCRIPTION OF THE
NOTES--BOOK-ENTRY NOTES" AND "ANNEX I" IN THIS PROSPECTUs SUPPLEMENT
FOR ADDITIONAL INFORMATION.
ASSETS OF THE TRUST
The trust's assets include:
o a pool of [adjustable rate home equity revolving credit line loan
agreements and fixed rate closed-end home equity loans,] secured by
either first or junior deeds of trust or mortgages on one- to
four-family residential properties;
o payments of interest due on the mortgage loans on and after the
cut-off date and principal payments received on the mortgage loans on
and after the cut-off date;
o property that secured a mortgage loan which has been acquired by
foreclosure or deed in lieu of foreclosure; and
o rights under certain hazard insurance policies covering the mortgaged
properties.
During the life of the trust, all new advances made to mortgagors under the
applicable credit line agreement will become assets of the trust. Due to such
advances and any principal payments on the mortgage loans, the pool balance
will generally fluctuate and differ from day to day.
THE MORTGAGE LOANS
1. Mortgage Loan Statistics
On the closing date, the trust will acquire a pool of [adjustable rate home
equity revolving credit line loan agreements (the revolving credit-line loans)
and fixed rate closed-end home equity loans] (the closed-end loans), or
"mortgage loans". The mortgage loans will have the following characteristics:
o number of mortgage loans: _____
o number of revolving credit-line loans:
o number of closed-end loans:
o aggregate principal balance: $__________
o number of mortgage loans: _____
o mortgaged property location: ___ states
o average credit limit of revolving credit-line loans: $_____
o credit limits on the revolving credit-line loans range: $____ to $____
o interest rates as of December 1, 1998 range: _____% to ______%
o weighted average interest rate as of the cut-off date _____%
(approximate)
o loan age range: ____ to ____months
o weighted average loan age: __ months
o credit limit utilization rate range for revolving credit-line loans:
___ to ___
o weighted average credit limit utilization rate for revolving
credit-line loans: ___
o gross margin range for revolving credit-line loans: ___ to ___
o weighted average gross margin for revolving credit-line loans: __
o combined loan-to-value ratio range, of ____% to _____% (approximate)
o weighted average combined loan-to-value ratio ____% (approximate)
o all of the revolving credit-line loans bear interest at an adjustable
rate based on [_________].
o balloon loans - loans with amortization schedules that don't fully
amortize by their maturity date: ____% (approximate).
2. Payment Terms of Mortgage Loans
A. Revolving Credit Line Loans
o Each borrower under a revolving credit-line loan may borrow amounts
from time to time up to the maximum amount of that borrower's line of
credit. If borrowed amounts are repaid, they can again be borrowed.
o INTEREST - Interest on each revolving credit-line loan is payable
monthly on the related outstanding principal balance for each day in
the billing cycle. The loan rate is variable and is equal to
__________.
PRINCIPAL - The revolving credit-line loans have [a ten year draw
period during which time amounts may be borrowed under the credit line
agreement, followed by a ten year repayment period during which the
borrower must repay the outstanding principal of the loan].
B. Closed-End Home Equity Loans
o The amount borrowed under a closed-end loan is fully disbursed on the
date of origination of the related closed-end loan and the borrower is
not entitled to future advances of cash under the related closed-end
loan.
o Interest on each closed-end loan is payable monthly on the related
outstanding principal balance of the closed-end loan. The loan rate
for most of the closed-end loans is fixed at origination of the
closed-end loan. The loan rate for the remainder of the closed-end
loans is variable and is equal to [________].
C. Simple Interest Loans
o All of the loans compute interest based on a simple interest method.
This means that interest is computed and charged to the borrower on
the outstanding balance of the loan based on the number of days
elapsed between the date through which interest was last paid on the
loan through receipt of the borrower's most current payment. The
portions of each monthly payment that are allocated to interest and
principal are adjusted based on the actual amount interest charged on
such basis.
WE REFER YOU TO "DESCRIPTION OF THE MORTGAGE LOANS" IN THIS PROSPECTUS
SUPPLEMENT FOR ADDITIONAL INFORMATION.
THE NOTES
1. GENERAL
o The notes will be secured by the assets of the trust.
o Each month, the indenture trustee will calculate the amount you are
owed.
o If you hold a note on the day immediately preceding the related
payment date, you will be entitled to receive payments on that payment
date.
2. INTEREST PAYMENTS: Interest on the notes accrues during the period
beginning on the prior payment date (or in the case of the first payment
date, beginning on the closing date) and ending on the day before the
applicable payment date. The indenture trustee will calculate interest
based on the actual number of days in the interest period and a year
assumed to consist of 360 days. On each payment date, you will be entitled
to the following amounts from your portion of interest collections on the
mortgage loans:
o interest at the related note rate that accrued during the interest
period on your invested amount; and
o any interest that was due on a prior payment date and not paid. In
addition, interest will have accrued on the amount of interest which
was previously due and not paid.
3. PRINCIPAL PAYMENTS: From the first payment date and ending on the payment
date in __________ and if certain events causing an acceleration of
payment of principal do not occur, you will be entitled to either (a) or
(b), whichever is the lesser amount:
o ___% of the principal collected during the prior due period; or
o the amount of principal collected during the prior due period minus
advances made to the borrowers under the credit line agreements during
that due period.
On the payment date following ___________, or if certain events causing an
acceleration of principal occur, you will be entitled to receive the
amount described in (a) above.
WE REFER YOU TO "DESCRIPTION OF THE NOTES--PAYMENTS ON THE NOTES" IN THIS
PROSPECTUS SUPPLEMENT FOR ADDITIONAL INFORMATION.
CREDIT ENHANCEMENT
1. THE INSURANCE POLICY: [_______________] will issue an insurance policy
which unconditionally guarantees the payment of:
o accrued and unpaid interest due on the Notes;
o principal losses on the mortgage loans; and
o any principal amounts owed to noteholders on the maturity date.
WE REFER YOU TO "DESCRIPTION OF THE NOTES--THE POLICY" IN THIS PROSPECTUS
SUPPLEMENT FOR ADDITIONAL INFORMATION.
[2. THE SPREAD ACCOUNT: Amounts on deposit in the spread account will be
available to the indenture trustee to pay interest due on the notes and
to cover principal losses on the mortgage loans prior to a draw on the
insurance policy.]
[WE REFER YOU TO "DESCRIPTION OF THE NOTES--THE SPREAD ACCOUNT" IN THIS
PROSPECTUS SUPPLEMENT FOR ADDITIONAL INFORMATION.]
3. LIMITED SUBORDINATION OF TRANSFEROR INTEREST: [After the spread account
is depleted and prior][Prior] to a draw on the policy, losses on the
mortgage loans will be allocable to the transferor interest. up to
certain levels. In addition, if the insurer defaults, certain payments to
the holder of the transferor interest will be made after payments to the
notes.
WE REFER YOU TO "DESCRIPTION OF THE NOTES--OVERCOLLATERALIZATION" IN THIS
PROSPECTUS SUPPLEMENT FOR ADDITIONAL INFORMATION.
OPTIONAL TERMINATION
The mortgage loans will be subject to an optional transfer to the owner
of the transferor interest on any payment date after:
o the principal balance of the notes is reduced to any amount less than
or equal to _% of the original principal balance of the notes; and
o all amounts due and owing to the insurer and unreimbursed draws on the
insurance policy, with interest thereon have been paid.
WE REFER YOU TO "DESCRIPTION OF THE NOTES--TERMINATION; RETIREMENT OF THE
NOTES" IN THIS PROSPECTUS SUPPLEMENT FOR ADDITIONAL INFORMATION.
FEDERAL TAX CONSIDERATIONS
For federal income tax purposes:
o Tax counsel is of the opinion that the notes will be treated as debt
instruments.
o You must agree to treat your note as indebtedness for federal, state
and local income and franchise tax purposes.
WE REFER YOU TO "CERTAIN FEDERAL INCOME TAX CONSIDERATIONS" IN THIS
PROSPECTUS SUPPLEMENT AND IN THE PROSPECTUS FOR ADDITIONAL INFORMATION.
ERISA CONSIDERATIONS
The fiduciary responsibility provisions of the Employee Retirement Income
Security Act of 1974, or ERISA, can limit investments by certain pension
and other employee benefit plans. Pension and other employee benefit plans
should be able to purchase investments like the notes so long as they are
treated as debt under applicable state law and have no "substantial equity
features". Any plan fiduciary considering whether to purchase the notes on
behalf of a plan should consult with its counsel regarding the
applicability of the provisions of ERISA and the Internal Revenue Code and
the availability of any exemptions.
WE REFER YOU TO "ERISA CONSIDERATIONS" IN THIS PROSPECTUS SUPPLEMENT AND
THE PROSPECTUS FOR ADDITIONAL INFORMATION.
LEGAL INVESTMENT CONSIDERATIONS
The Secondary Mortgage Market Enhancement Act of 1984 defines "mortgage
related securities" to include only first mortgages, and not second
mortgages. Because the pool of mortgage loans owned by the trust includes
junior mortgage loans, the notes will not be "mortgage related securities"
under that definition. Some institutions may be limited in their legal
investment authority to only first mortgages or "mortgage related
securities" and will be unable to invest in the Notes.
WE REFER YOU TO "LEGAL INVESTMENT CONSIDERATIONS" IN THIS PROSPECTUS
SUPPLEMENT AND "LEGAL INVESTMENT" IN THE PROSPECTUS FOR ADDITIONAL
INFORMATION.
NOTE RATING
The Trust will not issue the Notes unless they receive the following
ratings:
o ____ by ___________________________.
o ___ by ____________________________.
A rating is not a recommendation to buy, sell or hold securities and may
be subject to revision or withdrawal by either rating agency.
WE REFER YOU TO "RATINGS" AND "RISK FACTORS--NOTE RATING BASED PRIMARILY
ON CLAIMS-PAYING ABILITY OF THE INSURER" IN THIS PROSPECTUS SUPPLEMENT
FOR ADDITIONAL INFORMATION.
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS PRIOR TO ANY
PURCHASE OF NOTES. YOU SHOULD ALSO CAREFULLY CONSIDER THE INFORMATION SET FORTH
UNDER "RISK FACTORS" IN THE PROSPECTUS.
CONSEQUENCES ON LIQUIDITY AND PAYMENT DELAY BECAUSE OF OWNING BOOK-ENTRY NOTES
o LIMIT ON LIQUIDITY OF NOTES. Issuance of notes in book-entry form may
reduce the liquidity of such notes in the secondary trading market since
investors may be unwilling to purchase notes for which they cannot obtain
physical notes.
o LIMIT ON ABILITY TO TRANSFER OR PLEDGE. Since transactions in the
book-entry notes can be effected only through DTC, participating
organizations, indirect participants and certain banks, your ability to
transfer or pledge a book-entry note to persons or entities that do not
participate in the DTC system or otherwise to take actions in respect of
such notes, may be limited due to lack of a physical note representing the
book-entry notes.
o DELAYS IN PAYMENTS. You may experience some delay in the receipt of
payments on the book-entry notes since the payments will be forwarded by
the indenture trustee to DTC for DTC to credit the accounts of its
participants which will thereafter credit them to your account either
directly or indirectly through indirect participants, as applicable.
WE REFER YOU TO "DESCRIPTION OF NOTES--BOOK-ENTRY NOTES" IN THIS
PROSPECTUS SUPPLEMENT.
BALLOON LOAN RISK
Balloon loans pose a risk because a borrower must pay a large lump sum
payment of principal at the end of the loan term. If the borrower is unable to
pay the lump sum or refinance such amount, you will suffer a loss if the
insurer fails to perform its obligations under the policy and the other forms
of credit enhancement are insufficient to cover the loss. Approximately ___% of
the mortgage loans are balloon loans.
DELAY IN RECEIPT OF LIQUIDATION PROCEEDS; LIQUIDATION PROCEEDS MAY BE LESS THAN
MORTGAGE LOAN BALANCE
Substantial delays could be encountered in connection with the
liquidation of delinquent mortgage loans. Further, liquidation expenses such as
legal fees, real estate taxes and maintenance and preservation expenses will
reduce the portion of liquidation proceeds payable to you. If a mortgaged
property fails to provide adequate security for the mortgage loan, you will
incur a loss on your investment if the insurer fails to perform its obligations
under the insurance policy.
WE REFER YOU TO "CERTAIN LEGAL ASPECTS OF LOANS--FORECLOSURE" IN THE
PROSPECTUS.
PREPAYMENTS AFFECT TIMING AND RATE OF RETURN ON YOUR INVESTMENT
The yield to maturity on your notes will be directly related to the
rate of principal payments on the mortgage loans. Please consider the
following:
o Mortgagors may fully or partially prepay their mortgage loan at any time.
However, some mortgage loans require that the mortgagor pay a fee with any
prepayments in full within five years of origination, except that
generally no fee is required for any prepayment in full made within twelve
months of a loan's maturity date. This may result in the rate of
prepayments being slower than would otherwise be the case.
o During the period that a borrower may borrow money under a revolving
credit-line loan, the borrower may make monthly payments only for the
accrued interest or may also repay some or all of the amounts previously
borrowed. In addition, borrowers may borrow additional amounts up to the
maximum amounts of their lines of credit. As a result, the amount the
trust receives in any month (and in turn the amount of principal paid to
you) may change significantly.
o All of the mortgage loans compute interest due on a simple interest
method. This means that the amount of each monthly payment will vary each
month if the monthly payment is not received on its scheduled due date.
o All the mortgage loans contain due-on-sale provisions. Due-on-sale
provisions require the mortgagor to fully pay the mortgage loan when the
mortgaged property is sold. Generally, the master servicer will enforce
the due-on-sale provision unless prohibited by applicable law.
o The rate of principal payments on pools of mortgage loans is influenced by
a variety of factors, including general economic conditions, interest
rates, the availability of alternative financing and homeowner mobility.
o Home equity loans generally are not viewed by borrowers as permanent
financing. Accordingly, the mortgage loans may experience a higher rate of
prepayment than purchase money first lien mortgage loans.
o We cannot predict the rate at which borrowers will repay their mortgage
loans, nor are we aware of any publicly available studies or statistics on
the rate of prepayment of mortgage loans similar to the mortgage loans in
the pool.
o If you purchased your note at a premium and you receive your principal
faster than expected, your yield to maturity will be lower than you
anticipated. If you purchased your note at a discount and you receive your
principal slower than expected, your yield to maturity will be lower than
you anticipated.
WE REFER YOU TO "PREPAYMENT AND YIELD CONSIDERATIONS" IN THE
PROSPECTUS.
NOTE RATING BASED PRIMARILY ON CLAIMS-PAYING ABILITY OF THE INSURER
The rating on the notes depends primarily on an assessment by the
rating agencies of the mortgage loans and upon the claims-paying ability of the
insurer. Any reduction of the rating assigned to the claims-paying ability of
the insurer may cause a corresponding reduction on the ratings assigned to the
notes. A reduction in the rating assigned to the notes will reduce the market
value of the notes and may affect your ability to sell them. In general, the
rating on your notes addresses credit risk and does not address the likelihood
of prepayments.
WE REFER YOU TO "RATINGS" IN THIS PROSPECTUS SUPPLEMENT.
LIEN PRIORITY COULD RESULT IN PAYMENT DELAY AND LOSS
Most of the mortgage loans are secured by mortgages which are junior
in priority. For mortgage loans in the trust secured by first mortgages, the
master servicer may consent under certain circumstances to a new first priority
lien on the mortgaged property regardless of the principal amount, which has
the effect of making the first mortgage a junior mortgage. Mortgage loans that
are secured by junior mortgages will receive proceeds from a sale of the
related mortgaged property only after any senior mortgage loans and prior
statutory liens have been paid. If the remaining proceeds are insufficient to
satisfy the mortgage loan in the trust and the insurer fails to perform its
obligations under the policy and the other forms of credit enhancement are
insufficient to cover the loss, then:
o there will be a delay in payments to you while a deficiency judgment
against the borrower is sought; and
o you may incur a loss if a deficiency judgment cannot be obtained or is not
realized upon.
WE REFER YOU TO "CERTAIN LEGAL ASPECTS OF THE LOANS" IN THE
PROSPECTUS.
PAYMENTS TO AND RIGHTS OF INVESTORS ADVERSELY AFFECTED BY INSOLVENCY OF THE
DEPOSITOR OR THE TRANSFEROR
The sale of the mortgage loans from the transferor to the Depositor
will be treated by the transferor and the Depositor as a sale of the mortgage
loans. If the Transferor were to become insolvent, a receiver or conservator
for, or a creditor of, the transferor, may argue that the transaction between
the transferor and the trust is a pledge of mortgage loans as security for a
borrowing rather than a sale. Such an attempt, even if unsuccessful, could
result in delays in payments to you.
[In the event of the transferor's insolvency, there is a possibility
that the Federal Deposit Insurance Corporation could be appointed as a receiver
or conservator and prevent the Indenture Trustee from taking any action with
respect to the trust. The Federal Deposit Insurance Corporation may enforce the
transferor's contracts and may have the power to cause the transferor to
continue to perform the master servicer's duties. This would prevent the
appointment of a successor servicer and prevent the liquidation of the mortgage
loans or the early retirement of the notes.]
INTEREST PAYMENTS ON THE MORTGAGE LOANS MAY BE REDUCED
o PREPAYMENTS OF PRINCIPAL MAY REDUCE INTEREST PAYMENTS. If a mortgagor
prepays a mortgage loan in full, the mortgagor is charged interest only up
to the date of the prepayment, instead of a full month. The master
servicer is obligated to reduce its servicing fee in the month of such
prepayment so that one month's interest is paid with such prepayment in
full. If the servicing fee is insufficient to pay such interest shortfalls
attributed to prepayments, a shortfall in interest due on the notes may
result. The insurer is required to cover this shortfall. If the insurer
fails to perform its obligations under the policy, you may incur a loss.
o CERTAIN INTEREST SHORTFALLS ARE NOT COVERED BY THE MASTER SERVICER OR THE
INSURANCE POLICY. The Soldiers' and Sailors' Civil Relief Act of 1940
permits certain modifications to the payment terms for mortgage loans,
including a reduction in the amount of interest paid by the borrower,
under certain circumstances. Neither the master servicer nor the insurer
will pay for any interest shortfalls created by the Soldiers' and Sailors'
Civil Relief Act of 1940.
RISK OF LOSSES AS A RESULT OF GEOGRAPHIC CONCENTRATION
The mortgaged properties relating to the mortgage loans are located in
__ states. However, __% of the mortgaged properties (by principal balance as of
the cut-off date) are located in ______. If ____________ experiences in the
future weaker economic conditions or greater rates of decline in real estate
values than the United States generally, then the mortgage loans may experience
higher rates of delinquencies, defaults and foreclosures than would otherwise
be the case.
[NOTEHOLDERS COULD BE ADVERSELY AFFECTED IN THE ABSENCE OF YEAR 2000 COMPLIANCE
As is the case with most companies using computers in their
operations, the master servicer is faced with the task of preparing for year
2000. The year 2000 issue is the result of prior computer programs being
written using two digits, rather than four digits, to define the applicable
year. Any of the master servicer's computer programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. Major computer system failure or miscalculations may occur as a result.
The master servicer is presently engaged in various procedures to ensure that
their computer systems and software will be year 2000 compliant.
However, if the master servicer or any of its suppliers, customers,
brokers or agents do not successfully and timely achieve year 2000 compliance,
the performance of obligations of the master servicer could be materially
adversely affected. This could result in delays in processing payments on the
mortgage loans and cause a related delay in payments to you.]
RISK OF INCREASED DELINQUENCY, DEFAULT AND FORECLOSURE EXPERIENCE DUE TO LESS
STRINGENT UNDERWRITING STANDARDS
The transferor's underwriting standards are generally less stringent
than those of Fannie Mae or the Federal Home Loan Mortgage Corporation with
respect to credit history and certain other items. If a borrower has a poor
credit history, the transferor may still make a loan to the borrower. This
approach to underwriting may result in higher rates of delinquencies, defaults
and foreclosures than for mortgage loans underwritten in a more traditional
manner.
THE INSURER
The information set forth in this section have been provided by the
[________], the insurer (the "Insurer"). No representation is made by the
Underwriters, the Transferor, the Master Servicer or any of their affiliates as
to the accuracy of completeness of any such information.
[DESCRIPTION OF INSURER]
THE TRUST
GENERAL
Home Equity Loan Trust 199_-_ (the "Trust") is a business trust formed
under the laws of the State of Delaware pursuant to the Trust Agreement for the
transactions described in this Prospectus Supplement. After its formation, the
Trust will not engage in any activity other than (i) acquiring, holding and
managing the Mortgage Loans and the other assets of the Trust and proceeds
therefrom, (ii) issuing the Notes and the Transferor Interest, (iii) making
payments on the Notes and the Transferor Interest and (iv) engaging in other
activities that are necessary, suitable or convenient to accomplish the
foregoing or are incidental thereto or in connection therewith.
The Notes and the Transferor Interest will be delivered by the Trust
to the Transferor as consideration for the Mortgage Loans pursuant to the Sale
and Servicing Agreement.
On the Closing Date, the Trust will purchase Mortgage Loans having an
aggregate principal balance of approximately $___________ as of the Cut-Off
Date (the "Cut-Off Date Pool Principal Balance") from the Transferor pursuant
to a Sale and Servicing Agreement dated as of __________, 199_ (as amended and
supplemented from time to time, the "Sale and Servicing Agreement"), among the
Trust, the Depositor, the Transferor, the Master Servicer, the Owner Trustee
and the Indenture Trustee.
The assets of the Trust will consist primarily of the Mortgage Loans,
which will be secured by first- or junior-lien Mortgages on the Mortgaged
Properties. SEE "DESCRIPTION OF THE MORTGAGE LOANS" herein. The assets of the
Trust will also include (i) payments in respect on the Mortgage Loans received
on or after the Cut-Off Date (exclusive of (i) certain payments in respect of
interest accrued on the Mortgage Loans during ______ and (ii) payments in
respect of interest on the delinquent Mortgage Loans due prior to the Cut-Off
Date and received thereafter), (ii) amounts on deposit in the Collection
Account, Distribution Account [and the Spread Account} and (iii) certain other
ancillary or incidental funds, rights and properties related to the foregoing.
The Trust will include the unpaid principal balance of each Mortgage
Loan as of the opening of business on the Cut-Off Date (the "Cut-Off Date
Principal Balance"). With respect to any date, the "Pool Principal Balance"
will be equal to the aggregate Principal Balances of all Loans as of such date.
The assets of the Trust will be pledged to the Indenture Trustee as
security for the Notes pursuant to the Indenture dated as of _________ (as
amended and supplemented from time to time), between the Trust and the
Indenture Trustee.
The Master Servicer is obligated to service the Mortgage Loans
pursuant to the Sale and Servicing Agreement (collectively with the Indenture
and the Trust Agreement, the "Agreements") and will be compensated for such
services as described under "--Servicing Compensation and Payment of Expenses"
herein.
The Trust's principal offices are located in __________________, in
care of [____________________], as Owner Trustee, at the address set forth
below.
THE OWNER TRUSTEE
[__________________] will act as the Owner Trustee under the Trust
Agreement. [_________________] is a ____________________________ banking
corporation and its principal offices are located at
[_________________________________________________________].
THE TRANSFEROR
[DESCRIPTION OF THE TRANSFEROR]
CREDIT AND UNDERWRITING GUIDELINES
[Description of the Transferor's Credit and Underwriting Guidelines]
DELINQUENCY AND CHARGE-OFF EXPERIENCE
The following tables set forth the Master Servicer's delinquency and
charge-off experience on its servicing portfolio of home equity lines of credit
similar to and including the Mortgage Loans for the periods indicated. There
can be no assurance that the delinquency and charge-off experience on the
Mortgage Loans will be consistent with the historical information provided
below. Accordingly, this information should not be considered to reflect the
credit quality of the Mortgage Loans included in the Trust, or a basis of
assessing the likelihood, amount or severity of losses on the Mortgage Loans.
The statistical data in the tables set forth below are based on all of the
[mortgage loans][home equity lines of credit] in the Master Servicer's
servicing, portfolio.
Delinquency is a percentage of aggregate principal balance of mortgage
loans serviced for each period would be higher than those shown if a group of
mortgage loans were artificially isolated at a point in time and the
information showed the activity only in that isolated group.
DELINQUENCY EXPERIENCE OF THE MASTER SERVICER'S PORTFOLIO OF HOME
EQUITY LINES OF CREDIT
The following table sets forth information relating to the delinquency
experience of mortgage loans similar to and including the Mortgage Loans for
the ___ months ended _________, 199_, and the years ended December 31, 199_,
December 31, 199_ and December 31, 199_.
<TABLE>
<CAPTION>
YEAR ENDED ____ Months Ended
DECEMBER 31, 199_ DECEMBER 31, 199_ DECEMBER 31, 199_ DECEMBER 31, 199_ 30, 199_
- --------------
NUMBER DOLLAR NUMBER DOLLAR NUMBER DOLLAR NUMBER DOLLAR NUMBER DOLLAR
OF LOANS AMOUNT(4) OF AMOUNT(4) OF LOANS AMOUNT(4) OF LOANS AMOUNT(4) OF LOANS AMOUNT(4)
LOANS
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Portfolio...... (3) $ (3) $ $ $
Delinquency
Percentage(1) (3) (3) (3) % % % %
30-59 days
60-89 (3) (3) % % % %
90 days or (3) (3) % % % %
more(2)....
TOTAL.......... (3) % (3) % % % % %
</TABLE>
- --------------
(1) The delinquency percentage represents the number and principal balance of
mortgage loans with monthly payments which are contractually past due.
Mortgage loans for which the related borrower has declared bankruptcy are
not included unless or until such loans are delinquent pursuant to their
repayment terms.
(2) Includes the principal balance of loans currently in process of
foreclosure and loans acquired through foreclosure or deed in lieu of
foreclosure.
(3) Insufficient information available.
(4) Dollar amounts rounded to the nearest $1,000.
CHARGE-OFF EXPERIENCE OF THE MASTER SERVICER'S PORTFOLIO OF
HOME EQUITY LINES OF CREDIT
The following table sets forth information relating to the loan
charge-off experience of mortgage loans similar to and including the Mortgage
Loans for the ____ months ended ____________, 199_, and the years ended
December 31, 199_, December 31, 199_ and December 31, 199_.
YEAR ENDED
<TABLE>
<CAPTION>
MONTHS ENDED
DECEMBER 31, 199_ DECEMBER 31, 199_ DECEMBER 31, 199_ DECEMBER 31, 199_ ___________, 199_
<S> <C> <C> <C> <C> <C>
Average Portfolio $ $ $ $
Balance (1)....
Charge-Offs (2)...... $ $ $ $
Charge-Offs as a % % % % %(3)
of Average Portfolio
Balance............
</TABLE>
(1) "Average Portfolio Balance" during the period is the arithmetic average of
the principal balances of the mortgage loans outstanding on the first and
last days of each period. The Average Portfolio Balance has been rounded
to the nearest $1,000.
(2) "Charge-Offs" are amounts which have been determined by the Master
Servicer to be uncollectible relating to the mortgage loans for each
respective period and do not include any amount of collections or
recoveries received by the Master Servicer subsequent to charge-off dates.
The Master Servicer's policy regarding charge-offs provides that mortgaged
properties are reappraised when a mortgage loan has been delinquent for
180 days and based upon such appraisals, a decision is then made
concerning the amounts determined to be uncollectible.
(3) Annualized.
DESCRIPTION OF THE MORTGAGE LOANS
GENERAL
All statistical information concerning the Mortgage Loans is based
upon all of the Mortgage Loans included in the Trust. All weighted averages
described below are weighted on the basis of the Cut-Off Date Pool Balance
included in the Trust unless otherwise indicated.
Approximately ____% of the Mortgage Loans (by Cut-Off Date Pool
Balance) are fixed rate closed-end home equity loans evidenced by promissory
notes (such Mortgage Loans, the "Closed-End Loans"). Approximately ____% of the
Mortgage Loans (by Cut-Off Date Pool Balance) are adjustable rate revolving
home equity lines of credit (such Mortgage Loans, the "Revolving Credit-Line
Loans").
All Mortgage Loans were originated between _________ and ____________.
The aggregate Cut-Off Date Principal Balance of the Mortgage Loans was
$___________ (the "Cut-Off Date Pool Balance"), which is equal to the aggregate
Principal Balances of the Mortgage Loans as of the close of business on
_____________, 199__ (the "Cut-Off Date"). Approximately ____% of the Mortgage
Loans (by Cut-Off Date Pool Balance) were secured by a first Mortgage on the
related Mortgaged Property, ____% of the Mortgage Loans (by Cut-Off Date Pool
Balance") were secured by second Mortgages and ___% of the Mortgage Loans (by
Cut-Off Date Pool Balance) were secured by third Mortgages. No Mortgage Loan
had a Combined Loan-to-Value Ratio greater than 100%. As of the Cut-Off Date,
all of the Mortgage Loans were secured by Mortgaged Properties that are one- to
four-family residences. As of the Cut-Off Date, ___% of the Mortgage Loans (by
Cut-Off Date Pool Balance) were secured by Mortgaged Properties that are
owner-occupied, and ___% of the Mortgage Loans (by Cut-Off Date Pool Balance)
were secured by non-owner occupied Mortgaged Properties. Approximately ____%,
____% and ____% of the Mortgage Loans were secured by Mortgaged Properties in
Ohio, Kentucky and New Hampshire, respectively (by Cut-Off Date Pool Balance).
Approximately ____% of the Mortgage Loans were contractually delinquent 30 days
or more. No Mortgage Loan was delinquent more than 60 days.
The minimum Principal Balance of the Revolving Credit-Line Loans as of
the Cut-Off Date was $_______, the maximum Principal Balance of the Revolving
Credit-Line Loans as of the Cut-Off Date was $__________, and the average
Principal Balance of the Revolving Credit-Line Loans as of the Cut-Off Date was
$________. As of the Cut-Off Date, the rate at which interest accrues on the
Revolving Credit-Line Loans (the "Loan Rates") ranged from ______% per annum to
_____% per annum and the weighted average Loan Rate was ____% per annum. The
average Credit Limit Utilization Rate (defined below) of the Revolving
Credit-Line Loans was ____% as of the Cut-Off Date. The weighted average
Combined Loan-to-Value Ratio of the Revolving Credit-Line Loans was ___% as of
the Cut-Off Date (by Cut-Off Date Pool Balance) and the weighted average junior
mortgage ratio of the Revolving Credit-Line Loans (computed by dividing the
greater of the Credit Limit and the Cut-Off Date Principal Balance for each
Revolving Credit-Line Loan, provided such Revolving Credit-Line Loan was in a
junior lien position, by the sum of such Credit Limit or Cut-Off Date Principal
Balance as applicable and the outstanding balances at the time such Revolving
Credit-Line Loan was originated of all senior mortgage loans affecting the
Mortgaged Property) was approximately ____% (by Cut-Off Date Pool Balance).
The "Combined Loan-to-Value Ratio" or "CLTV" of each Revolving
Credit-Line Loan is the ratio, expressed as a percentage, of (a) the sum of (i)
the greater of the Credit Limit and the current balance as of the Cut-Off Date
and (ii) the principal balance of any senior mortgage loan as of the
origination of such Mortgage Loan, over (b) the value (based on an appraised
value or other acceptable valuation method) for the related Mortgaged Property
determined in the origination of such Mortgage Loan. The "Combined
Loan-to-Value Ratio" or "CLTV" of each Closed-End Loan is the ratio, expressed
as a percentage, of (i) the sum of (a) the original principal balance of such
Closed-End Loan at the date of origination plus (b) the remaining principal
balance of the senior lien(s), if any, at the date of origination of such
Closed-En Loan divided by (ii) the value of the related Mortgaged Property,
based upon the appraisal made at the time of origination of such Closed-End
Loan or other acceptable valuation method. The average "Credit Limit
Utilization Rate" for the Mortgage Loans as of the Cut-Off Date is determined
by dividing the sum of the Cut-Off Date Principal Balances of the Mortgage
Loans by the sum of the Credit Limits of the Mortgage Loans.
MORTGAGE LOAN TERMS
REVOLVING CREDIT-LINE LOANS. The Revolving Credit-Line Loans were
originated pursuant to loan agreements (the "Credit Line Agreements"). Under
the Credit Line Agreements, the borrowers may receive advances (an "Additional
Balance" or a "Draw") at any time during a specified period (the "Draw
Period"). The minimum amount of any Draw that a borrower may receive is $100.
The maximum amount of each Draw with respect to any Revolving Credit-Line Loan
is equal to the excess, if any, of the Credit Limit over the Principal Balance
outstanding under such Credit Line Agreement at the time of such Draw.
Approximately ___% (by Cut-Off Date Pool Balance) of the Mortgage
Loans (the "Ten-Year Draw Period Loans") have original terms of 20 years,
consisting of a Draw Period of 10 years and an Amortization Period of 10 years.
During the Amortization Period, the borrower is obligated to make monthly
payments equal to the sum of 1/120 of the unpaid balance of the Mortgage Loan
at the end of the Draw Period plus accrued finance charges. The Loan Rate for
each Ten-Year Draw Period Loan adjusts monthly. Minimal monthly principal
payments may be required to be made by the borrowers during the Draw Period,
but such payments will not be sufficient to fully amortize the Mortgage Loan
the Draw Period.
The borrower's right to make a Draw under a Revolving Credit-Line Loan
may be suspended, or the Credit Limit may be reduced under a number of
circumstances, including, but not limited to, a material adverse change in the
borrower's financial circumstances, a significant decline in the appraised
value of the Mortgaged Property or a default by the borrower of any material
obligation under the Credit Line Agreement. Generally, such suspension or
reduction will not affect the payment terms for previously drawn balances. In
the event of default under a Revolving Credit-Line Loan, the right of the
borrower to make a Draw may be terminated and the entire outstanding Principal
Balance of such Revolving Credit-Line Loan may be declared immediately due and
payable. A "default" includes, but is not limited to, the borrower's failure to
make any payment as required, any action or inaction by the borrower that
adversely affects the Mortgaged Property or the rights in the Mortgaged
Property or any fraud or material misrepresentation by the borrower in
connection with the Revolving Credit-Line Loan. The Credit Limit may also be
increased, upon completion of satisfactory underwriting review, as described
below.
Interest (the "Finance Charge") accrues on each Revolving Credit-Line
Loan, payable monthly, on the related average daily outstanding Principal
Balance for each Billing Cycle at a Loan Rate. The Loan Rate for each Billing
Cycle is adjusted quarterly (except for the Ten-Year Draw Period Loans which
are adjusted monthly) and is equal to the Index on the last day of the most
recently ended March, June, September or December (or, for the Ten-Year Draw
Period Loans, the twentieth day of the prior month) (such date, the "Adjustment
Date") as described below plus a fixed percentage amount (the "Gross Margin")
specified in the related Credit Line Agreement, computed on the basis of a 365
day year times actual days elapsed. The "Billing Cycle" for each Revolving
Credit-Line Loan is the calendar month preceding each Due Date.
The "Due Date" for payments under each Revolving Credit-Line Loan is
the twentieth day of each month.
The Finance Charge accrued each month with respect to each Revolving
Credit-Line Loan is calculated based on [_________________] (the "Index") on
the related Adjustment Date. The Gross Margins for the Revolving Credit-Line
Loans as of the Cut-Off Date ranged from ___% to ____%. The weighted average
Gross Margins as of the Cut-Off Date for the Revolving Credit-Line Loans was
___%. Substantially all of the Revolving Credit-Line Loans are subject to a
maximum Loan Rate of at least __% per annum. The Revolving Credit-Line Loans
have a minimum Loan Rate equal to the greater of zero and the Gross Margin.
No Revolving Credit-Line Loan is subject to a periodic rate cap.
Payments made by or on behalf of the borrower for each Revolving
Credit-Line Loan are generally required to be applied, first, to any unpaid
Finance Charges and second, to the Principal Balance outstanding with respect
to such Mortgage Loan.
CLOSED-END LOANS. All of the Closed-End Loans bear interest at rates
("Loan Rates") that are fixed and are evidenced by promissory notes (the
"Mortgage Notes") secured by deeds of trust or mortgages on the related
Mortgaged Properties. The Closed-End Loans provide that interest is charged to
the borrowers thereunder, and payments are due from such borrowers, as of a
scheduled day of each month which is fixed at the time of origination. Interest
is computed on the "simple interest basis" and charged to the borrower on the
outstanding Principal Balance of the related Closed-End Loan based on the
number of days elapsed between the date through which interest was last paid on
the closed-end loan through receipt of the borrower's most current monthly
payment, and the portions of each monthly payment that are allocated to
interest and principal are adjusted based on the actual amount of interest
charged on such basis. Interest accrues during the calendar month preceding
each Due Date, computed on the basis of a 365 day year times actual days
elapsed if such Closed-End Loan is an adjustable loan or a 360 day year of
twelve 30-day months, if such Closed-End Loan is a fixed-rate loan.
Approximately __% of the Closed-End Loans bear interest at a Loan Rate
based on the Index plus a Gross Margin, adjusted quarterly. The Adjustment Date
for each such loan is the twentieth day of March, June, September or December.
In connection with each adjustment, the monthly payment is adjusted to an
amount sufficient to fully amortize the mortgage loan over its remaining term.
The Gross Margins for the adjustable rate Closed-End Loans as of the Cut-Off
Date ranged from ___% to ___%. The weighted average Gross Margins as of the
Cut-Off Date for the adjustable rate Closed-End Loans was __%. Substantially
all of the adjustable rate Closed-End Loans are subject to a Maximum Loan Rate
of at least ___% per annum. The adjustable rate Closed-End Loans have a minimum
Loan Rate equal to the Gross Margin. No adjustable rate Closed-End Loan is
subject to a periodic rate cap.
MORTGAGE LOAN POOL STATISTICS
The Master Servicer has computed the following additional information
as of the Cut-Off Date with respect to the Mortgage Loans to be included in the
Trust. The following tables are based on the Cut-Off Date Principal Balances of
all Mortgage Loans.
COMBINED LOAN-TO-VALUE RATIOS
<TABLE>
<CAPTION>
Combined Number of Cut-Off Date Percent of
Loan -to-Value Ratios Mortgage Loans Principal Balance Pool by Cut-Off
Date
Principal Balance
<S> <C> <C> <C>
0.000% .....................
0.001 to ______...........
______ to ______...........
______ to ______...........
______ to ______...........
______ to ______...........
______ to ______...........
______ to ______...........
______ to ______...........
______ to ______...........
______ to ______...........
______ to ______...........
______ to ______...........
______ to ______...........
Total.......................... ___ $__________ 100.00%
=== =========== ======
</TABLE>
<TABLE>
<CAPTION>
LIEN PRIORITY
LIEN PRIORITY NUMBER OF CUT-OFF DATE PERCENT OF
MORTGAGE LOANS PRINCIPAL BALANCE POOL BY CUT-OFF DATE
PRINCIPAL BALANCE
<S> <C> <C> <C>
1........................
2........................
3........................
Unknown..................
Total............... ___ $_____ 100.00%
===== ====== ======
</TABLE>
<TABLE>
<CAPTION>
PROPERTY TYPE
PROPERTY TYPE NUMBER OF CUT-OFF DATE PERCENT OF
MORTGAGE LOANS PRINCIPAL BALANCE POOL BY CUT-OFF DATE
PRINCIPAL BALANCE
<S> <C> <C> <C>
1- to 4-Family............................. ___ $______ %
--- -------
Total................................. ___ $______ 100.00%
=== ======= ======
</TABLE>
<TABLE>
<CAPTION>
OWNER OCCUPANCY STATUS
OWNER OCCUPANCY STATUS NUMBER OF CUT-OFF DATE PERCENT OF
MORTGAGE LOANS PRINCIPAL BALANCE POOL BY CUT-OFF DATE
PRINCIPAL BALANCE
<S> <C> <C> <C>
Owner Occupied.............................
Non-Owner Occupied.........................
Unknown.................................... __ ______ __
---- ---------- -----
Total................................. ___ $_________ 100.00%
=== ========== ======
</TABLE>
<TABLE>
<CAPTION>
GEOGRAPHIC DISTRIBUTION(1)
OWNER OCCUPANCY STATUS NUMBER OF CUT-OFF DATE PERCENT OF
MORTGAGE LOANS PRINCIPAL BALANCE POOL BY CUT-OFF DATE
PRINCIPAL BALANCE
<S> <C> <C> <C>
- -----------------..........................
- -----------------..........................
- ----------.................................
Total................................. ___ $_____ 100.00%
=== ====== ======
(1) Geographic location is determined by the address of Mortgaged Property securing each Mortgage
Loan.
</TABLE>
PRINCIPAL BALANCES
<TABLE>
<CAPTION>
PRINCIPAL BALANCES NUMBER OF CUT-OFF DATE PERCENT
MORTGAGE LOANS PRINCIPAL BALANCE BY CUT-OFF DATE
PRINCIPAL BALANCE
<S> <C> <C> <C>
$ 0.01 - _________ ...................
__________- _________ ......................
__________- _________ ......................
__________- _________ ......................
__________- _________ ......................
__________- _________ ......................
__________- _________ ......................
__________- _________ ......................
__________- _________ ......................
__________- _________ ......................
__________- _________.......................
__________- _________.......................
__________- _________ ......................
__________- _________ ......................
__________ and greater ....................
Total............................. ___ $__________ 100.00%
=== =========== ======
</TABLE>
REVOLVING CREDIT-LINE LOANS
CREDIT LIMITS
<TABLE>
<CAPTION>
CREDIT LIMITS NUMBER CUT-OFF DATE PERCENT
OF REVOLVING PRINCIPAL BALANCE BY CUT-OFF DATE
CREDIT-LINE LOANS PRINCIPAL BALANCE
<S> <C> <C> <C>
$ 0.01- __________ ...................
_________- __________ .....................
_________- __________ .....................
_________- __________ .....................
_________- __________ .....................
_________- __________ .....................
_________- __________ .....................
_________- __________ .....................
_________- __________ ....................
_________- __________ .....................
_________- __________ .....................
_________- __________ .....................
_________- __________ .....................
_________- __________ .....................
_________- __________ .....................
_________ and greater .....................
Total............................... ____ $__________ 100.00%
==== =========== ======
</TABLE>
REVOLVING CREDIT-LINE LOANS
CREDIT LIMIT UTILIZATION RATES
<TABLE>
<CAPTION>
CREDIT LIMIT UTILIZATION RATES NUMBER CUT-OFF DATE PERCENT BY CUT-OFF DATE
OF REVOLVING PRINCIPAL BALANCE PRINCIPAL BALANCE
CREDIT-LINE LOANS
<S> <C> <C> <C>
less than or equal to _____%..........
---- - ---- ......................
---- - ---- ......................
---- - ---- ......................
---- - ---- ......................
---- - ---- ......................
---- - ---- ......................
---- - ---- ......................
---- - ---- ......................
---- - ---- ......................
---- - ---- ......................
---- - ---- ......................
---- - ---- ......................
Total......................... ____ $___________ 100.00%
</TABLE>
LOAN AGE
LOAN AGE NUMBER OF CUT-OFF DATE PERCENT BY CUT-OFF DATE
MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
0 months........
1- 12............
13- 24............
25- 36............
37- 48............
49- 60............
61- 72............
73-84 ............
85-96 ............
97-108............
109-120...........
121-132 ..........
Total........ ____ $_________ 100.00%
==== ========= ======
LOAN RATES AS OF THE CUT-OFF DATE
LOAN RATES NUMBER OF CUT-OFF DATE PERCENT BY CUT-OFF
MORTGAGE PRINCIPAL DATE PRINCIPAL
LOANS BALANCE BALANCE
- --- - ------ %.......
- --- - ------ ........
- --- - ------ ........
- --- - ------ ........
- --- - ------ ........
- --- - ------ ........
- --- - ------ .......
- --- - ------ ........
- --- - ------ ........
- --- - ------ ........
- --- - ------ ........
- --- - ------.........
- --- - ------.........
- --- - ------ ........
- --- - ------.........
- --- - ------.........
- --- - ------ ........
Total............. ____ $__________ 100.00%
==== =========== ======
GROSS MARGIN FOR ADJUSTABLE RATE MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
GROSS MARGIN NUMBER CUT-OFF DATE PERCENT BY CUT-OFF DATE
OF REVOLVING PRINCIPAL BALANCE PRINCIPAL BALANCE
CREDIT-LINE LOANS
<S> <C> <C> <C>
- ------ - -------%...................
- ------ - -------.....................
- ------ - - ------.....................
- ------ - ------.....................
----- - ------.....................
------ ------......................
------ ------......................
------ ------......................
------ ------......................
------ ------......................
------ ------......................
------ ------......................
------ ------......................
------ ------......................
------ ------......................
------ ------......................
Total........................... ____ $________ 100.00%
==== ========= ======
</TABLE>
- ---------
(1) Each adjustable rate Mortgage Loan is subject to a minimum Loan Rate
equal to the greater of zero and the Gross Margin.
MAXIMUM RATES FOR ADJUSTABLE RATE MORTGAGE LOANS
<TABLE>
<CAPTION>
MAXIMUM RATES NUMBER CUT-OFF DATE PERCENT BY CUT-OFF DATE
OF REVOLVING PRINCIPAL BALANCE PRINCIPAL BALANCE
CREDIT-LINE LOANS
<S> <C> <C> <C>
- -----%.......................
- ----- .......................
Total ................... _____ $_________ 100.00%
===== ======
</TABLE>
ORIGINATION YEAR
<TABLE>
<CAPTION>
ORIGINATION YEAR NUMBER OF CUT-OFF DATE PERCENT BY CUT-OFF DATE
MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
<S> <C> <C> <C>
198__ .......................
198__ .......................
198__ .......................
198__ .......................
199__ .......................
199__ .......................
199__ .......................
199__ .......................
199__ .......................
199__ .......................
199__ .......................
199__ .......................
Total................... ____ $_________ 100.00%
==== ========== ======
</TABLE>
DELINQUENCY STATUS
<TABLE>
<CAPTION>
NUMBER OF DAYS DELINQUENT NUMBER OF CUT-OFF DATE PERCENT BY CUT-OFF DATE
MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
<S> <C> <C> <C>
Current.......................
30 to 59......................
Total...................... _____ $_______ 100.00%
===== ======
</TABLE>
DESCRIPTION OF THE NOTES
The Home Equity Loan Trust 199__-__ (the "Trust") will issue one class
of Home Equity Loan Asset-Backed Notes (the "Notes") pursuant to the Indenture
to be dated as of _________ __, 199__ (the "Indenture"), between the Trust and
________, as Indenture Trustee (the "Indenture Trustee"). The Trust will also
issue the transferor interest (the "Transferor Interest") pursuant to the terms
of a Trust Agreement to be dated as of _________ __, 199__ (the "Trust
Agreement"), among the Trust and __________, as owner trustee (the "Owner
Trustee"). The Notes will be secured by the assets of the Trust pursuant to the
Indenture. In addition, J.P. Morgan Acceptance Corporation I (the "Depositor")
will enter into a sale and servicing agreement to be dated as of _________ __,
199__ (the "Sale and Servicing Agreement") among ____________, as transferor,
the Trust, the Indenture Trustee and the Master Servicer. The Indenture, the
Trust Agreement and the Sale and Servicing Agreement are collectively referred
to as the "Agreements" herein. The forms of the Agreements have been filed as
exhibits to the Registration Statement of which this Prospectus Supplement and
the Prospectus are a part. The following summaries describe certain provisions
of the Agreements. The summaries do not purport to be complete and are subject
to, and are qualified in their entirety by reference to, all of the provisions
of the Agreements. Wherever particular sections or defined terms of the
Agreements are referred to, such sections or defined terms are hereby
incorporated herein by reference.
GENERAL
The Notes will be issued in minimum denominations of $1,000 and
multiples of $1 in excess thereof and will evidence specified undivided
interests in the Trust. The property of the Trust will consist of: (i) each of
the Mortgage Loans that from time to time are subject to the Sale and Servicing
Agreement (including any Additional Balances arising after the Cut-Off Date)
and the Mortgage Files; (ii) collections on the Mortgage Loans received on and
after the Cut-Off Date (exclusive of certain payments in respect of interest
accrued on the Mortgage Loans during ______ and (ii) payments in respect to
interest on the delinquent Mortgage Loans due prior to the Cut-Off Date and
received thereafter); (iii) Mortgaged Properties relating to the Mortgage Loans
that are acquired by foreclosure or deed in lieu of foreclosure; (iv) the
Collection Account, the Distribution Account and the Spread Account; and (v)
the Policy. Definitive Notes (as defined below), if issued, will be
transferable and exchangeable at the corporate trust office of the Indenture
Trustee, which will initially act as Note Registrar. See "-- Book-Entry Notes"
below. No service charge will be made for any registration of exchange or
transfer of Notes, but the Indenture Trustee may require payment of a sum
sufficient to cover any tax or other governmental charge.
The aggregate undivided interest in the Trust represented by the Notes
as of the Closing Date will equal $____________ (the "Original Invested
Amount") which represents ___% of the Cut-Off Date Pool Balance. The "Original
Note Principal Balance" will equal $__________ (subject to a permitted variance
in the aggregate of plus or minus 5%). Following the Closing Date, the
"Invested Amount" with respect to any Payment Date will be an amount equal to
the Original Invested Amount minus (i) the amount of Investor Principal
Collections previously distributed to Noteholders, and minus (ii) an amount
equal to the product of the Investor Floating Allocation Percentage and the
Liquidation Loss Amounts not allocated to the Transferor Interest (each, as
defined herein). The principal amount of the outstanding Notes (the "Note
Principal Balance") on any Payment Date is equal to the Original Note Principal
Balance minus the aggregate of amounts actually distributed as principal to the
Noteholders. See "-- Payments on the Notes" below. Each Note represents the
right to receive payments of interest at the Note Rate and payments of
principal as described below.
The Transferor will own the remaining undivided interest in the
Mortgage Loans (the "Transferor Interest"), which is equal to the Pool Balance
less the Invested Amount. The Transferor Interest will initially equal
$_________ which represents approximately __% of the Cut-Off Date Pool Balance.
The "Transferor" as of any date is the owner of the Transferor Interest, which
initially will be ____________. In general, the Pool Balance will vary each day
as principal is paid on the Mortgage Loans, liquidation losses are incurred,
Additional Balances are drawn down by borrowers and Mortgage Loans are
transferred to the Trust.
The Transferor has the right to sell or pledge the Transferor Interest
at any time, provided (i) the Rating Agencies (as defined herein) have notified
the Transferor, the Insurer and the Indenture Trustee in writing that such
action will not result in the reduction or withdrawal of the ratings assigned
to the Notes, (ii) the Insurer has consented in writing to such transfer and
(iii) certain other conditions specified in the Sale and Servicing Agreement
are satisfied.
BOOK-ENTRY NOTES
The Notes will be book-entry Notes (the "Book-Entry Notes"). Persons
acquiring beneficial ownership interests in the Notes ("Notes Owners") may
elect to hold their Notes through The Depository Trust Company ("DTC") in the
United States, or Cedelbank ("Cedelbank") or the Euroclear System ("Euroclear")
in Europe if they are participants of such systems, or indirectly through
organizations which are participants in such systems. The Book-Entry Notes will
be issued in one or more notes which equal the aggregate principal balance of
the Notes and will initially be registered in the name of Cede & Co., the
nominee of DTC. Cedelbank and Euroclear will hold omnibus positions on behalf
of their participants through customers' securities accounts in Cedelbank's and
Euroclear's names on the books of their respective depositaries which in turn
will hold such positions in customers' securities accounts in the depositaries'
names on the books of DTC. Citibank, N.A. will act as depositary for Cedelbank
and Chase will act as depositary for Euroclear (in such capacities,
individually the "Relevant Depositary" and collectively the "European
Depositaries"). Investors may hold such beneficial interests in the Book-Entry
Notes in minimum denominations representing Note Principal Balances of $1,000
and in multiples of $1 in excess thereof. Except as described below, no person
acquiring a Book-Entry Note (each, a "beneficial owner") will be entitled to
receive a physical note representing such Note (a "Definitive Note"). Unless
and until Definitive Notes are issued, it is anticipated that the only
"Noteholder" of the Notes will be Cede & Co., as nominee of DTC. Note Owners
will not be Noteholders as that term is used in the Indenture. Note Owners are
only permitted to exercise their rights indirectly through Participants and
DTC.
The beneficial owner's ownership of a Book-Entry Note will be recorded
on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
beneficial owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Note will be recorded on the
records of DTC (or of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the beneficial owner's Financial Intermediary is not a DTC participant) and on
the records of Cedelbank or Euroclear, as appropriate.
Note Owners will receive all payments of principal of, and interest
on, the Notes from the Indenture Trustee through DTC and DTC participants.
While the Notes are outstanding (except under the circumstances described
below), under the rules, regulations and procedures creating and affecting DTC
and its operations (the "Rules"), DTC is required to make book-entry transfers
among Participants on whose behalf it acts with respect to the Notes and is
required to receive and transmit payments of principal of, and interest on, the
Notes. Participants and indirect participants with whom Note Owners have
accounts with respect to Notes are similarly required to make book-entry
transfers and receive and transmit such payments on behalf of their respective
Note Owners. Accordingly, although Note Owners will not possess notes, the
Rules provide a mechanism by which Note Owners will receive payments and will
be able to transfer their interest.
Note Owners will not receive or be entitled to receive Definitive
Notes representing their respective interests in the Notes, except under the
limited circumstances described below. Unless and until Definitive Notes are
issued, Note Owners who are not Participants may transfer ownership of Notes
only through Participants and indirect participants by instructing such
Participants and indirect participants to transfer Notes, by book-entry
transfer, through DTC for the account of the purchasers of such Notes, which
account is maintained with their respective Participants. Under the Rules and
in accordance with DTC's normal procedures, transfers of ownership of Notes
will be executed through DTC and the accounts of the respective Participants at
DTC will be debited and credited. Similarly, the Participants and indirect
participants will make debits or credits, as the case may be, on their records
on behalf of the selling and purchasing Note Owners.
Because of time zone differences, credits of securities received in
Cedelbank or Euroclear as a result of a transaction with a Participant will be
made during subsequent securities settlement processing and dated the business
day following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear or Cedelbank Participants on such business day. Cash received in
Cedelbank or Euroclear as a result of sales of securities by or through a
Cedelbank Participant (as defined below) or Euroclear Participant (as defined
below) to a DTC Participant will be received with value on the DTC settlement
date but will be available in the relevant Cedelbank or Euroclear cash account
only as of the business day following settlement in DTC. For information with
respect to tax documentation procedures relating to the Notes, see "CERTAIN
FEDERAL INCOME TAX CONSEQUENCES - Foreign Investors" and "-- Backup
Withholding" herein and "GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION
PROCEDURES - Certain U.S.
Federal Income Tax Documentation Requirements" in Annex I hereto.
Transfers between Participants will occur in accordance with DTC
rules. Transfers between Cedelbank Participants and Euroclear Participants will
occur in accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly through
DTC, on the one hand, and directly or indirectly through Cedelbank Participants
or Euroclear Participants, on the other, will be effected in DTC in accordance
with DTC rules on behalf of the relevant European international clearing system
by the Relevant Depositary; however, such cross market transactions will
require delivery of instructions to the relevant European international
clearing system by the counterparty in such system in accordance with its rules
and procedures and within its established deadlines (European time). The
relevant European international clearing system will, if the transaction meets
its settlement requirements, deliver instructions to the Relevant Depositary to
take action to effect final settlement on its behalf by delivering or receiving
securities, in DTC, and making or receiving payment in accordance with normal
procedures for same day funds settlement applicable to DTC. Cedelbank
Participants and Euroclear Participants may not deliver instructions, directly
to the European Depositaries.
DTC which is a New York-chartered limited purpose trust company,
performs services for its participants, some of which (and/or their
representatives) own DTC. In accordance with its normal procedures, DTC is
expected to record the positions held by each DTC participant in the Book-Entry
Notes, whether held for its own account or as a nominee for another person. In
general, beneficial ownership of Book-Entry Notes will be subject to the rules,
regulations and procedures governing DTC and DTC participants as in effect from
time to time.
Cedelbank is incorporated under the laws of Luxembourg as a
professional depository. Cedelbank holds securities for its participating
organizations ("Cedelbank Participants") and facilitates the clearance and
settlement of securities transactions between Cedelbank Participants through
electronic book-entry changes in accounts of Cedelbank Participants, thereby
eliminating the need for physical movement of notes. Transactions may be
settled in Cedelbank in any of 28 currencies, including United States dollars.
Cedelbank provides to its Cedelbank Participants, among other things, services
for safekeeping, administration, clearance and settlement of internationally
traded securities and securities lending and borrowing. Cedelbank interfaces
with domestic markets in several countries. As a professional depository,
Cedelbank is subject to regulation by the Luxembourg Monetary Institute.
Cedelbank Participants are recognized financial institutions around the world,
including underwriters, securities brokers and dealers, banks, trust companies,
clearing corporations and certain other organizations. Indirect access to
Cedelbank is also available to others, such as banks, brokers, dealers and
trust companies that clear through or maintain a custodial relationship with a
Cedelbank Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for participants of
Euroclear ("Euroclear Participants") and to clear and settle transactions
between Euroclear Participants through simultaneous electronic book-entry
delivery against payment, thereby eliminating the need for physical movement of
notes and any risk from lack of simultaneous transfers of securities and cash.
Transactions may now be settled in any of 32 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Brussels, Belgium office of
Morgan Guaranty Trust Company of New York (the "Euroclear Operator"), under
contract with Euroclear Clearance Systems S.C., a Belgian cooperative
corporation (the "Cooperative"). All operations are conducted by the Euroclear
Operator, and all Euroclear securities clearance accounts and Euroclear cash
accounts are accounts with the Euroclear Operator, not the Cooperative. The
Cooperative establishes policy for Euroclear on behalf of Euroclear
Participants. Euroclear Participants include banks (including central banks),
securities brokers and dealers and other professional financial intermediaries.
Indirect access to Euroclear is also available to other firms that clear
through or maintain a custodial relationship with a Euroclear Participant,
either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear
and the related Operating Procedures of the Euroclear System and applicable
Belgian law (collectively, the "Terms and Conditions"). The Terms and
Conditions govern transfers of securities and cash within Euroclear,
withdrawals of securities and cash from Euroclear, and receipts of payments
with respect to securities in Euroclear. All securities in Euroclear are held
on a fungible basis without attribution of specific notes to specific
securities clearance accounts. The Euroclear Operator acts under the Terms and
Conditions only on behalf of Euroclear Participants, and has no record of or
relationship with persons holding through Euroclear Participants.
Payments on the Book-Entry Notes will be made on each Payment Date by
the Indenture Trustee to DTC. DTC will be responsible for crediting the amount
of such payments to, the accounts of the applicable DTC participants in
accordance with DTC's normal procedures. Each DTC participant will be
responsible for disbursing such payments to the beneficial owners of the
Book-Entry Notes that it represents and to each Financial Intermediary for
which it acts as agent. Each such Financial Intermediary will be responsible
for disbursing funds to the beneficial owners of the Book-Entry Notes that it
represents.
Under a book-entry format, beneficial owners of the Book-Entry Notes
may experience some delay in their receipt of payments, since such payments
will be forwarded by the Indenture Trustee to Cede. Payments with respect to
Notes held through Cedelbank or Euroclear will be credited to the cash accounts
of Cedelbank Participants or Euroclear Participants in accordance with the
relevant system's rules and procedures, to the extent received by the Relevant
Depositary. Such payments will be subject to tax reporting in accordance with
relevant United States tax laws and regulations. See "CERTAIN FEDERAL INCOME
TAX CONSEQUENCES - Foreign Investors" and "- Backup Withholding" herein.
Because DTC can only act on behalf of Financial Intermediaries, the ability of
a beneficial owner to pledge Book-Entry Notes to persons or entities that do
not participate in the Depository system, or otherwise take actions in respect
of such Book-Entry Notes, may be limited due to the lack of physical notes for
such Book-Entry Notes. In addition, issuance of the Book-Entry Notes in
book-entry form may reduce the liquidity of such Notes in the secondary market
since certain potential investors may be unwilling to purchase Notes for which
they cannot obtain physical notes.
Monthly and annual reports on the Trust provided by the Master
Servicer to Cede, as nominee of DTC, may be made available to beneficial owners
upon request, in accordance with the rules, regulations and procedures creating
and affecting the Depository, and to the Financial Intermediaries to whose DTC
accounts the Book-Entry Notes of such beneficial owners are credited.
DTC has advised the Depositor and the Indenture Trustee that, unless
and until Definitive Notes are issued, DTC will take any action permitted to be
taken by the holders of the Book-Entry Notes under the Sale and Servicing
Agreement only at the direction of one or more Financial Intermediaries to
whose DTC accounts the Book-Entry Notes are credited, to the extent that such
actions are taken on behalf of Financial Intermediaries whose holdings include
such Book-Entry Notes. Cedelbank or the Euroclear Operator, as the case may be,
will take any other action permitted to be taken by a Noteholder under the Sale
and Servicing Agreement on behalf of a Cedelbank Participant or Euroclear
Participant only in accordance with its relevant rules and procedures and
subject to the ability of the Relevant Depositary to effect such actions on its
behalf through DTC. DTC may take actions, at the direction of the related
Participants, with respect to some Notes which conflict with actions taken with
respect to other Notes.
Definitive Notes will be issued to beneficial owners of the Book-Entry
Notes, or their nominees, rather than to DTC, only if (a) DTC or the Trust
advises the Indenture Trustee in writing that DTC is no longer willing,
qualified or able to discharge properly its responsibilities as nominee and
depository with respect to the Book-Entry Notes and the Trust or the Indenture
Trustee is unable to locate a qualified successor, (b) the Transferor, at its
sole option, elects to terminate a book-entry system through DTC or (c) after
the occurrence of an Event of Servicing Termination (as defined herein),
beneficial owners having Percentage Interests aggregating not less than 51% of
the Note Principal Balance of the Book-Entry Notes advise the Indenture Trustee
and DTC through the Financial Intermediaries and the DTC participants in
writing that the continuation of a book-entry system through DTC (or a
successor thereto) is no longer in the best interests of beneficial owners.
Upon the occurrence of any of the events described in the immediately preceding
sentence, the Indenture Trustee will be required to notify all beneficial
owners of the occurrence of such event and the availability through DTC of
Definitive Notes. Upon surrender by DTC of the global note or notes
representing the Book-Entry Notes and instructions for re-registration, the
Indenture Trustee will issue Definitive Notes, and thereafter the Indenture
Trustee will recognize the holders of such Definitive Notes as Noteholders
under the Indenture.
Although DTC, Cedelbank and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Notes among participants of DTC,
Cedelbank and Euroclear, they are under no obligation to perform or continue to
perform such procedures and such procedures may be discontinued at any time.
DTC management is aware that some computer applications, systems, and
the like for processing data ("Systems") that are dependent upon calendar
dates, including dates before, on, and after January 1, 2000, may encounter
"Year 2000 problems." DTC has informed its Participants and other members of
the financial community (the "Industry") that it has developed and is
implementing a program so that its Systems, as the same relate to the timely
payment of distributions (including principal and income payments) to
securityholders, book-entry deliveries, and settlement of trades within DTC
("DTC Services"), continue to function appropriately. This program includes a
technical assessment and a remediation plan, each of which is complete.
Additionally, DTC's plan includes a testing phase, which is expected to be
completed within appropriate time frames.
However, DTC's ability to perform properly its services is also
dependent upon other parties, including but not limited to issuers and their
agents, as well as third party vendors from whom DTC licenses software and
hardware, and third party vendors on whom DTC relies for information or the
provision of services, including telecommunication and electrical utility
service providers, among others. DTC has informed the Industry that it is
contacting (and will continue to contact) third party vendors from whom DTC
acquires services to: (i) impress upon them the importance of such services
being year 2000 compliant; and (ii) determine the extent of their efforts for
Year 2000 remediation (and, as appropriate, testing) of their services. In
addition, DTC is in the process of developing such contingency plans as it
deems appropriate.
According to DTC, the foregoing information with respect to DTC has
been provided to the Industry for informational purposes only and is not
intended to serve as a representation, warranty, or contract modification of
any kind.
ASSIGNMENT OF MORTGAGE LOANS
At the time of issuance of the Notes, the Depositor will transfer to
the Trust all of its right, title and interest in and to each Mortgage Loan
(including any Additional Balances arising in the future), related Credit Line
Agreements and Mortgage Notes, as applicable, and the mortgages and other
related documents (collectively, the "Related Documents"), including all
collections received on or with respect to each such Mortgage Loan on or after
the Cut-Off Date (exclusive of certain payments in respect of (i) interest
accrued on the Mortgage Loans in _____ and (ii) payments in respect of interest
on the delinquent Mortgage Loans due prior to the Cut-Off Date and received
thereafter) . The Trust, concurrently with such transfer, will deliver or cause
to be delivered the Notes to the Depositor and the Transferor Interest to the
Transferor. Each Mortgage Loan transferred to the Trust will be identified on a
schedule (the "Mortgage Loan Schedule") which will be attached as an exhibit to
the Indenture. Such schedule will include information as to the Cut-Off Date
Principal Balance of each Mortgage Loan, as well as information with respect to
the Loan Rate.
The Indenture Trustee will review or cause to be reviewed the Mortgage
Notes within 60 days of the Closing Date and the assignments of each Mortgage
within 180 days of the Closing Date. If any Related Document is found to be
defective in any material respect and such defect is not cured within 90 days
following notification thereof to the Transferor by the Owner Trustee, the
Trust or the Insurer, the Transferor will be obligated to accept the transfer
of such Mortgage Loan from the Trust. Upon such transfer, the Principal Balance
of such Mortgage Loan will be deducted from the Pool Balance, thus reducing the
amount of the Transferor Interest. If the deduction would cause the Transferor
Interest to become less than the Minimum Transferor Interest at such time (a
"Transfer Deficiency"), the Transferor will be obligated to either substitute
an Eligible Substitute Mortgage Loan or make a deposit into the Collection
Account in the amount (the "Transfer Deposit Amount") equal to the Transfer
Deficiency. Any such deduction, substitution or deposit, will be considered for
the purposes of the Sale and Servicing Agreement a payment in full of such
Mortgage Loan. Any Transfer Deposit Amount will be treated as a Principal
Collection. No such transfer shall be considered to have occurred until the
required deposit to the Collection Account is actually made. The obligation of
the Transferor to accept a transfer of a Defective Mortgage Loan, is the sole
remedy regarding any defects in the Mortgage File and Related Documents
available to the Owner Trustee, the Indenture Trustee or the Noteholders.
An "Eligible Substitute Mortgage Loan" is a mortgage loan substituted
by the Transferor for a Defective Mortgage Loan which must, on the date of such
substitution, (i) have an outstanding Principal Balance (or in the case of a
substitution of more than one Mortgage Loan for a Defective Mortgage Loan, an
aggregate Principal Balance) that is approximately equal to the Transfer
Deficiency relating to such Defective Mortgage Loan; (ii) have a Loan Rate not
less than the Loan Rate of the Defective Mortgage Loan and not more than 1% in
excess of the Loan Rate of such Defective Mortgage Loan; (iii) have a Loan Rate
based on the same Index with adjustments to such Loan Rate made on the same
Adjustment Date as that of the Defective Mortgage Loan; (iv) have a Gross
Margin that is not less than the Gross Margin of the Defective Mortgage Loan
and not more than 100 basis points higher than the Gross Margin for the
Defective Mortgage Loan; (v) have a mortgage of the same or higher level of
priority as the mortgage relating to the Defective Mortgage Loan; (vi) comply
with each representation and warranty as to the Mortgage Loans set forth in the
Sale and Servicing Agreement (deemed to be made as of the date of
substitution); (vii) have an original Combined Loan-to-Value Ratio not greater
than that of the Defective Mortgage Loan; and (viii) satisfy certain other
conditions specified in the Sale and Servicing Agreement. To the extent the
Principal Balance of an Eligible Substitute Mortgage Loan is less than the
related Transfer Deficiency, the Transferor will be required to make a deposit
to the Collection Account equal to such difference. Any such amounts will be
treated as Principal Collections.
The Transferor will make certain representations and warranties as to
the accuracy in all material respects of certain information furnished to the
Owner Trustee with respect to each Mortgage Loan (e.g., Cut-Off Date Principal
Balance and the Loan Rate). In addition, the Transferor will represent and
warrant on the Closing Date that, among other things: (i) at the time of
transfer to the Trust, the Transferor has transferred or assigned all of its
rights, title and interest in or granted a security interest in each Mortgage
Loan and the Related Documents, free of any lien (subject to certain
exceptions) and (ii) each Mortgage Loan complied, at the time or origination,
in all material respects with applicable state and federal laws. Upon discovery
of a breach of any such representation and warranty which materially and
adversely affects the interests of the Noteholders or the Insurer in the
related Mortgage Loan and Related Documents, the Transferor will have a period
of 60 days after discovery or notice of the breach to effect a cure. If the
breach cannot be cured within the 60-day period, the Transferor will be
obligated to accept a transfer of the Defective Mortgage Loan from the Trust.
The same procedure and limitations that are set forth in the two preceding
paragraphs for the transfer of Defective Mortgage Loans will apply to the
transfer of a Mortgage Loan that is required to be transferred because of such
breach of a representation or warranty in the Sale and Servicing Agreement that
materially and adversely affects the interests of the Noteholders.
Mortgage Loans required to be transferred to Transferor as described
in the preceding paragraphs are referred to as "Defective Mortgage Loans."
Pursuant to the Sale and Servicing Agreement, the Master Servicer will
service and administer the Mortgage Loans as more fully set forth above.
AMENDMENTS TO CREDIT LINE AGREEMENTS
Subject to applicable law, the Master Servicer may change the terms of
the Credit Line Agreements at any time provided that such changes (i) do not
adversely affect the interest of the Noteholders or the Insurer, and (ii) are
consistent with prudent business practice. In addition, the Sale and Servicing
Agreement permits the Master Servicer, within certain limitations described
therein, to increase or reduce the Credit Limit of the related Mortgage Loan
and reduce the Gross Margin for such Mortgage Loan.
OPTIONAL TRANSFERS OF MORTGAGE LOANS TO THE TRANSFEROR
Subject to the conditions specified in the Sale and Servicing
Agreement, on any Payment Date the Transferor may, but shall not be obligated
to, remove on such Payment Date (the "Transfer Date") from the Trust, certain
Mortgage Loans without notice to the Noteholders. The Transferor is permitted
to randomly designate the Mortgage Loans to be removed. Mortgage Loans so
designated will only be removed upon satisfaction of certain conditions
specified in the Sale and Servicing Agreement, including: (i) the Transferor
Interest as of such Transfer Date (after giving effect to such removal) exceeds
the Minimum Transferor Interest; (ii) the Transferor shall have delivered to
the Indenture Trustee and the Insurer a "Mortgage Loan Schedule" containing a
list of all Mortgage Loans remaining in the Trust after such removal; (iii) the
Transferor shall represent and warrant that no selection procedures which the
Transferor reasonably believes are adverse to the interests of the Noteholders
or the Insurer were used by the Transferor in selecting such Mortgage Loans;
(iv) in connection with each such retransfer of Mortgage Loans, the Rating
Agencies shall have been notified of the proposed transfer and prior to the
Transfer Date the Rating Agencies shall have notified the Transferor, the
Indenture Trustee and the Insurer in writing that such transfer will not result
in a reduction or withdrawal of the ratings assigned to the Notes without
regard to the Policy; and (v) the Transferor shall have delivered to the
Indenture Trustee and the Insurer an officer's certificate confirming the
satisfaction of the conditions set forth in clauses (i) through (iii) above.
As of any date of determination, the "Minimum Transferor Interest" is
an amount equal to the lesser of (a) __% of the Pool Balance on such date and
(b) the Transferor Interest as of the Closing Date.
PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO COLLECTION ACCOUNT AND
DISTRIBUTION ACCOUNT
The Master Servicer shall establish and maintain in the name of the
Indenture Trustee a separate trust account (the "Collection Account") for the
benefit of the Noteholders, the Insurer and the Transferor, as their interests
may appear. The Collection Account will be an Eligible Account (as defined
herein). Subject to the investment provisions described in the following
paragraphs, upon receipt by the Master Servicer of amounts in respect of the
Mortgage Loans (excluding amounts representing the Servicing Fee) the Master
Servicer will deposit such amounts in the Collection Account. Not later than
the eighteenth day of the calendar month of each Payment Date (the
"Determination Date"), the Master Servicer will notify the Indenture Trustee of
the amount of such deposit to be included in funds available for the related
Payment Date. Amounts so deposited may be invested in Eligible Investments (as
described in the Sale and Servicing Agreement) maturing no later than one
Business Day prior to the date on which amounts on deposit therein are required
to be deposited in the Distribution Account.
The Indenture Trustee will establish an account (the "Distribution
Account") into which will be deposited amounts withdrawn from the Collection
Account for payment to Noteholders on a Payment Date. The Distribution Account
will be an Eligible Account. Amounts on deposit therein may be invested in
Eligible Investments maturing on or before the Business Day prior to the
related Payment Date. Net investment earnings on the funds in the Distribution
Account will be paid to ____________.
An "Eligible Account" is a segregated account that is (i) maintained
with a depository institution whose debt obligations at the time of any deposit
therein have the highest short-term debt rating by the Rating Agencies and
whose accounts are fully insured by either the Savings Association Insurance
Fund ("SAIF") or the Bank Insurance Fund ("BIF") of the Federal Deposit
Insurance Corporation with a minimum long-term unsecured debt rating of "A1" by
Moody's and "A" by S&P and Fitch, and which is any of (a) a federal savings and
loan association duly organized, validly existing and in good standing under
the applicable banking laws of any state, (b) an institution or association
duly organized, validly existing and in good standing under the applicable
banking laws of any state, (c) a national banking association duly organized,
validly existing and in good standing under the federal banking laws or (d) a
principal subsidiary of a bank holding company, and in each case of (a) - (d),
approved in writing by the Insurer, (ii) a segregated trust account maintained
with the corporate trust department of a federal or state chartered depository
institution or trust company,, having capital and surplus of not less than
$50,000,000, acting in its fiduciary capacity or (iii) otherwise acceptable to
each Rating Agency and the Insurer as evidenced by a letter from each Rating
Agency and the Insurer to the Indenture Trustee, without reduction or
withdrawal of their then current ratings of the Notes without regard to the
Policy.
Eligible Investments are specified in the Sale and Servicing Agreement
and are limited to investments which are acceptable to the Insurer and meet the
criteria of the Rating Agency from time to time as being consistent with their
then current ratings of the Notes.
SIMPLE INTEREST EXCESS SUB-ACCOUNT
The Sale and Servicing Agreement requires that the Master Servicer
establish and maintain in the name of the Indenture Trustee a sub-account of
the Collection Account (the "Simple Interest Excess Sub-Account") which must be
an Eligible Account. The Indenture Trustee will transfer to the Simple Interest
Excess Sub-Account all Net Simple Interest Excess. "Net Simple Interest Excess"
means as of any Payment Date, the excess, if any, of the aggregate amount of
Simple Interest Excess over the amount of Simple Interest Shortfall. "Net
Simple Interest Shortfall" means as of any Payment Date, the excess, if any, of
the aggregate amount of Simple Interest Shortfall over the amount Simple
Interest Excess. "Simple Interest Shortfall" means as of any Payment Date for
each Simple Interest Qualifying Loan, the excess, if any, of (i) 30 days'
interest on the Principal Balance of all such Mortgage Loans at the Loan Rate,
over (ii) the portion of the monthly payment received from the Mortgagor for
such Mortgage Loan allocable to interest with respect to the related Collection
Period. "Simple Interest Excess" means as of any Payment Date for each Simple
Interest Qualifying Loan, the excess, if any, of (i) the portion of the monthly
payment received from the mortgagor for such Mortgage Loan allocable to
interest with respect to the related Collection Period, over (ii) 30 days'
interest on the Principal Balance of such Mortgage Loan at the Loan Rate. A
Simple Interest Qualifying Loan" as of any Determination Date is any Mortgage
Loan that was neither prepaid in full during the related Collection Period and
is not delinquent with respect to a payment that became due during the related
Collection Period as of the close of business on the Determination Date
following such Collection Period.
The Master Servicer will withdraw amounts on deposit in the Simple
Interest Excess Sub-Account for deposit to the Collection Account prior to each
Payment Date to pay Net Simple Interest Shortfalls.
All funds in the Simple Interest Excess Sub-Account may be invested in
Eligible Investments. So long as no Event of Servicing Termination shall have
occurred and be continuing, any investment earnings on funds held in the Simple
Interest Excess Sub-Account are for the account of the Master Servicer. Upon
receipt of notification of a loss on investment in the Simple Interest Excess
Sub-Account, the Master Servicer, including any predecessor Master Servicer,
which directed such investments, shall promptly remit the amount of such loss
from its own funds to the Simple Interest Excess Sub-Account.
ALLOCATIONS AND COLLECTIONS
All collections on the Mortgage Loans will generally be allocated in
accordance with the Credit Line Agreements or the Mortgage Notes, as
applicable, between amounts collected in respect of interest and amounts
collected in respect of principal. As to any Payment Date, "Interest
Collections" will be equal to the amounts collected during the related
Collection Period, including such portion of Net Liquidation Proceeds allocated
to interest pursuant to the terms of the Credit Line Agreements or the Mortgage
Notes, as applicable, less Servicing Fees for the related Collection Period and
as adjusted for Simple Interest Shortfalls and Simple Interest Excess as
described above under "--Simple Interest Excess Sub-Account."
As to any Payment Date, "Principal Collections" will be equal to the
sum of (i) the amounts collected during the related Collection Period,
including such portion of Net Liquidation Proceeds allocated to principal
pursuant to the terms of the Credit Line Agreements or Mortgage Notes, as
applicable, and (ii) any Transfer Deposit Amounts. "Liquidation Proceeds" are
the proceeds (excluding any amounts drawn on the Policy) received in connection
with the liquidation of any Mortgage Loan, whether through trustee's sale,
foreclosure sale or otherwise. "Net Liquidation Proceeds" with respect to a
Mortgage Loan are equal to the Liquidation Proceeds, reduced by related
expenses, but not including the portion, if any, of such amount that exceeds
the sum of (i) the Principal Balance of the Mortgage Loan plus (ii) accrued and
unpaid interest thereon to the end of the Collection Period during which such
Mortgage Loan became a Liquidated Mortgage Loan.
With respect to any Payment Date, the portion of Interest Collections
allocable to the Notes ("Investor Interest Collections") will equal the product
of (a) Interest Collections for such Payment Date and (b) the Investor Floating
Allocation Percentage. With respect to any Payment Date, the "Investor Floating
Allocation Percentage" is the percentage equivalent of a fraction determined by
dividing (a) the Invested Amount at the close of business on the preceding
Payment Date (or the Closing Date in the case of the first Payment Date) by (b)
the Pool Balance at the beginning of the related Collection Period. The
remaining amount of Interest Collections will be allocated to the Transferor
Interest.
Principal Collections will be allocated between the Noteholders and
the Transferor ("Investor Principal Collections" and "Transferor Principal
Collections", respectively) as described herein.
The Indenture Trustee will deposit any amounts withdrawn from the
Spread Account or drawn under the Policy into the Distribution Account.
With respect to any date, the "Pool Balance" will be equal to the
aggregate of the Principal Balances of all Mortgage Loans as of such date. The
"Principal Balance" of a Mortgage Loan (other than a Liquidated Mortgage Loan)
on any day is equal to the Cut-Off Date Principal Balance thereof, plus (i) any
Additional Balances in respect of such Mortgage Loan minus (ii) all collections
credited against the Principal Balance of such Mortgage Loan in accordance with
the related Credit Line Agreement or Mortgage Note prior to such day. The
Principal Balance of a Liquidated Mortgage Loan after final recovery of related
Liquidation Proceeds shall be zero.
"Liquidation Loss Amount" means with respect to any Liquidated
Mortgage Loan, the unrecovered Principal Balance thereof during the Collection
Period in which such Mortgage Loan became a Liquidated Mortgage Loan, after
giving effect to the Net Liquidation Proceeds received in connection therewith.
The "Investor Loss Amount" shall be the product of the Investor Floating
Allocation Percentage and the aggregate of the Liquidation Loss Amounts for
such Payment Date. A "Liquidated Mortgage Loan" means, as to any Payment Date,
any Mortgage Loan in respect of which the Master Servicer has determined, based
on the servicing procedures specified in the Sale and Servicing Agreement, as
of the end of the preceding Collection Period that all Liquidation Proceeds
which it expects to recover with respect to the disposition of the related
Mortgaged Property have been recovered.
As, to any Payment Date, the "Collection Period" is the calendar month
preceding each Payment Date.
PAYMENTS ON THE NOTES
Beginning with the first Payment Date (which will occur on _________
__, 199__), payments on the Notes will be made by the Indenture Trustee or the
Paying Agent based upon aggregate information provided by the Master Servicer
on each Payment Date to the persons in whose names such Notes are registered at
the close of business on the day prior to each Payment Date or, if the Notes
are no longer Book-Entry Notes, at the close of business on the last day of the
month preceding such Payment Date (the "Record Date"). The term "Payment Date"
means the twenty-fifth day of each month or, if such day is not a Business Day,
then the next succeeding Business Day. Payments will be made by check or money
order mailed (or upon the request of a Noteholder owning Notes having
denominations aggregating at least $1,000,000, by wire transfer or otherwise)
to the address of the person entitled thereto (which, in the case of Book-Entry
Notes, will be DTC or its nominee) as it appears on the Note Register in
amounts calculated as described herein on the Determination Date. However, the
final payment in respect of the Notes will be made only upon presentation and
surrender thereof at the office or the agency of the Indenture Trustee
specified in the notice to Noteholders of such final payment. For purposes of
the Agreements, a "Business Day" is any day other than (i) a Saturday or Sunday
or (ii) a day on which the Insurer or banking institutions in the States of
Ohio, California or New York are required or authorized by law to be closed.
APPLICATION OF INTEREST COLLECTIONS. On each Payment Date, the
Indenture Trustee or the Paying Agent will apply the Investor Interest
Collections in the following manner and order of priority:
(i) as payment to the Indenture Trustee for its fee for
services rendered pursuant to the Sale and Servicing Agreement and as
payment to the Owner Trustee for its fee for services rendered
pursuant to the Trust Agreement;
(ii) as payment for the premium for the Policy, and
(iii) concurrently, as follows:
(a) to the Noteholders, as payment for the accrued
interest due and any overdue accrued interest (with interest
thereon to the extent permitted by law) on the Note Principal
Balance of the Notes; and
(b) to the holder of the Transferor Interest, the amount
to which it is entitled in accordance with the provisions of
the Sale and Servicing Agreement, which will generally be
equal to the amount accrued on a notional balance equal to
the Note Principal Balance at a rate equal to the excess of
the Net WAC over the Note Rate;
PROVIDED, HOWEVER, if Investor Interest Collections (prior to giving effect to
withdrawals from the Spread Account or draws on the Policy) on such Payment
Date are insufficient to make the payments required to be made pursuant to this
clause (iii), then Investor Interest Collections will be allocated between
subclauses (a) and (b) above, PRO RATA, based on the amount required to be paid
pursuant to each such subclause without giving effect to any shortfall in such
Investor Interest Collections; PROVIDED, FURTHER that if the amount on deposit
in the Spread Account has been depleted and the Insurer fails to pay under the
Policy, the amount payable pursuant to clause (b) above on any Payment Date
thereafter will be paid to the holder of the Transferor Interest after payment
of principal and interest due on the Notes are made on such Payment Date.
CALCULATION OF THE NOTE RATE. Interest will be distributed on each
Payment Date at the Note Rate for the related Interest Period on the Note
Principal Balance as of the first day of such Interest Period (reduced by any
Civil Relief Act Interest Shortfalls for such Payment Date). The "Note Rate"
for a Payment Date will generally equal the sum of (a) LIBOR, determined as
specified herein, as of the second LIBOR Business Day prior to the immediately
preceding Payment Date (or as of two LIBOR Business Days prior to the Closing
Date, in the case of the first Payment Date) plus (b) ___% per annum.
Notwithstanding the foregoing, in no event will the amount of interest required
to be distributed in respect of the Notes on any Payment Date exceed the amount
calculated at a rate (the "Net WAC") equal to the weighted average of the Loan
Rates (net of the Servicing Fee Rate, the fee payable to the Indenture Trustee
and the Owner Trustee (expressed as a rate) and the rate at which the premium
payable to the Insurer is calculated) weighted on the basis of the daily
balance of each Mortgage Loan during the calendar month preceding the
Collection Period relating to such Payment Date or in the case of the first
Payment Date, the weighted average loan rate as of the Cut-Off Date.
Interest on the Notes in respect of any Payment Date will accrue on
the Note Principal Balance from the preceding Payment Date (or in the case of
the first Payment Date, from the date of the initial issuance of the Notes (the
"Closing Date")) through the day preceding such Payment Date (each such period,
an "Interest Period") on the basis of the actual number of days in the Interest
Period and a 360-day year. Interest payments on the Notes will be funded from
Investor Interest Collections and, if necessary, from the Policy pursuant to
the terms thereof. Interest for any Payment Date due but not paid on such
Payment Date will be due on the next succeeding Payment Date together with
additional interest on such amount at a rate equal to the applicable Note Rate.
CALCULATION OF THE LIBOR RATE. On each Payment Date, LIBOR shall be
established by the Indenture Trustee and as to any Interest Period, LIBOR will
equal the rate for United States dollar deposits for one month which appears on
the Telerate Screen Page 3750 as of 11:00 A.M., London time, on the second
LIBOR Business Day prior to the first day of such Interest Period. "Telerate
Screen Page 3750" means the display designated as page 3750 on the Telerate
Service (or such other page as may replace page 3750 on that service for the
purpose of displaying London interbank offered rates of major banks). If such
rate does not appear on such page (or such other page as may replace that page
on that service, or if such service is no longer offered, such other service
for displaying LIBOR or comparable rates as may be selected by the Transferor
after consultation with the Indenture Trustee), the rate will be the Reference
Bank Rate. The "Reference Bank Rate" will be determined on the basis of the
rates at which deposits in U.S. Dollars are offered by the reference banks
(which shall be three major banks that are engaged in transactions in the
London interbank market, selected by the Transferor after consultation with the
Indenture Trustee) as of 11:00 A.M., London time, on the day that is two LIBOR
Business Days prior to the immediately preceding Payment Date to prime banks in
the London interbank market for a period of one month in amounts approximately
equal to the principal amount of the Notes then outstanding. The Indenture
Trustee will request the principal London office of each of the reference banks
to provide a quotation of its rate. If at least two such quotations are
provided, the rate will be the arithmetic mean of the quotations. If on such
date fewer than two quotations are provided as requested, the rate will be the
arithmetic mean of the rates quoted by two or more major banks in New York
City, selected by the Transferor after consultation with the Indenture Trustee,
as of 11:00 A.M., New York City time, on such date for loans in U.S. Dollars to
leading European banks for a period of one month in amounts approximately equal
to the principal amount of the Notes then outstanding. If no such quotations
can be obtained, the rate will be LIBOR for the prior Payment Date. "LIBOR
Business Day" means any day other than (i) a Saturday or a Sunday or (ii) a day
on which banking institutions in the State of New York or in the city of
London, England are required or authorized by law to be closed.
TRANSFEROR COLLECTIONS. Interest Collections allocable to the
Transferor Interest will be paid to the Transferor on each Payment Date.
Principal Collections allocable to the Transferor Interest will be distributed
to the Transferor only to the extent that such payment will not reduce the
amount of the Transferor Interest as of the related Payment Date below the
Minimum Transferor Interest. Amounts not distributed to the Transferor because
of such limitations will be retained in the Collection Account until the
Transferor Interest exceeds the Minimum Transferor Interest, at which time such
excess shall be released to the Transferor.
PAYMENTS OF PRINCIPAL COLLECTIONS. For the period beginning on the
first Payment Date and, unless a Rapid Amortization Event shall have earlier
occurred, ending immediately after the Payment Date in _____________ (such
period, the "Managed Amortization Period"), the amount of Principal Collections
payable to Noteholders as of each Payment Date during the Managed Amortization
Period will equal, to the extent funds are available therefor, the Scheduled
Principal Collections Payment Amount for such Payment Date. On any Payment Date
during the Managed Amortization Period, the "Scheduled Principal Collections
Payment Amount" shall equal the lesser of (i) the Maximum Principal Payment (as
defined below) and (ii) the Alternative Principal Payment (as defined herein).
With respect to any Payment Date, the "Maximum Principal Payment" will equal
the product of the Investor Fixed Allocation Percentage and Principal
Collections for such Payment Date. With respect to any Payment Date, the
"Alternative Principal Payment" will equal the amount, but not less than zero,
of Principal Collections for such Payment Date less the aggregate of Additional
Balances created during the related Collection Period. The "Rapid Amortization
Period" is the period beginning at the earlier of (i) the occurrence of a Rapid
Amortization Event and (ii) immediately following the Payment Date in
__________ and continuing until the later of when (i) the Note Principal
Balance has been reduced to zero and all amounts then due and owing to the
Insurer have been paid and (ii) the Trust is terminated. See "-- Termination;
Retirement of the Notes."
Beginning with the first Payment Date following the end of the Managed
Amortization Period, the amount of Principal Collections payable to Noteholders
on each Payment Date will be equal to the Maximum Principal Payment.
Payments of Principal Collections based upon the Investor Fixed
Allocation Percentage may result in payments of principal to Noteholders in
amounts that are greater relative to the declining Pool Balance than would be
the case if the Investor Floating Allocation Percentage were used to determine
the percentage of Principal Collections distributed in respect of the Invested
Amount. Principal Collections not allocated to the Noteholders will be
allocated to the Transferor Interest. The aggregate payments of principal to
the Noteholders will not exceed the Original Note Principal Balance.
In addition, to the extent of funds available therefor (including
funds available under the Policy), on the Payment Date in __________,
Noteholders will be entitled to receive as a payment of principal an amount
equal to the outstanding Note Principal Balance.
THE PAYING AGENT. The Paying Agent shall initially be the Indenture
Trustee, together with any successor thereto in such capacity (the "Paying
Agent"). The Paying Agent shall have the revocable power to withdraw funds from
the Distribution Account for the purpose of making payments to the Noteholders.
[THE SPREAD ACCOUNT
The Sale and Servicing Agreement requires the Master Servicer to
establish in the name of the Indenture Trustee on the Closing Date and to
maintain a reserve account (the "Spread Account") for the benefit of the
Insurer and the Noteholders. On the Closing Date, the Indenture Trustee will
make a deposit to the Spread Account, as specified in the Sale and Servicing
Agreement. No additional deposits will be required to be made to the Spread
Account.
On any Payment Date prior to giving effect to any draw on the Policy,
amounts, if any, on deposit in the Spread Account will be available to make any
of the following payments on the Policy in the following order of priority:
to the Noteholders, any Insured Payment required to be made on such
Payment Date;
to Noteholders, the Investor Loss Amount for such Payment Date or
unreimbursed Investor Loss Amounts from a previous Payment Date;
to reimburse the Insurer for prior draws made under the Policy (with
interest thereon); and
to pay any other amounts owed to the Insurer pursuant to the
Insurance Agreement.
The Sale and Servicing Agreement permits reduction of the amount on
deposit in the Spread Account as specified in the Sale and Servicing Agreement.
Any such reduction will be dependent on the delinquency and loss performance of
the Mortgage Loans. The maximum amount required to be on deposit at any time in
the Spread Account is the "Spread Account Requirement."
The amounts on deposit in the Spread Account in excess of the Spread
Account Requirement will be distributed to the Transferor. The Transferor will
not be required to refund any amounts previously and properly distributed to
it, regardless of whether there are sufficient funds on a subsequent Payment
Date to make a full payment to the holders of the Notes on such Payment Date.
Funds credited to the Spread Account may be invested in Eligible Investments or
certain other investments specified in the Sale and Servicing Agreement that
are scheduled to mature on or prior to the next Payment Date as specified in
the Sale and Servicing Agreement. The Spread Account shall be an Eligible
Account.
The Spread Account may be terminated or other assets, including
mortgage loans such as the Mortgage Loans or a guarantee of the Transferor or a
letter of credit issued on behalf of the Transferor, may be substituted for
some or all of the assets held therein, if any, provided that the Insurer and
the Rating Agencies consent to such action and the then current ratings of the
Notes assigned by the Rating Agencies are not lowered as a result thereof.]
RAPID AMORTIZATION EVENTS
As described above, the Managed Amortization Period will continue
through the Payment Date in __________, unless a Rapid Amortization Event
occurs prior to such date in which case the Rapid Amortization Period will
commence prior to such date. The "Rapid Amortization Period" is the period
commencing on the earlier of (x) the end of the Managed Amortization Period and
(y) the day, if any, upon which a Rapid Amortization Event occurs and
concluding upon the later of (i) termination of the Trust and (ii) all amounts
due and owing to the Insurer and the Noteholders have been paid. "Rapid
Amortization Event" refers to any of the following events:
(a) failure on the part of the Transferor (i) to make a
payment or deposit required under the Agreements or (ii) to observe or
perform in any material respect any other covenants or agreements of
the Transferor set forth in the Agreements, which failure continues
unremedied for a period of 30 days after written notice;
(b) any representation or warranty made by the Transferor in
the Agreements proves to have been incorrect in any material respect
when made and continues to be incorrect in any material respect for a
period of 30 days after written notice and as a result of which the
interests of the Noteholders or the Insurer are materially and
adversely affected; provided, however, that a Rapid Amortization Event
shall not be deemed to occur with respect to a breach of
representation and warranty relating to a Mortgage Loan if the
Transferor has purchased or made a substitution for the related
Mortgage Loan or Mortgage Loans if applicable during such period (or
within an additional 60 days, with the consent of the Indenture
Trustee and the Insurer) in accordance with the provisions of the Sale
and Servicing Agreement;
(c) the occurrence of certain events of bankruptcy,
insolvency or receivership relating to the Transferor,
(d) the Trust becomes subject to regulation by the Securities
and Exchange Commission as an investment company within the meaning of
the Investment Company Act, of 1940, as amended; or
(e) the aggregate of all draws under the Policy exceeds __%
of the Cut-Off Date Pool Balance.
In the case of any event described in clause (a) or (b), a Rapid
Amortization Event will be deemed to have occurred only if, after the
applicable grace period, if any, described in such clauses, either the
Indenture Trustee or Noteholders holding Notes evidencing more than 51% of the
Percentage Interests (in either case, with the consent of the Insurer) or the
Insurer (so long as there is no default by the Insurer in the performance of
its obligations under the Policy), by written notice to the Transferor and the
Master Servicer (and to the Indenture Trustee, if given by the Noteholders)
declare that a Rapid Amortization Event has occurred as of the date of such
notice. In the case of any event described in clause (c), (d) or (e) a Rapid
Amortization Event will be deemed to have occurred without any notice or other
action on the part of the Indenture Trustee, the Insurer or the Noteholders
immediately upon the occurrence of such event.
In addition to the consequences of a Rapid Amortization Event
discussed above, if the Transferor voluntarily files a bankruptcy petition or
goes into liquidation or any person is appointed a receiver or bankruptcy
trustee of the Transferor, on the day of any such filing or appointment no
further Additional Balances will be transferred to the Trust, the Transferor
will immediately cease to transfer Additional Balances to the Trust and the
Transferor will promptly give notice to the Indenture Trustee and the Insurer
of any such filing or appointment.
Notwithstanding the foregoing, if a conservator or
trustee-in-bankruptcy is appointed for the Transferor and no Rapid Amortization
Event exists other than such conservatorship, receivership or insolvency of the
Transferor, the conservator or receiver may have the power to prevent the
commencement of the Rapid Amortization Period or the sale of Mortgage Loans
described above.
THE POLICY
The following information has been supplied by the Insurer for
inclusion in this Prospectus Supplement. Accordingly, the Depositor does not
make any representation as to the accuracy and completeness of such
information.
The Insurer, in consideration of the payment of the premium and
subject to the terms of the Policy, thereby unconditionally and irrevocably
guarantees to any Owner (as defined herein) that an amount equal to each full
and complete Insured Payment will be received by the Indenture Trustee, or its
successor, as trustee for the __________, on behalf of the Owners from the
Insurer, for distribution by the Indenture Trustee to each Owner of each
Owner's proportionate share of the Insured Payment. The Insurer's obligations
under the Policy with respect to a particular Insured Payment shall be
discharged to the extent funds equal to the applicable Insured Payment are
received by the Indenture Trustee, whether or not such funds are properly
applied by the Indenture Trustee. Insured Payments shall be made only at the
time set forth in the Policy and no accelerated Insured Payments shall be made
regardless of any acceleration of the Notes, unless such acceleration is at the
sole option of the Insurer.
Notwithstanding the foregoing paragraph, the Policy does not cover
shortfalls, if any, attributable to the liability of the Trust or the Indenture
Trustee for withholding taxes, if any (including interest and penalties in
respect of any such liability).
The Insurer will pay any Insured Payment that is a Preference Amount
on the Business Day following receipt on a Business Day by the Fiscal Agent (as
described below) of (i) a certified copy of the order requiring the return of a
preference payment, (ii) an opinion of counsel satisfactory to the Insurer that
such order is final and not subject to appeal, (iii) an assignment in such form
as is reasonably required by the Insurer, irrevocably assigning to the Insurer
all rights and claims of the Owner relating to or arising under the Notes
against the debtor that made such preference payment or otherwise with respect
to such preference payment and (iv) appropriate instruments to effect the
appointment of the Insurer as agent for such Owner in any legal proceeding,
related to such preference payment, such instruments being in a form
satisfactory to the Insurer, provided that if such documents are received after
12:00 noon, New York City time, on such Business Day, they will be deemed to be
received on the following Business Day. Such payments shall be disbursed to the
receiver or trustee in bankruptcy named in the final order of the court
exercising jurisdiction on behalf of the Owner and not to any Owner directly
unless such Owner has returned principal or interest paid on the Notes to such
receiver or trustee in bankruptcy, in which case such payment shall be
disbursed to such Owner.
The Insurer will pay any other amount payable under the Policy no
later than 12:00 noon, New York City time, on the later of the Payment Date on
which the related Deficiency Amount is due or the third Business Day following
receipt in New York, New York on a Business Day by ________________, as Fiscal
Agent for the Insurer or any successor fiscal agent appointed by the Insurer
(the "Fiscal Agent") of a Notice (as described below); provided that if such
Notice is received after 12:00 noon, New York City time, on such Business Day,
it will be deemed to be received on the following Business Day. If any such
Notice received by the Fiscal Agent is not in proper form or is otherwise
insufficient for the purpose of making claim under the Policy, it shall be
deemed not to have been received by the Fiscal Agent for purposes of this
paragraph, and the Insurer or the Fiscal Agent, as the case may be, shall
promptly so advise the Indenture Trustee and the Indenture Trustee may submit
an amended Notice.
Insured Payments due under the Policy unless otherwise stated therein
will be disbursed by the Fiscal Agent to the Indenture Trustee on behalf of the
Owners by wire transfer of immediately available funds in the amount of the
Insured Payment less, in respect of Insured Payments related to Preference
Amounts, any amount held by the Indenture Trustee for the payment of such
Insured Payment and legally available therefor.
The Fiscal Agent is the agent of the Insurer only and the Fiscal Agent
shall in no event be liable to the Owners for any acts of the Fiscal Agent or
any failure of the Insurer to deposit or cause to be deposited, sufficient
funds to make payments due under the Policy.
As used in the Policy, the following terms shall have the following
meanings:
"AGREEMENTS" means any of the Indenture, the Trust Agreement or the
Sale and Servicing Agreement without regard to any amendment or supplement
thereto unless such amendment or modification has been approved in writing by
the Insurer.
"BUSINESS DAY" means any day other than (i) a Saturday or a Sunday or
(ii) a day on which the Insurer or banking institutions in the States of New
York or _________ are required or authorized by law or executive order to be
closed.
"CIVIL RELIEF ACT INTEREST SHORTFALLS" means for any Payment Date any
shortfall in interest collections on the Mortgage Loans during the prior
Collection Period that are attributable to the Soldiers' and Sailors' Civil
Relief Act of 1940, as amended.
"DEFICIENCY AMOUNT" means for any Payment Date (A) the excess, if any,
of (i) Investor Interest for such Payment Date plus any Unpaid Investor
Interest Shortfall, if any, due on the Notes over (ii) Investor Interest
Collections on deposit in the Distribution Account available to be distributed
therefor on such Payment Date and (B) the Guaranteed Principal Amount.
"FINAL PAYMENT DATE" means the Payment Date in __________.
"GUARANTEED PRINCIPAL AMOUNT" means (a) for any Payment Date (other
than the Final Payment Date) the amount, if any, by which the Note Principal
Balance exceeds the Invested Amount as of such Payment Date (after giving
effect to all payments of principal on the Notes on such Payment Date pursuant
to the Agreements) and (b) on the Final Payment Date, the outstanding Note
Principal Balance (after giving effect to all other payments of principal on
the Notes on such Payment Date pursuant to the Agreements).
"INSURED PAYMENT" means (i) as of any Payment Date, any Deficiency
Amount and (ii) any Preference Amount.
"INVESTOR INTEREST" means, with respect to any Payment Date, interest
for the related Interest Period at the applicable Note Rate on the Note
Principal Balance as of the first day of such Interest Period (after giving
effect to the payments made on the first day of such Interest Period), net of
any Civil Relief Act Interest Shortfalls for such Payment Date.
"NOTICE" means the telephonic or telegraphic notice, promptly
confirmed in writing by telecopy, substantially in the form of Exhibit A
attached to the Policy, the original of which is subsequently delivered by
registered or certified mail, from the Indenture Trustee specifying the Insured
Payment which shall be due and owing on the applicable Payment Date.
"OWNER" means each Holder (as defined in the Sale and Servicing
Agreement) who, on the applicable Payment Date, is entitled under the terms of
the applicable Notes to payment thereunder.
"PREFERENCE AMOUNT" means any amount previously distributed to an
Owner on the Notes that is recoverable and sought to be recovered as avoidable
preference by a trustee in bankruptcy pursuant to the United States Bankruptcy
Code (11 U.S.C.), as amended from time to time in accordance with a final
nonappealable order of a court having competent jurisdiction.
"UNPAID INVESTOR SHORTFALL" means, with respect to any Payment Date,
the aggregate amount, if any, of Investor Interest that was accrued in respect
of prior Payment Dates and has not been distributed to Noteholders.
Capitalized terms used in the Policy and not otherwise defined in the
Policy shall have the respective meanings set forth in the Sale and Servicing
Agreement as of the date of execution of the Policy, without giving effect to
any subsequent amendment or modification to the Sale and Servicing Agreement
unless such amendment or modification has been approved in writing by the
Insurer.
Any notice under the Policy or service of process on the Fiscal Agent
or the Insurer may be made at the address listed below for the Fiscal Agent or
the Insurer or such other address as the Insurer shall specify in writing to
the Indenture Trustee.
The notice address of the Fiscal Agent is ________________________,
Attention: Municipal Registrar and Paying Agency, or such other address as the
Fiscal Agent shall specify to the Indenture Trustee in writing.
The Policy is being issued under and pursuant to, and shall be
construed under, the laws of the State of New York, without giving effect to
the conflict of laws principles thereof.
The insurance provided by the Policy is not covered by the
Property/Casualty Insurance Security Fund specified in Article 76 of the New
York Insurance Law.
The Policy is not cancelable for any reason. The premium on the Policy
is not refundable for any reason including payment, or provision being made for
payment, prior to the maturity of the Notes.
POOL FACTOR
The "Pool Factor" is a seven-digit decimal which the Master Servicer
will compute monthly expressing the Note Principal Balance of the Notes as of
each Payment Date (after giving effect to any payment of principal on such
Payment Date) as a proportion of the Original Note Principal Balance. On the
Closing Date, the Pool Factor will be 1.0000000. See "DESCRIPTION OF THE
NOTES--Payments on the Notes." Thereafter, the Pool Factor will decline to
reflect reductions in the related Note Principal Balance resulting from
payments of principal to the Notes.
Pursuant to the Sale and Servicing Agreement, monthly reports
concerning the Invested Amount, the Pool Factor and various other items of
information will be made available to the Noteholders. In addition, within 60
days after the end of each calendar year, beginning with the 199__ calendar
year, information for tax reporting purposes will be made available to each
person who has been a Noteholder of record at any time during the preceding
calendar year. See "DESCRIPTION OF THE NOTES--Book-Entry Notes" and "--Reports
to Noteholders" herein.
MATURITY AND PREPAYMENT CONSIDERATIONS
The Agreements, except as otherwise described herein, provides that
the Noteholders will be entitled to receive on each Payment Date payments of
principal, in the amounts described herein, until the Note Principal Balance is
reduced to zero. During the Managed Amortization Period, Noteholders will
receive amounts from Principal Collections based upon the Investor Fixed
Allocation Percentage subject to reduction as described below. During the Rapid
Amortization Period, Noteholders will receive amounts from Principal
Collections based solely upon the Investor Fixed Allocation Percentage. Because
prior payments of Investor Principal Collections to Noteholders reduce the
Investor Floating Allocation Percentage but do not change the Fixed Allocation
Percentage, allocations of Principal Collections based on the Fixed Allocation
Percentage may result in payments of principal to the Noteholders in amounts
that are, in most cases, greater relative to the declining balance of the
Mortgage Loans than would be the case if the Investor Floating Allocation
Percentage were used to determine the percentage of Principal Collections
distributed to Noteholders. This is especially true during the Rapid
Amortization Period when the Noteholders are entitled to receive Investor
Principal Collections and not a lesser amount. In addition, to the extent of
losses allocable to the Noteholders, Noteholders may also receive as payment of
principal the Investor Floating Allocation Percentage of the amount of such
losses either from the Spread Account or draws under the Policy. The level of
losses may therefore affect the rate of payment of principal on the Notes. For
a description of the defined terms used in this section, See "DESCRIPTION OF
THE NOTES."
To the extent obligors make more draws than principal payments, the
Transferor Interest may grow. Because during the Rapid Amortization Period the
Noteholders' share of Principal Collections is based upon the Investor Fixed
Allocation Percentage (without reduction), an increase in the Transferor
Interest due to additional draws may also result in Noteholders receiving
principal at a greater rate than would otherwise occur if the Investor Floating
Allocation Percentage were used to determine the percentage of Principal
Collections distributed to Noteholders. The Sale and Servicing Agreement
permits the Transferor, at its option, but subject to the satisfaction of
certain conditions specified in the Sale and Servicing Agreement, including the
conditions described below, to remove certain Mortgage Loans from the Trust at
any time during the life of the Trust, so long as the Transferor Interest
(after giving effect to such removal) is not less than the Minimum Transferor
Interest. Such removals may affect the rate at which principal is distributed
to Noteholders by reducing the overall Pool Balance and thus the amount of
Principal Collections. See "DESCRIPTION OF THE NOTES--Optional Retransfers of
Mortgage Loans to the Transferor."
The prepayment experience with respect to the Mortgage Loans will
affect the weighted average life of the Notes.
The rate of prepayment on the Mortgage Loans cannot be predicted. The
Depositor is not aware of any publicly available studies or statistics that
accurately predict or forecast the rate of prepayment of mortgage loans such as
the Mortgage Loans. Generally, home equity loans are not viewed by borrowers as
permanent financing. Accordingly, the Mortgage Loans may experience a higher
rate of prepayment than traditional first mortgage loans. Because the Revolving
Credit-Line Loans generally do not amortize during the Draw Period, rates of
principal payment on the Mortgage Loans will generally be slower than those of
traditional fully-amortizing first mortgages in the absence of prepayments on
such Mortgage Loans. The prepayment experience of the Trust with respect to the
Mortgage Loans may be affected by a wide variety of factors, including general
economic conditions, prevailing interest rate levels, the availability of
alternative financing, homeowner mobility, the frequency and amount of any
future draws on the Credit Line Agreements and changes affecting the
deductibility for Federal income tax purposes of interest payments on home
equity loans. Substantially all of the Mortgage Loans contain "due-on-sale"
provisions, and the Master Servicer intends to enforce such provisions, unless
such enforcement is not permitted by applicable law. The enforcement of a
"due-on-sale" provision will have the same effect as a prepayment of the
related Mortgage Loan. See "CERTAIN LEGAL ASPECTS OF LOANS--Due-on-Sale
Clauses" in the Prospectus.
As with fixed rate obligations generally, the rate of prepayment on a
pool of mortgage loans with fixed rates such as the Closed-End Loans with fixed
Loan Rates is affected by prevailing market rates for mortgage loans of a
comparable term and risk level. When the market interest rate is below the
interest rate on a mortgage loan, mortgagors may have an increased incentive to
refinance their mortgage loans. Depending on prevailing mortgage rates, the
future outlook for market rates and economic conditions generally, some
mortgagors may sell or refinance mortgaged properties in order to realize their
equity in the mortgaged properties, to meet cash flow needs or to make other
investments.
The yield to an investor who purchases the Notes in the secondary
market at a price other than par will vary from the anticipated yield if the
rate of prepayment on the Mortgage Loans is actually different than the rate
anticipated by such investor at the time such Notes were purchased.
Collections on the Mortgage Loans may vary because, among other
things, borrowers may make payments during any month as low as the minimum
monthly payment for such month which, in the case of the Revolving Credit-Line
Loans may be zero, or as high as the entire outstanding principal balance plus
accrued interest and the fees and charges thereon. It is possible that
borrowers may fail to make scheduled payments. Collections on the Mortgage
Loans may vary due to seasonal purchasing and payment habits of borrowers.
No assurance can be given as to the level of prepayments that will be
experienced by the Trust but it can be expected that a portion of borrowers
will not prepay their Mortgage Loans to any significant degree. See
"DESCRIPTION OF THE SECURITIES--Weighted Average Life of the Certificates" in
the Prospectus.
DESCRIPTION OF THE AGREEMENTS
The following summary describes certain terms of the Sale and
Servicing Agreement, the Trust Agreement and the Indenture. Such summary does
not purport to be complete and is subject to, and qualified in its entirety by
reference to, the respective provisions of the Sale and Servicing Agreement,
the Trust Agreement and the Indenture. Whenever particular defined terms in the
Indenture are referred to, such defined terms are thereby incorporated herein
by reference. See "The Agreements" in the Prospectus.
REPORTS TO NOTEHOLDERS
Concurrently with each payment to the Noteholders, the Master Servicer
will forward to the Indenture Trustee for mailing to such Noteholder and the
Insurer a statement setting forth among other items:
(i) the Investor Floating Allocation Percentage for the preceding
Collection Period;
(ii) the amount being distributed to Noteholders;
(iii) the amount of interest included in such payment and the
related Note Rate;
(iv) the amount, if any, of overdue accrued interest included in
such payment;
(v) the amount, if any, of the remaining overdue accrued interest
after giving effect to such payment;
(vi) the amount, if any, of principal included in such payment;
(vii) the amount, if any, of the reimbursement of previous
Liquidation Loss Amounts included in such payment;
(viii) the amount, if any, of the aggregate unreimbursed
Liquidation Loss Amounts after giving effect to such payment;
(ix) the Servicing Fee for such Payment Date;
(x) the Invested Amount and the Note Principal Balance, each
after giving effect to such payment;
(xi) the Pool Balance as of the end of the preceding Collection
Period;
(xii) the number and aggregate Principal Balances of the Mortgage
Loans as to which the minimum monthly payment is delinquent to 30-59
days, 60-89 days and 90 or more days, respectively, as of the end of
the Collection Period;
(xiii) the book value of any real estate which is acquired by the
Trust through foreclosure or grant of deed in lieu of foreclosure; and
(xiv) the amount of any draws on the Policy.
In the case of information furnished pursuant to clauses (ii), (iii)
in respect of the amount of interest included in such payment, (iv) and (viii)
above, the amounts shall be expressed as a dollar amount per Note with a $1,000
denomination.
Each year commencing in 1999, the Master Servicer will be required to
forward to the Indenture Trustee a statement containing the information set
forth in clauses (iii) and (vi) above aggregated for such calendar year.
COLLECTION AND OTHER SERVICING PROCEDURES ON MORTGAGE LOANS
The Master Servicer will make reasonable efforts to collect all
payments called for under the Mortgage Loans and will, consistent with the Sale
and Servicing Agreement, follow such collection procedures as it follows from
time to time with respect to the home equity loans in its servicing portfolio
comparable to the Mortgage Loans. Consistent with the above, the Master
Servicer may in its discretion waive any late payment charge or any assumption
or other fee or charge that may be collected in the ordinary course of
servicing the Mortgage Loans.
With respect to the Mortgage Loans, the Master Servicer may arrange
with a borrower a schedule for the payment of interest due and unpaid for a
period, provided that any such arrangement is consistent with the Master
Servicer's policies with respect to the home equity mortgage loans it owns or
services. In accordance with the terms of the Sale and Servicing Agreement, the
Master Servicer may consent under certain circumstances to the placing of a
subsequent senior lien in respect of a Mortgage Loan.
HAZARD INSURANCE
The Master Servicer will cause to be maintained for each Mortgage Loan
fire and hazard insurance with extended coverage customary in the area where
the Mortgaged Property is located in an amount which is at least equal to the
lesser of (i) the outstanding Principal Balance on the Mortgage Loan and any
related senior lien(s); and (ii) the maximum insurable value of the
improvements securing the Mortgage Loan. Generally, if the Mortgaged Property
is in an area identified in the Federal Register by the Flood Emergency
Management Agency as FLOOD ZONE "A", such flood insurance has been made
available and the Master Servicer determines that such insurance is necessary
in accordance with accepted mortgage servicing practices of prudent lending
institutions, the Master Servicer will cause to be purchased a flood insurance
policy with a generally acceptable insurance carrier, in an amount representing
coverage not less than the lesser of (a) the outstanding Principal Balance of
the Mortgage Loan and any related senior lien(s), if any, or (b) the maximum
amount of insurance available under the National Flood Insurance Act of 1968,
as amended. Any amounts collected by the Master Servicer under any such
policies (other than amounts to be applied to the restoration or repair of the
Mortgaged Property, or to be released to the borrower in accordance with
customary mortgage servicing procedures) will be deposited in the Collection
Account, subject to retention by the Master Servicer to the extent such amounts
constitute servicing compensation or to withdrawal pursuant to the Sale and
Servicing Agreement.
In the event that the Master Servicer obtains and maintains a blanket
policy as provided in the Sale and Servicing Agreement insuring against fire
and hazards of extended coverage on all of the Mortgage Loans then, to the
extent such policy names the Master Servicer or its designee as loss payee and
provides coverage in an amount equal to the aggregate unpaid principal balance
of the Mortgage Loans without coinsurance, and otherwise complies with the
requirements of the first paragraph of this subsection, the Master Servicer
will be deemed conclusively to have satisfied its obligations with respect to
fire and hazard insurance coverage.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
The Master Servicer will foreclose upon or otherwise comparably
convert to ownership Mortgaged Properties securing such of the Mortgage Loans
as come into default when, in accordance with applicable servicing procedures
under the Sale and Servicing Agreement, no satisfactory arrangements can be
made for the collection of delinquent payments. In connection with such
foreclosure or other conversion, the Master Servicer will follow such practices
as it deems necessary or advisable and as are in keeping with its general
subordinate mortgage servicing activities, provided the Master Servicer will
not be required to expend its own funds in connection with foreclosure or other
conversion, correction of default on a related senior mortgage loan or
restoration of any property unless, in its sole judgment, such foreclosure,
correction or restoration will increase Net Liquidation Proceeds. The Master
Servicer will be reimbursed out of Liquidation Proceeds for advances of its own
funds as liquidation expenses before any Net Liquidation Proceeds are
distributed to Noteholders or the Transferor.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
With respect to each Collection Period, the Master Servicer will
receive from interest collections in respect of the Mortgage Loans a portion of
such interest collections as a monthly Servicing Fee in the amount equal to
0.50% per annum ("Servicing Fee Rate") on the aggregate Principal Balances of
the Mortgage Loans as of the first day of the related Collection Period (or as
of the Cut-Off Date for the first Collection Period). All assumption fees, late
payment charges and other fees and charges, to the extent collected from
borrowers, will be retained by the Master Servicer as additional servicing
compensation.
The Master Servicer will pay certain ongoing expenses associated with
the Trust and incurred by it in connection with its responsibilities under the
Sale and Servicing Agreement. In addition, the Master Servicer will be entitled
to reimbursement for certain expenses incurred by it in connection with
defaulted Mortgage Loans and in connection with the restoration of Mortgaged
Properties, such right of reimbursement being prior to the rights of
Noteholders to receive any related Net Liquidation Proceeds.
EVIDENCE AS TO COMPLIANCE
The Sale and Servicing Agreement provides for delivery on or before
May 31 in each year, beginning on May 31, 1999, to the Indenture Trustee, the
Rating Agencies and the Insurer of an annual statement signed by an officer of
the Master Servicer to the effect that the Master Servicer has fulfilled its
material obligations under the Sale and Servicing Agreement throughout the
preceding fiscal year, except as specified in such statement.
CERTAIN MATTERS REGARDING THE MASTER SERVICER AND THE TRANSFEROR
The Sale and Servicing Agreement provides that the Master Servicer may
not resign from its obligations and duties thereunder, except in connection
with a permitted transfer of servicing, unless (i) such duties and obligations
are no longer permissible under applicable law or are in material conflict by
reason of applicable law with any other activities of a type and nature
presently carried on by it or its subsidiaries or affiliates or (ii) upon the
satisfaction of the following conditions: (a) the Master Servicer has proposed
a successor Master Servicer to the Indenture Trustee and the Insurer in writing
and such proposed successor Master Servicer is reasonably acceptable to the
Indenture Trustee; (b) the Rating Agencies have confirmed to the Indenture
Trustee and the Insurer that the appointment of such proposed successor Master
Servicer as the Master Servicer will not result in the reduction or withdrawal
of the then current rating of the Notes; and (c) such proposed successor Master
Servicer is acceptable to the Insurer. No such resignation will become
effective until the Indenture Trustee or a successor Master Servicer has
assumed the Master Servicer's obligations and duties under the Sale and
Servicing Agreement.
The Master Servicer may perform any of its duties and obligations
under the Sale and Servicing Agreement through one or more subservicers or
delegates, which may be affiliates of the Master Servicer. Notwithstanding any
such arrangement, the Master Servicer will remain liable and obligated to the
Indenture Trustee, the Owner Trustee, the Noteholders and the Insurer for the
Master Servicer's duties and obligations under the Sale and Servicing
Agreement, without any diminution of such duties and obligations and as if the
Master Servicer itself were performing such duties and obligations.
Any person into which, in accordance with the Sale and Servicing
Agreement, the Transferor or the Master Servicer may be merged or consolidated
or any person resulting from any merger or consolidation to which the
Transferor or the Master Servicer is a party, or any person succeeding to the
business of the Transferor or the Master Servicer, will be the successor to the
Master Servicer under the Sale and Servicing Agreement.
The Sale and Servicing Agreement provides that the Master Servicer
will indemnify the Trust, the Indenture Trustee and the Owner Trustee from and
against any loss, liability, expense, damage or injury suffered or sustained as
a result of the Master Servicer's actions or omissions in connection with the
servicing and administration of the Mortgage Loans which are not in accordance
with the provisions of the Sale and Servicing Agreement. In the event of an
Event of Servicing Termination (as defined below) resulting in the assumption
of servicing obligations by a successor Master Servicer, the successor Master
Servicer will indemnify the Transferor for any losses, claims, damages and
liabilities of the Transferor as described in this paragraph arising from the
successor Master Servicer's actions or omissions. The Sale and Servicing
Agreement provides that neither the Transferor nor the Master Servicer nor
their directors, officers, employees or agents will be under any other
liability to the Trust, the Indenture Trustee, the Owner Trustee, the
Noteholders or any other person for any action taken or for refraining from
taking any action pursuant to the Sale and Servicing Agreement. However,
neither the Transferor nor the Master Servicer will be protected against any
liability which would otherwise be imposed by reason of willful misconduct, bad
faith or gross negligence of the Transferor or the Master Servicer in the
performance of its duties under the Sale and Servicing Agreement or by reason
of reckless disregard of its obligations thereunder. In addition, the Sale and
Servicing Agreement provides that the Master Servicer will not be under any
obligation to appear in, prosecute or defend any legal action which is not
incidental to its servicing responsibilities under the Sale and Servicing
Agreement and which in its opinion may expose it to any expense or liability.
The Master Servicer may, in its sole discretion, undertake any such legal
action which it may deem necessary or desirable with respect to the Sale and
Servicing Agreement and the rights and duties of the parties thereto and the
interest of the Noteholders and the Insurer thereunder.
EVENTS OF SERVICING TERMINATION
"Events of Servicing Termination" will consist of: (i) any failure by
the Master Servicer to deposit in the Collection Account any deposit required
to be made under the Sale and Servicing Agreement; (ii) any failure by the
Master Servicer duly to observe or perform in any material respect any other of
its covenants or agreements in the Sale and Servicing Agreement which, in each
case, materially and adversely affects the interests of the Noteholders or the
Insurer and continues unremedied for 30 days after the giving of written notice
of such failure to the Master Servicer by the Indenture Trustee, or to the
Master Servicer and the Indenture Trustee by the Insurer or Noteholders
evidencing Percentage Interests aggregating not less than 25%; (iii) certain
events of insolvency, readjustment of debt, marshalling of assets and
liabilities or similar proceedings relating to the Master Servicer and certain
actions by the Master Servicer indicating insolvency, reorganization or
inability to pay its obligations; or (iv) certain loss or delinquency tests set
forth in the Sale and Servicing Agreement are not met. Under certain other
circumstances, the Indenture Trustee shall, at the direction of the Insurer or
may, with the consent of the Insurer, or the holders of Notes evidencing an
aggregate, undivided interest in the Trust of at least 51% of the Note
Principal Balance may (with the consent of the Insurer so long as there is no
default by the Insurer in the performance of its obligations under the Policy)
deliver written notice to the Master Servicer terminating all the rights and
obligations of the Master Servicer under the Sale and Servicing Agreement.
Notwithstanding the foregoing, a delay in or failure of performance
referred to under clause (i) or (ii) above for a period of ten or 30 Business
Days, respectively, shall not constitute an Event of Servicing Termination if
such delay or failure could not be prevented by the exercise of reasonable
diligence by the Master Servicer and such delay or failure was caused by an act
of God, or other similar occurrence. Upon the occurrence of any such event the
Master Servicer shall not be relieved from using its best efforts to perform
its obligations in a timely manner in accordance with the terms of the Sale and
Servicing Agreement and the Master Servicer shall provide the Indenture Trustee
and the Noteholders prompt notice of such failure or delay by it, together with
a description of its efforts to so perform its obligations.
RIGHTS UPON AN EVENT OF SERVICING TERMINATION
So long as an Event of Servicing Termination remains unremedied,
either the Indenture Trustee shall at the direction of the Insurer or may, with
the consent of the Insurer, or Noteholders evidencing an aggregate, undivided
interest in the Trust of at least 51% of the Note Principal Balance with the
consent of the Insurer, may terminate all of the rights and obligations of the
Master Servicer under the Sale and Servicing Agreement and in and to the
Mortgage Loans, whereupon the Indenture Trustee will succeed to all the
responsibilities, duties and liabilities of the Master Servicer under the Sale
and Servicing Agreement and will be entitled to similar compensation
arrangements. In the event that the Indenture Trustee would be obligated to
succeed the Master Servicer but is unwilling or unable so to act, it may
appoint, or petition a court of competent jurisdiction for the appointment of,
a housing and home finance institution or other mortgage loan or home equity
loan Master Servicer with all licenses and permits required to perform its
obligations under the Sale and Servicing Agreement and having a net worth of at
least $15,000,000 and acceptable to the Insurer to act as successor to the
Master Servicer under the Sale and Servicing Agreement. Pending such
appointment, the Indenture Trustee will be obligated to act in such capacity
unless prohibited by law. Such successor will be entitled to receive the same
compensation that the Master Servicer would otherwise have received (or such
lesser compensation as the Indenture Trustee and such successor may agree). A
receiver or conservator for the Master Servicer may be empowered to prevent the
termination and replacement of the Master Servicer where the only Event of
Servicing Termination that has occurred is an Insolvency Event.
EVENTS OF DEFAULT UNDER THE INDENTURE
"Events of Default" under the Indenture include:
(i) a default in the payment of any interest or principal
payment when the same becomes due and payable and continuance of such
default for a period of five days;
(ii) failure on the part of the Trust to perform in any
material respect any covenant or agreement under the Indenture (other
than a covenant covered in clause (i) hereof) which continues for a
period of thirty days after notice thereof is given; and
(iii) certain events of bankruptcy, insolvency, receivership
or liquidation of the Trust.
REMEDIES ON EVENT OF DEFAULT UNDER THE INDENTURE
If an Event of Default under the Indenture has occurred and is
continuing, either the Indenture Trustee or the majority of the then
outstanding amount of the Notes may declare the principal amount of the Notes
due and payable immediately. Such a declaration may be rescinded by a majority
of the then outstanding amount of the Notes.
If the principal of the Notes has been declared due and payable as
described in the preceding paragraph, the Indenture Trustee may elect not to
liquidate the assets of the Trust provided that the assets are generating
sufficient cash to pay interest and principal as it becomes due and payable to
the Noteholders.
However, the Indenture Trustee may not sell or otherwise liquidate the
assets of the Trust following an Event of Default (other than one described in
clause (i) of the definition of "Event of Default"), unless (a) the holders of
100% of the Notes and the Insurer consents to such sale, or (b) the proceeds of
such sale or liquidation are sufficient to pay all amounts due and owing to the
Noteholders and the Insurer, or (c) the Trustee determines that the assets of
the Trust would not be sufficient on an ongoing basis to make all payments on
the Notes as they become due and payable and the Trustee obtains the consent of
the holders of 66-2/3% of the Percentage Interests of the Notes agree.
CERTAIN MATTERS REGARDING THE INDENTURE TRUSTEE AND THE OWNER TRUSTEE
Neither the Indenture Trustee nor any director, officer or employee of
the Indenture Trustee will be under any liability to the Trust of the
Noteholders for taking any action or for refraining from the taking of any
action in good faith pursuant to the Indenture, or for errors in judgment;
provided, that none of the Indenture Trustee or any director, officer or
employee thereof will be protected against any liability that would otherwise
be imposed on it by reason of willful malfeasance, bad faith or negligence in
the performance of its duties or by reason of its reckless disregard of its
obligations and duties under the Indenture. Subject to certain limitations set
forth in the Indenture, the Indenture Trustee and any director, officer,
employee or agent thereof will be indemnified by the Trust and held harmless
against any loss, liability or expense incurred in connection with
investigating, preparing to defend or defending any legal action, commenced or
threatened, relating to the indenture, other than any loss, liability or
expense incurred by reason of its own willful malfeasance, bad faith or
negligence in the performance of its duties under the Indenture, or by reason
of its reckless disregard of its obligations and duties under the Indenture.
All persons into which the Indenture Trustee may be merged or with which it may
be consolidated, or any person resulting from such merger or consolidation,
will be the successor to the Indenture Trustee under the Indenture.
The Owner Trustee, the Indenture Trustee and any of their respective
affiliates may hold Notes in their own names or as pledgees. For the purpose of
meeting the legal requirements of certain jurisdictions, the Master Servicer,
the Owner Trustee and the Indenture Trustee acting jointly (or in some
instances, the Owner Trustee or the Indenture Trustee acting alone) will have
the power to appoint co-trustees or separate trustees of all or any part of the
Trust. In the event of such an appointment, all rights, powers, duties and
obligations conferred or imposed upon the Owner Trustee by the Sale and
Servicing Agreement and the Trust Agreement and the Indenture Trustee by the
Indenture will be conferred or imposed upon the Owner Trustee and the Indenture
Trustee, respectively, and in each such case such separate trustee or
co-trustee jointly, or, in any jurisdiction in which the Owner Trustee or
Indenture Trustee will be incompetent or unqualified to perform certain acts,
singly upon such separate trustee or co-trustee who will exercise and perform
such rights, powers, duties and obligations solely at the direction of the
Owner Trustee or the Indenture Trustee, respectively.
The Indenture Trustee may resign at any time, in which event the Owner
Trustee will be obligated to appoint a successor thereto. The Owner Trustee may
resign at any time, in which event the Co-Owner Trustee will be obligated to
appoint a successor thereto. The Master Servicer may also remove the Owner
Trustee or the Indenture Trustee if either ceases to be eligible to continue as
such under the Trust Agreement or the Indenture, as the case may be, or becomes
legally unable to act or becomes insolvent. Any resignation or removal of the
Owner Trustee or Indenture Trustee and appointment of a successor thereto will
not become effective until acceptance of the appointment by such successor.
DUTIES OF THE OWNER TRUSTEE AND INDENTURE TRUSTEE
The Owner Trustee will make no representations as to the validity or
sufficiency of the Trust Agreement, the Notes (other than the execution and
authentication thereof), or of any Mortgage Loans or related documents, and
will not be accountable for the use or application by the Transferor or the
Master Servicer of any funds paid to the Transferor or the Master Servicer in
respect of the Notes, or the Mortgage Loans, or the investment of any monies by
the Master Servicer before such monies are deposited into the Collection
Account or the Distribution Account. So long as no Event of Default has
occurred and is continuing, the Owner Trustee will be required to perform only
those duties specifically required of it under the Trust Agreement. Generally,
those duties will be limited to the receipt of the various certificates,
reports or other instruments required to be furnished to the Owner Trustee
under the Trust Agreement, in which case it will only be required to examine
them to determine whether they conform to the requirements of the Trust
Agreement. The Owner Trustee will not be charged with knowledge of a failure by
the Master Servicer to perform its duties under the Trust Agreement or Sale and
Servicing Agreement which failure constitutes an Event of Default unless the
Owner Trustee obtains actual knowledge of such failure as will be specified in
the Trust Agreement.
The Indenture Trustee will make no representations as to the validity
or sufficiency of the Indenture, the Notes (other than the execution and
authentication thereof) or of any Mortgage Loans or related documents, and will
not be accountable for the use or application by the Transferor or the Master
Servicer of any funds paid to the Transferor or the Master Servicer in respect
of the Notes or the Mortgage Loans, or the use or investment of any monies by
the Master Servicer before such monies are deposited into the Collection
Account or the Distribution Account. So long as no Event of Default has
occurred and is continuing, the Indenture Trustee will be required to perform
only those duties specifically required of it under the Indenture. Generally,
those duties will be limited to the receipt of the various certificates,
reports or other instruments required to be furnished to the Indenture Trustee
under the Indenture, in which case it will only be required to examine them to
determine whether they conform to the requirements of the Indenture. The
Indenture Trustee will not be charged with knowledge of a failure by the Master
Servicer to perform its duties under the Trust Agreement or Sale and Servicing
Agreement which failure constitutes an Event of Default unless the Indenture
Trustee obtains actual knowledge of such failure as will be specified in the
Indenture.
The Indenture Trustee will be under no obligation to exercise any of
the rights or powers vested in it by the Indenture or to make any investigation
of matters arising thereunder or to institute, conduct or defend any litigation
thereunder or in relation thereto at the request, order or direction of any of
the Noteholders, unless such Noteholders have offered to the Indenture Trustee
reasonable security or indemnity against the costs, expenses and liabilities
that may be incurred therein or thereby.
AMENDMENT
Each of the Agreements may be amended from time to time by the Master
Servicer and the Indenture Trustee and with the consent of the Insurer, but
without the consent of the Noteholders, to cure any ambiguity, to correct or
supplement any provisions therein which may be inconsistent with any other
provisions of such Agreement, to add to the duties of the Transferor or the
Master Servicer or to add or amend any provisions of such Agreement as required
by the Rating Agencies in order to maintain or improve any rating of the Notes
(it being understood that, after obtaining the ratings in effect on the Closing
Date, neither the Trustee nor the Master Servicer is obligated to obtain,
maintain, or improve any such rating) or to add any other provisions with
respect to matters or questions arising under such Agreement which shall not be
inconsistent with the provisions of such Agreement, provided that such action
will not, as evidenced by an opinion of counsel, materially and adversely
affect the interests of any Noteholder or the Insurer; provided, that any such
amendment will not be deemed to materially and adversely affect the Noteholders
and no such opinion will be required to be delivered if the person requesting
such amendment obtains a letter from the Rating Agencies stating that such
amendment would not result in a downgrading of the then current rating of the
Notes. Each of the Agreements may also be amended from time to time by the
Master Servicer and the Indenture Trustee, with the consent of Noteholders
evidencing an aggregate, undivided interest in the Trust of at least 51% of the
Note Principal Balance and the Insurer for the purpose of adding any provisions
to or changing in any manner or eliminating any of the provisions of the Sale
and Servicing Agreement or of modifying in any manner the rights of the
Noteholders, provided that no such amendment will (i) reduce in any manner the
amount of, or delay the timing of, collections of payments on the Notes or
payments under the Policy which are required to be made on any Note without the
consent of the holder of such Note and the Insurer or (ii) reduce the aforesaid
percentage required to consent to any such amendment, without the consent of
the holders of all Notes then outstanding.
TERMINATION; RETIREMENT OF THE NOTES
The Trust will terminate on the Payment Date following the later of
(A) payment in full of all amounts owing to the Insurer and (B) the earliest of
(i) the Payment Date on which the Note Principal Balance has been reduced to
zero, (ii) the final payment (or other liquidation) of the last Mortgage Loan
in the Trust or the disposition of all property acquired upon foreclosure or by
deed in lieu of foreclosure of any Mortgage Loan, (iii) the optional transfer
to the Transferor of the Mortgage Loans, as described below and (iv) the
Payment Date in ___________.
The Mortgage Loans will be subject to optional transfer to the
Transferor on any Payment Date after the Note Principal Balance is reduced to
an amount less than __% of the Original Note Principal Balance and all amounts
due and owing to the Insurer, including unreimbursed draws on the Policy,
together with interest thereon, as provided under the Insurance Agreement, have
been paid. The transfer price will be equal to the sum of the outstanding Note
Principal Balance and accrued and unpaid interest thereon at the Note Rate
through the day preceding the final Payment Date. In no event, however, will
the Trust created by the Trust Agreement continue for more than 21 years after
the death of certain individuals named in the Sale and Servicing Agreement.
Written notice of termination of the Sale and Servicing Agreement will be given
to each Noteholder, and the final payment will be made only upon surrender and
cancellation of the Notes at an office or agency appointed by the Indenture
Trustee which will be specified in the notice of termination.
THE INDENTURE TRUSTEE
____________, a ___________________ with its principal place of
business in ____________, has been named Indenture Trustee pursuant to the Sale
and Servicing Agreement.
The commercial bank or trust company serving as Indenture Trustee may
own Notes and have normal banking relationships with the Depositor, the Master
Servicer and the Insurer and/or their affiliates.
The Indenture Trustee may resign at any time, in which event the
Depositor will be obligated to appoint a successor Indenture Trustee, as
approved by the Insurer. The Depositor or the Insurer may also remove the
Indenture Trustee if the Indenture Trustee ceases to be eligible to continue as
such under the Sale and Servicing Agreement or if the Indenture Trustee becomes
insolvent. Upon becoming aware of such circumstances, the Depositor will be
obligated to appoint a successor Indenture Trustee, as approved by the Insurer.
Any resignation or removal of the Indenture Trustee and appointment of a
successor Indenture Trustee will not become effective until acceptance of the
appointment by the successor Indenture Trustee.
No holder of a Note will have any right under the Sale and Servicing
Agreement to institute any proceeding with respect to the Sale and Servicing
Agreement unless the Insurer has consented in writing to the institution of
such proceeding and such holder previously has given to the Indenture Trustee
written notice of default and unless Noteholders evidencing an aggregate,
undivided interest in the Trust of at least 51% of the Note Principal Balance
have made written requests upon the Indenture Trustee to institute such
proceeding in its own name as Indenture Trustee thereunder and have offered to
the Indenture Trustee reasonable indemnity and the Indenture Trustee for 60
days has neglected or refused to institute any such proceeding. The Indenture
Trustee will be under no obligation to exercise any of the trusts or powers
vested in it by the Sale and Servicing Agreement or to make any investigation
of matters arising thereunder or to institute, conduct or defend any litigation
thereunder or in relation thereto at the request, order or direction of any of
the Noteholders, unless such Noteholders have offered to the Indenture Trustee
reasonable security or indemnity against the cost expenses and liabilities
which may be incurred therein or thereby.
CERTAIN ACTIVITIES
The Trust will not: (i) borrow money; (ii) make loans; (iii) invest in
securities for the purpose of exercising control; (iv) underwrite securities;
(v) except as provided in the Sale and Servicing Agreement, engage in the
purchase and sale (or turnover) of investments; (vi) offer securities in
exchange for property (except Notes for the Mortgage Loans); or (vii)
repurchase or otherwise reacquire its. securities. See "--Evidence as to
Compliance" above for information regarding reports as to the compliance by the
Master Servicer with the terms of the Sale and Servicing Agreement.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Notes will be
applied by the Depositor to purchase the Mortgage Loans.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following discussion, which summarizes certain U.S. federal income
tax aspects of the purchase, ownership and disposition of the Notes, is based
on the provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), the Treasury Regulations thereunder, and published rulings and court
decisions in, effect as of the date hereof, all of which are subject to change,
possibly retroactively. This discussion does not address every aspect of the
U.S. federal income tax laws which may be relevant to Note Owners in light of
their personal investment circumstances or to certain types of Note Owners
subject to special treatment under the U.S. federal income tax laws (for
example, banks and life insurance companies). Accordingly, investors should
consult their tax advisors regarding U.S. federal, state, local, foreign and
any other tax consequences to them of investing in the Notes.
CHARACTERIZATION OF THE NOTES AS INDEBTEDNESS
Based on the application of existing law to the facts as set forth in
the Agreements and other relevant documents and assuming compliance with the
terms of the Agreements as in effect on the date of issuance of the Notes,
Brown & Wood LLP, special tax counsel to the Trust ("Tax Counsel") and counsel
to the Underwriters, is of the opinion that (i) the Notes will be treated as
debt instruments for federal income tax purposes as of such date and (ii) the
Trust will not be characterized as an association (or publicly traded
partnership) taxable as a corporation or as a taxable mortgage pool within the
meaning of Section 7701 (i). Accordingly, upon issuance, the Notes will be
treated as "Debt Securities" as described in the Prospectus. See "CERTAIN
FEDERAL INCOME TAX CONSIDERATIONS" in the Prospectus.
The Transferor and the Noteholders express in the Sale and Servicing
Agreement their intent that, for applicable tax purposes, the Notes will be
indebtedness secured by the Mortgage Loans. The Transferor and the Noteholders,
by accepting the Notes, and each Note Owner by its acquisition of a beneficial
interest in a Note, have agreed to treat the Notes as indebtedness for U.S.
federal income tax purposes. However, because different criteria are used to
determine the non-tax accounting characterization of the transaction, the
Transferor intends to treat this transaction as a sale of an interest in the
Principal Balances of the Mortgage Loans for financial accounting and certain
regulatory purposes.
In general, whether for U.S. federal income tax purposes a transaction
constitutes a sale of property or loan, the repayment of which is secured by
property, is a question of fact, the resolution of which is based upon the
economic substance of the transaction rather than its form or the manner in
which it is labeled. While the Internal Revenue Service (the "IRS") and the
courts have set forth several factors to be taken into account in determining
whether the substance of a transaction is a sale of property or a secured loan,
the primary factor in making this determination is whether the transferee has
assumed the risk of loss or other economic burdens relating to the property and
has obtained the benefits of ownership thereof. Tax Counsel has analyzed and
relied on several factors in reaching its opinion that the weight of the
benefits and burdens of ownership of the Mortgage Loans has been retained by
the Transferor and has not been transferred to the Note Owners.
In some instances, courts have held that a taxpayer is bound by the
particular form it has chosen for a transaction, even if the substance of the
transaction does not accord with its form. Tax Counsel has advised that the
rationale of those cases will not apply to this transaction, because the form
of the transaction as reflected in the operative provisions, of the documents
either accords with the characterization of the Notes as debt or otherwise
makes the rationale of those cases inapplicable to this situation.
TAXATION OF INTEREST INCOME OF NOTE OWNERS
Assuming that the Note Owners are holders of debt obligations for U.S.
federal income tax purposes, the Notes generally will be taxable as Debt
Securities. See "CERTAIN FEDERAL INCOME TAX CONSIDERATIONS" in the Prospectus.
While it is not anticipated that the Notes will be issued at a greater
than DE MINIMIS discount, under Treasury regulations (the "OID Regulations") it
is possible that the Notes could nevertheless be deemed to have been issued
with original issue discount ("OID") if the interest were not treated as an
unconditionally payable under the OID Regulations. If such regulations were to
apply, all of the taxable income to be recognized with respect to the Notes
would be includible in income of Note Owners as OID, but would not be
includible again when the interest is actually received. See "CERTAIN FEDERAL
INCOME TAX CONSIDERATIONS--Taxation of Debt Securities; Interest and
Acquisition Discount" in the Prospectus for a discussion of the application of
the OID rules if the Notes are in fact issued at a greater than DE MINIMIS
discount or are treated as having been issued with OID under the OID
Regulations. For purposes of calculating OID, it is likely that the Notes will
be treated as Pay-Through Securities.
POSSIBLE CLASSIFICATION OF THE NOTES AS A PARTNERSHIP OR ASSOCIATION TAXABLE
AS A CORPORATION
The opinion of Tax Counsel is not binding on the courts or the IRS, It
is possible that the IRS could assert that for purposes of the Code, the
transaction contemplated by this Prospectus with respect to the Notes
constitutes a sale of the Mortgage Loans (or an interest therein) to the Note
Owners and that the proper classification of the legal relationship between the
Transferor and the Note Owners resulting from this transaction is that of a
partnership (including a publicly traded partnership), a publicly traded
partnership treated as a corporation, or an association taxable as a
corporation. Since Tax Counsel has advised that the Notes will be treated as
indebtedness in the hands of the Noteholders for U.S. federal income tax
purposes, the Transferor will not attempt to comply with U.S. federal income
tax reporting requirements applicable to partnerships or corporations as such
requirements would apply if the Notes were treated as indebtedness.
If it were determined that this transaction created an entity
classified as a corporation (including a publicly traded partnership taxable as
a corporation), the Trust would be subject to U.S. federal income tax at
corporate income tax rates on the income it derives from the Mortgage Loans,
which would reduce the amounts available for payment to the Note Owners. Cash
payments to the Note Owners generally would be treated as dividends for tax
purposes to the extent of such corporation's earnings and profits. If the
transaction were treated as creating a partnership between the Note Owners and
the Transferor, the partnership itself would not be subject to U.S. federal
income tax (unless it were to be characterized as a publicly traded partnership
taxable as a corporation); rather, the Transferor and each Note Owner would be
taxed individually on their respective distributive shares of the partnership's
income, gain, loss, deductions and credits. The amount and timing of items of
income and deductions of the Note Owner could differ if the Notes were held to
constitute partnership interests rather than indebtedness.
POSSIBLE CLASSIFICATION AS A TAXABLE MORTGAGE POOL
In relevant part, Section 7701 (i) of the Code provides that any
entity (or a portion of an entity) that is a "taxable mortgage pool" will be
classified as a taxable corporation and will not be permitted to file a
consolidated U.S. federal income tax return with another corporation. Subject
to a grandfather provision for existing entities, any entity (or a portion of
any entity) will be a taxable mortgage pool if (i) substantially all of its
assets consist of debt instruments, more than 50% of which are real estate
Mortgages (ii) the entity is the obligor under debt obligations with two or
more maturities, and (iii) under the terms of the entity's debt obligations (or
an underlying arrangement), payments on such debt obligations bear a
relationship to the debt instruments held by the entity.
Assuming that all of the provisions of the Agreements, as in effect on
the date of issuance, are complied with, Tax Counsel is of the opinion that the
arrangement created by the Agreements will not be a taxable mortgage pool under
Section 7701 (i) of the Code because only one class of indebtedness, secured by
the Mortgage Loans is being issued.
The opinion of Tax Counsel is not binding on the IRS or the courts. If
the IRS were to contend successfully (or future regulations were to provide)
that the arrangement created by the Agreements is a taxable mortgage pool, such
arrangement would be subject to U.S. federal corporate income tax on its
taxable income generated by ownership of the Mortgage Loans. Such a tax might
reduce amounts available for payments to Note Owners. The amount of such a tax
would depend upon whether payments to Note Owners would be deductible as
interest expense in computing the taxable income of such an arrangement as a
taxable mortgage pool.
FOREIGN INVESTORS
In general, subject to certain exceptions, interest (including OID)
paid on a Note to a nonresident alien individual, foreign corporation or other
non-United States person is not subject to U.S. federal income tax, provided
that such interest is not effectively connected with a trade or business of the
recipient in the United States and the Note Owner provides the required foreign
person information certification. See "CERTAIN FEDERAL INCOME TAX
CONSIDERATIONS--Tax Treatment of Foreign Investors" in the Prospectus.
If the interests of the Note Owners were deemed to be partnership
interests, the partnership, if it were considered to be engaged in a U.S. trade
or business, would be required, on a quarterly basis, to pay withholding tax
equal to the product, for each foreign partner, of such foreign partner's
distributive share of "effectively connected" income of the partnership
multiplied by the highest rate of tax applicable to that foreign partner. In
addition, such foreign partner would be subject to branch profits tax. Each
non-foreign partner would be required to certify to the partnership that it is
not a foreign person. The tax withheld from each foreign partner would be
credited against such foreign partner's U.S. income tax liability.
If the Trust were taxable as a corporation, payments to foreign
persons, to the extent treated as dividends (or if the Trust were characterized
as a partnership that was not engaged in a trade or business, all interest
payments), would generally be subject to withholding at the rate of 30%, unless
such rate were reduced by an applicable tax treaty.
If, contrary to the opinion of Tax Counsel, the Notes are
recharacterized as equity interests in a partnership, or in an association or
publicly traded partnership taxable as a corporation, any taxes required to be
so withheld will be treated for all purposes of the Notes and the Policy as
having been paid to the related Noteholder.
BACKUP WITHHOLDING
Certain Note Owners may be subject to backup withholding at the rate
of 31% with respect to interest paid on the Notes if the Note Owners, upon
issuance, fail to supply the Indenture Trustee or his broker with his taxpayer
identification number, furnish an incorrect taxpayer identification number,
fail to report interest, dividends, or other "reportable payments" (as defined
in the Code) property, or, under certain circumstances, fail to provide the
Indenture Trustee or his broker with a certified statement, under penalty of
perjury, that he is not subject to backup withholding.
The Indenture Trustee will be required to report annually to the IRS,
and to each Noteholder of record, the amount of interest paid (and OID accrued,
if any) on the Notes (and the amount of interest withheld for U.S. federal
income taxes, if any) for each calendar year, except as to exempt holders
(generally, holders that are corporations, certain tax-exempt organizations or
nonresident aliens who provide certification as to their status as
nonresidents). As long as the only "Noteholder" of record is Cede, as nominee
for DTC, Note Owners and the IRS will receive tax and other information
including the amount of interest paid on the Notes from Participants and
Indirect Participants rather than from the Indenture Trustee. (The Indenture
Trustee, however, will respond to requests for necessary information to enable
Participants, Indirect Participants and certain other persons to complete their
reports.) Each non-exempt Note Owner will be required to provide, under penalty
of perjury, a certificate on IRS Form W-9 containing his or her name, address,
correct federal taxpayer identification number and a statement that he or she
is not subject to backup withholding. Should a nonexempt Note Owner fail to
provide the required certification, the Participants or Indirect Participants
(or the Paying Agent) will be required to withhold 31% of the interest (and
principal) otherwise payable to the holder, and remit the withheld amount to
the IRS as a credit against the holder's Federal income tax liability.
TAX-EXEMPT ENTITIES
A tax-exempt Note Owner would be subject to less favorite tax
treatment because an interest in a partnership would generate "unrelated
business taxable income" and thereby subject the Note Owner to the "unrelated
business, taxable income" provisions of the Code.
STATE TAXES
The Depositor makes no representations regarding the tax consequences
of purchase, ownership or disposition of the Notes under the tax laws of any
state. Investors considering an investment in the Notes should consult their
own tax advisors regarding such tax consequences.
All investors should consult their own tax advisors regarding the
Federal, state, local, foreign or any other income tax consequences of the
purchase, ownership and disposition of the Notes.
ERISA CONSIDERATIONS
GENERAL
The Employee Retirement Income Security Act of 1974, as amended
("ERISA") and Section 4975 of the Code impose certain restrictions on employee
benefit plans subject to ERISA or plans or arrangements subject to Section 4975
of the Code ("Plans") and on persons who are parties in interest or
disqualified persons ("parties in interest") with respect to such Plans.
Certain employee benefit plans, such as governmental plans and church plans (if
no election has been made under section 410(d) of the Code), are not subject to
the restrictions of ERISA, and assets of such plans may be invested in the
Offered Securities without regard to the ERISA considerations described below,
subject to other applicable Federal and state law. However, any such
governmental or church plan which is qualified under section 401(a) of the Code
and exempt from taxation under section 501(a) of the Code is subject to the
prohibited transaction rules set forth in section 503 of the Code. Any Plan
fiduciary which proposes to cause a Plan to acquire any of the Notes should
consult with its counsel with respect to the potential consequences under ERISA
and the Code, of the Plan's acquisition and ownership of the Notes. See "ERISA
Considerations" in the Prospectus. Investments by Plans are also 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.
PROHIBITED TRANSACTIONS
GENERAL
Section 406 of ERISA prohibits parties in interest with respect to a
Plan from engaging in certain transactions (including loans) involving a Plan
and its assets unless a statutory regulatory or administrative exemption
applies to the transaction. Section 4975 of the Code imposes certain excise
taxes (or, in some cases, a civil penalty may be assessed pursuant to section
502(i) of ERISA) on parties in interest which engage in non-exempt prohibited
transactions.
Depending on the relevant facts and circumstances, certain prohibited
transaction exemptions may apply to the purchase or holding of the Notes--for
example, Prohibited Transaction Class Exemption ("PTE") 96-23, which exempts
certain transactions effected on behalf of a Plan by an "in-house asset
manager"; PTE 95-60, which exempts certain transactions between insurance
company general accounts and parties in interest; PTE 91-38, which exempts
certain transactions between bank collective investment funds and parties in
interest; PTE 90-1, which exempts certain transactions between insurance
company pooled separate accounts and parties in interest; or PTE 84-14, which
exempts certain transactions effected on behalf of a Plan by a "qualified
professional asset manager". There can be no assurance that any of these
exemptions will apply with respect to any Plan's investment in the Notes, or
that such an exemption, if it did apply, would apply to all prohibited
transactions that may occur in connection with such investment.
PLAN ASSET REGULATION
The United States Department of Labor ("Labor") has issued final
regulations concerning the definition of what constitutes the assets of a Plan
for purposes of ERISA and the prohibited transaction provisions of the Code
(the "Plan Asset Regulation"). The Plan Asset Regulation describes the
circumstances under which the assets of an entity in which a Plan invests will
be considered to be "plan assets" such that any person who exercises control
over such assets would be subject to ERISA's fiduciary standards. Under the
Plan Asset Regulation, generally when a Plan invests in another entity, the
Plan's assets do not include, solely by reason of such investment, any of the
underlying assets of the entity. However, the Plan Asset Regulation provides
that, if a Plan acquires an "equity interest" in an entity that is neither a
"publicly-offered security" (as defined therein) nor a security issued by an
investment company registered under the Investment Company Act of 1940, the
assets of the entity will be treated as assets of the Plan investor unless
certain exceptions apply. If the Notes were deemed to be equity interests and
no statutory, regulatory or administrative exemption applies, the Trust could
be considered to hold plan assets by reason of a Plan's investment in the
Notes. Such plan assets would include an undivided interest in any assets held
by the Trust. In such an event, the Master Servicer and other persons, in
providing services with respect to the Trust's assets, may be parties in
interest with respect to such Plans, subject to the fiduciary responsibility
provisions of Title I of ERISA, including the prohibited transaction provisions
of Section 406 of ERISA and Section 4975 of the Code, with respect to
transactions involving the Trust's assets. Under the Plan Asset Regulation, the
term "equity interest" is defined as any interest in an entity other than an
instrument that is treated as indebtedness under "applicable local law" and
which has no "substantial equity features." Although the Plan Asset Regulation
is silent with respect to the question of which law constitutes "applicable
local law" for this purpose, Labor has stated that these determinations should
be made under the state law governing interpretation of the instrument in
question. In the preamble to the Plan Asset Regulation, Labor declined to
provide a precise definition of what features are equity features or the
circumstances under which such features would be considered "substantial,"
noting that the question of whether a plan's interest has substantial equity
features is an inherently factual one, but that in making a determination it
would be appropriate to take into account whether the equity features are such
that a Plan's investment would be a practical vehicle for the indirect
provision of investment management services. Based upon the terms of the Notes,
the opinion of Tax Counsel that the Notes will be classified as debt
instruments for Federal income tax purposes and the ratings which have been
assigned to the Notes, the Issuer expects that the Notes will not constitute
"equity interests" for purposes of the Plan Asset Regulation. However, if the
Notes are deemed nevertheless to be equity interests in the Trust and no
statutory, regulatory or administrative exception applies, the Trust could be
considered to hold plan assets by reason of a Plan's investment in the Notes.
REVIEW BY PLAN FIDUCIARIES
Any Plan fiduciary considering whether to purchase any Notes on behalf
of a Plan should consult with its counsel regarding the applicability of the
fiduciary responsibility and prohibited transaction provisions of ERISA and the
Code to such investment. Among other things, before purchasing any Notes, a
fiduciary of a Plan should make its own determination as to whether the Trust,
as obligor on the Notes, is a party in interest with respect to the Plan, the
availability of the relief provided in the Plan Asset Regulations and the
availability of any other prohibited transaction exemptions. Purchasers should
analyze whether the decision may have an impact with respect to purchases of
the Notes.
LEGAL INVESTMENT CONSIDERATIONS
Although, as a condition to their issuance, the Notes will be rated in
the highest rating category of the Rating Agencies, the Notes will not
constitute "mortgage related securities" for purposes of the Secondary Mortgage
Market Enhancement Act of 1984 ("SMMEA"), because not all of the Mortgages
securing the Mortgage Loans are first mortgages. Accordingly, many institutions
with legal authority to invest in comparably rated securities based on first
mortgage loans may not be legally authorized to invest in the Notes, which
because they evidence interests in a pool that includes junior mortgage loans
are not "mortgage related securities" under SMMEA. See "LEGAL INVESTMENT" in
the Prospectus.
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting
agreement, dated _________ __, 199__ (the "Underwriting Agreement"), between
the Depositor and J.P. Morgan Securities Inc. (the "Underwriter"), the
Depositor has agreed to sell to the Underwriter, and the Underwriter has agreed
to purchase from the Depositor the Notes offered hereby.
In the Underwriting Agreement, the Underwriter has agreed, subject to
the terms and conditions set forth therein, to purchase all the Notes offered
hereby if any of the Notes are purchased.
The Depositor has been advised by the Underwriter that they propose
initially to offer the Notes to the public in Europe and the United States at
the underwriting price set forth herein and to certain dealers at such, price,
less a discount not in excess of ____% of the Note denominations. The
Underwriter may allow and such dealers may reallow a discount not in excess of
___% of the Note denominations to certain other dealers. After the initial
public offering, the public offering price, such concessions and such discounts
may be changed.
The Depositor has been advised by the Underwriter that they presently
intend to make a market in the Notes offered hereby; however, the Underwriter
is not obligated to do so, any market-making may be discontinued at any time,
and there can be no assurance that an active public market for the Notes will
develop.
In connection with the offering, the Underwriter may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Securities. Specifically, the Underwriter may overallot the offering, crating a
syndicate short position. In addition, the Underwriter may bid for, and
purchase, the Securities in the open market to cover syndicate shorts or to
stabilize the price of the Securities. Any of these activities may stabilize or
maintain the market price of the Securities above independent market levels.
The Underwriter is not required to engage in these activities, and if
commenced, such activities may be discontinued at any time.
The Underwriting Agreement provides that the Depositor will indemnify
the Underwriter against certain civil liabilities, including liabilities under
the Securities Act of 1933, as amended.
LEGAL MATTERS
Certain legal matters with respect to the Notes will be passed upon
for the Depositor by Brown & Wood LLP, New York, New York and for the
Underwriters by Brown & Wood LLP, New York, New York. Certain legal matters
will be passed upon for the Insurer by _____________.
EXPERTS
The consolidated balance sheets of [Insurer] and its subsidiaries as
of December 31, 199__ and 199__ and the related consolidated statements of
income, changes in shareholder's equity, and cash flows for each of the three
years in the period ended December 31, 199__, incorporated by reference in this
Prospectus Supplement, have been incorporated herein in reliance on the report
of _________________, independent accountants, given on the authority of that
firm as experts in accounting and auditing.
RATINGS
It is a condition to issuance that the Notes be rated "____" by
__________ and _____ and "_____" by __________.
A securities rating addresses the likelihood of the receipt by
Noteholders of payments on the Mortgage Loans. The rating takes into
consideration the characteristics of the Mortgage Loans and the structural,
legal and tax aspects associated with the Notes. The ratings on the Notes do
not, however, constitute statements regarding the likelihood or frequency of
prepayments on the Mortgage Loans or the possibility that Noteholders might
realize a lower than anticipated yield.
The ratings assigned to the Notes will depend primarily upon the
creditworthiness of the Insurer. Any reduction in a rating assigned to the
claims-paying ability of the Insurer below the ratings initially assigned to
the Notes may result in a reduction of one or more of the ratings assigned to
the Notes.
A securities rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each securities rating should be evaluated
independently of similar ratings on different securities.
The information in this prospectus supplement is not complete and may be
changed. We may not sell these securities until the registration statement
filed with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities and it is not soliciting
an offer to buy these securities in any state where the offer or sale is not
permitted.
SUBJECT TO COMPLETION, DATED APRIL 28, 1999
To Prospectus dated _____________
$___________ (approximate)
Home Equity Loan Trust 199_
Home Equity Loan Asset-Backed Certificates, Series 199_
J.P. Morgan Acceptance Corporation I
as Depositor
---------------
as Seller and Master Servicer
The certificates represent obligations of the trust only and do not
represent an interest in or obligation of the Depositor, the Trustee or any of
their affiliates.
This prospectus supplement may be used to offer and sell the certificates
only if accompanied by the prospectus.
The Trust
o will issue [6] classes of senior Class A Certificates
o will issue a single Residual Certificate
o will make a REMIC election for federal income tax purposes
The Certificates
o represent the entire beneficial interest in a trust, whose assets are a
pool of closed-end fixed and adjustable rate mortgage loans consisting of
two loan groups
o currently have no trading market
o are not guaranteed
o are obligations of the trust only and are not obligations of the seller
and master servicer or its affiliates
Credit Enhancement
o will be provided in the form of [overcollateralization] and an
irrevocable and unconditional certificate guaranty insurance policy
issued by [certificate insurer]
REVIEW THE INFORMATION IN "RISK FACTORS" ON PAGE S-10 AND ON PAGE 5 IN THE
PROSPECTUS.
o For complete information about the Class A Certificates, read both this
prospectus supplement and the prospectus.
o J.P. Morgan Securities Inc., the Underwriter, will buy the Class A
Certificates from J.P. Morgan Acceptance Corporation I at a price equal
to ________ of their face value. The Underwriter will sell the Class A
Certificates from time to time in negotiated transactions.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE
J.P. Morgan & Co.
___________, 199_
THIS PROSPECTUS SUPPLEMENT DOES NOT CONTAIN COMPLETE INFORMATION ABOUT
THE OFFERING OF THE OFFERED CERTIFICATES. ADDITIONAL INFORMATION IS CONTAINED
IN THE PROSPECTUS, DATED _______, 199_ AND ATTACHED HERETO. PURCHASERS ARE
URGED TO READ BOTH THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS IN FULL.
SALES OF THE OFFERED CERTIFICATES HEREBY MAY NOT BE CONSUMMATED UNLESS THE
PURCHASER HAS RECEIVED BOTH THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS.
No dealer, salesman, or any other person has been authorized to give any
information or to make any representations other than those contained in this
prospectus supplement and the accompanying prospectus and if given or made,
such information or representations must not be relied upon as having been
authorized by the Depositor or the Underwriter. This prospectus supplement and
the accompanying prospectus shall not constitute an offer to sell or a
solicitation of an offer to buy any of the securities offered hereby in any
jurisdiction in which, or to any person to whom, it is unlawful to make such
offer or solicitation in such jurisdiction. The delivery of this prospectus
supplement and the accompanying prospectus at any time does not imply that the
information herein or therein is correct as of any time subsequent to the date
hereof.
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE OFFERED CERTIFICATES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS TO WHICH IT RELATES. THIS DELIVERY REQUIREMENT
IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT
AND PROSPECTUS WHEN ACTING AS UNDERWRITER AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
TABLE OF CONTENTS[To be Updated]
Page
Prospectus Supplement
Summary............................................... S-4
Risk Factors.......................................... S-10
The Certificate Insurer............................... S-13
The Seller and the Master Servicer.................... S-13
Description of the Mortgage Loans..................... S-14
Prepayment and Yield Considerations................... S-31
Description of the Certificates....................... S-36
Use of Proceeds....................................... S-57
Federal Income Tax Consequences....................... S-57
State Taxes........................................... S-59
ERISA Considerations.................................. S-60
Legal Investment Considerations....................... S-62
Underwriting.......................................... S-62
Experts............................................... S-63
Legal Matters......................................... S-63
Ratings............................................... S-63
Index of Defined Terms................................ S-64
Annex I............................................... S-65
Prospectus
Risk Factors.......................................... 5
The Trust Fund........................................ 7
Use of Proceeds.......................................25
The Depositor.........................................25
Description of the Securities.........................25
Credit Enhancement....................................43
Yield and Prepayment Considerations...................50
The Agreements........................................52
Material Legal Aspects of the Loans...................68
Federal Income Tax Consequences.......................84
State Tax Considerations..............................111
ERISA Considerations..................................111
Legal Investment......................................118
Method of Distribution................................119
Legal Matters.........................................120
Financial Information.................................120
Rating................................................120
Index of Defined Terms................................122
SUMMARY
This summary highlights selected information from this document and does
not contain all of the information that you need to consider in making your
investment decision. Please read this entire prospectus supplement and the
accompanying prospectus carefully for additional information about the Class A
Certificates.
Home Equity Loan Asset-Backed Certificates, Series 199_-_
Initial Class Last Scheduled
Class Certificate Rate Principal Balance (1) Distribution Date(2)
----- ---------------- ------------------ -------------------
Class A-1 % $ -
Class A-2 % $ -
Class A-3 % $ -
Class A-4 % $ -
Class A-5 % $ -
Class A-6 Variable(3) $ -
Class R N/A $0 -
(1) This amount is subject to a variance of 5%.
(2) We expect the actual last distribution date for each Class A Certificate
to be significantly earlier than its last scheduled distribution date.
(3) [Describe variable rate]
(4) The Class R Certificates are not offered pursuant to this prospectus
supplement and prospectus.
The Seller and Master Servicer
o ________________.
o _______________ maintains its principal office at _________________.
Its telephone number is (___) ___-____.
o The master servicer will receive a monthly fee from the interest
payments on the mortgage loans equal to __% per annum on the
principal balance of each mortgage loan.
We refer you to "THE SELLER" in this prospectus supplement for additional
information.
The Depositor
o J.P. Morgan Acceptance Corporation I.
o J.P. Morgan Acceptance Corporation I maintains its principal office
at 60 Wall Street, New York, New York 10260. Its telephone number is
(212) 648-7741.
We refer you to "THE DEPOSITOR" in this prospectus supplement for
additional information.
Trust Fund
o Home Equity Loan Trust 199_-_.
Trustee
o [----------------------------]
Certificate Insurer
o [------------------].
We refer you to "THE CERTIFICATE INSURER" in this prospectus supplement
for additional information.
Cut-Off Date
o ____________, 199_.
Closing Date
o ________________, 199_.
Distribution Date
o The 25th day of each month, or if such day is not a business day,
the next business day. The first distribution date is ___________
199_.
Due Period
o The calendar month immediately preceding a determination date or a
distribution date, as applicable.
Designations
o Offered Certificates - The Class A Certificates.
o Non-Offered Certificates - The Class R Certificates.
o Regular Certificates - All classes of certificates other than the
Class R Certificates.
o Residual Certificates - The Class R Certificates.
o Class A Certificates - Class A-1, Class A-2, Class A-3, Class A-4,
Class A-5 and Class A-6 Certificates.
o Fixed Rate or Group 1 Certificates - Class A-1, Class A-2, Class
A-3, Class A-4 and Class A-5 Certificates. These certificates will
receive their payments from loan group 1.
o Variable Rate or Group 2 Certificates - The Class A-6 Certificates.
These certificates will receive their payments from loan group 2.
o Loan Group 1 - Mortgage loans which bear interest at a fixed rate.
o Loan Group 2 - Mortgage loans which bear interest at an adjustable
rate.
Registration of Class A Certificates
We will issue the Class A Certificates in book-entry form. You will hold
your interests either through a depository in the United States or
through one of two depositories in Europe. While the certificates are
book-entry, they will be registered in the name of the applicable
depository, or in the name of the depository's nominee.
Transfers within any depository system will be made in accordance with
the usual rules and operating procedures of that system. Cross-market
transfers between two different depository systems may be made through a
third-party bank and/or the related depositories. The limited
circumstances under which definitive certificates will replace the
book-entry certificates are described in this prospectus supplement.
We refer you to "RISK FACTORS--Consequences on Liquidity and Payment
Delay Because of Owing Book-Entry Certificates", "DESCRIPTION OF THE
CERTIFICATES--Book-Entry Certificates" and "ANNEX I" in this prospectus
supplement for additional information.
Trust Fund Property
The trust fund property is held by the trustee for the benefit of the
certificateholders. The trust fund property includes:
o a pool of closed-end fixed and adjustable rate mortgage loans,
secured by first and second deeds of trust or mortgages on one- to
four-family residential properties;
o payments on the mortgage loans received on and after the cut-off date;
o property that secured a mortgage loan which has been acquired by
foreclosure or deed in lieu of foreclosure;
o rights under any hazard insurance policies covering the mortgaged
properties; and
o amounts on deposit in certain accounts described in this prospectus
supplement.
The Mortgage Loans
On the closing date, the trust fund will acquire a pool of fixed and
adjustable rate home equity loans, or "mortgage loans" with an aggregate
principal balance as of the cut-off date of $____________.
The mortgage loans will have the following characteristics as of the
cut-off date:
o number of mortgage loans: _______
o aggregate principal balance: $____________
o mortgaged property location: __ states and the District of Columbia
o loan rates range: _____% to _____%
o weighted average interest rate: _____% (approximate)
o weighted average remaining term to stated maturity, based on
principal balance: ___ months (approximate)
o term to stated maturity range: __ months to 360 months
o last maturity date: __________
o combined loan-to-value ratio range: _____% to _____% (approximate)
o balloon loans - loans with amortization schedules that don't fully
amortize by their maturity date: _____% (approximate)
The mortgage loans in loan group 1 will have the following
characteristics as of the cut-off date:
o number of mortgage loans: _______
o aggregate principal balance: $___________
o mortgaged property location: __ states and the District of Columbia
o average principal balance: $___________
o maximum principal balance: $___________
o interest rates range: _____% to ____%
o weighted average interest rate: _________% (approximate)
o weighted average remaining term to stated maturity, based on
principal balance: ___ months (approximate)
o term to stated maturity range: __ months to 360 months
o combined loan-to-value ratio range: ____% to _____% (approximate)
o balloon loans - loans with amortization schedules that don't fully
amortize by their maturity date: _____% (approximate)
The mortgage loans in loan group 2 will have the following
characteristics as of the cut-off date:
o number of mortgage loans: _______
o aggregate principal balance: $___________
o mortgaged property location: __ states and the District of Columbia
o average principal balance: $___________
o maximum principal balance: $___________
o interest rates range: _____% to ____%
o weighted average interest rate: _________% (approximate)
o weighted average remaining term to stated maturity, based on
principal balance: ___ months (approximate)
o term to stated maturity range: __ months to 360 months
o combined loan-to-value ratio range: ____% to _____% (approximate)
o weighted average combined loan-to-value ratio: ____% (approximate)
o balloon loans - loans with amortization schedules that don't fully
amortize by their maturity date: _____% (approximate)
o weighted average periodic cap: __%
o range of periodic caps: ___% to ___%.
We refer you to "DESCRIPTION OF THE MORTGAGE LOANS" in this prospectus
supplement for additional information.
Monthly Advances
If the master servicer reasonably believes that cash advances can be
recovered from future payments or collections on the mortgage loans, the
master servicer will make cash advances to the trust fund to cover
delinquent mortgage loan payments. The master servicer will make advances
only to maintain a regular flow of scheduled interest and principal
payments on the certificates, not to guarantee or insure against losses.
We refer you to "DESCRIPTION OF THE CERTIFICATES--Monthly Advances" in
this prospectus supplement for additional information.
The Certificates
1. General
o Each month the trustee will calculate the amount you are owed.
o If you hold a certificate on the last day of a calendar month, you
will be entitled to receive payments on the distribution date in the
next month.
We refer you to "DESCRIPTION OF THE CERTIFICATES" in this prospectus
supplement for additional information.
2. Interest Distributions
o Interest accrues on the group 1 certificates from the first day of a
calendar month through the last day of that calendar month.
o Interest accrues on the group 2 certificates from the distribution
date in the month prior to that distribution date through the day
before that distribution date.
On each distribution date, you will be entitled to the following:
o interest at the related certificate rate that accrued during the
related interest period; and
o any interest that was due on a prior distribution date and not paid.
In addition, interest will have accrued on the amount of interest
which was previously due and not paid.
We refer you to "DESCRIPTION OF THE CERTIFICATES--Interest" in this
prospectus supplement for additional information.
3. Principal Distributions
o Principal distributions are payable on each distribution date.
However, no class of group 1 certificates will receive a principal
distribution until the other classes with a lower numerical class
designation are paid in full.
o Shortfalls in available funds may result in a class receiving less
than what is due.
o The calculation of the amount a class is entitled to receive on each
distribution date and the priority of principal distributions among
the group 1 certificates is described in this prospectus supplement
under "DESCRIPTION OF THE CERTIFICATES --Principal."
We refer you to "DESCRIPTION OF THE CERTIFICATES--Principal" in this
prospectus supplement for additional information.
Credit Enhancements
1. The Certificate Insurance Policy: The Certificate Insurance Policy
guarantees the payment of:
o accrued and unpaid interest on the Class A Certificates;
o principal losses on the mortgage loans; and
o any principal amounts owed to the certificateholders on the last
scheduled distribution date.
We refer you to "THE CERTIFICATE INSURER" in this prospectus supplement
for additional information.
2. Overcollateralization: On the closing date the aggregate principal
balance of the mortgage loans in each group will equal the aggregate
principal balance of the certificates in the related certificate group.
The interest payments on the mortgage loans in each loan group are
expected to exceed the amount of interest due and payable on the
certificates in the related certificate group. This excess will be
applied as principal payments to the most senior Class A Certificate in
the related certificate group that is outstanding on that distribution
date. This will result in a limited acceleration of principal payments on
the certificates relative to the amortization of the related mortgage
loans, thereby creating overcollateralization for the Class A
Certificates. Once the required level of overcollateralization is
reached, the application of the excess interest payments will stop, until
it is again needed to maintain the required level of
overcollateralization.
The level of required overcollateralization will increase and decrease
over time. For example, an increase in the required level of
overcollateralization will result if the delinquency or default
experience on the mortgage loans exceeds certain set levels. In that
event, amortization of the Class A Certificates would be accelerated
until the level of overcollateralization reaches its required level.
We refer you to "DESCRIPTION OF THE CERTIFICATES--Overcollateralization"
in this prospectus supplement for additional information.
3. Crosscollateralization
The excess interest generated by one loan group may be used to fund
shortfalls on the certificates in the other loan group.
We refer you to "DESCRIPTION OF THE CERTIFICATES--Crosscollateralization"
in this prospectus supplement for additional information.
Pre-Funding Account
On the closing date, the trustee shall deposit $_______________ in the
group 1 pre-funding account and $_____________ in the group 2 pre-funding
account. The trust will use the amounts on deposit in the pre-funding
accounts to acquire additional mortgage loans for the related loan group
from the seller. The trustee may only acquire such additional mortgage
loans until _________________.
If any amounts are left in the pre-funding accounts on
___________________, holders of the group 1 certificates will receive
amounts left in the group 1 pre-funding account and holders of the group
2 certificates will receive amounts left in the group 2 pre-funding
account on the next distribution date as payment of principal.
We refer you to "DESCRIPTION OF THE CERTIFICATES--Pre-Funding Account" in
this prospectus supplement for additional information.
Capitalized Interest Account
On the closing date, the trustee shall deposit $_______________ in the
group 1capitalized interest account and $____________ in the group 2
capitalized interest account. The trust will use the amounts on deposit
in the capitalized interest accounts to cover interest shortfalls on the
certificates expected to occur prior to the trust's purchase of the
additional mortgage loans. Until the trust purchases the additional
mortgage loans or prepays the certificates, interest payments on the
loans will not cover the amount of interest due on the certificates.
Any amounts left in the capitalized interest account after
_______________ will be paid to Seller.
We refer you to "DESCRIPTION OF THE CERTIFICATES--Capitalized Interest
Account" in this prospectus supplement for additional information.
Optional Termination
If the total pool principal balance declines below __% of the total pool
principal balance as of the cut-off date, then the seller may purchase
all of the mortgage loans and the related properties in the trust fund.
If the seller purchases all of the mortgage loans, you will receive a
final distribution and the trust fund will be terminated.
We refer you to "DESCRIPTION OF THE CERTIFICATES--Termination; Purchase
of the Mortgage Loans" in this prospectus supplement for more detail.
Federal Tax Considerations
For federal income tax purposes:
o An election will be made to treat the trust fund as a "real estate
mortgage investment conduit" or REMIC
o The Class A Certificates will be "regular interests" in the REMIC
and will be treated as debt instruments of the REMIC
o The Class R Certificates will represent the beneficial ownership of
the sole class of "residual interest" in the REMIC.
We refer you to "CERTAIN FEDERAL INCOME TAX CONSIDERATIONS" in this
prospectus supplement and in this prospectus for additional information.
ERISA Considerations
The fiduciary responsibility provisions of the Employee Retirement Income
Security Act of 1974, or ERISA, can limit investments by certain pension
and other employee benefit plans. For example, the acquisition of certain
certificates may be considered a "prohibited transaction" under ERISA.
Certain exemptions from the prohibited transaction rules could be
applicable to the acquisition of the Class A Certificates. If you are a
fiduciary of a pension or other employee benefit plan which is subject to
ERISA, you should consult with your counsel regarding the applicability
of the provisions of ERISA and the tax code before purchasing a Class A
Certificate.
We refer you to "ERISA Considerations" in this prospectus supplement and
the prospectus for additional information.
Legal Investment Considerations
The Secondary Mortgage Market Enhancement Act of 1984 defines "mortgage
related securities" to include only first mortgages, and not second
mortgages. Because the pool of mortgage loans owned by the trust fund
includes second mortgage loans, the certificates will not be "mortgage
related securities" under that definition. Some institutions may be
limited in their legal investment authority to only first mortgages or
"mortgage related securities" and will be unable to invest in the Class A
Certificates.
We refer you to "LEGAL INVESTMENT CONSIDERATIONS" in this prospectus
supplement and "LEGAL INVESTMENT" in the prospectus for additional
information.
Certificate Rating
The Trust Fund will not issue the Class A Certificates unless they
receive the following ratings:
___ by _________________
___ by _________________
A rating is not a recommendation to buy, sell or hold securities and may
be subject to revision or withdrawal by either rating agency.
We refer you to "RATINGS" and "RISK FACTORS--Rating of the Securities" in
the prospectus for additional information.
RISK FACTORS
You should carefully consider the following risk factors prior to any
purchase of certificates. You should also carefully consider the information
set forth under "Risk Factors" in the prospectus.
Consequences on Liquidity and Payment Delay Because of Owning Book-Entry
Certificates
o Limit on Liquidity of Certificates. Issuance of certificates in
book-entry form may reduce the liquidity of such certificates in the secondary
trading market since investors may be unwilling to purchase certificates for
which they cannot obtain physical certificates.
o Limit on Ability to Transfer or Pledge. Since transactions in the
book-entry certificates can be effected only through DTC, participating
organizations, indirect participants and certain banks, your ability to
transfer or pledge a book-entry certificate to persons or entities that do not
participate in the DTC system or otherwise to take actions in respect of such
certificates, may be limited due to lack of a physical certificate
representing the book-entry certificates.
o Delays in Distributions. You may experience some delay in the receipt
of distributions on the book-entry certificates since the distributions will
be forwarded by the trustee to DTC for DTC to credit the accounts of its
participants which will thereafter credit them to your account either directly
or indirectly through indirect participants, as applicable.
We refer you to "DESCRIPTION OF THE CERTIFICATES--Book-Entry Certificate"
in this prospectus supplement.
Balloon Loan Risk
Balloon loans pose a risk because a borrower must pay a large lump sum
payment of principal at the end of the loan term. If the borrower is unable to
pay the lump sum or refinance such amount, you will suffer a loss if the
certificate insurer fails to perform its obligations under the policy.
Approximately ___% of the mortgage loans are balloon loans.
Delay in Receipt of Liquidation Proceeds; Liquidation Proceeds May Be
Less than Mortgage Loan Balance
Substantial delays could be encountered in connection with the
liquidation of delinquent mortgage loans. Further, liquidation expenses such
as legal fees, real estate taxes and maintenance and preservation expenses
will reduce the portion of liquidation proceeds payable to you. If a mortgaged
property fails to provide adequate security for the mortgage loan, you will
incur a loss on your investment if the certificate insurer fails to perform
its obligations under the certificate insurance policy.
We refer you to "CERTAIN LEGAL ASPECTS OF LOANS--Foreclosure" in the
prospectus.
Prepayments Affect Timing and Rate of Return on Your Investment
The yield to maturity on your certificates will be directly related to
the rate of principal payments on the mortgage loans. Please consider the
following:
o Mortgagors may fully or partially prepay their mortgage loan at any time.
However, some mortgage loans require that the mortgagor pay a fee with any
prepayment. This may result in the rate of prepayments being slower than
otherwise be the case.
o All the mortgage loans contain due-on-sale provisions. Due-on-sale
provisions require the mortgagor to fully pay the mortgage loan when the
mortgaged property is sold. Generally, the master servicer will enforce the
due-on-sale provision unless prohibited by applicable law.
o The rate of principal payments on pools of mortgage loans is influenced
by a variety of factors, including general economic conditions, interest
rates, the availability of alternative financing and homeowner mobility.
o We cannot predict the rate at which borrowers will repay their mortgage
loans, nor are we aware of any publicly available studies or statistics on the
rate of prepayment of mortgage loans similar to the mortgage loans in the
pool.
We refer you to "PREPAYMENT AND YIELD CONSIDERATIONS" in this prospectus
supplement.
Certificate Rating Based Primarily on Claims-Paying Ability of the
Certificate Insurer
The rating on the certificates depends primarily on the claims paying
ability of the certificate insurer. Therefore, a reduction of the rating
assigned to the claims-paying ability of the certificate insurer may have a
corresponding reduction on the ratings assigned to the certificates. A
reduction in the rating assigned to the certificates would reduce the market
value of the certificates and may affect your ability to sell them. In
general, the rating on your certificate addresses credit risk and does not
address the likelihood of prepayments.
We refer you to "Ratings" in this prospectus supplement.
Lien Priority Could Result in Payment Delay and Loss
Some of the mortgage loans are secured by mortgages which are junior in
priority. For mortgage loans in the trust fund secured by first mortgages, the
master servicer may consent under certain circumstances to a new first
priority lien regardless of the principal amount, which has the effect of
making the first mortgage a junior mortgage. Mortgage loans that are secured
by junior mortgages will receive proceeds from a sale of the related mortgaged
property only after any senior mortgage loans and prior statutory liens have
been paid. If the remaining proceeds are insufficient to satisfy the mortgage
loan in the trust fund and the certificate insurer fails to perform its
obligations under the policy, then:
o there will be a delay in distributions to you while a deficiency
judgment against the borrower is sought; and
o you may incur a loss if a deficiency judgment cannot be obtained.
Distributions and Rights of Investors Adversely Affected by Insolvency of Seller
The sale of the mortgage loans from the seller to the depositor will be
treated by the seller and the depositor as a sale of the mortgage loans. The
sale of the mortgage loans from the depositor to the trust will be treated by
the depositor and the trust as a sale of the mortgage loans. If the seller
were to become insolvent, a receiver or conservator for, or a creditor of, the
seller, may argue that the transaction between the seller and the depositor is
a pledge of mortgage loans as security for a borrowing rather than a sale.
Such an attempt, even if unsuccessful, could result in delays in distributions
to you.
Interest Payments on the Mortgage Loans May Be Reduced
o Prepayments of Principal May Reduce Interest Payments. If a mortgagor
fully prepays a mortgage loan, the mortgagor is charged interest only up to
the date of the prepayment, instead of a full month. This may result in an
interest shortfall. The master servicer is obligated to pay that interest
shortfall, without any right of reimbursement, up to the amount of its
servicing fee for that month. If the servicing fee is insufficient to pay such
interest shortfalls attributed to prepayments, they will be covered by the
certificate insurance policy.
o Certain Interest Shortfalls Are Not Covered by the Master Servicer or
the Certificate Insurance Policy. The Soldiers' and Sailors' Civil Relief Act
of 1940 permits certain modifications to the payment terms for mortgage loans,
including a reduction in the amount of interest paid by the borrower, under
certain circumstances. Neither the master servicer nor the certificate insurer
will pay for any interest shortfalls created by the Soldiers' and Sailors'
Civil Relief Act of 1940.
[Risk of Losses as a Result of Geographic Concentration
The mortgaged properties relating to the mortgage loans are located in __
states and the District of Columbia. However, __% of the mortgaged properties
(by principal balance as of the cut-off date) are located in _______. If
____________ experiences in the future weaker economic conditions or greater
rates of decline in real estate values than the United States generally then,
the mortgage loans may experience higher rates of delinquencies and
foreclosures than would otherwise be the case.]
[Risk of Prepayment Due to Subsequent Mortgage Loans
The trust will buy additional mortgage loans from the seller until
_______. The seller will sell mortgage loans to the trust if it has mortgage
loans to sell. The ability of the seller to originate and acquire additional
mortgage loans is affected by a variety of factors, including interest rates,
unemployment levels, the rate of inflation and consumer perception of economic
conditions generally. If the full amount deposited in the pre-funding accounts
for the purpose of purchasing additional mortgage loans cannot be used for
that purpose within [three] months from the closing date, any remaining
amounts will be paid to you as a prepayment on the certificates.]
Risks Associated With Year 2000 Compliance
As is the case with most companies using computers in their operations,
the master servicer is faced with the task of preparing for year 2000. The
year 2000 issue is the result of prior computer programs being written using
two digits, rather than four digits, to define the applicable year. Any of the
master servicer's computer programs that have time-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. Major
computer system failure or miscalculations may occur as a result. The master
servicer is presently engaged in various procedures to ensure that their
computer systems and software will be year 2000 compliant.
However, if the master servicer or any of its suppliers, customers,
brokers or agents do not successfully and timely achieve year 2000 compliance,
the performance of obligations of the master servicer could be materially
adversely affected. This could result in delays in processing payments on the
mortgage loans and cause a related delay in distributions to you.
THE CERTIFICATE INSURER
The information set forth in this section have been provided by the
Certificate Insurer. No representation is made by the Underwriter, the
Depositor, the Seller, the Master Servicer or any of their affiliates as to
the accuracy or completeness of any such information.
[Description of the Certificate Insurer]
THE SELLER AND THE MASTER SERVICER
______________ ("__________"), as Master Servicer (the "Master Servicer")
will be responsible for servicing the Mortgage Loans for the Trust Fund in
accordance with the terms of the pooling and servicing agreement (the
"Agreement") to be dated as of _____, 199_, among J.P. Morgan Acceptance
Corporation I, as depositor (the "Depositor"), _____________, as seller (the
"Seller") and master servicer, and ________, as trustee (the "Trustee"). See
"--Servicing and Collection Procedures."
Credit and Underwriting Guidelines
The following is a description of the underwriting guidelines customarily
employed by the Seller with respect to Mortgage Loans which it purchases or
originates. Each Mortgage Loan was underwritten according to these guidelines.
[Description of Credit and Underwriting Guidelines]
Servicing and Collection Procedures
The following is a description of the servicing policies and procedures
customarily and currently employed by the Master Servicer with respect to the
portion of its mortgage loan portfolio which it services. The Master Servicer
intends to service the Mortgage Loans in accordance with these policies and
procedures and in accordance with the Agreement.
[Description of Servicing and Collection Procedures]
Delinquency Experience of the Master Servicer's Portfolio of Home Equity
Lines of Credit
The following table sets forth information relating to the delinquency
experience of mortgage loans similar to and including the Mortgage Loans for
the ___ months ended _________, 199_, and the years ended December 31, 199_,
December 31, 199_ and December 31, 199_.
<TABLE>
<CAPTION>
Year Ended
--------------------------------------------------------------------------------------------------------------
December 31, 199_ December 31, 199_ December 31, 199_ December 31, 199_
----------------------- --------------------------- ---------------------- ---------------------------
Number of Dollar Number of Number of Dollar Number of Dollar
Loans Amount(4) Loans Dollar Amount(4) Loans Amount(4) Loans Amount(4)
--------- -------- --------- ---------------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Portfolio..... (3) $ (3) $ $
Delinquency
Percentage(1) (3) (3) (3) % %
30-59 days...
60-89....... (3) (3) % %
90 days or (3) (3) % %
more(2)...
TOTAL......... (3) % (3) % % %
____ Months Ended
30, 199_
-------------------------
Number of Dollar
Loans Amount(4)
------------- -----------
Portfolio..... $
Delinquency
Percentage(1) % %
30-59 days...
60-89....... % %
90 days or % %
more(2)...
TOTAL......... % %
</TABLE>
- ------------------------------
(1)The delinquency percentage represents the number and principal balance of
mortgage loans with monthly payments which are contractually past due.
Mortgage loans for which the related borrower has declared bankruptcy are not
included unless or until such loans are delinquent pursuant to their repayment
terms.
(2) Includes the principal balance of loans currently in process of
foreclosure and loans acquired through foreclosure or deed in lieu of
foreclosure.
(3)Insufficient information available.
(4)Dollar amounts rounded to the nearest $1,000.
Charge-Off Experience of the Master Servicer's Portfolio of Home Equity
Lines of Credit
The following table sets forth information relating to the loan
charge-off experience of mortgage loans similar to and including the Mortgage
Loans for the ____ months ended ____________, 199_, and the years ended
December 31, 199_, December 31, 199_ and December 31, 199_.
<TABLE>
<CAPTION>
Year Ended
------------------------------------------------------------------------------
Months-Ended
------------
December 31, 199_ December 31, 199_ December 31, 199_ December 31, 199_ ______, 199_
----------------- ----------------- ----------------- ----------------- ------------
<S> <C> <C> <C> <C> <C>
Average Portfolio Balance(1)...... $ $ $ $ $
Charge-Offs (2)................... $ $ $ $ $
Charge-Offs as a % % % % % %(3)
of Average Portfolio
Balance..........................
</TABLE>
- -------------------
(1)"Average Portfolio Balance" during the period is the arithmetic average of
the principal balances of the mortgage loans outstanding on the first and last
days of each period. The Average Portfolio Balance has been rounded to the
nearest $1,000.
(2)"Charge-Offs" are amounts which have been determined by the Master Servicer
to be uncollectible relating to the mortgage loans for each respective period
and do not include any amount of collections or recoveries received by the
Master Servicer subsequent to charge-off dates. The Master Servicer's policy
regarding charge-offs provides that mortgaged properties are reappraised when
a mortgage loan has been delinquent for 180 days and based upon such
appraisals, a decision is then made concerning the amounts determined to be
uncollectible.
(3)Annualized.
DESCRIPTION OF THE MORTGAGE LOANS
General
The statistical information presented in this prospectus supplement (the
"Prospectus Supplement") is only with respect to the Mortgage Loans and
describes the Mortgage Loans in loan group 1 ("Loan Group 1") and the Mortgage
Loans in loan group 2 ("Loan Group 2" and each, a "Loan Group") and is based
on the characteristics of such Loan Group as of _______, 199_, (the "Cut-Off
Date").
The Mortgage Loans are divided into two Loan Groups. Loan Group 1
consists of Mortgage Loans with fixed interest rates. Loan Group 2 consists of
Mortgage Loans with adjustable interest rates. With respect to any date, the
"Loan Group 1 Principal Balance" and the "Loan Group 2 Principal Balance" will
be equal to the aggregate of the Principal Balances of all Mortgage Loans in
Loan Group 1 and Loan Group 2, respectively, as of such date. The Loan Group 1
Principal Balance and the Loan Group 2 Principal Balance are each sometimes
referred to herein as a "Loan Group Principal Balance."
The Mortgage Loans to be purchased by the Trust Fund will be originated
or purchased by the Seller and sold by the Seller to the Depositor and
transferred by the Depositor to the Trust Fund.
The mortgage pool (the "Mortgage Pool") consists of mortgage loans (the
"Mortgage Loans") with an aggregate Principal Balance as of the Cut-Off Date
of $______________ (the "Cut-Off Date Pool Principal Balance"). The "Principal
Balance" of a Mortgage Loan (other than a Liquidated Mortgage Loan) on any day
is equal to its Cut-Off Date Principal Balance minus all collections applied
in reduction of the Cut-Off Date Principal Balance of such Mortgage Loan. With
respect to any date, the "Pool Principal Balance" will be equal to the
aggregate of the Principal Balances of all the Mortgage Loans as of such date.
The Mortgage Pool consists of fixed and adjustable rate mortgage loans with
remaining terms to stated maturity of not more than ___ months (including both
fully amortizing and Balloon Loans). Approximately ___% of the Mortgage Loans
(by Cut-Off Date Pool Principal Balance) were 30 to 59 days delinquent. No
Mortgage Loan was more than 59 days delinquent as of the Cut-Off Date. With
respect to the Mortgage Loans, the average Cut-Off Date Principal Balance was
$_______, and the minimum Cut-Off Date Principal Balance was $______, the
maximum Cut-Off Date Principal Balance was $______. Interest on each Mortgage
Loan is payable monthly on the outstanding Principal Balance thereof at a rate
per annum ("Loan Rate") specified in the related Mortgage Note. The minimum
Loan Rate and the maximum Loan Rate on the Cut-Off Date were % and % per
annum, respectively, and the weighted average Loan Rate as of the Cut-Off Date
was % per annum. The weighted average Loan-to-Value Ratio (as defined herein)
of the Mortgage Loans was % as of the Cut-Off Date. Approximately ___% of the
Mortgage Loans (by Cut-Off Date Pool Principal Balance) are Balloon Loans.
"Balloon Loans" are mortgage loans in which borrowers are not required to make
monthly payments of principal that will fully amortize such mortgage loan by
their maturity. Each Mortgage Loan was originated on or after____. The
remaining terms to stated maturity as of the Cut-Off Date of the Mortgage
Loans range from ____ months to ____ months; the weighted average remaining
term to stated maturity of the Mortgage Loans as of the Cut-Off Date is _____
months. In no event will more than 5% of the Cut-Off Date Pool Principal
Balance of the Mortgage Pool deviate from the characteristics of the Mortgage
Loans described herein.
The Mortgage Loans provide that interest is charged to the borrowers
thereunder, and payments are due from such borrowers, as of a scheduled day of
each month which is fixed at the time of origination. Scheduled monthly
payments made by the borrowers on the Mortgage Loans either earlier or later
than the scheduled due dates thereof will not affect the amortization schedule
or the relative application of such payments to principal and interest.
Loan Group 1 Statistics
The sum of the columns below may not equal the total indicated due to
rounding. In addition, unless otherwise set forth herein, all percentages setS
forth herein with respect to the Mortgage Loans in Loan Group 1 are
percentages of the Cut-Off Date Loan Group 1 Principal Balance.
The Mortgage Loans in Loan Group 1 consist of ___ loans, and the related
mortgaged properties (the "Mortgaged Properties") are located in __ states and
the District of Columbia. As of the Cut-Off Date, the Mortgage Loans in Loan
Group 1 had an aggregate Principal Balance of $__________ (the "Cut-Off Date
Loan Group 1 Principal Balance"), the maximum Principal Balance of any of the
Mortgage Loans in Loan Group 1 was $__________, the minimum Principal Balance
thereof was $________, and the Principal Balance of such Mortgage Loans
averaged $_________. As of the Cut-Off Date, the Loan Rates on the Mortgage
Loans in Loan Group 1 ranged from ____% to _____% per annum, and the weighted
average Loan Rate for Mortgage Loans in Loan Group 1 was ______% per annum. As
of the Cut-Off Date, the original term to stated maturity of each Mortgage
Loans in Loan Group 1 was ___ months, the remaining term to stated maturity
ranged from ___ months to ___ months, the weighted average remaining term to
stated maturity was ___ months and the Loan-to-Value Ratio (as defined below)
ranged from % to % with a weighted average Loan-to-Value Ratio of %. All of
the Mortgage Loans in Loan Group 1 are secured by first liens. % of the
Mortgage Loans in Loan Group 1 require monthly payments of principal that will
fully amortize such Mortgage Loans by their respective maturity dates, and %
of the Mortgage Loans in Loan Group 1 are Balloon Loans.
CUT-OFF DATE LOAN GROUP 1 PRINCIPAL BALANCES
Range of Cut-Off Cut-Off Date % of Cut-Off Date
Date Principal Number of Loan Group 1 Loan Group 1
Balance Mortgage Loans Principal Balance Principal Balance
- ---------------- -------------- ----------------- -----------------
GEOGRAPHIC DISTRIBUTION BY STATE(1)
LOAN GROUP 1
Cut-Off Date % of Cut-Off Date
Number of Loan Group 1 Loan Group 1
State Mortgage Loans Principal Balance Principal Balance
- ----- -------------- ----------------- -----------------
LOAN-TO-VALUE RATIOS(1)
LOAN GROUP 1
Cut-Off Date % of Cut-Off Date
Number of Loan Group 1 Loan Group 1
Loan-to-Value Ratio Mortgage Loans Principal Balance Principal Balance
- ------------------- -------------- ----------------- -----------------
- ------------------------------------------------------------------------------
(1) The Loan-to-Value Ratios ("Loan-to-Value Ratio") shown above are equal,
with respect to each Mortgage Loan, to (i) the original principal balance
of such Mortgage Loan at the date of origination divided by (ii) the
lesser of (a) the value of the related Mortgaged Property, based upon the
appraisal made at the time of origination of such Mortgage Loan or (b)
the purchase price of such Mortgaged Property if the Mortgage Loan
proceeds from such Mortgage Loan are used to purchase such Mortgaged
Property.
LOAN RATES
LOAN GROUP 1
Cut-Off Date % of Cut-Off Date
Number of Loan Group 1 Loan Group 1
Loan Rates Mortgage Loans Principal Balance Principal Balance
- ---------- -------------- ----------------- ------------------
ORIGINAL TERM TO STATED MATURITY
LOAN GROUP 1
Cut-Off Date % of Cut-Off Date
Original Term to Number of Loan Group 1 Loan Group 1
Stated Maturity Mortgage Loans Principal Balance Principal Balance
- ---------------- -------------- ----------------- -----------------
REMAINING MONTHS TO STATED MATURITY
LOAN GROUP 1
Cut-Off Date % of Cut-Off Date
Remaining Term to Number of Loan Group 1 Loan Group 1
Stated Maturity Mortgage Loans Principal Balance Principal Balance
- ----------------- -------------- ----------------- -----------------
MONTHS SINCE ORIGINATION
LOAN GROUP 1
Cut-Off Date % of Cut-Off Date
Months since Number of Loan Group 1 Loan Group 1
Origination Mortgage Loans Principal Balance Principal Balance
- ------------ -------------- ----------------- -----------------
PROPERTY TYPE
LOAN GROUP 1
Cut-Off Date % of Cut-Off Date
Number of Loan Group 1 Loan Group 1
Property Type Mortgage Loans Principal Balance Principal Balance
- ------------- -------------- ----------------- -----------------
OCCUPANCY TYPE
LOAN GROUP 1
Cut-Off Date % of Cut-Off Date
Number of Loan Group 1 Loan Group 1
Occupancy Type Mortgage Loans Principal Balance Principal Balance
- -------------- -------------- ----------------- -----------------
[Conveyance of Subsequent Mortgage Loans
The Agreement permits the Trust Fund to purchase from the Seller,
subsequent to the date hereof and prior to _______, 19__, Subsequent Mortgage
Loans in an amount not to exceed approximately $________ in aggregate
principal balance for inclusion in the Trust Fund. Each Subsequent Mortgage
Loan will have been originated or purchased by the Seller in accordance with
the underwriting guidelines set forth above under "Underwriting and Credit
Guidelines." Accordingly, the statistical characteristics of the Mortgage Pool
set forth above are based exclusively on the Initial Mortgage Loans and the
statistical characteristics of the Mortgage Pool after giving effect to the
acquisition of any Subsequent Mortgage Loans will likely differ from the
information specified herein. The date on which the Seller transfers a
Subsequent Mortgage Loan to the Trust Fund shall be referred to herein as the
"Subsequent Transfer Date".
In any event, each conveyance of Subsequent Mortgage Loans will be
subject to, among other things, the following conditions: (i) such Subsequent
Mortgage Loans must (a) satisfy the eligibility criteria set forth in the
prospectus (the "Prospectus") under "The Loan Program--Representations by
Sellers; Repurchases" and (b) comply with each representation and warranty as
to the Mortgage Loans set forth in the Agreement; (ii) such Subsequent
Mortgage Loan must not have been selected by the Seller in a manner that it
believes is adverse to the interests of the Certificateholders, (iii) no
Subsequent Mortgage Loan may be ___ or more days contractually delinquent as
of the applicable Cut-Off Date; (iv) no Subsequent Mortgage Loan may have a
remaining term to maturity in excess of ___ years; (v) no Subsequent Mortgage
Loan may have a Mortgage Rate less than ____%; (vi) following the purchase of
such Subsequent Mortgage Loans by the Trust Fund, the Mortgage Loans (a) will
have a weighted average Mortgage Rate of at least ____%; (b) will have a
weighted average Loan-to-Value Ratio of not more than ____%; (c) will not have
a weighted average remaining term to stated maturity of more than ____ months;
and (d) will, in each case, have a principal balance in excess of $_______ as
of the Cut-Off Date; (vii) the Seller [, the Depositor and the Trustee shall
not have been notified by either Rating Agency that the conveyance of such
Subsequent Mortgage Loans will result in a qualification, modification or
withdrawal of its then-current rating of any class of Certificates] [shall
have notified each Rating Agency of such conveyance as required by the
Agreement]; and (viii) the Trustee shall have received certain opinions of
counsel as to, among other things, the enforceability and validity of the
transfer agreements relating to such conveyance of such Subsequent Mortgage
Loans.] All Subsequent Mortgage Loans shall be added from a specified group of
Mortgage Loans.]
Loan Group 2 Statistics
The sum of the columns below may not equal the total indicated due to
rounding. In addition, unless otherwise set forth herein, all percentages set
forth herein with respect to the Mortgage Loans in Loan Group 2 are
percentages of the Cut-Off Date Loan Group 2 Principal Balance.
The Mortgage Loans in Loan Group 2 bear interest rates that adjust based
on the London interbank offered rate for six-month United States dollar
deposits.
The Mortgage Loans in Loan Group 2 consist of _____ loans, and the
related Mortgaged Properties are located in 22 states and the District of
Columbia. As of the Cut-Off Date, the Mortgage Loans in Loan Group 2 had an
aggregate Principal Balance of $______________ (the "Cut-Off Date Loan Group 2
Principal Balance"), the maximum Principal Balance of any of the Mortgage
Loans in Loan Group 2 was $__________, the minimum Principal Balance thereof
was $________ and the Principal Balance of such Mortgage Loans averaged
$_________. As of the Cut-Off Date, the Loan Rates on the Mortgage Loans in
Loan Group 2 ranged from ____% to _____% per annum, and the weighted average
Loan Rate for Mortgage Loans in Loan Group 2 was _____% per annum. As of the
Cut-Off Date, the original term to stated maturity of the Mortgage Loans in
Loan Group 2 was ___ months, the remaining term to stated maturity ranged from
___ months to ___ months, the weighted average remaining term to stated
maturity was ___ months and the Loan-to-Value Ratio (as defined below) ranged
from % to % with a weighted average Loan-to-Value Ratio of %. The Mortgage
Loans in Loan Group 2 had stated maturities ranging from to . [All] of the
Mortgage Loans in Loan Group 2 require monthly payments of principal that will
fully amortize such Mortgage Loans by their respective maturity dates. All of
the Mortgage Loans in Loan Group 2 have Loan Rates which adjust semi-annually.
All of the Mortgage Loans in Loan Group 2 have minimum and maximum Loan Rates.
The weighted average minimum Loan Rate of the Mortgage Loans in Loan Group 2
is approximately % per annum, with minimum Loan Rates that range from
approximately % per annum to % per annum. The weighted average maximum Loan
Rate of the Mortgage Loans in Loan Group 2 is approximately % per annum, with
maximum Loan Rates that range from approximately % per annum to % per annum.
The Mortgage Loans in Loan Group 2 have a weighted average gross margin of
approximately % per annum, with gross margins that range from approximately %
per annum to % per annum. The Mortgage Loans in Loan Group 2 have a weighted
average periodic cap of approximately % per annum, with periodic caps that
range from approximately % per annum to % per annum. % of the Mortgage Loans
in Loan Group 2 adjust after [one] year; % of the Mortgage Loans in Loan Group
2 adjust after [three] years; % of the Mortgage Loans in Loan Group 2 adjust
after [five] years. The weighted average number of months to the next reset
date of the Mortgage Loans in Loan Group 2 is approximately , with a maximum
number of months of and a minimum number of months of .
CUT-OFF DATE LOAN GROUP 2 PRINCIPAL BALANCES
Range of Cut-Off Date % of Cut-Off Date
Cut-Off Date Number of Loan Group 2 Loan Group 2
Principal Balances Mortgage Loans Principal Balance Principal Balance
- ------------------ -------------- ----------------- -----------------
GEOGRAPHIC DISTRIBUTION BY STATE(1)
LOAN GROUP 2
Cut-Off Date % of Cut-Off Date
Number of Loan Group 2 Loan Group 2
State Mortgage Loans Principal Balance Principal Balance
- ----- -------------- ----------------- -----------------
- -----------------------------------------------------------------------------
(1) Determined by property address designated as such in the related Mortgage.
LOAN-TO-VALUE RATIOS(1)
LOAN GROUP 2
Cut-Off Date % of Cut-Off Date
Number of Loan Group 2 Loan Group 2
Loan-to-Value Ratio Mortgage Loans Principal Balance Principal Balance
- ------------------- -------------- ----------------- -----------------
- ------------------------------------------------------------------------------
(1) The Loan-to-Value Ratios ("Loan-to-Value Ratio") shown above are equal,
with respect to each Mortgage Loan, to (i) the original principal balance
of such Mortgage Loan at the date of origination divided by (ii) the
lesser of (a) the value of the related Mortgaged Property, based upon the
appraisal made at the time of origination of such Mortgage Loan orS (b)
the purchase price of such Mortgaged Property if the Mortgage Loan
proceeds from such Mortgage Loan are used to purchase such Mortgaged
Property.
LOAN RATES
LOAN GROUP 2
Cut-Off Date % of Cut-Off Date
Number of Loan Group 2 Loan Group 2
Loan Rates Mortgage Loans Principal Balance Principal Balance
- ---------- -------------- ----------------- -----------------
ORIGINAL TERM TO STATED MATURITY
LOAN GROUP 2
Cut-Off Date % of Cut-Off Date
Original Term to Number of Loan Group 2 Loan Group 2
Stated Maturity Mortgage Loans Principal Balance Principal Balance
- ---------------- -------------- ----------------- -----------------
REMAINING MONTHS TO STATED MATURITY
LOAN GROUP 2
Cut-Off Date % of Cut-Off Date
Remaining Term to Number of Loan Group 2 Loan Group 2
Stated Maturity Mortgage Loans Principal Balance Principal Balance
- ----------------- -------------- ----------------- -----------------
MONTHS SINCE ORIGINATION
LOAN GROUP 2
Cut-Off Date % of Cut-Off Date
Months Since Number of Loan Group 2 Loan Group 2
Origination Mortgage Loans Principal Balance Principal Balance
- ------------ -------------- ----------------- -----------------
PROPERTY TYPE
LOAN GROUP 2
Cut-Off Date % of Cut-Off Date
Number of Loan Group 2 Loan Group 2
Property Type Mortgage Loans Principal Balance Principal Balance
- ------------- -------------- ----------------- -----------------
OCCUPANCY TYPE
LOAN GROUP 2
Cut-Off Date % of Cut-Off Date
Number of Loan Group 2 Loan Group 2
Occupancy Type Mortgage Loans Principal Balance Principal Balance
- -------------- -------------- ----------------- -----------------
MARGIN
LOAN GROUP 2
Cut-Off Date % of Cut-Off Date
Number of Loan Group 2 Loan Group 2
Margin Mortgage Loans Principal Balance Principal Balance
- ------ -------------- ----------------- -----------------
LIFETIME CAP
LOAN GROUP 2
Cut-Off Date % of Cut-Off Date
Number of Loan Group 2 Loan Group 2
Lifetime Cap Mortgage Loans Principal Balance Principal Balance
- ------------ -------------- ----------------- -----------------
FLOOR
LOAN GROUP 2
Cut-Off Date % of Cut-Off Date
Number of Loan Group 2 Loan Group 2
Floor Mortgage Loans Principal Balance Principal Balance
- ----- -------------- ----------------- -----------------
PREPAYMENT AND YIELD CONSIDERATIONS
General
The rate of principal payments on the Class A Certificates, the aggregate
amount of distributions on the Class A Certificates and the yield to maturity
of the Class A Certificates will be related to the rate and timing of payments
of principal on the Mortgage Loans in the related Loan Group. The rate of
principal payments on the Mortgage Loans will in turn be affected by the
amortization schedules of the Mortgage Loans and by the rate of principal
prepayments (including for this purpose prepayments resulting from
refinancing, liquidations of the Mortgage Loans due to defaults, casualties,
condemnations and repurchases by the Seller). The Mortgage Loans may be
prepaid by the Mortgagors at any time. However, approximately __% of the
Mortgage Loans are subject to prepayment penalties which vary from
jurisdiction to jurisdiction.
Prepayments, liquidations and purchases of the Mortgage Loans in a Loan
Group (including any optional purchase by the Master Servicer of the remaining
Mortgage Loans in connection with the termination of the Trust Fund) will
result in distributions on the related Class A Certificates of principal
amounts which would otherwise be distributed over the remaining terms of such
Mortgage Loans. Since the rate of payment of principal of the Mortgage Loans
will depend on future events and a variety of factors, no assurance can be
given as to such rate or the rate of principal prepayments. The extent to
which the yield to maturity of a Class A Certificate may vary from the
anticipated yield will depend upon the degree to which a Certificate is
purchased at a discount or premium, and the degree to which the timing of
payments thereon is sensitive to prepayments, liquidations and purchases of
such Mortgage Loans.
The rate of prepayment on the Mortgage Loans cannot be predicted. The
prepayment experience of the Trust Fund with respect to the Mortgage Loans may
be affected by a wide variety of factors, including economic conditions,
prevailing interest rate levels, the availability of alternative financing and
homeowner mobility and changes affecting the deductibility for Federal income
tax purposes of interest payments on loans. All of the Mortgage Loans contain
"due-on-sale" provisions, and, with respect to the Mortgage Loans, the Master
Servicer is required by the Agreement to enforce such provisions, unless such
enforcement is not permitted by applicable law. The enforcement of a
"due-on-sale" provision will have the same effect as a prepayment of the
related Mortgage Loan. See "CERTAIN LEGAL ASPECTS OF LOANS--Due-on-Sale
Clauses in Mortgage Loans" in the Prospectus.
As with fixed rate obligations generally, the rate of prepayment on a
pool of mortgage loans with fixed rates such as the Mortgage Loans in the Loan
Group 1 is affected by prevailing market rates for mortgage loans of a
comparable term and risk level. When the market interest rate is below the
interest rate on a mortgage, mortgagors may have an increased incentive to
refinance their mortgage loans. Depending on prevailing market rates, the
future outlook for market rates and economic conditions generally, some
mortgagors may sell or refinance mortgaged properties in order to realize
their equity in the mortgaged properties, to meet cash flow needs or to make
other investments.
All of the Mortgage Loans in the Loan Group 2 are adjustable-rate
mortgage loans. As is the case with conventional fixed-rate mortgage loans,
adjustable-rate mortgage loans may be subject to a greater rate of principal
prepayments in a declining interest rate environment. For example, if
prevailing interest rates fall significantly, adjustable-rate mortgage loans
could be subject to higher prepayment rates than if prevailing interest rates
remain constant because the availability of fixed-rate mortgage loans at
competitive interest rates may encourage mortgagors to refinance their
adjustable-rate mortgage loans at competitive interest rates may encourage
mortgagors to refinance their adjustable-rate mortgage loans to "lock in" a
lower fixed interest rate. However, no assurance can be given as to the level
of prepayments that the Mortgage Loans will experience.
In addition to the foregoing factors affecting the weighted average life
of the Class A Certificates, the use of Excess Spread to pay principal of the
Class A Certificates of the related Certificate Group to the extent required
by the Agreement will result in the acceleration of the Class ___ and Class
___ Certificates, as applicable, relative to the amortization of the Mortgage
Loans in the related Loan Group in early months of the transaction as well as,
with respect to Group 1 Certificates, accelerating the first date on which
each other Class of Group 1 Certificates will begin to receive distributions
of principal than would otherwise be the case. This acceleration feature
creates overcollateralization which results from the excess of the aggregate
Principal Balance of Mortgage Loans in a Loan Group over the Aggregate Class A
Principal Balance of the related Certificate Group. Once the required level of
overcollateralization for a Certificate Group is reached, the acceleration
feature for such Certificate Group will cease, unless necessary to maintain
the required level of overcollateralization for such Certificate Group. See
"DESCRIPTION OF THE CERTIFICATES--Overcollateralization Provisions."
Weighted Average Lives
Generally, greater than anticipated prepayments of principal will
increase the yield on the Class A Certificates purchased at a price less than
par and will decrease the yield on the Class A Certificates purchased at a
price greater than par. The effect on an investor's yield due to principal
prepayments on the Mortgage Loans occurring at a rate that is faster (or
slower) than the rate anticipated by the investor in the period immediately
following the issuance of the Certificates will not be entirely offset by a
subsequent like reduction (or increase) in the rate of principal payments. The
weighted average life of the Class A Certificates will also be affected by the
amount and timing of delinquencies and defaults on the Mortgage Loans and the
recoveries, if any, on defaulted Mortgage Loans and foreclosed properties.
The "weighted average life" of a Certificate refers to the average amount
of time that will elapse from the date of issuance to the date each dollar in
respect of principal of such Certificate is repaid. The weighted average life
of any class of Class A Certificates will be influenced by, among other
factors, the rate at which principal payments are made on the Mortgage Loans,
including, with respect to the Group 1 Certificates, final payments made upon
the maturity of Balloon Loans.
Prepayments on Mortgage Loans are commonly measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement is
the prepayment assumption (the "Prepayment Assumption"), which represents an
assumed rate of prepayment each month relative to the then outstanding
principal balance of the pool of mortgage loans for the life of such mortgage
loans. A 100% Prepayment Assumption assumes a conditional prepayment rate
("CPR") of 4% per annum of the outstanding principal balance of such mortgage
loans in the first month of the life of the mortgage loans and an additional
1.45% (precisely 16/11) (expressed as a percentage per annum) in each month
thereafter until the twelfth month; beginning in the twelfth month and in each
month thereafter during the life of the mortgage loans, a conditional
prepayment rate of 20% per annum each month is assumed. As used in the table
below, 0% Prepayment Assumption assumes a conditional prepayment rate equal to
0% of the Prepayment Assumption, i.e., no prepayments. Correspondingly, [200]%
Prepayment Assumption assumes prepayment rates equal to [200]% of the
Prepayment Assumption, and so forth. The Prepayment Assumption does not
purport to be a historical description of prepayment experience or a
prediction of the anticipated rate of prepayment of any pool of mortgage
loans, including the Mortgage Loans. The Depositor believes that no existing
statistics of which it is aware provide a reliable basis for holders of the
Class A Certificates to predict the amount or the timing of receipt of
prepayments on the Mortgage Loans.
Since the tables were prepared on the basis of the assumptions in the
following paragraph, there are discrepancies between characteristics of the
actual Mortgage Loans and the characteristics of the Mortgage Loans assumed in
preparing the tables. Any such discrepancy may have an effect upon the
percentages of the Principal Balances outstanding and weighted average lives
of the Class A Certificates set forth in the tables. In addition, since the
actual Mortgage Loans in the Trust Fund 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.
For the purpose of the tables below, it is assumed that: (i) the Mortgage
Loans consist of pools of loans with the level-pay and balloon amortization
characteristics set forth below, (ii) the Closing Date for the Class A
Certificates is ________________, (iii) distributions on the Class A
Certificates are made on the 25th day of each month regardless of the day on
which the Distribution Date actually occurs, commencing in _____________ and
are made in accordance with the priorities described herein, (iv) the
scheduled monthly payments of principal and interest on the Mortgage Loans
will be timely delivered on the first day of each month (with no defaults),
commencing in _______________, (v) the Mortgage Loans' prepayment rates are a
multiple of the Prepayment Assumption, (vi) all prepayments are prepayments in
full received on the last day of each month (commencing ______________) and
include 30 days' interest thereon, (vii) no optional termination is exercised,
(viii) the Class A Certificates of each Class have the respective Certificate
Rates and initial Class A Principal Balances as set forth herein, (ix) the
overcollateralization levels are set initially as specified in the Agreement,
and thereafter decrease in accordance with the provisions of the Agreement,
[(x) with respect to pools of loans with an assumed Cut-Off Date of
_________________, interest will be calculated at a rate of % per annum for
one month], (xi) six-month LIBOR for each Interest Period will be % and (xii)
one-month LIBOR for each Interest Period will be %.
Original Remaining
Original Term to Term to
Amortization Principal Amortization Maturity Maturity
Methodology Balance Loan Rate Term (months) (months) (months)
- ------------ --------- --------- ------------- -------- ---------
GROUP 1
Balloon...... $
Level Pay.... $
Level Pay.... $
Subject to the foregoing discussion and assumptions, the following table
indicates the weighted average life of each Class of Class A Certificates, and
sets forth the percentages of the initial Class A Principal Balance of each
such Class of Class A Certificates that would be outstanding after each of the
dates shown at various percentages of Prepayment Assumption.
<TABLE>
<CAPTION>
Original Original Term
Amortization Principal Loan Months to Gross Maximum Minimum Amortization to Maturity
Methodology Balance Rate Rate Change Margin Interest Rate Interest Rate term (months) (months)
- ----------- --------- ---- ----------- ------ ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
GROUP 2
Balloon...... $
Level Pay.... $
Level Pay.... $
Remaining
Amortization Term to
Methodology Maturity(months)
- ----------- ---------------
<S> <C>
GROUP 2
Balloon......
Level Pay....
Level Pay....
</TABLE>
PERCENT OF INITIAL CLASS A PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS A-1 CLASS A-2
DISTRIBUTION DATE % % % % % % % %
- ----------------- - - - - - - - -
Initial
Percentage .. 100 100 100 100 100 100 100 100
Weighted Average
Life (years)*
- ------------------------------------------------------------------------------
* The weighted average life of a Certificate of any class is determined by
(i) multiplying the amount of each distribution in reduction of the
related Class A Principal Balance by the number of years from the date of
issuance of the Certificate to the related Distribution Date, (ii) adding
the results, and (iii) dividing the sum by the highest related Principal
Balance of the Certificate.
CLASS A-3 CLASS A-4
DISTRIBUTION DATE % % % % % % % %
- ----------------- - - - - - - - -
Initial
Percentage .. 100 100 100 100 100 100 100 100
Weighted Average
Life (years)*
- ------------------------------------------------------------------------------
* The weighted average life of a Certificate of any class is determined by
(i) multiplying the amount of each distribution in reduction of the
related Class A Principal Balance by the number of years from the date of
issuance of the Certificate to the related Distribution Date, (ii) adding
the results, and (iii) dividing the sum by the highest related Principal
Balance of the Certificate.
DISTRIBUTION DATE CLASS A-5 CLASS A-6
- ----------------- % % % % % % % %
Initial - - - - - - - -
Percentage .. 100 100 100 100 100 100 100 100
Weighted Average
Life (years)*
- ------------------------------------------------------------------------------
* The weighted average life of a Certificate of any class is determined by
(i) multiplying the amount of each distribution in reduction of the
related Class A Principal Balance by the number of years from the date of
issuance of the Certificate to the related Distribution Date, (ii) adding
the results, and (iii) dividing the sum by the highest related Principal
Balance of the Certificate.
These tables have been prepared based on the assumptions described above
(including the assumptions regarding the characteristics and performance of
the Mortgage Loans, which differ from the actual characteristics and
performance thereof) and should be read in conjunction therewith.
DESCRIPTION OF THE CERTIFICATES
The Home Equity Loan Asset - Backed Certificates, Series 199_-_ (the
"Certificates") will be issued pursuant to the Agreement. The form of the
Agreement has been filed as an exhibit to the Registration Statement of which
this Prospectus Supplement and the Prospectus is a part. The following
summaries describe certain provisions of the Agreement. The summaries do not
purport to be complete and are subject to, and are qualified in their entirety
by reference to, all of the provisions of the Agreement. Wherever particular
sections or defined terms of the Agreement are referred to, such sections or
defined terms are hereby incorporated herein by reference.
General
The Offered Certificates will be issued in denominations of $1,000 and
multiples of $1 in excess thereof and will evidence specified undivided
interests in the Trust Fund. The property of the trust fund (the "Trust Fund")
will consist of, to the extent provided in the Agreement: (i) the Mortgage
Loans; (ii) payments on the Mortgage Loans received on and after the Cut-Off
Date (exclusive of payments in respect of interest on the Mortgage Loans due
prior to the Cut-Off Date and received thereafter); (iii) Mortgaged Properties
relating to the Mortgage Loans that are acquired by foreclosure or deed in
lieu of foreclosure; (iv) the Collection Account and the Distribution Account
and funds on deposit therein (excluding net earnings thereon); and (v) rights
under certain hazard insurance policies covering the Mortgaged Properties. In
addition, the Seller has caused the Certificate Insurer to issue an
irrevocable and unconditional certificate guaranty insurance policy (the
"Policy") for the benefit of the holders of the Class A Certificates, pursuant
to which the Certificate Insurer will guarantee payments to such
Certificateholders as described herein. Definitive Certificates (as defined
below) will be transferable and exchangeable at the corporate trust office of
the Trustee, which will initially act as Certificate Registrar. See
"--Book-Entry Certificates" below. No service charge will be made for any
registration of exchange or transfer of Certificates, but the Trustee may
require payment of a sum sufficient to cover any tax or other governmental
charge.
Each Mortgage Loan in the Trust Fund will be assigned to one of two
mortgage loan groups ("Loan Group 1" and "Loan Group 2", respectively, and
each a "Loan Group"). The Class A-1, Class A-2, Class A-3, Class A-4 and Class
A-5 Certificates (collectively, the "Group 1 Certificates") will represent
undivided ownership interests in the Mortgage Loans assigned to Loan Group 1,
all collections thereon (exclusive of payments in respect of interest on such
Mortgage Loan due prior to the Cut-Off Date and received thereafter) and the
proceeds thereof. The Class A-6 Certificates (the "Group 2 Certificates") will
represent undivided ownership interests in the Mortgage Loans assigned to Loan
Group 2, all collections thereon (exclusive of payments in respect of interest
on such Mortgage Loans due prior to the Cut-Off Date and received thereafter)
and the proceeds thereof. The principal amount of a Class of Class A
Certificates (each, a "Class A Principal Balance") on any Distribution Date is
equal to the applicable Class A Principal Balance on the Closing Date minus
the aggregate of amounts actually distributed as principal to the holders of
such Class of Class A Certificates. On any date, the "Aggregate Class A
Principal Balance" is, with respect to the Group 1 Certificates, the aggregate
of the Class A Principal Balances of the Class A-1, Class A-2, Class A-3,
Class A-4 and Class A-5 Certificates and with respect to the Group 2
Certificates, the Class A Principal Balance of the Class A-6 Certificates.
The Trust Fund will issue six classes (each, a "Class") of Class A
Certificates, Class A-1 (the "Class A-1 Certificates"), Class A-2 (the "Class
A-2 Certificates"), Class A-3 (the "Class A-3 Certificates"), Class A-4 (the
"Class A-4 Certificates"), Class A-5 (the "Class A-5 Certificates") and Class
A-6 (the "Class A-6 Certificates") and one Class of subordinated Certificates
(the "Class R Certificates"). Only the Class A Certificates (the "Offered
Certificates") are being offered hereby. Each Class of Offered Certificates
represents the right to receive payments of interest at the Certificate Rate
for such Class and payments of principal as described below.
The Person in whose name a Certificate is registered as such in the
Certificate Register is referred to herein as a "Certificateholder."
The "Percentage Interest" of a Class A Certificate as of any date of
determination will be equal to the percentage obtained by dividing the
denomination of such Certificate by the Class A Principal Balance for the
related Class as of the Cut-Off Date.
The Certificates will not be listed on any securities exchange.
Book-Entry Certificates
The Offered Certificates will be book-entry Certificates (the "Book-Entry
Certificates"). Persons acquiring beneficial ownership interests in the
Offered Certificates ("Certificate Owners") will hold their Offered
Certificates through the Depository Trust Company ("DTC") in the United
States, or Cedelbank (the "Cedelbank") or the Euroclear System ("Euroclear")
(in Europe) if they are participants of such systems, or indirectly through
organizations which are participants in such systems. The Book-Entry
Certificates will be issued in one or more certificates which equal the
aggregate principal balance of the Offered Certificates and will initially be
registered in the name of Cede, the nominee of DTC. Cedelbank and Euroclear
will hold omnibus positions on behalf of their participants through customers'
securities accounts in Cedelbank's and Euroclear's names on the books of their
respective depositaries which in turn will hold such positions in customers'
securities accounts in the depositaries' names on the books of DTC. Citibank
N.A. ("Citibank") will act as depositary for Cedelbank and The Chase Manhattan
Bank ("Chase") will act as depositary for Euroclear (in such capacities,
individually the "Relevant Depositary" and collectively the "European
Depositaries"). Investors may hold such beneficial interests in the Book-Entry
Certificates in minimum denominations representing Certificate Principal
Balances of $1,000 and in multiples of $1 in excess thereof. Except as
described below, no person acquiring a Book-Entry Certificate (each, a
"beneficial owner") will be entitled to receive a physical certificate
representing such Certificate (a "Definitive Certificate"). Unless and until
Definitive Certificates are issued, it is anticipated that the only
"Certificateholder" of the Offered Certificates will be Cede, as nominee of
DTC. Certificate Owners will not be Certificateholders as that term is used in
the Agreement. Certificate Owners are only permitted to exercise their rights
indirectly through Participants and DTC.
The beneficial owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or
other financial intermediary (each, a "Financial Intermediary") that maintains
the beneficial owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Certificate will be recorded on
the records of DTC (or of a participating firm that acts as agent for the
Financial Intermediary, whose interest will in turn be recorded on the records
of DTC, if the beneficial owner's Financial Intermediary is not a DTC
participant and on the records of Cedelbank or Euroclear, as appropriate).
Certificate Owners will receive all distributions of principal of, and
interest on, the Offered Certificates from the Trustee through DTC and DTC
participants. While the Offered Certificates are outstanding (except under the
circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the "Rules"), DTC is required
to make book-entry transfers among Participants on whose behalf it acts with
respect to the Offered Certificates and is required to receive and transmit
distributions of principal of, and interest on, the Offered Certificates.
Participants and indirect participants with whom Certificate Owners have
accounts with respect to Offered Certificates are similarly required to make
book-entry transfers and receive and transmit such distributions on behalf of
their respective Certificate Owners. Accordingly, although Certificate Owners
will not possess certificates, the Rules provide a mechanism by which
Certificate Owners will receive distributions and will be able to transfer
their interest.
Certificate Owners will not receive or be entitled to receive
certificates representing their respective interests in the Offered
Certificates, except under the limited circumstances described below. Unless
and until Definitive Certificates are issued, Certificate Owners who are not
Participants may transfer ownership of Offered Certificates only through
Participants and indirect participants by instructing such Participants and
indirect participants to transfer Offered Certificates, by book-entry
transfer, through DTC for the account of the purchasers of such Offered
Certificates, which account is maintained with their respective Participants.
Under the Rules and in accordance with DTC's normal procedures, transfers of
ownership of Offered Certificates will be executed through DTC and the
accounts of the respective Participants at DTC will be debited and credited.
Similarly, the Participants and indirect participants will make debits or
credits, as the case may be, on their records on behalf of the selling and
purchasing Certificate Owners.
Because of time zone differences, credits of securities received in
Cedelbank or Euroclear as a result of a transaction with a Participant will be
made during subsequent securities settlement processing and dated the business
day following the DTC settlement date. Such credits or any transactions in
such securities settled during such processing will be reported to the
relevant Euroclear or Cedelbank Participants on such business day. Cash
received in Cedelbank or Euroclear as a result of sales of securities by or
through a Cedelbank Participant (as defined below) or Euroclear Participant
(as defined below) to a DTC Participant will be received with value on the DTC
settlement date but will be available in the relevant Cedelbank or Euroclear
cash account only as of the business day following settlement in DTC. For
information with respect to tax documentation procedures relating to the
Certificates, see "FEDERAL INCOME TAX CONSEQUENCES--Foreign Investors" and
"Backup Withholding" herein and "GLOBAL CLEARANCE, SETTLEMENT AND TAX
DOCUMENTATION PROCEDURES--Certain U.S. Federal Income Tax Documentation
Requirements" in Annex I hereto.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between Cedelbank Participants and Euroclear Participants will occur
in accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Cedelbank
Participants or Euroclear Participants, on the other, will be effected in DTC
in accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. Cedelbank Participants and Euroclear Participants may not deliver
instructions directly to the European Depositaries.
DTC, which is a New York-chartered limited purpose trust company,
performs services for its participants, some of which (and/or their
representatives) own DTC. In accordance with its normal procedures, DTC is
expected to record the positions held by each DTC participant in the
Book-Entry Certificates, whether held for its own account or as a nominee for
another person. In general, beneficial ownership of Book-Entry Certificates
will be subject to the rules, regulations and procedures governing DTC and DTC
participants as in effect from time to time.
Cedelbank is incorporated under the laws of Luxembourg as a professional
depository. Cedelbank holds securities for its participating organizations
("Cedelbank Participants") and facilitates the clearance and settlement of
securities transactions between Cedelbank Participants through electronic
book-entry changes in accounts of Cedelbank Participants, thereby eliminating
the need for physical movement of certificates. Transactions may be settled in
Cedelbank in any of 28 currencies, including United States dollars. Cedelbank
provides to its Cedelbank Participants, among other things, services for
safekeeping, administration, clearance and settlement of internationally
traded securities and securities lending and borrowing. Cedelbank interfaces
with domestic markets in several countries. As a professional depository,
Cedelbank is subject to regulation by the Luxembourg Monetary Institute.
Cedelbank participants are recognized financial institutions around the world,
including underwriters, securities brokers and dealers, banks, trust
companies, clearing corporations and certain other organizations. Indirect
access to Cedelbank is also available to others, such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a Cedelbank Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for its participants
("Euroclear Participants") and to clear and settle transactions between
Euroclear Participants through simultaneous electronic book-entry delivery
against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities
and cash. Transactions may be settled in any of 32 currencies, including
United States dollars. Euroclear includes various other services, including
securities lending and borrowing and interfaces with domestic markets in
several countries generally similar to the arrangements for cross-market
transfers with DTC described above. Euroclear is operated by the Brussels,
Belgium office of Morgan Guaranty Trust Company of New York (the "Euroclear
Operator"), under contract with Euroclear Clearance Systems S.C., a Belgian
cooperative corporation (the "Cooperative"). All operations are conducted by
the Euroclear Operator, and all Euroclear securities clearance accounts and
Euroclear cash accounts are accounts with the Euroclear Operator, not the
Cooperative. The Cooperative establishes policy for Euroclear on behalf of
Euroclear Participants. Euroclear Participants include banks (including
central banks), securities brokers and dealers and other professional
financial intermediaries. Indirect access to Euroclear is also available to
other firms that clear through or maintain a custodial relationship with a
Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it
is regulated and examined by the Board of Governors of the Federal Reserve
System and the New York State Banking Department, as well as the Belgian
Banking Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear
and the related Operating Procedures of the Euroclear System and applicable
Belgian law (collectively, the "Terms and Conditions"). The Terms and
Conditions govern transfers of securities and cash within Euroclear,
withdrawals of securities and cash from Euroclear, and receipts of payments
with respect to securities in Euroclear. All securities in Euroclear are held
on a fungible basis without attribution of specific certificates to specific
securities clearance accounts. The Euroclear Operator acts under the Terms and
Conditions only on behalf of Euroclear Participants, and has no record of or
relationship with persons holding through Euroclear Participants.
Distributions on the Book-Entry Certificates will be made on each
Distribution Date by the Trustee to DTC. DTC will be responsible for crediting
the amount of such payments to the accounts of the applicable DTC participants
in accordance with DTC's normal procedures. Each DTC participant will be
responsible for disbursing such payments to the beneficial owners of the
Book-Entry Certificates that it represents and to each Financial Intermediary
for which it acts as agent. Each such Financial Intermediary will be
responsible for disbursing funds to the beneficial owners of the Book-Entry
Certificates that it represents.
Under a book-entry format, beneficial owners of the Book-Entry
Certificates may experience some delay in their receipt of payments, since
such payments will be forwarded by the Trustee to Cede. Distributions with
respect to Certificates held through Cedelbank or Euroclear will be credited
to the cash accounts of Cedelbank Participants or Euroclear Participants in
accordance with the relevant system's rules and procedures, to the extent
received by the Relevant Depositary. Such distributions will be subject to tax
reporting in accordance with relevant United States tax laws and regulations.
See "FEDERAL INCOME TAX CONSEQUENCES--Foreign Investors" and "Backup
Withholding" herein. Because DTC can only act on behalf of Financial
Intermediaries, the ability of a beneficial owner to pledge Book-Entry
Certificates to persons or entities that do not participate in the Depository
system, or otherwise take actions in respect of such Book-Entry Certificates,
may be limited due to the lack of physical certificates for such Book-Entry
Certificates. In addition, issuance of the Book-Entry Certificates in
book-entry form may reduce the liquidity of such Certificates in the secondary
market since certain potential investors may be unwilling to purchase
Certificates for which they cannot obtain physical certificates.
Monthly and annual reports on the Trust Fund will be provided to Cede, as
nominee of DTC, and may be made available by Cede to beneficial owners upon
request, in accordance with the rules, regulations and procedures creating and
affecting the Depository, and to the Financial Intermediaries to whose DTC
accounts the Book-Entry Certificates of such beneficial owners are credited.
DTC has advised the Trustee that, unless and until Definitive
Certificates are issued, DTC will take any action permitted to be taken by the
holders of the Book-Entry Certificates under the Agreement only at the
direction of one or more Financial Intermediaries to whose DTC accounts the
Book-Entry Certificates are credited, to the extent that such actions are
taken on behalf of Financial Intermediaries whose holdings include such
Book-Entry Certificates. Cedelbank or the Euroclear Operator, as the case may
be, will take any other action permitted to be taken by a Certificateholder
under the Agreement on behalf of a Cedelbank Participant or Euroclear
Participant only in accordance with its relevant rules and procedures and
subject to the ability of the Relevant Depositary to effect such actions on
its behalf through DTC. DTC may take actions, at the direction of the related
Participants, with respect to some Class A Certificates which conflict with
actions taken with respect to other Class A Certificates.
Definitive Certificates will be issued to beneficial owners of the
Book-Entry Certificates, or their nominees, rather than to DTC, only if (a)
DTC or the Depositor advises the Trustee in writing that DTC is no longer
willing, qualified or able to discharge properly its responsibilities as
nominee and depository with respect to the Book-Entry Certificates and the
Depositor or the Trustee is unable to locate a qualified successor, (b) the
Depositor, at its sole option, with the consent of the Trustee, elects to
terminate a book-entry system through DTC or (c) after the occurrence of an
Event of Servicing Termination (as defined under "--Events of Servicing
Termination), beneficial owners having Percentage Interests aggregating not
less than 51% of the aggregate Class A Principal Balance of the Book-Entry
Certificates advise the Trustee and DTC through the Financial Intermediaries
and the DTC participants in writing that the continuation of a book-entry
system through DTC (or a successor thereto) is no longer in the best interests
of beneficial owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all beneficial
owners of the occurrence of such event and the availability through DTC of
Definitive Certificates. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Certificates and instructions for
re-registration, the Trustee will issue Definitive Certificates, and
thereafter the Trustee will recognize the holders of such Definitive
Certificates as Certificateholders under the Agreement.
Although DTC, Cedelbank and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Class A Certificates among
participants of DTC, Cedelbank and Euroclear, they are under no obligation to
perform or continue to perform such procedures and such procedures may be
discontinued at any time.
Neither the Depositor, the Seller, the Master Servicer nor the Trustee
will have any responsibility for any aspect of the records relating to or
payments made on account of beneficial ownership interests of the Book-Entry
Certificates held by Cede, as nominee for DTC, or for maintaining, supervising
or reviewing any records relating to such beneficial ownership interests.
Assignment of Mortgage Loans
On ______________, (the "Closing Date"), the Depositor will transfer to
the Trust Fund all of its right, title and interest in and to each Mortgage
Loan, the related Mortgage Notes, Mortgages and other related documents
(collectively, the "Related Documents"), including all payments received on or
with respect to each such Mortgage Loan on or after the applicable Cut-Off
Date (exclusive of payments in respect of interest on the Mortgage Loans due
prior to the Cut-Off Date and received thereafter). The Trustee, concurrently
with such transfer, will deliver the Certificates to the Depositor. Each
Mortgage Loan transferred to the Trust Fund will be identified on a schedule
(the "Mortgage Loan Schedule") delivered to the Trustee pursuant to the
Agreement. The Mortgage Loan Schedule will include information as to the
Principal Balance of each Mortgage Loan as of the Cut-Off Date, its Loan Rate
as well as other information.
Within 60 days of the Closing Date, the Trustee will review the Mortgage
Loans and the Related Documents pursuant to the Agreement and if any Mortgage
Loan or Related Document is found to be defective in any material respect and
such defect is not cured within 90 days following notification thereof to the
Seller, the Seller will be obligated to either (i) substitute for such
Mortgage Loan an Eligible Substitute Mortgage Loan; however, such substitution
is permitted only within two years of the Closing Date and may not be made
unless an opinion of counsel is provided to the effect that such substitution
will not disqualify the Trust Fund as a real estate mortgage investment
conduit ("REMIC") or result in a prohibited transaction tax under the Internal
Revenue Code of 1986, as amended (the "Code") or (ii) purchase such Mortgage
Loan at a price (the "Purchase Price") equal to the outstanding Principal
Balance of such Mortgage Loan as of the date of purchase, plus all accrued and
unpaid interest thereon, computed at the Loan Rate, net of the Master
Servicing Fee (if the Seller is the Master Servicer), plus the amount of any
unreimbursed Servicing Advances made by the Master Servicer. The Purchase
Price will be deposited in the Collection Account on or prior to the next
succeeding Determination Date after such obligation arises. The "Determination
Date" is the eighteenth day of each month. The obligation of the Seller to
repurchase or substitute for a Defective Mortgage Loan is the sole remedy
regarding any defects in the Mortgage Loans and Related Documents available to
the Trustee or the Certificateholders.
In connection with the substitution of an Eligible Substitute Mortgage
Loan, the Seller will be required to deposit in the Collection Account on or
prior to the next succeeding Determination Date after such obligation arises
an amount (the "Substitution Adjustment") equal to the excess of the Principal
Balance of the related Defective Mortgage Loan over the Principal Balance of
such Eligible Substitute Mortgage Loan.
An "Eligible Substitute Mortgage Loan" is a Mortgage Loan substituted by
the Seller for a Defective Mortgage Loan which must, on the date of such
substitution, (i) have an outstanding Principal Balance (or in the case of a
substitution of more than one Mortgage Loan for a Defective Mortgage Loan, an
aggregate Principal Balance), not in excess of and not more than 5% less than
the Principal Balance of the Defective Mortgage Loan; (ii) have a Loan Rate
not less than the Loan Rate of the Defective Mortgage Loan and not more than
1% in excess of the Loan Rate of such Defective Mortgage Loan; (iii) if such
Defective Mortgage Loan is in Loan Group 2, have a Loan Rate based on the same
Index with adjustments to such Loan Rate made on the same Interest Rate
Adjustment Date as that of the Defective Mortgage Loan and have a Margin that
is not less than the Margin of the Defective Mortgage Loan and not more than
100 basis points higher than the Margin for the Defective Mortgage Loan; or
(iv) have a Mortgage of the same or higher level of priority as the Mortgage
relating to the Defective Mortgage Loan at the time such Mortgage was
transferred to the Trust Fund; (v) have a remaining term to maturity not more
than six months earlier and not later than the remaining term to maturity of
the Defective Mortgage Loan; (vi) comply with each representation and warranty
set forth in Section 2.04 (deemed to be made as of the date of substitution);
(vii) have an original Loan-to-Value Ratio not greater than that of the
Defective Mortgage Loan; (viii) if such Defective Mortgage Loan is in Loan
Group 2, have a Lifetime Rate Cap and a Periodic Rate Cap no lower than the
Lifetime Rate Cap and Periodic Rate Cap, respectively, applicable to such
Defective Mortgage Loan; and (ix) be of the same type of Mortgaged Property as
the Defective Mortgage Loan or a detached single family residence. More than
one Eligible Substitute Mortgage Loan may be substituted for a Defective
Mortgage Loan if such Eligible Substitute Mortgage Loans meet the foregoing
attributes in the aggregate and such substitution is approved in writing in
advance by the Certificate Insurer.
The Seller will make certain representations and warranties as to the
accuracy in all material respects of certain information furnished to the
Trustee with respect to each Mortgage Loan (e.g., Cut-Off Date Principal
Balance and the Loan Rate). In addition, the Seller will represent and
warrant, on the Closing Date, that, among other things: (i) at the time of
transfer to the Trust Fund, the Seller has transferred or assigned all of its
right, title and interest in each Mortgage Loan and the Related Documents,
free of any lien; and (ii) each Mortgage Loan complied, at the time of
origination, in all material respects with applicable state and federal laws.
Upon discovery of a breach of any such representation and warranty which
materially and adversely affects the interests of the Trust Fund, the
Certificateholders or the Certificate Insurer in the related Mortgage Loan and
Related Documents, the Seller will have a period of 60 days after discovery or
notice of the breach to effect a cure. If the breach cannot be cured within
the 60-day period, the Seller will be obligated to (i) substitute for such
Defective Mortgage Loan an Eligible Substitute Mortgage Loan or (ii) purchase
such Defective Mortgage Loan from the Trust Fund. The same procedure and
limitations that are set forth above for the substitution or purchase of
Defective Mortgage Loans as a result of deficient documentation relating
thereto will apply to the substitution or purchase of a Defective Mortgage
Loan as a result of a breach of a representation or warranty in the Agreement
that materially and adversely affects the interests of the Certificateholders
or the Certificate Insurer.
Mortgage Loans required to be transferred to the Seller as described in
the preceding paragraphs are referred to as "Defective Mortgage Loans."
Pursuant to the Agreement, the Master Servicer will service and
administer the Mortgage Loans as more fully set forth above.
Payments on Mortgage Loans; Deposits to Collection Account and
Distribution Account
The Master Servicer shall establish and maintain in the name of the
Trustee a separate trust account (the "Collection Account") for the benefit of
the holders of the Certificates. The Collection Account will be an Eligible
Account (as defined below). Subject to the investment provision described in
the following paragraphs, upon receipt by the Master Servicer of amounts in
respect of the Mortgage Loans (excluding amounts representing the Master
Servicing Fee), the Master Servicer will deposit such amounts in the
Collection Account. Amounts so deposited may be invested in Eligible
Investments (as described in the Agreement) maturing no later than two
Business Days prior to the next succeeding date on which amounts on deposit
therein are required to be deposited in the Distribution Account.
The Trustee will establish an account (the "Distribution Account") into
which will be deposited amounts withdrawn from the Collection Account for
distribution to Certificateholders on a Distribution Date. The Distribution
Account will be an Eligible Account. Amounts on deposit therein may be
invested in Eligible Investments maturing on or before the Business Day prior
to the related Distribution Date.
An "Eligible Account" is an account that is (i) maintained with a
depository institution whose debt obligations at the time of any deposit
therein have the highest short-term debt rating by the Rating Agencies, and
whose accounts are fully insured by either the Savings Association Insurance
Fund ("SAIF") or the Bank Insurance Fund ("BIF") of the Federal Deposit
Insurance Corporation established by such fund with a minimum long-term
unsecured debt rating of "A2" by Moody's and "A" by S&P, otherwise acceptable
to each Rating Agency and the Certificate Insurer as evidenced by a letter
from each Rating Agency and the Certificate Insurer to the Trustee, without
reduction or withdrawal of their then current ratings of the Certificates.
Eligible Investments are specified in the Agreement and are limited to
investments which meet the criteria of the Rating Agencies from time to time
as being consistent with their then current ratings of the Certificates.
"Eligible Investments" are limited to (i) direct obligations of, or
obligations fully guaranteed as to timely payment of principal and interest
by, the United States or any agency or instrumentality thereof, provided that
such obligations are backed by the full faith and credit of the United States;
(ii) repurchase agreements on obligations specified in clause (i) maturing not
more than three months from the date of acquisition thereof, provided that the
short-term unsecured debt obligations of the party agreeing to repurchase such
obligations are at the time rated by each Rating Agency in its highest
short-term rating category; (iii) certificates of deposit, time deposits and
bankers' acceptances (which, if Moody's is a Rating Agency, shall each have an
original maturity of not more than 90 days and, in the case of bankers'
acceptances, shall in no event have an original maturity of more than 365
days) of any U.S. depository institution or trust company incorporated under
the laws of the United States or any state thereof and subject to supervision
and examination by federal and/or state banking authorities, provided that the
unsecured short-term debt obligations of such depository institution or trust
company at the date of acquisition thereof have been rated by each of the
Rating Agencies in its highest unsecured short-term debt rating category; (iv)
commercial paper (having original maturities of not more than 90 days) of any
corporation incorporated under the laws of the United States or any state
thereof which on the date of acquisition has been rated by the Rating Agencies
in their highest short-term rating categories; (v) short term investment funds
("STIFS") sponsored by any trust company or bank incorporated under the laws
of the United States or any state thereof which on the date of acquisition has
been rated by the Rating Agencies in their respective highest rating category
of long term unsecured debt; (vi) interests in any money market fund which at
the date of acquisition of the interests in such fund and throughout the time
as the interest is held in such fund has the rating specified by each Rating
Agency; and (vii) other obligations or securities that are acceptable to each
Rating Agency as an Eligible Investment hereunder and will not result in a
reduction in the then current rating of the Certificates, as evidenced by a
letter to such effect from such Rating Agency and with respect to which the
Master Servicer has received confirmation that, for tax purposes, the
investment complies with the last clause of this definition; provided that no
instrument described hereunder shall evidence either the right to receive (a)
only interest with respect to the obligations underlying such instrument or
(b) both principal and interest payments derived from obligations underlying
such instrument and the interest and principal payments with respect to such
instrument provided a yield to maturity at par greater than 120% of the yield
to maturity at par of the underlying obligations; and provided, further, that
no instrument described hereunder may be purchased at a price greater than par
if such instrument may be prepaid or called at a price less than its purchase
price prior to its stated maturity.
Advances
Not later than two Business Days prior to each Distribution Date, the
Master Servicer will remit to the Trustee for deposit in the Distribution
Account an amount, to be distributed on the related Distribution Date, equal
to the sum of the interest accrued and principal due on each Mortgage Loan
through the related Due Date but not received by the Master Servicer as of the
close of business on the last day of the related Due Period (net of the Master
Servicing Fee) (the "Monthly Advance"). Such obligation of the Master Servicer
continues with respect to each Mortgage Loan until such Mortgage Loan becomes
a Liquidated Mortgage Loan.
In the course of performing its servicing obligations, the Master
Servicer will pay all reasonable and customary "out-of-pocket" costs and
expenses incurred in the performance of its servicing obligations, including,
but not limited to, the cost of (i) the preservation, restoration and
protection of the Mortgaged Properties, (ii) any enforcement or judicial
proceedings, including foreclosures, and (iii) the management and liquidation
of Mortgaged Properties acquired in satisfaction of the related Mortgage. Each
such expenditure will constitute a "Servicing Advance".
The Master Servicer's right to reimbursement for Servicing Advances is
limited to late collections on the related Mortgage Loan, including
Liquidation Proceeds, Insurance Proceeds and such other amounts as may be
collected by the Master Servicer from the related Mortgagor or otherwise
relating to the Mortgage Loan in respect of which such unreimbursed amounts
are owed. The Master Servicer's right to reimbursement for Monthly Advances
shall be limited to late collections of interest on any Mortgage Loan and to
Liquidation Proceeds and Insurance Proceeds on the related Mortgage Loan. The
Master Servicer's right to such reimbursements is prior to the rights of
Certificateholders.
Notwithstanding the foregoing, the Master Servicer is not required to
make any Monthly Advance or Servicing Advance if in the good faith judgment
and sole discretion of the Master Servicer, the Master Servicer determines
that such advance will not be ultimately recoverable from collections received
from the Mortgagor in respect of the related Mortgage Loan or other recoveries
in respect of such Mortgage Loan (a "Nonrecoverable Advance"). However, if any
Servicing Advance or Monthly Advance is determined by the Master Servicer to
be nonrecoverable from such sources, the amount of such Nonrecoverable Advance
may be reimbursed to the Master Servicer from other amounts on deposit in the
Collection Account.
Distribution Dates
On the 25th day of each month, or if such day is not a Business Day, then
the next succeeding Business Day, commencing in ______________________, (each
such day, a "Distribution Date"), the holders of the Offered Certificates will
be entitled to receive, from amounts then on deposit in the Distribution
Account, to the extent of funds available therefor in accordance with the
priorities and in the amounts described below under "Priority of
Distributions," an aggregate amount equal to the sum of (a) the Class Interest
Distribution for each Class of Offered Certificates and (b) the Class A
Principal Distribution for each Certificate Group. Distributions will be made
(i) in immediately available funds to holders of Offered Certificates, the
aggregate principal balance of which is at least $1,000,000, by wire transfer
or otherwise, to the account of such Certificateholder at a domestic bank or
other entity having appropriate facilities therefor, if such Certificateholder
has so notified the Trustee in accordance with the Agreement, or (ii) by check
mailed to the address of the person entitled thereto as it appears on the
register (the "Certificate Register") maintained by the Trustee as registrar
(the "Certificate Registrar").
Deposits to the Distribution Account
No later than one Business Day prior to each Distribution Date, the
following amounts in respect of a Loan Group and the previous Due Period shall
be deposited into the Distribution Account and shall constitute the "Available
Funds" for the related Certificate Group for such Distribution Date: (i)
payments of principal and interest on the Mortgage Loans in such Loan Group
(net of amounts representing the Master Servicing Fee with respect to each
Mortgage Loan in the related Loan Group and reimbursement for related Monthly
Advances and Servicing Advances); (ii) Net Liquidation Proceeds and Insurance
Proceeds with respect to the Mortgage Loans in such Loan Group (net of amounts
applied to the restoration or repair of a Mortgaged Property); (iii) the
Purchase Price for repurchased Defective Mortgage Loans with respect to the
Mortgage Loans in such Loan Group and any related Substitution Adjustment
Amounts; (iv) payments from the Master Servicer in connection with (a) Monthly
Advances, (b) Prepayment Interest Shortfalls and (c) the termination of the
Trust Fund with respect to the Mortgage Loans in such Loan Group as provided
in the Agreement; and (v) any amounts paid under the Policy in respect of the
related Certificate Group.
Priority of Distributions
On each Distribution Date the Trustee shall withdraw from the
Distribution Account the sum of (a) the Available Funds with respect to the
Group 1 Certificates and (b) the Available Funds with respect to the Group 2
Certificates (such sum, the "Amount Available"), and make distributions
thereof as described below and to the extent of the Amount Available:
A. With respect to the Group 1 Certificates, the Available Funds
with respect to such Certificate Group in the following order of
priority:
(i) to the Trustee, the Trustee fee for such Loan Group for
such Distribution Date;
(ii) to holders of each Class of Group 1 Certificates, an
amount equal to the related Class Interest Distribution for such
Distribution Date;
(iii) sequentially, to the Class A-1, Class A-2, Class A-3,
Class A-4 and Class A-5 Certificateholders, in that order, until the
respective Class A Principal Balance of each such Class is reduced
to zero, the related Class A Principal Distribution (other than the
portion constituting the Distributable Excess Spread) for such
Distribution Date; provided, however, that after the occurrence and
continuance of an Insurer Default, such portion of the Class A
Principal Distribution for the Group 1 Certificates will be
distributed pro rata to the holders thereof based on the respective
Class A Principal Balances;
(iv) to the Certificate Insurer, the amount owing to the
Certificate Insurer under the Insurance Agreement for the premium
payable in respect of the Group 1 Certificates; and
(v) sequentially, to the Class A-1, Class A-2, Class A-3, Class
A-4 and Class A-5 Certificateholders, in that order, until the
respective Class A Principal Balance of each such Class is reduced
to zero, the related Distributable Excess Spread for such
Distribution Date; provided, however, that after the occurrence and
continuance of an Insurer Default, such Distributable Excess Spread
for the Group 1 Certificates will be distributed pro rata to the
holders thereof based on the respective Class A Principal Balances.
B. With respect to the Group 2 Certificates, the Available Funds with
respect to such Certificate Group in the following order of priority:
(i) to the Trustee, the Trustee fee for such Loan Group for
such Distribution Date;
(ii) to the holders of the Class A-6 Certificates, an amount
equal to the Class Interest Distribution for the Class A-6
Certificates for such Distribution Date;
(iii) to the holders of the Class A-6 Certificates, the Class A
Principal Distribution for the Class A-6 Certificates (other than
the portion constituting the Distributable Excess Spread);
(iv) to the Certificate Insurer, the amount owing to the
Certificate Insurer under the Insurance Agreement for the premium
payable in respect of the Group 2 Certificates; and
(v) to the holders of the Class A-6 Certificates until the
Class A-6 Principal Balance is reduced to zero, the related
Distributable Excess Spread for such Distribution Date.
C. On any Distribution Date, to the extent Available Funds for a
Certificate Group are insufficient to make the distributions specified above
pursuant to the applicable subclause, Available Funds for the other
Certificate Group remaining after making the distributions required to be made
pursuant to the applicable subclause for such other Certificate Group shall be
distributed to the extent of such insufficiency in accordance with the
priorities for distribution set forth in the subclause above with respect to
the Certificate Group experiencing such insufficiency.
D. After making the distributions referred to in subclauses A, B and C
above, the Trustee shall make distributions in the following order of
priority, to the extent of the balance of the Amount Available:
(i) to the Master Servicer, the amount of any accrued and unpaid
Master Servicing Fee;
(ii) to the Certificate Insurer, amounts owing to the Certificate
Insurer for reimbursement for prior draws made on the Policy;
(iii) to the Master Servicer, the amount of Nonrecoverable Advances
not previously reimbursed;
(iv) to the Certificate Insurer, any other amounts owing to the
Certificate Insurer under the Insurance Agreement;
(v) to the Class A-6 Certificateholders, the Class A-6 Interest
Carryover; and
(vi) to the Class R Certificateholders, the balance.
"Class A-6 Interest Carryover" means, with respect to any Distribution
Date on which the Certificate Rate for the Class A-6 Certificates is based
upon the Net Funds Cap, the excess of (i) the amount of interest the Class A-6
Certificates would be entitled to receive on such Distribution Date had such
rate been calculated pursuant to the lesser of clause (A) and clause (C) of
the definition of Certificate Rate over (ii) the amount of interest the Class
A-6 Certificates actually receives on such Distribution Date, plus accrued
interest thereon at the rate determined pursuant to clause (i) above for such
Distribution Date.
The Certificate Rate
The "Certificate Rate" for any Interest Period with respect to: the Class
A-1 Certificates will be % per annum, the Class A-2 Certificates will be % per
annum, the Class A-3 Certificates will be % per annum, the Class A-4
Certificates will be % per annum and the Class A-5 Certificates will be % per
annum. "Interest Period " means, with respect to each Distribution Date and
Group 1 Certificates, the period from the first day of the calendar month
preceding the month of such Distribution Date through the last day of such
calendar month. "Interest Period " means, with respect to each Distribution
Date and Group 2 Certificates, the period from the Distribution Date in the
month preceding the month of such Distribution Date (or, in the case of the
first Distribution Date, from the Closing Date) through the day before such
Distribution Date. Interest in respect of any Distribution Date will accrue on
the Group 1 Certificates during each Interest Period on the basis of a 360-day
year consisting of twelve 30-day months.
The "Certificate Rate" with respect to the Class A-6 Certificates for an
Interest Period will equal the least of (A) the sum of the LIBOR Rate plus
____% (or ____% for each Distribution Date occurring after the date on which
the Master Servicer has the right to terminate the Trust Fund), (B) the Net
Funds Cap for such Distribution Date and (C) ____% per annum. The "Net Funds
Cap" for any Distribution Date shall equal the difference between (A) the
average of the Loan Rates of the Mortgage Loans in Loan Group 2 as of the
first day of the month preceding the month of such Distribution Date, weighted
on the basis of the related Principal Balances as of such date and (B) the sum
of (i) the Master Servicing Fee Rate and the rate at which the Trustee Fee and
the premium payable to the Certificate Insurer are calculated and (ii)
commencing with the thirteenth Distribution Date, ___%. With respect to the
Class A-6 Certificates, interest in respect of any Distribution Date will
accrue during each Interest Period on the basis of a 360-day year and the
actual number of days elapsed.
The "LIBOR Rate" is the rate for United States dollar deposits for one
month which appear on the Telerate Screen LIBO Page 3750 as of 11:00 A.M.,
London time, on the second LIBOR Business Day prior to the first day of any
Interest Period relating to the Class A-6 Certificates (or the second LIBOR
Business Day prior to the Closing Date, in the case of the first Distribution
Date). If such rate does not appear on such page (or such other page as may
replace that page on that service, or if such service is no longer offered,
such other service for displaying the LIBOR Rate or comparable rates as may be
reasonably selected by the Seller, after consultation with the Trustee), the
rate will be the Reference Bank Rate. If no such quotations can be obtained
and no Reference Bank Rate is available, the LIBOR Rate will be the LIBOR Rate
applicable to the preceding Distribution Date. On the second LIBOR Business
Day immediately preceding each Distribution Date, the Trustee shall determine
the LIBOR Rate for the Interest Period commencing on such Distribution Date
and inform the Master Servicer of such rate.
Interest
On each Distribution Date, to the extent of funds available therefor as
described herein, interest will be distributed with respect to each Class of
Class A Certificates in an amount (each, a "Class Interest Distribution")
equal to the sum of (a) one month's interest at the related Certificate Rate
on the related Class A Principal Balance immediately prior to such
Distribution Date (the "Class Monthly Interest Distributable Amount") and (b)
any Class Interest Carryover Shortfall for such Class of Class A Certificates
for such Distribution Date. As to any Distribution Date and Class of Class A
Certificates, the "Class Interest Carryover Shortfall" is the sum of (i) the
excess of the related Class Monthly Interest Distributable Amount for the
preceding Distribution Rate and any outstanding Class Interest Carryover
Shortfall with respect to such Class on such preceding Distribution Date, over
the amount in respect of interest that is actually distributed to such Class
on such preceding Distribution Date plus (ii) one month's interest on such
excess, to the extent permitted by law, at the related Certificate Rate. The
interest entitlement described in (a) above will be reduced by such Class' pro
rata share of Civil Relief Act Interest Shortfalls, if any, for such
Distribution Date. Civil Relief Act Interest Shortfalls will not be covered by
payments under the Policy.
On each Distribution Date, the Class Interest Distribution for each Class
of Class A Certificates in a particular Certificate Group will be distributed
on an equal priority and any shortfall in the amount required to be
distributed as interest thereon to each such Class will be allocated between
such Classes pro rata based on the amount each such Class would have been
distributed in the absence of such shortfall. See "--Crosscollateralization"
below.
Principal
On each Distribution Date, to the extent of funds available thereof, in
accordance with the priorities described above under "--Priorities of
Distributions," principal will be distributed to the holders of Class A
Certificates of each Certificate Group then entitled to distributions of
principal in an amount equal to the lesser of (A) the related Aggregate Class
A Principal Balance and (B) the related Class A Principal Distribution for
such Distribution Date. "Class A Principal Distribution" means, with respect
to any Distribution Date and Certificate Group, the sum of the related Class A
Monthly Principal Distributable Amount for such Distribution Date and any
outstanding Class A Principal Carryover Shortfall as of the close of business
on the preceding Distribution Date.
"Class A Monthly Principal Distributable Amount" means, with respect to
any Distribution Date and Certificate Group, to the extent of funds available
therefor as described herein the amount equal to the sum of the following
amounts (without duplication) with respect to the immediately preceding Due
Period (as defined below): (i) each payment of principal on a Mortgage Loan in
the related Loan Group received by the Master Servicer during such Due Period,
including all full and partial principal prepayments, (ii) the Principal
Balance as of the end of the immediately preceding Due Period of each Mortgage
Loan in the related Loan Group that became a Liquidated Mortgage Loan for the
first time during the related Due Period, (iii) the portion of the Purchase
Price allocable to principal of all repurchased Defective Mortgage Loans in
the related Loan Group with respect to such Due Period, (iv) any Substitution
Adjustment Amounts received on or prior to the previous Determination Date and
not yet distributed with respect to the related Loan Group and (v) such
portion (not greater than 100%) of Excess Spread, if any, required to be
distributed on such Distribution Date to satisfy the required level of
overcollateralization for the related Loan Group for such Distribution Date
(the "Distributable Excess Spread").
"Class A Principal Carryover Shortfall" means, with respect to any
Distribution Date and Certificate Group, the excess of the sum of the related
Class A Monthly Principal Distributable Amount for the preceding Distribution
Date and any outstanding Class A Principal Carryover Shortfall with respect to
such Certificate Group on such preceding Distribution Date over the amount in
respect of principal that is actually distributed to the Class A
Certificateholders of such Certificate Group on such preceding Distribution
Date.
If the required level of overcollateralization for a Certificate Group is
reduced below the then existing amount of overcollateralization (described
below) or if the required level of overcollateralization for such Certificate
Group is satisfied, the amount of the related Class A Monthly Principal
Distributable Amount on the following Distribution Date will be
correspondingly reduced by the amount of such reduction or by the amount
necessary such that the overcollateralization will not exceed the required
level of overcollateralization for a Certificate Group after giving effect to
the distribution in respect of principal with respect to such Certificate
Group to be made on such Distribution Date.
The application of Distributable Excess Spread in respect of a
Certificate Group is intended to create overcollateralization to provide a
source of additional cashflow to cover losses on the Mortgage Loans in the
related Loan Group. If the amount of losses in a particular Due Period for
such Loan Group exceeds the amount of the related Excess Spread for the
related Distribution Date, subject to the provisions described below under
"--Crosscollateralization," the amount distributed in respect of principal
will be reduced. A draw on the Policy in respect of principal will not be made
until the Class A Principal Balance of a Certificates Group exceeds the
aggregate Principal Balance of the Mortgage Loans in the related Loan Group.
See "--The Policy" herein. Accordingly, there may be Distribution Dates on
which Class A Certificateholders receive little or no distributions in respect
of principal.
So long as an Insurer Default has not occurred and is continuing,
distributions of the Class A Principal Distribution with respect to the Group
1 Certificates will be applied, sequentially, to the distribution of principal
to the Class A-1, Class A-2, Class A-3, Class A-4 and Class A-5 Certificates,
in that order, such that no Class of Group 1 Certificates having a higher
numerical designation is entitled to distributions of principal until the
Class A Principal Balance of each such Class of Certificates having a lower
numerical designation has been reduced to zero. On any Distribution Date if an
Insurer Default has occurred and is continuing, the Class A Principal
Distribution with respect to the Group 1 Certificates will be applied to the
distribution of principal of each such Class outstanding on a pro rata basis
in accordance with the Class A Principal Balance of each such Class.
On each Distribution Date following an Insurer Default, net losses
realized in respect of Liquidated Mortgage Loans in a Loan Group (to the
extent such amount is not covered by Available Funds from the related Loan
Group or the crosscollateralization mechanics described herein) will reduce
the amount of overcollateralization, if any, with respect to the related
Certificate Group.
"Due Period" means, with respect to any Determination Date or
Distribution Date, the calendar month immediately preceding such Determination
Date or Distribution Date, as the case may be.
A "Liquidated Mortgage Loan", as to any Distribution Date, is a Mortgage
Loan with respect to which the Master Servicer has determined, in accordance
with the servicing procedures specified in the Agreement, as of the end of the
preceding Due Period, that all Liquidation Proceeds which it expects to
recover with respect to such Mortgage Loan (including disposition of the
related REO Property) have been recovered.
"Excess Spread" means, with respect to any Distribution Date and Loan
Group, the positive excess, if any, of (x) Available Funds for the related
Certificate Group for such Distribution Date over (y) the amount required to
be distributed pursuant to subclause A items (i) through (iv), with respect to
the Group 1 Certificates and subclause B items (i) through (iv), with respect
to the Group 2 Certificates, in each case set forth under the heading
"DESCRIPTION OF CERTIFICATES--Priority of Distributions" on such Distribution
Date.
An "Insurer Default" will occur in the event the Certificate Insurer
fails to make a payment required under the Policy or if certain events of
bankruptcy or insolvency occur with respect to the Certificate Insurer.
The Policy
The following information has been supplied by the Certificate Insurer
for inclusion in this Prospectus Supplement. Accordingly, neither the
Depositor nor the Master Servicer makes any representation as to the accuracy
and completeness of such information.
The Certificate Insurer, in consideration of the payment of the premium
and subject to the terms of the Policy, thereby unconditionally and
irrevocably guarantees to any Owner that an amount equal to each full and
complete Insured Payment will be received by __________________________, or
its successor, as trustee for the Owners (the "Trustee"), on behalf of the
Owners from the Certificate Insurer, for distribution by the Trustee to each
Owner of each Owner's proportionate share of the Insured Payment. The
Certificate Insurer's obligations under the Policy with respect to a
particular Insured Payment shall be discharged to the extent funds equal to
the applicable Insured Payment are received by the Trustee, whether or not
such funds are properly applied by the Trustee. Insured Payments shall be made
only at the time set forth in the Policy and no accelerated Insured Payments
shall be made regardless of any acceleration of the Class A Certificates,
unless such acceleration is at the sole option of the Certificate Insurer.
Notwithstanding the foregoing paragraph, the Policy does not cover
shortfalls, if any, attributable to the liability of the Trust Fund, the REMIC
or the Trustee for withholding taxes, if any (including interest and penalties
in respect of any such liability).
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 Fiscal
Agent (as described below) of (i) a certified copy of the order requiring the
return of a preference payment, (ii) an opinion of counsel satisfactory to the
Certificate Insurer that such order is final and not subject to appeal, (iii)
an assignment in such form as is reasonably required by the Certificate
Insurer, irrevocably assigning to the Certificate Insurer all rights and
claims of the Owner relating to or arising under the Class A Certificates
against the debtor that made such preference payment or otherwise with respect
to such Preference Amount and (iv) appropriate instruments to effect the
appointment of the Certificate Insurer as agent for such Owner in any legal
proceeding related to such Preference Amount, such instruments being in a form
satisfactory to the Certificate Insurer, provided that if such documents are
received after 12:00 noon New York City time on such Business Day, they will
be deemed to be received on the following Business Day. Such payments shall be
disbursed to the receiver or trustee in bankruptcy named in the final order of
the court exercising jurisdiction on behalf of the Owners and not any Owner
directly unless such Owner has returned principal or interest paid on the
Class A Certificates to such receiver or trustee in bankruptcy, in which case
such payment shall be disbursed to such Owner.
The Certificate Insurer will pay any other amount payable under the
Policy no later than 12:00 noon New York City time on the later of the
Distribution Date on which the Deficiency Amount is due or the Business Day
following receipt in New York, New York on a Business Day by State Street Bank
and Trust Company, N.A., as Fiscal Agent for the Certificate Insurer or any
successor fiscal agent appointed by the Certificate Insurer (the "Fiscal
Agent") of a Notice (as described below); provided that if such Notice is
received after 12:00 noon New York City time on such Business Day, it will be
deemed to be received on the following Business Day. If any such Notice
received by the Fiscal Agent is not in proper form or is otherwise
insufficient for the purpose of making claim under the Policy it shall be
deemed not to have been received by the Fiscal Agent for purposes of this
paragraph, and the Certificate Insurer or the Fiscal Agent, as the case may
be, shall promptly so advise the Trustee and the Trustee may submit an amended
Notice.
Insured Payments due under the Policy unless otherwise stated therein
will be disbursed by the Fiscal Agent to the Trustee on behalf of the Owners
by wire transfer of immediately available funds in the amount of the Insured
Payment less, in respect of Insured Payments related to Preference Amounts,
any amount held by the Trustee for the payment of such Insured Payment and
legally available therefor.
The Fiscal Agent is the agent of the Certificate Insurer only and the
Fiscal Agent shall in no event be liable to the Owners for any acts of the
Fiscal Agent or any failure of the Certificate Insurer to deposit or cause to
be deposited, sufficient funds to make payments due under the Policy.
As used in the Policy, the following terms shall have the following
meanings:
"Agreement" means the Pooling and Servicing Agreement, dated as of
_________________, between J.P. Morgan Acceptance Corporation I, as
depositor, ____________, as Seller and Master Servicer, and the Trustee,
as trustee, without regard to any amendment or supplement thereto unless
such amendment or modification has been approved in writing by the
Certificate Insurer.
"Business Day" means any day other than a Saturday, a Sunday or a
day on which banking institutions in New York City or the city in which
the corporate trust office of the Trustee under the Agreement is located
are authorized or obligated by law or executive order to close.
"Deficiency Amount" means for any Distribution Date (A) the excess,
if any, of (i) Class Monthly Interest Distributable Amount (net of any
Civil Relief Act Interest Shortfalls) plus any Class Interest Carryover
Shortfall over (ii) funds on deposit in the Distribution Account (net of
the Trustee's Fee and the Insurance Premium for such Distribution Date)
and (B) the Guaranteed Principal Amount.
"Guaranteed Principal Amount" means for any Distribution Date (a)
the amount which is required to reduce the then outstanding Class A
Principal Balance after giving effect to the distributions, if any, to
the Holders in respect of principal on such Distribution Date to an
amount equal to the Aggregate Principal Balance of the Mortgage Loans as
of the last day of the immediately preceding Due Period and (b) on
__________, ____ after all distributions have been made including
distributions pursuant to clause (a) of this definition of "Guaranteed
Principal Amount," an amount equal to the then outstanding Class A
Principal Balance.
"Insured Payment" means (i) as of any Distribution Date, any
Deficiency Amount and (ii) any Preference Amount.
"Notice" means the telephonic or telegraphic notice, promptly
confirmed in writing (in the case of a telephonic notice) by telecopy,
substantially in the form of Exhibit A attached to the Policy, the
original of which is subsequently delivered by registered or certified
mail, from the Trustee specifying the Insured Payment which shall be due
and owing on the applicable Distribution Date.
"Owner" means each Holder (as defined in the Agreement) who, on the
applicable Distribution Date, is entitled under the terms of the
applicable Class A Certificates to payment under the Policy.
"Preference Amount" means any amount previously distributed to an
Owner on the Class A Certificates that is recoverable and sought to be
recovered as a voidable preference by a trustee in bankruptcy pursuant to
the United States Bankruptcy Code (11 U.S.C.), as amended from time to
time in accordance with a final nonappealable order of a court having
competent jurisdiction.
Capitalized terms used in the Policy and not otherwise defined in the
Policy shall have the respective meanings set forth in the Agreement as of the
date of execution of the Policy, without giving effect to any subsequent
amendment or modification to the Agreement unless such amendment or
modification has been approved in writing by the Certificate Insurer.
Any notice under the Policy or service of process on the Fiscal Agent may
be made at the address listed below for the Fiscal Agent or such other address
as the Certificate Insurer shall specify to the Trustee in writing.
The notice address of the Fiscal Agent is _____________________________
Attention: ________________, or such other address as the Fiscal Agent shall
specify to the Trustee in writing.
The Policy is being issued under and pursuant to, and shall be construed
under, the laws of the State of New York, without giving effect to the
conflict of laws principles thereof.
The insurance provided by the Policy is not covered by the
Property/Casualty Insurance Security Fund specified in Article 76 of the New
York Insurance Law.
The Policy is not cancelable for any reason. The premium on the Policy is
not refundable for any reason including payment, or provision being made for
payment, prior to the maturity of the Class A Certificates.
Overcollateralization
The credit enhancement provisions of the Trust Fund result in a limited
acceleration of the Class A Certificates of a Certificate Group relative to
the amortization of the Mortgage Loans in the related Loan Group in the early
months of the transaction. The accelerated amortization is achieved by the
application of Distributable Excess Spread relating to a Loan Group to
principal distributions on the Class A Certificates of the related Certificate
Group. This acceleration feature creates, with respect to each Certificate
Group, overcollateralization (i.e., the excess of the aggregate outstanding
Principal Balance of the Mortgage Loans in the related Loan Group over the
related Aggregate Class A Principal Balance). Once the required level of
overcollateralization is reached for a Certificate Group, and subject to the
provisions described in the next paragraph, the acceleration feature for such
Certificate Group will cease, until necessary to maintain the required level
of overcollateralization for such Certificate Group.
The Agreement provides that, subject to certain floors, caps and
triggers, the required level of overcollateralization with respect to a
Certificate Group may increase or decrease over time. Any decrease in the
required level of overcollateralization for a Loan Group will occur only at
the sole discretion of the Certificate Insurer. Any such decrease will have
the effect of reducing the amortization of the Class A Certificates of the
related Certificate Group below what it otherwise would have been.
Crosscollateralization
Excess Spread with respect to a Loan Group will be available to cover
certain shortfalls with respect to the Offered Certificates relating to the
other Loan Group as described above under the caption "--Priority of
Distributions".
[Pre-Funding Account
On the Closing Date, $___________ (the "Pre-Funded Amount") will be
deposited in an account (the "Pre-Funding Account"), which account shall be in
the name of and maintained by the Trustee and shall be part of the Trust Fund
and will be used to acquire Subsequent Mortgage Loans. During the period
beginning on the Closing Date and terminating on _____________, 19__ (the
"Funding Period"), the Pre-Funded Amount will be reduced by the amount thereof
used to purchase Subsequent Mortgage Loans in accordance with the Agreement.
Any Pre-Funded Amount remaining at the end of the Funding Period will be
distributed to holders of the classes of Certificates entitled to receive
principal on the Distribution Date in ______________, 19__ in reduction of the
related Certificate Principal Balances (thus resulting in a partial principal
prepayment of the related Certificates on such date).
Amounts on deposit in the Pre-Funding Account will be invested in
Permitted Investments. All interest and any other investment earnings on
amounts on deposit in the Pre-Funding Account will be deposited in the
Capitalized Interest Account. The Pre-Funding Account shall not be an asset of
the REMIC. All reinvestment earnings on the Pre-Funding Account shall be owned
by, and be taxable to, the Seller.
Capitalized Interest Account
On the Closing Date there will be deposited in an account (the
"Capitalized Interest Account") maintained with and in the name of the Trustee
on behalf of the Trust Fund a portion of the proceeds of the sale of the
Certificates. The amount deposited therein will be used by the Trustee on the
Distribution Dates in __________________ 19__, _____________ 19__ and
______________, 19__ to cover shortfalls in interest on the Certificates that
may arise as a result of the utilization of the Pre-Funding Account for the
purchase by the Trust Fund of Subsequent Mortgage Loans after the Closing
Date. Any amounts remaining in the Capitalized Interest Account at the end of
the Funding Period which are not needed to cover shortfalls on the
Distribution Date in ___________ 19__ are required to be paid directly to the
Seller.] The Capitalized Interest Account shall not be an asset of the REMIC.
All reinvestment earnings on the Capitalized Interest Account shall be owned
by, and be taxable to, the Seller.]
Reports to Certificateholders
Concurrently with each distribution to the Certificateholders, the
Trustee will forward to each Certificateholder a statement (based solely on
information received from the Master Servicer) setting forth among other items
with respect to each Distribution Date:
(i) the aggregate amount of the distribution to each Class of
Certificateholders on such Distribution Date;
(ii) the amount of distribution set forth in paragraph (i) above in
respect of interest and the amount thereof in respect of any Class
Interest Carryover Shortfall, and the amount of any Class Interest
Carryover Shortfall remaining;
(iii) the amount of distribution set forth in paragraph (i) above in
respect of principal and the amount thereof in respect of the Class A
Principal Carryover Shortfall, and any remaining Class A Principal
Carryover Shortfall;
(iv) the amount of Excess Spread for each Loan Group and the amount
applied as to a distribution on the Certificates;
(v) the Guaranteed Principal Amount with respect to each Certificate
Group, if any, for such Distribution Date;
(vi) the amount paid under the Policy for such Distribution Date in
respect of the Class Interest Distribution to each Class of Certificates;
(vii) the Master Servicing Fee;
(viii) the Pool Principal Balance, the Loan Group 1 Principal
Balance and the Loan Group 2 Principal Balance, in each case as of the
close of business on the last day of the preceding Due Period;
(ix) the Aggregate Class A Principal Balance of each Certificate
Group after giving effect to payments allocated to principal above;
(x) the amount of overcollateralization relating to each Loan Group
as of the close of business on the Distribution Date, after giving effect
to distributions of principal on such Distribution Date;
(xi) the number and aggregate Principal Balances of the Mortgage
Loans as to which the minimum monthly payment is delinquent for 30-59
days, 60-89 days and 90 or more days, respectively, as of the end of the
preceding Due Period;
(xii) the book value of any real estate which is acquired by the
Trust Fund through foreclosure or grant of deed in lieu of foreclosure;
(xiii) the aggregate amount of prepayments received on the Mortgage
Loans during the previous Due Period and specifying such amount for each
Loan Group; and
(xiv) the weighted average Loan Rate on the Mortgage Loans and
specifying such weighted average Loan Rate for each Loan Group as of the
first day of the month prior to the Distribution Date.
In the case of information furnished pursuant to clauses (ii) and (iii)
above, the amounts shall be expressed as a dollar amount per Certificate with
a $1,000 denomination.
Within 60 days after the end of each calendar year, the Trustee will
forward to each Person, if requested in writing by such Person, who was a
Certificateholder during the prior calendar year a statement containing the
information set forth in clauses (ii) and (iii) above aggregated for such
calendar year.
Last Scheduled Distribution Date
The last scheduled Distribution Date for each Class of Offered
Certificates is as follows: Class A-1 Certificates, ; Class A-2 Certificates,
; Class A-3 Certificates, ; Class A-4 Certificates, ; Class A-_ Certificates,
; and Class A-_ Certificates, . It is expected that the actual last
Distribution Date for each Class of Offered Certificates will occur
significantly earlier than such scheduled Distribution Dates. See "PREPAYMENT
AND YIELD CONSIDERATIONS".
Such last scheduled Distribution Dates are based on a 0% Prepayment
Assumption with no Distributable Excess Spread used to make accelerated
payments of principal to the holders of the related Offered Certificates and
the assumptions set forth above under "PREPAYMENT AND YIELD
CONSIDERATIONS--Weighted Average Lives"; provided that the last scheduled
Distribution Dates for the Class A-5 Certificates and the Class A-6
Certificates have been calculated assuming that the Mortgage Loan in the
related Loan Group having the latest maturity date allowed by the Agreement
amortizes according to its terms, plus one year.
Collection and Other Servicing Procedures on Mortgage Loans
The Master Servicer will make reasonable efforts to collect all payments
called for under the Mortgage Loans and will, consistent with the Agreement,
follow such collection procedures as it follows from time to time with respect
to the loans in its servicing portfolio comparable to the Mortgage Loans.
Consistent with the above, the Master Servicer may in its discretion waive any
late payment charge or any assumption or other fee or charge that may be
collected in the ordinary course of servicing the Mortgage Loans.
With respect to the Mortgage Loans, the Master Servicer may arrange with
a borrower a schedule for the payment of interest due and unpaid for a period,
provided that any such arrangement is consistent with the Master Servicer's
policies with respect to the mortgage loans it owns or services.
Hazard Insurance
The Master Servicer will cause to be maintained fire and hazard insurance
with extended coverage customary in the area where the Mortgaged Property is
located, in an amount which is at least equal to the lesser of (i) the maximum
insurable value of the improvements securing such Mortgage Loan from time to
time and (ii) the combined principal balance owing on such Mortgage Loan and
any mortgage loan senior to such Mortgage Loan. The Master Servicer shall also
maintain on property acquired upon foreclosure, or by deed in lieu of
foreclosure, hazard insurance with extended coverage in an amount which is at
least equal to the lesser of (i) the maximum insurable value from time to time
of the improvements which are a part of such property and (ii) the combined
principal balance owing on such Mortgage Loan and any mortgage loan senior to
such Mortgage Loan. In cases in which any Mortgaged Property is located in a
federally designated flood area as designated by the Federal Emergency
Management Agency, the hazard insurance to be maintained for the related
Mortgage Loan shall include flood insurance to the extent such flood insurance
is available and the Master Servicer has determined such insurance to be
necessary in accordance with accepted first and second mortgage loan servicing
standards, as applicable. All such flood insurance shall be in amounts equal
to the lesser of (A) the amount in clause (ii) above and (B) the maximum
amount of insurance available under the National Flood Insurance Act of 1968,
as amended. The Master Servicer will also maintain on REO Property, to the
extent such insurance is available, fire and hazard insurance in the
applicable amounts described above, liability insurance and, to the extent
required and available under the National Flood Insurance Act of 1968, as
amended, and the Master Servicer determines that such insurance is necessary
in accordance with accepted mortgage servicing practices of prudent lending
institutions, flood insurance in an amount equal to that required above. Any
amounts collected by the Master Servicer under any such policies (other than
amounts to be applied to the restoration or repair of the Mortgaged Property,
or to be released to the Mortgagor in accordance with customary mortgage
servicing procedures) will be deposited in the Collection Account, subject to
retention by the Master Servicer to the extent such amounts constitute
servicing compensation or to withdrawal pursuant to the Agreement.
In the event that the Master Servicer obtains and maintains a blanket
policy as provided in the Agreement insuring against fire and hazards of
extended coverage on all of the Mortgage Loans, then, to the extent such
policy names the Master Servicer as loss payee and provides coverage in an
amount equal to the aggregate unpaid principal balance of the Mortgage Loans
without coinsurance, and otherwise complies with the requirements of the first
paragraph of this subsection, the Master Servicer will be deemed conclusively
to have satisfied its obligations with respect to fire and hazard insurance
coverage.
Realization upon Defaulted Mortgage Loans
The Master Servicer will foreclose upon or otherwise comparably convert
to ownership Mortgaged Properties securing such of the Mortgage Loans as come
into default when, in accordance with applicable servicing procedures under
the Agreement, no satisfactory arrangements can be made for the collection of
delinquent payments. In connection with such foreclosure or other conversion,
the Master Servicer will follow such practices as it deems necessary or
advisable and as are in keeping with its general mortgage servicing
activities, provided that the Master Servicer will not be required to expend
its own funds in connection with foreclosure or other conversion, correction
of default on a related senior mortgage loan or restoration of any property
unless, in its sole judgment, such foreclosure, correction or restoration will
increase Net Liquidation Proceeds. The Master Servicer will be reimbursed out
of Liquidation Proceeds for advances of its own funds as liquidation expenses
before any Net Liquidation Proceeds are distributed to Certificateholders.
Servicing Compensation and Payment of Expenses
With respect to each Due Period, the Master Servicer will receive from
interest payments in respect of the Mortgage Loans, on behalf of itself, a
portion of such interest payments as a monthly servicing fee (the "Master
Servicing Fee") in the amount equal to ____% per annum (the "Master Servicing
Fee Rate") on the Principal Balance of each Mortgage Loan as of the first day
of each such Due Period. All assumption fees, late payment charges and other
fees and charges, to the extent collected from borrowers, will be retained by
the Master Servicer as additional servicing compensation.
The Master Servicer's right to reimbursement for unreimbursed Servicing
Advances is limited to late collections on the related Mortgage Loan,
including Liquidation Proceeds, Insurance Proceeds and such other amounts as
may be collected by the Master Servicer from the related Mortgagor or
otherwise relating to the Mortgage Loan in respect of which such unreimbursed
amounts are owed. The Master Servicer's right to reimbursement for
unreimbursed Monthly Advances shall be limited to late collections of interest
on any Mortgage Loan and to liquidation proceeds and insurance proceeds on the
related Mortgage Loan. The Master Servicer's right to such reimbursements is
prior to the rights of Certificateholders. However, if any Servicing Advance
or Monthly Advance is determined by the Master Servicer to be nonrecoverable
from such sources, the amount of such nonrecoverable advances may be
reimbursed to the Master Servicer from other amounts on deposit in the
Collection Account.
Civil Relief Act Interest Shortfalls will not be covered by the Policy,
although Prepayment Interest Shortfalls, after application of the Master
Servicing Fee, will be so covered. The Master Servicer is not obligated to
offset any of the Master Servicing Fee against, or to provide any other funds
to cover, any shortfalls in interest collections on the Mortgage Loans that
are attributable to the application of the Civil Relief Act ("Civil Relief Act
Interest Shortfalls"). See "RISK FACTORS--Payments on the Mortgage Loans" in
this Prospectus Supplement.
Evidence as to Compliance
The Agreement provides for delivery on or before the last day of the
fifth month following the end of the Master Servicer's fiscal year, beginning
in 199_, to the Trustee, the Depositor, the Certificate Insurer and the Rating
Agencies of an annual statement signed by an officer of the Master Servicer to
the effect that the Master Servicer has fulfilled its material obligations
under the Agreement throughout the preceding fiscal year, except as specified
in such statement.
On or before the last day of the fifth month following the end of the
Master Servicer's fiscal year, beginning in 199_, the Master Servicer will
furnish a report prepared by a firm of nationally recognized independent
public accountants (who may also render other services to the Master Servicer
or the Depositor) to the Trustee, the Depositor, the Certificate Insurer and
the Rating Agencies to the effect that such firm has examined certain
documents and the records relating to servicing of the Mortgage Loans under
the Uniform Single Attestation Program for Mortgage Bankers and such firm's
conclusion with respect thereto.
The Master Servicer's fiscal year is the calendar year.
Certain Matters Regarding the Master Servicer
The Agreement provides that the Master Servicer may not resign from its
obligations and duties thereunder, except in connection with a permitted
transfer of servicing, unless (i) such duties and obligations are no longer
permissible under applicable law as evidenced by an opinion of counsel
delivered to the Certificate Insurer or (ii) upon the satisfaction of the
following conditions: (a) the Master Servicer has proposed a successor master
servicer to the Trustee in writing and such proposed successor master servicer
is reasonably acceptable to the Trustee; (b) the Rating Agencies have
confirmed to the Trustee that the appointment of such proposed successor
master servicer as the Master Servicer will not result in the reduction or
withdrawal of the then current rating of the Certificates; and (c) such
proposed successor master servicer is reasonably acceptable to the Certificate
Insurer. No such resignation will become effective until the Trustee or a
successor master servicer has assumed the Master Servicer's obligations and
duties under the Agreement.
The Master Servicer may perform any of its duties and obligations under
the Agreement through one or more subservicers or delegates, which may be
affiliates of the Master Servicer. Notwithstanding any such arrangement, the
Master Servicer will remain liable and obligated to the Trustee and the
Certificateholders for the Master Servicer's duties and obligations under the
Agreement, without any diminution of such duties and obligations and as if the
Master Servicer itself were performing such duties and obligations.
The Master Servicer may agree to changes in the terms of a Mortgage Loan,
provided, however, that such changes (i) will not cause the Trust Fund to fail
to qualify as a REMIC and do not adversely affect the interests of the
Certificateholders or the Certificate Insurer, (ii) are consistent with
prudent business practices and (iii) do not change the Loan Rate of such
Mortgage Loan or extend the maturity date of such Mortgage Loan in excess of
one year unless the related mortgager is in default, or such default is, in
the judgment of the Master Servicer, imminent. Any changes to the terms of a
Mortgage Loan that would cause the Trust Fund to fail to qualify as a REMIC,
however, may be agreed to by the Master Servicer, provided that the Master
Servicer has determined such changes are necessary to avoid a prepayment of
such Mortgage Loan, such changes are in accordance with prudent business
practices and the Master Servicer purchases such Mortgage Loan in accordance
with the terms of the Agreement.
The Agreement provides that the Master Servicer will indemnify the Trust
Fund and the Trustee from and against any loss, liability, expense, damage or
injury suffered or sustained as a result of the Master Servicer's actions or
omissions in connection with the servicing and administration of the Mortgage
Loans which are not in accordance with the provisions of the Agreement. The
Agreement provides that neither the Depositor nor the Master Servicer nor
their directors, officers, employees or agents will be under any other
liability to the Trust Fund, the Trustee, the Certificateholders or any other
person for any action taken or for refraining from taking any action pursuant
to the Agreement. However, neither the Depositor nor the Master Servicer will
be protected against any liability which would otherwise be imposed by reason
of willful misconduct, bad faith or gross negligence of the Depositor or the
Master Servicer, as the case may be, in the performance of its duties under
the Agreement or by reason of reckless disregard of its obligations
thereunder. In addition, the Agreement provides that the Master Servicer will
not be under any obligation to appear in, prosecute or defend any legal action
which is not incidental to its servicing responsibilities under the Agreement.
The Master Servicer may, in its sole discretion, undertake any such legal
action which it may deem necessary or desirable with respect to the Agreement
and the rights and duties of the parties thereto and the interest of the
Certificateholders thereunder.
Any corporation into which the Master Servicer may be merged or
consolidated, or any corporation resulting from any merger, conversion or
consolidation to which the Master Servicer shall be a party, or any
corporation succeeding to the business of the Master Servicer shall be the
successor of the Master Servicer under the Agreement, without the execution or
filing of any paper or any further act on the part of any of the parties to
the Agreement, anything in the Agreement to the contrary notwithstanding.
Events of Default
"Events of Default" will consist of: (i) (A) any failure of the Master
Servicer to make any required Monthly Advance or (B) any other failure of the
Master Servicer to deposit in the Collection Account or Distribution Account
any deposit required to be made under the Agreement, which failure continues
unremedied for two Business Days after the giving of written notice of such
failure to the Master Servicer by the Trustee, or to the Master Servicer and
the Trustee by the Certificate Insurer or any Certificateholder; (ii) any
failure by the Master Servicer duly to observe or perform in any material
respect any other of its covenants or agreements in the Agreement which, in
each case, materially and adversely affects the interests of the
Certificateholders or the Certificate Insurer and continues unremedied for 30
days after the giving of written notice of such failure to the Master Servicer
by the Trustee, or to the Master Servicer and the Trustee by the Certificate
Insurer or any Certificateholder; (iii) any failure by the Master Servicer to
make any required Servicing Advance, which failure continues unremedied for a
period of 30 days after the giving of written notice of such failure to the
Master Servicer by the Trustee, or to the Master Servicer and the Trustee by
the Certificate Insurer or any Certificateholder; or (iv) certain events of
insolvency, readjustment of debt, marshalling of assets and liabilities or
similar proceedings relating to the Master Servicer and certain actions by the
Master Servicer indicating insolvency, reorganization or inability to pay its
obligations (an "Insolvency Event").
Upon the occurrence and continuation beyond the applicable grace period
of the event described in clause (i) (A) above, if any Monthly Advance is not
made by 4:00 P.M., New York City time, on the second Business Day following
written notice to the Master Servicer of such event, the Trustee will make
such Monthly Advance and either the Trustee or a successor master servicer
will immediately assume the duties of the Master Servicer.
Upon removal or resignation of the Master Servicer, the Trustee will be
the successor master servicer (the "Successor Master Servicer"). The Trustee,
as Successor Master Servicer, will be obligated to make Monthly Advances and
Servicing Advances and certain other advances unless it determines reasonably
and in good faith that such advances would not be recoverable.
Notwithstanding the foregoing, a delay in or failure of performance
referred to under clause (i) above for a period of ten (10) Business Days or
referred to under clause (ii) above for a period of thirty (30) Business Days,
shall not constitute an Event of Default if such delay or failure could not be
prevented by the exercise of reasonable diligence by the Master Servicer and
such delay or failure was caused by an act of God or other similar occurrence.
Upon the occurrence of any such event the Master Servicer shall not be
relieved from using its best efforts to perform its obligations in a timely
manner in accordance with the terms of the Agreement and the Master Servicer
shall provide the Trustee, the Certificate Insurer and the Certificateholders
prompt notice of such failure or delay by it, together with a description of
its efforts to so perform its obligations.
Rights upon an Event of Default
So long as an Event of Default remains unremedied, either the Trustee,
Certificateholders holding Certificates evidencing at least 51% of the voting
rights in the Trust Fund, with the consent of the Certificate Insurer, or the
Certificate Insurer may terminate all of the rights and obligations of the
Master Servicer under the Agreement and in and to the Mortgage Loans,
whereupon the Trustee will succeed to all the responsibilities, duties and
liabilities of the Master Servicer under the Agreement and will be entitled to
similar compensation arrangements. In the event that the Trustee would be
obligated to succeed to all the responsibilities, duties and liabilities of
the Master Servicer but is unwilling or unable so to act, it may appoint, or
petition a court of competent jurisdiction for the appointment of, a housing
and home finance institution or other mortgage loan or home equity loan
servicer with all licenses and permits required to perform its obligations
under the Agreement and having a net worth of at least $50,000,000 and
acceptable to the Certificate Insurer to act as successor to the Master
Servicer under the Agreement. Pending such appointment, the Trustee will be
obligated to act in such capacity unless prohibited by law. Such successor
will be entitled to receive the same compensation that the Master Servicer
would otherwise have received (or such lesser compensation as the Trustee and
such successor may agree). A receiver or conservator for the Master Servicer
may be empowered to prevent the termination and replacement of the Master
Servicer if the only Event of Default that has occurred is an Insolvency
Event.
Amendment
The Agreement may be amended from time to time by the Seller, the Master
Servicer, and the Trustee and with the consent of the Certificate Insurer, but
without the consent of the Certificateholders, to cure any ambiguity, to
correct or supplement any provisions therein which may be inconsistent with
any other provisions of the Agreement, to add to the duties of the Seller or
the Master Servicer to comply with any requirements imposed by the Internal
Revenue Code or any regulation thereunder, or to add or amend any provisions
of the Agreement as required by the Rating Agencies in order to maintain or
improve any rating of the Offered Certificates (it being understood that,
after obtaining the ratings in effect on the Closing Date, neither the Seller,
the Trustee, the Certificate Insurer nor the Master Servicer is obligated to
obtain, maintain, or improve any such rating) or to add any other provisions
with respect to matters or questions arising under the Agreement which shall
not be inconsistent with the provisions of the Agreement; provided that such
action will not, as evidenced by an opinion of counsel, materially and
adversely affect the interests of any Certificateholder or the Certificate
Insurer; provided, further, that any such amendment will not be deemed to
materially and adversely affect the Certificateholders and no such opinion
will be required to be delivered if the person requesting such amendment
obtains a letter from the Rating Agencies stating that such amendment would
not result in a downgrading of the then current rating of the Offered
Certificates. The Agreement may also be amended from time to time by the
Seller, the Master Servicer, and the Trustee, with the consent of
Certificateholders evidencing at least 51% of the Percentage Interests of each
Class affected thereby and the Certificate Insurer for the purpose of adding
any provisions to or changing in any manner or eliminating any of the
provisions of the Agreement or of modifying in any manner the rights of the
Certificateholders, provided that no such amendment will (i) reduce in any
manner the amount of, or delay the timing of, collections of payments on the
Certificates or distributions or payments under the Policy which are required
to be made on any Certificate without the consent of the Certificateholder or
(ii) reduce the aforesaid percentage required to consent to any such
amendment, without the consent of the holders of all Offered Certificates then
outstanding.
Termination; Purchase of Mortgage Loans
The Trust Fund will terminate on the Distribution Date following the
later of (A) payment in full of all amounts owing to the Certificate Insurer
unless the Certificate Insurer shall otherwise consent and (B) the earliest of
(i) the Distribution Date on which the Aggregate Class A Principal Balance has
been reduced to zero, (ii) the final payment or other liquidation of the last
Mortgage Loan in the Trust Fund, (iii) the optional purchase by the Master
Servicer of the Mortgage Loans, as described below and (iv) the Distribution
Date in [ ] on which date the Policy will be available to pay the outstanding
Aggregate Class A Principal Balance of the Class A Certificates.
Subject to provisions in the Agreement concerning adopting a plan of
complete liquidation, the Master Servicer may, at its option, terminate the
Agreement on any date on which the Pool Principal Balance is less than 5% of
the sum of the Cut-Off Date Pool Principal Balance by purchasing, on the next
succeeding Distribution Date, all of the outstanding Mortgage Loans at a price
equal to the sum of the outstanding Pool Principal Balance (subject to
reduction as provided in the Agreement if the purchase price is based in part
on the appraised value of any REO Property included in the Trust Fund and such
appraised value is less than the Principal Balance of the related Mortgage
Loan) and accrued and unpaid interest thereon at the weighted average of the
Loan Rates through the end of the Due Period preceding the final Distribution
Date together with all amounts due and owing to the Certificate Insurer.
Any such purchase shall be accomplished by deposit into the Distribution
Account of the purchase price specified above.
Voting Rights
Under the Agreement, the voting rights (the "Voting Rights") will be
allocated to the Class A Certificates among such Classes in proportion to
their respective Class Principal Balances. Voting Rights allocated to a Class
of Certificates will be further allocated among the Certificates of such Class
on the basis of their respective Percentage Interests. [So long as no Insurer
Default is continuing, the Certificate Insurer will be entitled to exercise
the Voting Rights of the Class A Certificates].
The Trustee
________________________________________, has been named Trustee pursuant
to the Agreement.
The Trustee may have normal banking relationships with the Depositor and
the Master Servicer.
The Trustee may resign at any time, in which event the Depositor will be
obligated to appoint a successor Trustee, as approved by the Certificate
Insurer. The Depositor may also remove the Trustee if the Trustee ceases to be
eligible to continue as such under the Agreement or if the Trustee becomes
insolvent. Upon becoming aware of such circumstances, the Depositor will be
obligated to appoint a successor Trustee, as approved by the Certificate
Insurer. Any resignation or removal of the Trustee and appointment of a
successor Trustee will not become effective until acceptance of the
appointment by the successor Trustee.
No holder of a Certificate will have any right under the Agreement to
institute any proceeding with respect to the Agreement unless such holder
previously has given to the Trustee written notice of default and unless
Certificateholders holding Certificates evidencing at least 51% of the
Percentage Interests in the Trust Fund have made written requests upon the
Trustee to institute such proceeding in its own name as Trustee thereunder and
have offered to the Trustee reasonable indemnity and the Trustee for 60 days
has neglected or refused to institute any such proceeding. The Trustee will be
under no obligation to exercise any of the trusts or powers vested in it by
the Agreement or to make any investigation of matters arising thereunder or to
institute, conduct or defend any litigation thereunder or in relation thereto
at the request, order or direction of any of the Certificateholders, unless
such Certificateholders have offered to the Trustee reasonable security or
indemnity against the cost, expenses and liabilities which may be incurred
therein or thereby.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Certificates will be
applied by the Depositor towards the purchase of the Mortgage Loans.
FEDERAL INCOME TAX CONSEQUENCES
An election will be made to treat the Trust Fund as a "real estate
mortgage investment conduit" ("REMIC") for federal income tax purposes under
the Internal Revenue Code of 1986, as amended (the "Code"). In the opinion of
Tax Counsel, the Class A Certificates will be designated as "regular
interests" in the REMIC and the Class R Certificates will be designated as the
sole class of residual interests in the REMIC. See "FEDERAL INCOME TAX
CONSEQUENCES--Taxation of the REMIC and its Holders" in the Prospectus.
The Offered Certificates generally will be treated as debt instruments
issued by the REMIC for Federal income tax purposes. Income on such
Certificates must be reported under an accrual method of accounting.
The Offered Certificates may, depending on their issue price, be issued
with original issue discount ("OID") for federal income tax purposes. Holders
of such Certificates issued with OID will be required to include OID in income
as it accrues under a constant yield method, in advance of the receipt of cash
attributable to such income. The OID Regulations do not contain provisions
specifically interpreting Code Section 1272(a)(6) which applies to prepayable
securities such as the Offered Certificates. Until the Treasury issues
guidance to the contrary, the Trustee intends to base its OID computation on
Code Section 1272(a)(6) and the OID Regulations as described in the
Prospectus. However, because no regulatory guidance currently exists under
Code Section 1272(a)(6), there can be no assurance that such methodology
represents the correct manner of calculating OID.
The yield used to calculate accruals of OID with respect to the Offered
Certificates with OID will be the original yield to maturity of such
Certificates, determined by assuming that the Mortgage Loans in Loan Group 1
will prepay in accordance with % of the Prepayment Assumption and that the
Mortgage Loans in Loan Group 2 will prepay in accordance with % of the
Prepayment Assumption. No representation is made as to the actual rate at
which the Mortgage Loans will prepay.
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The Prepayment Assumption model used in this
Prospectus is based on a Constant Prepayment Rate ("CPR"). CPR represents a
constant rate of prepayment on the Mortgage Loans each month relative to the
aggregate outstanding principal balance of the Mortgage Loans. CPR does not
purport to be either an historical description of the prepayment experience of
any pool of mortgage loans or a prediction of the anticipated rate of
prepayment of any pool of mortgage loans, including the Mortgage Loans, and
there is no assurance that the Mortgage Loans will prepay at the specified
CPR. The Depositor does not make any representation about the appropriateness
of the CPR model.
In the opinion of Tax Counsel, the Offered Certificates will be treated
as regular interests in a REMIC under section 860G of the Code. Accordingly,
the Offered Certificates will be treated as (i) assets described in section
7701(a)(19)(C) of the Code, and (ii) "real estate assets" within the meaning
of section 856(c)(4)(A) of the Code, in each case to the extent described in
the Prospectus. Interest on the Offered Certificates 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 to the same extent that the
Offered Certificates are treated as real estate assets. See "Federal Income
Tax Consequences" in the Prospectus.
Backup Withholding
Certain Certificate Owners may be subject to backup withholding at the
rate of 31% with respect to interest paid on the Offered Certificates if the
Certificate Owners, upon issuance, fail to supply the Trustee or their broker
with their taxpayer identification number, furnish an incorrect taxpayer
identification number, fails to report interest, dividends, or other
"reportable payments" (as defined in the Code) properly, or, under certain
circumstances, fails to provide the Trustee or their broker with a certified
statement, under penalty of perjury, that they are not subject to backup
withholding.
The Trustee will be required to report annually to the IRS, and to each
Offered Certificateholder of record, the amount of interest paid (and OID
accrued, if any) on the Offered Certificates (and the amount of interest
withheld for Federal income taxes, if any) for each calendar year, except as
to exempt holders (generally, holders that are corporations, certain
tax-exempt organizations or nonresident aliens who provide certification as to
their status as nonresidents). As long as the only "Class A Certificateholder"
of record is Cede, as nominee for DTC, Certificate Owners and the IRS will
receive tax and other information including the amount of interest paid on
such Certificates owned from Participants and Indirect Participants rather
than from the Trustee. (The Trustee, however, will respond to requests for
necessary information to enable Participants, Indirect Participants and
certain other persons to complete their reports.) Each non-exempt Certificate
Owner will be required to provide, under penalty of perjury, a certificate on
IRS Form W-9 containing his or her name, address, correct Federal taxpayer
identification number and a statement that he or she is not subject to backup
withholding. Should a nonexempt Certificate Owner fail to provide the required
certification, the Participants or Indirect Participants (or the Paying Agent)
will be required to withhold 31% of the interest (and principal) otherwise
payable to the holder, and remit the withheld amount to the IRS as a credit
against the holder's Federal income tax liability.
Such amounts will be deemed distributed to the affected Certificate owner
for all purposes of the Certificates, the Agreement and the Policy.
Final regulations dealing with withholding tax on income paid to foreign
persons, backup withholding and related matters (the "New Withholding
Regulations") were issued by the Treasury Department on October 6, 1997. The
New Withholding Regulations generally will be effective for payments made
after December 31, 1999, subject to certain transition rules. Prospective
Certificate Owners are strongly urged to consult their own tax advisors with
respect to the New Withholding Regulations.
Federal Income Tax Consequences to Foreign Investors
The following information describes the United States federal income tax
treatment of holders that are not United States persons ("Foreign Investors").
The term "Foreign Investor" means any person other than (i) a citizen or
resident of the United States, (ii) a corporation, partnership or other entity
organized in or under the laws of the United States, any state thereof or the
District of Columbia, (other than a partnership that is not treated as a
United States person under any applicable Treasury regulations), (iii) an
estate the income of which is includible in gross income for United States
federal income tax purposes, regardless of its source, (iv) a trust fund if a
court within the United States is able to exercise primary supervision over
the administration of the trust fund and one or more United States persons
have authority to control all substantial decisions of the trust fund, or (v)
certain trusts treated as United States persons before August 20, 1996 that
elect to continue to be so treated to the extent provided in regulations.
The Code and Treasury regulations generally subject interest paid to a
Foreign Investor to a withholding tax at a rate of 30% (unless such rate were
changed by an applicable treaty). The withholding tax, however, is eliminated
with respect to certain "portfolio debt investments" issued to Foreign
Investors. Portfolio debt investments include debt instruments issued in
registered form for which the United States payor receives a statement that
the beneficial owner of the instrument is a Foreign Investor. The Offered
Certificates will be issued in registered form, therefore if the information
required by the Code is furnished (as described below) and no other exceptions
to the withholding tax exemption are applicable, no withholding tax will apply
to the Offered Certificates.
For the Offered Certificates to constitute portfolio debt investments
exempt from the United States withholding tax, the withholding agent must
receive from the Certificate Owner an executed IRS Form W-8 or similar form
signed under penalty of perjury by the Certificate Owner stating that the
Certificate Owner is a Foreign Investor and providing such Certificate Owner's
name and address. The statement must be received by the withholding agent in
the calendar year in which the interest payment is made, or in either of the
two preceding calendar years.
A Certificate Owner that is a nonresident alien or foreign corporation
will not be subject to United States federal income tax on gain realized on
the sale, exchange, or redemption of such Offered Certificate, provided that
(i) such gain is not effectively connected with a trade or business carried on
by the Certificate Owner in the United States, (ii) in the case of a
Certificate Owner that is an individual, such Certificate Owner is not present
in the United States for 183 days or more during the taxable year in which
such sale, exchange or redemption occurs and (iii) in the case of gain
representing accrued interest, the conditions described in the immediately
preceding paragraph are satisfied.
In addition, prospective Certificate Owners are strongly urged to consult
their own tax advisors with respect to the New Withholding Regulations. See
"CERTAIN FEDERAL INCOME TAX CONSEQUENCES - Backup Withholding".
STATE TAXES
The Depositor makes no representations regarding the tax consequences of
purchase, ownership or disposition of the Offered Certificates under the tax
laws of any state. Investors considering an investment in the Certificates
should consult their own tax advisors regarding such tax consequences.
All investors should consult their own tax advisors regarding the
Federal, state, local or foreign income tax consequences of the purchase,
ownership and disposition of the Certificates.
ERISA CONSIDERATIONS
Any Plan fiduciary which proposes to cause a Plan to acquire any of the
Offered Certificates should consult with its counsel with respect to the
potential consequences under the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), and the Code, of the Plan's acquisition and
ownership of such Certificates. See "ERISA CONSIDERATIONS" in the Prospectus.
The U.S. Department of Labor (the "DOL") has granted to J.P. Morgan
Securities Inc. (the "Underwriter") Prohibited Transaction Exemption 90-23,
Application No. D-7989, 55 Fed. Reg. 20545 (1990) (the "Exemption") which
exempts from the application of the prohibited transaction rules transactions
relating to (1) the acquisition, sale and holding by Plans of certain
certificates representing an undivided interest in certain asset-backed
pass-through trusts, with respect to which J.P. Morgan Securities Inc. or any
of its affiliates is the sole underwriter or the manager or co-manager of the
underwriting syndicate; and (2) the servicing, operation and management of
such asset-backed pass-through trusts, provided that the general conditions
and certain other conditions set forth in the Exemption are satisfied. The
Exemption will apply to the acquisition, holding and resale of the Class A
Certificates by a Plan, provided that certain conditions (certain of which are
described below) are met.
Among the conditions which must be satisfied for the Exemption to apply
are the following:
(1) The acquisition of the Class A Certificates by a Plan is on
terms (including the price for such Certificates) that are at least as
favorable to the investing Plan as they would be in an arm's-length
transaction with an unrelated party;
(2) The rights and interests evidenced by the Class A Certificates
acquired by the Plan are not subordinated to the rights and interests
evidenced by other certificates of the Trust Fund;
(3) The Class A Certificates acquired by the Plan have received a
rating at the time of such acquisition that is in one of the three
highest generic rating categories from S&P, Moody's, Duff & Phelps Credit
Rating Co. or Fitch IBCA, Inc. (each, a "Rating Agency");
(4) The sum of all payments made to and retained by the Underwriter
in connection with the distribution of the Class A Certificates
represents not more than reasonable compensation for underwriting such
Certificates; the sum of all payments made to and retained by the Seller
pursuant to the sale of the Mortgage Loans to the Trust Fund represents
not more than the fair market value of such Mortgage Loans; the sum of
all payments made to and retained by such Servicer represents not more
than reasonable compensation for any Servicer's services under the
Agreement and reimbursement of such Servicer's reasonable expenses in
connection therewith;
(5) The Trustee is not an affiliate of any Underwriter, the Seller,
any Servicer, the Certificate Insurer, any borrower whose obligations
under one or more Mortgage Loans constitute more than 5% of the aggregate
unamortized principal balance of the assets in the Trust Fund, or any of
their respective affiliates; and
(6) The Plan investing in the Class A Certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the Securities
and Exchange Commission under the Securities Act of 1933, as amended.
On July 21, 1997, the DOL published in the Federal Register an amendment
to the Exemption, which extends exemptive relief to certain mortgage-backed
and asset-backed securities transactions using pre-funding accounts for trusts
issuing pass-through certificates. The amendment generally allows mortgage
loans or other secured receivables (the "Obligations") supporting payments to
certificateholders, and having a value equal to no more than twenty-five
percent (25%) of the total principal amount of the certificates being offered
by the trust, to be transferred to the trust within a 90-day or three-month
period following the closing date (the "Pre-Funding Period"), instead of
requiring that all such Obligations be either identified or transferred on or
before the Closing Date. The relief is available when the following conditions
are met:
(1) The ratio of the amount allocated to the pre-funding account to
the total principal amount of the certificates being offered (the
"Pre-Funding Limit") must not exceed twenty-five percent (25%).
(2) All Obligations transferred after the Closing Date (the
"Additional Obligations") must meet the same terms and conditions for
eligibility as the original Obligations used to create the trust, which
terms and conditions have been approved by a Rating Agency.
(3) The transfer of such Additional Obligations to the trust during
the Pre-Funding Period must not result in the certificates to be covered
by the Exemption receiving a lower credit rating from a Rating Agency
upon termination of the Pre-Funding Period than the rating that was
obtained at the time of the initial issuance of the certificates by the
trust.
(4) Solely as a result of the use of pre-funding, the weighted
average annual percentage interest rate for all of the Obligations in the
trust at the end of the Pre-Funding Period must not be more than 100
basis points lower than the average interest rate for the Obligations
transferred to the trust on the Closing Date.
(5) In order to insure that the characteristics of the Additional
Obligations are substantially similar to the original Obligations which
were transferred to the Trust Fund:
(i) the characteristics of the Additional Obligations must be
monitored by an insurer or other credit support provider that is
independent of the depositor; or
(ii) an independent accountant retained by the depositor must
provide the depositor with a letter (with copies provided to each
Rating Agency rating the certificates, the related underwriter and
the related trustee) stating whether or not the characteristics of
the Additional Obligations conform to the characteristics described
in the related prospectus or prospectus supplement and/or pooling
and servicing agreement. In preparing such letter, the independent
accountant must use the same type of procedures as were applicable
to the Obligations transferred to the trust as of the Closing Date.
(6) The Pre-Funding Period must end no later than three months or 90
days after the Closing Date or earlier in certain circumstances if the
pre-funding account falls below the minimum level specified in the
pooling and servicing agreement or an Event of Default occurs.
(7) Amounts transferred to any pre-funding account and/or
capitalized interest account used in connection with the pre-funding may
be invested only in certain permitted investments ("Permitted
Investments").
(8) The related prospectus or prospectus supplement must describe:
(i) any pre-funding account and/or capitalized interest account
used in connection with a pre-funding account;
(ii) the duration of the Pre-Funding Period;
(iii) the percentage and/or dollar amount of the Pre-Funding
Limit for the trust; and
(iv) that the amounts remaining in the pre-funding account at
the end of the Pre-Funding Period will be remitted to
certificateholders as repayments of principal.
(9) The related pooling and servicing agreement must describe the
Permitted Investments for the pre-funding account and/or capitalized
interest account and, if not disclosed in the related prospectus or
prospectus supplement, the terms and conditions for eligibility of
Additional Obligations.
The Underwriter believes that the Exemption as amended will apply to the
acquisition and holding of the Class A Certificates by Plans and that all
conditions of the Exemption other than those within the control of the
investors will be met.
Any Plan fiduciary considering whether to purchase any Class A
Certificates on behalf of a Plan should consult with its counsel regarding the
applicability of the fiduciary responsibility and prohibited transaction
provisions of ERISA and the Code to such investment. Among other things,
before purchasing any Class A Certificates, a fiduciary of a Plan subject to
the fiduciary responsibility provisions of ERISA or an employee benefit plan
subject to the prohibited transaction provisions of the Code should make its
own determination as to the availability of the exemptive relief provided in
the Exemption, and also consider the availability of any other prohibited
transaction exemptions.
LEGAL INVESTMENT CONSIDERATIONS
The Offered Certificates will constitute "mortgage related securities"
for purposes of the Secondary Mortgage Market Enhancement Act of 1984
("SMMEA") so long as they are rated in one of the two highest rating
categories by at least one nationally recognized statistical rating
organization and, as such, are legal investments for certain entities to the
extent provided in SMMEA.
Institutions whose investment activities are subject to review by federal
or state regulatory authorities should consult with their counsel or the
applicable authorities to determine whether an investment in the Offered
Certificates complies with applicable guidelines, policy statements or
restrictions. See "LEGAL INVESTMENT" in the Prospectus.
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting
agreement, dated ____________________ (the "Underwriting Agreement"), between
the Depositor and J.P. Morgan Securities Inc. (the "Underwriter"), the
Depositor has agreed to sell to the Underwriter and the Underwriter has agreed
to purchase from the Depositor the Class A Certificates.
Distributions of the Offered Certificates will be made from time to time
in negotiated transactions or otherwise at varying prices to be determined at
the time of sale. Proceeds to the Depositor from the sale of the Offered
Certificates will be approximately $ , plus accrued interest, before deducting
expenses payable by the Depositor, estimated to be $ in the aggregate. In
connection with the purchase and sale of the Offered Certificates, the
Underwriter may be deemed to have received compensation from the Depositor in
the form of underwriting discounts.
The Depositor has been advised by the Underwriter that it presently
intends to make a market in the Offered Certificates; however, it is not
obligated to do so, any market-making may be discontinued at any time, and
there can be no assurance that an active public market for the Offered
Certificates will develop.
The Underwriting Agreement provides that the Depositor will indemnify the
Underwriter against certain civil liabilities, including liabilities under the
Act.
EXPERTS
[----------]
LEGAL MATTERS
Certain legal matters with respect to the Class A Certificates will be
passed upon for the Depositor by Brown & Wood LLP, New York, New York, and for
the Underwriter by ____________________.
RATINGS
It is a condition to the issuance of the Class A Certificates that they
receive ratings of "AAA" by _______ and "Aaa" by ______ (each, a "Rating
Agency" and together, the "Rating Agencies").
A securities rating addresses the likelihood of the receipt by Class A
Certificateholders of distributions on the Mortgage Loans. The rating takes
into consideration the characteristics of the Mortgage Loans and the
structural, legal and tax aspects associated with the Class A Certificates.
The ratings on the Class A Certificates do not, however, constitute statements
regarding the likelihood or frequency of prepayments on the Mortgage Loans or
the possibility that Class A Certificateholders might realize a lower than
anticipated yield.
The ratings assigned to the Class A Certificates will depend primarily
upon the creditworthiness of the Certificate Insurer. Any reduction in a
rating assigned to the claims-paying ability of the Certificate Insurer below
the ratings initially assigned to the Class A Certificates may result in a
reduction of one or more of the ratings assigned to the Class A Certificates.
A securities rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each securities rating should be evaluated
independently of similar ratings on different securities.
INDEX OF DEFINED TERMS
TERMS PAGE
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Home Equity
Loan Asset-Backed Certificates, Series 199___ (the "Global Securities") will
be available only in book-entry form. Investors in the Global Securities may
hold such Global Securities through any of DTC, Cedelbank or Euroclear. The
Global Securities will be tradeable as home market instruments in both the
European and U.S. domestic markets. Initial settlement and all secondary
trades will settle in same-day funds.
Secondary market trading between investors holding Global Securities
through Cedelbank and Euroclear will be conducted in the ordinary way in
accordance with their normal rules and operating procedures and in accordance
with conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations and prior Mortgage Pass-Through
Certificates issues.
Secondary cross-market trading between Cedelbank or Euroclear and DTC
Participants holding Certificates will be effected on a
delivery-against-payment basis through the respective Depositaries of
Cedelbank and Euroclear (in such capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be
subject to U.S. withholding taxes unless such holders meet certain
requirements and deliver appropriate U.S. tax documents to the securities
clearing organizations or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the name
of Cede & Co. ("Cede") as nominee of DTC. Investors' interests in the Global
Securities will be represented through financial institutions acting on their
behalf as direct and indirect Participants in DTC. As a result, Cedelbank and
Euroclear will hold positions on behalf of their participants through their
respective Depositaries, which in turn will hold such positions in accounts as
DTC Participants.
Investors electing to hold their Global Securities through DTC will
follow the settlement practices applicable to prior Mortgage Pass-Through
Certificates issues. Investor securities custody accounts will be credited
with their holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Cedelbank or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to
the securities custody accounts on the settlement date against payment in
same-day funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired
value date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior Mortgage
Pass-Through Certificates issues in same-day funds.
Trading between Cedelbank and/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.
Trading between DTC seller and Cedelbank or Euroclear purchaser. When
Global 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 respective Depositary, as
the case may be, to receive the Global Securities against payment. Payment
will include interest accrued on the Global Securities from and including the
last coupon payment date to and excluding the settlement date, on the basis of
either the actual number of days in such accrual period and a year assumed to
consist of 360 days or a 360-day year of 12 30-day months as applicable to the
related class of Global Securities. For transactions settling on the 31st of
the month, payment will include interest accrued to and excluding the first
day of the following month. Payment will then be made by the respective
Depositary of the DTC Participant's account against delivery of the Global
Securities. After settlement has been completed, the Global Securities will be
credited to the respective clearing system and by the clearing system, in
accordance with its usual procedures, to the 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 (i.e., 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 Global Securities are credited to their accounts 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 the finance
settlement. Under this procedure, Cedelbank Participants or Euroclear
Participants purchasing Global Securities would incur overdraft charges for
one day, assuming they cleared the overdraft when the Global Securities were
credited to their accounts. However, interest on the Global Securities would
accrue from the value date. Therefore, in many cases the investment income on
the Global Securities earned during that one-day period may substantially
reduce or offset the amount of such overdraft charges, although this 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 sending Global Securities
to the respective European Depositary 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
Global Securities are to be transferred by the respective clearing system,
through the respective Depositary, to a DTC Participant. The seller will send
instructions to 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 Depositary, as
appropriate, to deliver the Global Securities to the DTC Participant's account
against payment. Payment will include interest accrued on the Global
Securities from and including the last coupon payment to and excluding the
settlement date on the basis of either the actual number of days in such
accrual period and a year assumed to consist of 360 days or a 360-day year of
12 30-day months as applicable to the related class of Global Securities. For
transactions settling on the 31st of the month, payment will include interest
accrued to and excluding the first day of the following month. The payment
will then be reflected in the account of the 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). Should the Cedelbank Participant or
Euroclear Participant have a line of credit with its respective clearing
system and elect to be in debt in anticipation of receipt of the sale proceeds
in its account, the back-valuation will extinguish any overdraft incurred over
that one-day period. If settlement is not completed on the intended value date
(i.e., 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.
Finally, day traders that use Cedelbank or Euroclear and that purchase
Global Securities from DTC Participants for delivery to Cedelbank Participants
or Euroclear Participants should note that these trades would automatically
fail on the sale side unless affirmative action were taken. At least three
techniques should be readily available to eliminate this potential problem:
(a) borrowing through Cedelbank or Euroclear for one day (until the
purchase side of the day trade is reflected in their Cedelbank or Euroclear
accounts) in accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC Participant no
later than one day prior to settlement, which would give the Global Securities
sufficient time to be reflected in their Cedelbank or Euroclear account in
order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade so
that the value date for the purchase from the DTC Participant is at least one
day 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 Global 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 (i) each clearing system, bank
or other financial institution that holds customers' securities in the
ordinary course of its trade or business in the chain of intermediaries
between such beneficial owner and the U.S. entity required to withhold tax
complies with applicable certification requirements and (ii) such beneficial
owner takes one of the following steps to obtain an exemption or reduced tax
rate:
Exemption for non-U.S. Persons (Form W-8). Beneficial owners of Global
Securities that are non-U.S. Persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status).
If the information shown on Form W-8 changes, a new Form W-8 must be filed
within 30 days of such change.
Exemption for non-U.S. Persons with effectively connected income (Form
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its
conduct of a trade or business in the United States, can obtain an exemption
from the withholding tax by filing Form 4224 (Exemption from Withholding of
Tax on Income Effectively Connected with the Conduct of a Trade or Business in
the United States).
Exemption or reduced rate for non-U.S. Persons resident in treaty
countries (Form 1001). Non-U.S. Persons that are Certificate Owners residing
in a country that has a tax treaty with the United States can obtain an
exemption or reduced tax rate (depending on the treaty terms) by filing Form
1001 (Ownership, Exemption or Reduced Rate Certificate). If the treaty
provides only for a reduced rate, withholding tax will be imposed at that rate
unless the filer alternatively files Form W-8. Form 1001 may be filed by the
Certificate Owners or his agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Certificate Owner of a
Global Security or, in the case of a Form 1001 or a Form 4224 filer, his
agent, files by submitting the appropriate form to the person through whom it
holds (the clearing agency, in the case of persons holding directly on the
books of the clearing agency). Form W-8 and Form 1001 are effective for three
calendar years and Form 4224 is effective for one calendar year.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation or partnership organized in or under the laws of
the United States or any political subdivision thereof, (iii) an estate the
income of which is includible in gross income for United States tax purposes,
regardless of its source, or (iv) a trust if a court within the United States
is able to exercise primary supervision over the administration of the trust
and one or more United States trustees have authority to control all
substantial decisions of the trust. This summary does not deal with all
aspects of U.S. Federal income tax withholding that may be relevant to foreign
holders of the Global Securities. Investors are advised to consult their own
tax advisors for specific tax advice concerning their holding and disposing of
the Global Securities.
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED APRIL 28, 1999
PROSPECTUS
Asset Backed Securities
(Issuable in Series)
----------------
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING
ON PAGE 5 OF THIS PROSPECTUS.
The securities represent obligations of the
trust only and do not represent an interest in
or obligation of J.P. Morgan Acceptance
Corporation I, the master servicer or any of
their affiliates.
This prospectus may be used to offer and sell
the securities only if accompanied by a
prospectus supplement.
J.P. Morgan Acceptance Corporation I may
periodically establish trusts which will issue
securities. The securities may be in the form of
asset-backed certificates or asset-backed notes.
Each issue of securities will have its own
series designation and will evidence interests
in or obligations only of the trust established
for that issuance.
Each trust will consist of:
o mortgage loans secured by senior or junior
liens on one- to four-family residential
properties;
o closed-end and/or revolving home equity
loans secured by senior or junior liens
on one- to four-family residential
properties;
o home improvement installment sales
contracts and installment loan
agreements unsecured or secured by
senior or junior liens on one- to
four-family residential properties or
by purchase money security interests in
the home improvements financed thereby;
o manufactured housing installment sales
contracts and installment loan
agreements secured by senior or junior
liens on manufactured homes or by
mortgages on real estate on which the
manufactured homes are located;
o mortgaged backed securities issued or
guaranteed by GNMA, FHLMC or FNMA; and
o privately issued mortgage backed securities.
Each series of securities will:
o either evidence beneficial ownership of a
trust or be secured by the assets of a
trust;
o will be issued in one or more classes of
securities. A class of securities:
o will be entitled to anywhere from
0% to 100% of the interest payments
and principal payments on the
assets of the trust;
o may be senior or subordinate in
right of payment to other classes;
and
o may receive payments from an
insurance policy, cash account or
other form of credit enhancement
to cover losses on the trust assets.
No market will exist for the securities of any series before they are issued.
In addition, even after the securities of a series have been issued and sold,
there can be no assurance that a resale market will develop.
The securities may be offered to the public through different methods as
described in "Method of Distribution" in this prospectus.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
________________, 1999
IMPORTANT NOTICE ABOUT 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: (a) this prospectus, which provides
general information, some of which may not apply to your series of securities
and (b) the accompanying prospectus supplement, which describes the specific
terms of your series of securities.
If the terms of a particular series of securities vary between this prospectus
and the accompanying prospectus supplement, you should rely on the information
in the prospectus supplement.
You should rely only on the information provided in this prospectus and the
accompanying prospectus supplement, including the information incorporated by
reference. We have not authorized anyone to provide you with different
information. We are not offering the securities in any state where the offer is
not permitted.
We include cross-references in this prospectus and the accompanying prospectus
supplement to captions in these materials where you can find further related
discussions. The following Table of Contents and the Table of Contents included
in the accompanying prospectus supplement provide the pages on which these
captions are located.
You can find a listing of the pages where capitalized terms used in this
prospectus are defined under the caption "Index of Defined Terms" beginning on
page 122.
Table of Contents
Page
Risk Factors.......................................5
Limited Resale Market for Securities..........5
Limited Source of Payments -No Recourse to
Seller, Depositor or Master Servicer..........5
Limitations on the Effectiveness of Credit
Enhancement.................................5
Nature of Mortgages Securing the Loans........5
Trust Subject to Environmental Risks..........7
Value of Trust Assets.........................7
The Trust Fund.....................................7
General.......................................7
The Loans.....................................9
Modification of Loans........................15
Agency Securities............................15
Private Mortgage-Backed Securities...........21
Representations by Sellers or Originators;
Repurchases................................23
Substitution of Trust Fund Assets............25
Use of Proceeds...................................25
The Depositor.....................................25
Description of the Securities.....................25
General......................................26
Indexed Securities...........................28
Distributions on Securities..................29
Advances.....................................31
Reports to Securityholders...................32
Categories of Classes of Securities..........33
Indices Applicable to Floating Rate and
Inverse Floating Rate Classes..............36
LIBOR........................................36
COFI.........................................37
Treasury Index...............................39
Prime Rate...................................39
Book-Entry Registration of Securities........40
Credit Enhancement................................43
General......................................43
Subordination................................44
Letter of Credit.............................45
Insurance Policies, Surety Bonds
and Guaranties.............................45
Over-Collateralization.......................46
Spread Account...............................46
Reserve Accounts.............................46
Pool Insurance Policies......................48
Cross-Collateralization......................49
Other Insurance, Surety Bonds, Guaranties,
and Letters of Credit......................50
Derivative Products..........................50
Yield and Prepayment Considerations...............52
The Agreements....................................52
Assignment of the Trust Fund Assets..........53
No Recourse to Sellers, Originators,
Depositor or Master Servicer...............55
Payments on Loans; Deposits to Security
Account....................................55
Pre-Funding Account..........................57
Sub-Servicing by Sellers.....................59
Hazard Insurance.............................59
Realization Upon Defaulted Loans.............61
Servicing and Other Compensation and
Payment of Expenses........................62
Evidence as to Compliance....................63
Matters Regarding the Master Servicer
and the Depositor..........................63
Events of Default; Rights Upon Event
of Default.................................64
Amendment....................................67
Termination; Optional Termination............67
The Trustee..................................68
Material Legal Aspects of the Loans...............68
General......................................68
Foreclosure/Repossession.....................69
Environmental Risks..........................72
Rights of Redemption.........................73
Anti-deficiency Legislation and Other
Limitations on Lenders.....................73
Due-on-Sale Clauses..........................74
Enforceability of Prepayment and Late
Payment Fees...............................75
Applicability of Usury Laws..................75
The Contracts................................75
Installment Contracts........................78
Soldiers'and Sailors'Civil Relief Act........79
Junior Mortgages; Rights of Senior
Mortgagees.................................79
The Title I Program..........................80
Consumer Protection Laws.....................84
Federal Income Tax Consequences...................84
General......................................84
Taxation of Debt Securities..................85
Taxation of the REMIC and Its Holders........90
REMIC Expenses; Single Class REMICS..........91
Taxation of the REMIC........................91
Taxation of Holders of Residual
Interest Securities........................93
Administrative Matters.......................95
Tax Status as a Grantor Trust................95
Sale or Exchange.............................99
Miscellaneous Tax Aspects....................99
Tax Treatment of Foreign Investors...........99
Tax Characterization of the Trust Fund
as a Partnership..........................100
Tax Consequences to Holders of the Notes....100
Tax Consequences to Holders of the
Certificates..............................102
Taxation of Trust as FASIT..................107
Treatment of FASIT Regular Securities.......109
Treatment of High-Yield Interests...........110
Tax Treatment of FASIT Ownership Securities.110
State Tax Considerations.........................111
ERISA Considerations.............................111
General.....................................111
Prohibited Transactions.....................112
General.....................................112
Plan Asset Regulation.......................112
Exemption 83-1..............................113
The Underwriter's Exemption.................114
Insurance Company Purchasers................117
Consultation with Counsel...................118
Legal Investment.................................118
Method of Distribution...........................119
Legal Matters....................................120
Financial Information............................120
Rating...........................................120
Index of Defined Terms...........................122
Risk Factors
You should consider the following risk factors in deciding whether to
purchase any of the securities.
Limited Resale Market for Securities
No market will exist for the securities of any series before they are
issued. We cannot give you any assurances that a resale market will develop
following the issuance and sale of any series of securities. Consequently, you
may not be able to sell your securities at prices that will enable you to
realize your desired yield.
Limited Source of Payments - No Recourse to Seller, Depositor or Master Servicer
The securities of each series will be payable solely from the assets of
the related trust, including any applicable credit enhancement. Moreover, at the
times specified in the related prospectus supplement, some assets of the trust
may be released to the seller, the depositor, the master servicer, a credit
enhancement provider or other person. Once released, those assets will no longer
be available to make payments to securityholders.
The securities will not represent an interest in the seller, the
depositor, the master servicer or any of their respective affiliates, nor will
the securities represent an obligation of any of them. The only obligations of
the seller or originator with respect to a trust is the obligation to repurchase
a trust asset if the seller or originator breaches a representation and warranty
concerning the related trust asset. There will be no recourse against the
seller, the depositor or the master servicer if any required distribution on the
securities is not made. Consequently, if payments on the trust assets are
insufficient to make all payments required on the securities you may incur a
loss of your investment.
Limitations on the Effectiveness of Credit Enhancement
Credit enhancement is intended to reduce the effect of delinquent
payments or loan losses on those classes of securities that have the benefit of
the credit enhancement. However, the amount of any credit enhancement may
decline or be depleted before the securities are paid in full. As a result,
securityholders may suffer losses. In addition, credit enhancement may not cover
all potential sources of loss, including, for instance, a loss resulting from
fraud or negligence by a loan originator or other party.
Nature of Mortgages Securing the Loans
o Decline in Property Values May Increase Loan Losses. If your
securities represent an interest in mortgage loans or contracts or are secured
by mortgage loans or contracts, your investment may be affected by a decline in
property values. If the outstanding balance of a mortgage loan or contract and
any secondary financing on the underlying property is greater than the value of
the property, there is an increased risk of delinquency, foreclosure and loss. A
decline in property values could extinguish the value of a junior mortgagee's
interest in a property.
o Delays Due to Liquidation. Substantial delays may occur before
defaulted loans are liquidated and the proceeds forwarded to investors. Property
foreclosure actions are regulated by state statutes and rules and are subject to
many of the delays and expenses that characterize lawsuits if defenses or
counterclaims are made. As a result, foreclosure actions can sometimes take
several years to complete and property proceeds may not cover the defaulted loan
amount. Some states prohibit a mortgage lender from obtaining a judgment against
the borrower for amounts not covered by property proceeds if the property is
sold outside of a judicial proceeding.
We refer you to "Material Legal Aspects of the Loans--Anti-Deficiency
Legislation and other Limitations on Lenders" for additional information.
o Junior Liens Satisfied After Senior Liens. Mortgages or deeds of
trust securing junior loans will be satisfied after the claims of the senior
mortgage holders and the foreclosure costs are satisfied. In addition, a junior
mortgage lender may only foreclose subject to any related senior mortgage. As a
result, the junior mortgage lender generally must either pay the related senior
mortgage lender in full at or before the foreclosure sale or agree to make the
regular payments on the senior mortgage. Since the trust will not have any
source of funds to satisfy any senior mortgage or to continue making payments
thereon, the trust's ability as a practical matter to foreclose on any junior
mortgage will be limited.
o Regulated by Consumer Protection Laws. Most states have laws and
public policies for the protection of consumers that prohibit unfair and
deceptive practices in the origination, servicing and collection of loans,
regulate interest rates and other loan changes and require licensing of loan
originators and servicers. Violations of these laws may limit the ability of the
master servicer to collect interest or principal on the loans and may entitle
the borrowers to a refund of amounts previously paid.
The loans may also be subject to federal laws relating to the
origination and underwriting of loans. These laws
o require specified disclosures to the borrowers regarding the terms of the
loans;
o prohibit discrimination on the basis of age, race, color, sex, religion,
marital status, national origin, receipt of public assistance or the
exercise of any right under the consumer credit protection act in the
extension of credit;
o regulate the use and reporting of information related to the borrower's
credit experience;
o require additional application disclosures, limit changes that may be made
to the loan documents without the borrower's consent and restrict a
lender's ability to declare a default or to suspend or reduce a borrower's
credit limit to enumerated events;
o permit a homeowner to withhold payment if defective craftsmanship or
incomplete work do not meet the quality and durability standards agreed to
by the homeowner and the contractor; and
o limit the ability of the master servicer to collect full amounts of
interest on some loans and interfere with the ability of the master
servicer to foreclose on some properties.
If particular provisions of these federal laws are violated, the master
servicer may be unable to collect all or part of the principal or interest on
the loans. The trust also could be subject to damages and administrative
enforcement.
We refer you to "Material Legal Aspects of the Loans" for additional
information.
o Non-Owner Occupied Properties. . The mortgaged properties in the
trust fund may not be owner occupied. Rates of delinquencies, foreclosures and
losses on mortgage loans secured by non-owner occupied properties may be higher
than mortgage loans secured by a primary residence.
Trust Subject to Environmental Risks
Under the laws of some states, contamination of a property may give
rise to a lien on the property to assure the costs of cleanup. In several
states, a lien to assure cleanup has priority over the lien of an existing
mortgage. In addition, the holder of a mortgage, including a trust, may be held
responsible for the costs associated with the clean up of hazardous substances
released at a property. Those costs could result in a loss to the
securityholders.
We refer you to "Material Legal Aspects of the Loans--Environmental
Risks" for additional information.
Value of Trust Assets
There is no assurance that the value of the trust assets for any series
of securities at any time will equal or exceed the principal amount of the
outstanding securities of the series. If trust assets have to be sold because of
an event of default or otherwise, providers of services to the trust (including
the trustee, the master servicer and the credit enhancer, if any) generally will
be entitled to receive the proceeds of the sale to the extent of their unpaid
fees and other amounts due them before any proceeds are paid to investors. As a
result, you may not receive the full amount of interest and principal due on
your security.
The Trust Fund
General
The Securities of each Series will represent interests in the assets of
a trust established by the Depositor (each, a "Trust Fund"), and the Notes of
each Series will be secured by the pledge of the assets of the related Trust
Fund. The Trust Fund for each Series will be held by the Trustee for the benefit
of the related Securityholders. Each Trust Fund will consist of assets (the
"Trust Fund Assets") consisting of a pool (each, a "Pool") comprised of, as
specified in the related Prospectus Supplement, any one or more of the
following:
(a) single family mortgage loans (the "Loans"), including:
(i) mortgage loans secured by first, second and/or more
subordinate liens on one- to four-family residential properties,
(ii) closed-end and/or more revolving home equity loans (the
"Home Equity Loans") secured by first second and/or more subordinate
liens on one-to four-family residential properties,
(iii) home improvement installment sale contracts and
installment loan agreements (the "Home Improvement Contracts") that are
either unsecured or secured by first, second and/or more subordinate
liens on one- to four-family residential properties, or by purchase
money security interests in the home improvements financed thereby (the
"Home Improvements"), including loans insured under the FHA Title I
Credit Insurance program administered pursuant to the National Housing
Act of 1934, and
(iv) manufactured housing installment sales contracts and
installment loan agreements (the "Manufactured Housing Contracts," and
together with the Home Improvement Contracts, the "Contracts") secured
by first, second and/or more subordinate liens on Manufactured Homes or
by mortgages on real estate on which the related Manufactured Homes are
located;
(b) mortgaged-backed securities issued or guaranteed by the
Government National Mortgage Association ("GNMA") , the Federal
National Mortgage Association ("FNMA") or the Federal Home Loan
Mortgage Corporation ("FHLMC") (the "Agency Securities");
(c) privately issued mortgaged-backed securities ("Private
Mortgage-Backed Securities" or "PMBS"); and
(d) all monies due thereunder net, if and as provided in the
related Prospectus Supplement, of required amounts payable to the
servicer of the Loans, Agency Securities or Private Mortgaged-Backed
Securities, together with payments in respect of , and other accounts,
obligations or agreements, in each case, as specified in the related
Prospectus Supplement.*
The Pool will be created on the first day of the month of the issuance of the
related Series of Securities or any other date specified in the related
Prospectus Supplement (the "Cut-off Date"). The Securities will be entitled to
payment from the assets of the related Trust Fund or Funds or other assets
pledged for the benefit of the Securityholders, as specified in the related
Prospectus Supplement, and will not be entitled to payments in respect of the
assets of any other trust fund established by the Depositor.
The Trust Fund Assets will be acquired by the Depositor, either
directly or through affiliates, from sellers (the "Sellers"). The Sellers may be
affiliates of the Depositor. Loans acquired by the Depositor will have been
originated in accordance with the underwriting criteria described below under
"The Loans -- Underwriting Standards." The Depositor will cause the Trust Fund
Assets to be assigned without recourse to the Trustee named in the related
Prospectus Supplement for the benefit of the holders of the Securities of the
related Series. The Master Servicer named in the related Prospectus Supplement
will service the Trust Fund Assets, either directly or through other servicing
institutions ("Sub-Servicers"), pursuant to a Pooling and Servicing Agreement
among the Depositor, the Master Servicer and the Trustee with respect to a
Series consisting of Certificates, or a master servicing agreement or a sale and
servicing agreement (each, a "Master Servicing Agreement") between the Trustee
and the Master Servicer with respect to a Series consisting of Certificates and
Notes, and will receive a fee for its services. See "The Agreements." With
respect to Loans serviced by the Master Servicer through a Sub-Servicer, the
Master Servicer will remain liable for its servicing obligations under the
related Agreement as if the Master Servicer alone were servicing those Loans.
As used herein, "Agreement" means, with respect to a Series consisting
of Certificates, the Pooling and Servicing Agreement, and with respect to a
Series consisting of Certificates and Notes, the Trust Agreement, the Indenture
and the Master Servicing Agreement, as the context requires.
- ----------------------------
* Whenever the terms "Pool," "Certificates," "Notes" and "Securities" are
used in this Prospectus, such terms will be deemed to apply, unless the
context indicates otherwise, to one specific Pool and the Securities of
one Series including the Certificates representing certain undivided
interests in, and/or Notes secured by the assets of, a single Trust Fund
consisting primarily of the Loans, Agency Securities or Private
Mortgage-Backed Securities in such Pool. Similarly, the term
"Pass-Through Rate" will refer to the Pass-Through Rate borne by the
Certificates and the term "interest rate" will refer to the interest rate
borne by the Notes of one specific Series, as applicable, and the term
"Trust Fund" will refer to one specific Trust Fund.
If so specified in the related Prospectus Supplement, a Trust Fund
relating to a Series of Securities may be a business trust formed under the laws
of the state specified in the related Prospectus Supplement pursuant to a trust
agreement (each, a "Trust Agreement") between the Depositor and the trustee of
the related Trust Fund.
With respect to each Trust Fund, prior to the initial offering of the
related Series of Securities, the Trust Fund will have no assets or liabilities.
No Trust Fund is expected to engage in any activities other than acquiring,
managing and holding of the related Trust Fund Assets and other assets
contemplated herein specified and in the related Prospectus Supplement and the
proceeds thereof, issuing Securities and making payments and distributions
thereon and related activities. No Trust Fund is expected to have any source of
capital other than its assets and any related credit enhancement.
Unless otherwise specified in the related Prospectus Supplement, the
only obligations of the Depositor with respect to a Series of Securities will be
to obtain representations and warranties from the Sellers or the Originators and
to assign to the Trustee for the related Series the Depositor's rights with
respect to those representations and warranties. See "The Agreements --
Assignment of the Trust Fund Assets." The obligations of the Master Servicer
with respect to the Loans will consist principally of its contractual servicing
obligations under the related Agreement (including its obligation to enforce the
obligations of the Sub-Servicers or Sellers, or both, as more fully described
herein under "The Trust Fund -- Representations by Sellers or Originators;
Repurchases" and "The Agreements -- Sub-Servicing By Sellers" and "-- Assignment
of the Trust Fund Assets") and its obligation, if any, to make cash advances in
the event of delinquencies in payments on or with respect to the Loans in the
amounts described herein under "Description of the Securities -- Advances." The
obligations of the Master Servicer to make advances may be subject to
limitations, to the extent provided herein and in the related Prospectus
Supplement.
The following is a brief description of the assets expected to be
included in the Trust Funds. If specific information respecting the Trust Fund
Assets is not known at the time the related Series of Securities initially is
offered, more general information of the nature described below will be provided
in the related Prospectus Supplement, and specific information will be set forth
in a report on Form 8-K to be filed with the Securities and Exchange Commission
within fifteen days after the initial issuance of those Securities (the
"Detailed Description"). A copy of the Agreement with respect to each Series of
Securities will be attached to the Form 8-K and will be available for inspection
at the corporate trust office of the Trustee specified in the related Prospectus
Supplement. A schedule of the Loans, Agency Securities and/or Private
Mortgage-Backed Securities relating to a Series will be attached to the
Agreement delivered to the Trustee upon delivery of the Securities.
The Loans
General. Unless otherwise specified in the related Prospectus
Supplement, Loans will consist of mortgage loans or deeds of trust secured by
first or subordinated liens on one- to four-family residential properties, Home
Equity Loans, Home Improvement Contracts or Manufactured Housing Contracts. For
purposes hereof, "Home Equity Loans" includes "Closed-End Loans" and "Revolving
Credit Line Loans." If so specified, the Loans may include cooperative apartment
loans ("Cooperative Loans") secured by security interests in shares issued by
private, non-profit, cooperative housing corporations ("Cooperatives") and in
the related proprietary leases or occupancy agreements granting exclusive rights
to occupy specific dwelling units in the Cooperatives' buildings. As more fully
described in the related Prospectus Supplement, the Loans may be "conventional"
loans or loans that are insured or guaranteed by a governmental agency such as
the FHA or VA. The Loans will have been originated in accordance with the
underwriting criteria specified in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, all of
the Loans in a Pool will have monthly payments due on the first day of each
month. The payment terms of the Loans to be included in a Trust Fund will be
described in the related Prospectus Supplement and may include any of the
following features (or combination thereof), all as described below or in the
related Prospectus Supplement:
(a) Interest may be payable at a fixed rate, a rate adjustable
from time to time in relation to an index (which will be specified in
the related Prospectus Supplement), a rate that is fixed for a period
of time or under limited circumstances and is followed by an adjustable
rate, a rate that otherwise varies from time to time, or a rate that is
convertible from an adjustable rate to a fixed rate. Changes to an
adjustable rate may be subject to periodic limitations, maximum rates,
minimum rates or a combination of those limitations. As specified in
the related Prospectus Supplement, the Loans will provide either for
payments in level monthly installments (except in the case of Loans
with balloon payments) consisting of interest equal to one-twelfth of
the specified interest rate borne by the related Loan (the "Loan Rate")
times the unpaid principal balance, with the remainder of the payment
applied to principal, for payments that are allocated to principal and
interest according to the daily simple interest method, or for payments
that are allocated to principal and interest according to the "sum of
the digits" or "Rule of 78s" methods. Accrued interest may be deferred
and added to the principal of a Loan for the periods and under the
circumstances as may be specified in the related Prospectus Supplement.
Loans may provide for the payment of interest at a rate lower than the
Loan Rate for a period of time or for the life of the Loan, and the
amount of any difference may be contributed from funds supplied by the
seller of the Property or another source.
(b) Principal may be payable on a level debt service basis to
fully amortize the Loan over its term, may be calculated on the basis
of an assumed amortization schedule that is significantly longer than
the original term to maturity or on an interest rate that is different
from the Loan Rate or may not be amortized during all or a portion of
the original term. Payment of all or a substantial portion of the
principal may be due on maturity ("balloon payment"). Principal may
include interest that has been deferred and added to the principal
balance of the Loan.
(c) Monthly payments of principal and interest may be fixed
for the life of the Loan, may increase over a specified period of time
or may change from period to period. Loans may include limits on
periodic increases or decreases in the amount of monthly payments and
may include maximum or minimum amounts of monthly payments.
(d) Prepayments of principal may be subject to a prepayment
fee, which may be fixed for the life of the Loan or may decline over
time, and may be prohibited for the life of the Loan or for particular
periods ("lockout periods"). Some Loans may permit prepayments after
expiration of the applicable lockout period and may require the payment
of a prepayment fee in connection with any subsequent prepayment. Other
Loans may permit prepayments without payment of a fee unless the
prepayment occurs during specified time periods. The Loans may include
"due on sale" clauses which permit the mortgagee to demand payment of
the entire Loan in connection with the sale or certain transfers of the
related Property. Other Loans may be assumable by persons meeting the
then applicable underwriting standards of the related Seller.
A Trust Fund may contain Loans ("Buydown Loans") that include
provisions whereby a third party partially subsidizes the monthly payments of
the borrowers on those Loans during the early years of those Loans, the
difference to be made up from a fund (a "Buydown Fund") contributed by that
third party at the time of origination of the Loan. A Buydown Fund will be in an
amount equal either to the discounted value or full aggregate amount of future
payment subsidies. The underlying assumption of buydown plans is that the income
of the borrower will increase during the buydown period as a result of normal
increases in compensation and inflation, so that the borrower will be able to
meet the full loan payments at the end of the buydown period. To the extent that
this assumption as to increased income is not fulfilled, the possibility of
defaults on Buydown Loans is increased. The related Prospectus Supplement will
contain information with respect to any Buydown Loan concerning limitations on
the interest rate paid by the borrower initially, on annual increases in the
interest rate and on the length of the buydown period.
The real property which secures repayment of the Loans is referred to
as the "Mortgaged Properties." Home Improvement Contracts and Manufactured
Housing Contracts may, and the other Loans will, be secured by mortgages or
deeds of trust or other similar security instruments creating a lien on a
Mortgaged Property. In the case of Home Equity Loans, the related liens may be
subordinated to one or more senior liens on the related Mortgaged Properties as
described in the related Prospectus Supplement. As specified in the related
Prospectus Supplement, Home Improvement Contracts and Manufactured Housing
Contracts may be unsecured or secured by purchase money security interests in
the Home Improvements and Manufactured Homes financed thereby. The Mortgaged
Properties, the Home Improvements and the Manufactured Homes are collectively
referred to herein as the "Properties." The Properties relating to Loans will
consist primarily of detached or semi-detached one- to four-family dwelling
units, townhouses, rowhouses, individual condominium units, individual units in
planned unit developments, and other dwelling units ("Single Family Properties")
or "mixed used properties" which consist of structures of not more than three
stories which include one- to four-family residential dwelling units and space
used for retail, professional or other commercial uses. Properties may include
vacation and second homes, investment properties and leasehold interests. In the
case of leasehold interests, the term of the leasehold will exceed the scheduled
maturity of the Loan by at least five years, unless otherwise specified in the
related Prospectus Supplement. The Properties may be located in any one of the
fifty states, the District of Columbia, Guam, Puerto Rico or any other territory
of the United States.
Loans with specified Loan-to-Value Ratios and/or principal balances may
be covered wholly or partially by primary mortgage guaranty insurance policies
(each, a "Primary Mortgage Insurance Policy"). The existence, extent and
duration of any coverage provided by primary mortgage guaranty insurance
policies will be described in the applicable Prospectus Supplement.
The aggregate principal balance of Loans secured by Properties that are
owner-occupied will be disclosed in the related Prospectus Supplement. Unless
otherwise specified in the related Prospectus Supplement, the sole basis for a
representation that a given percentage of the Loans is secured by Single Family
Properties that are owner-occupied will be either (i) the making of a
representation by the borrower at the Loan's origination either that the
underlying Property will be used by the borrower for a period of at least six
months every year or that the borrower intends to use the Property as a primary
residence or (ii) a finding that the address of the underlying Property is the
borrower's mailing address.
Home Equity Loans. As more fully described in the related Prospectus
Supplement, interest on each Revolving Credit Line Loan, excluding introduction
rates offered from time to time during promotional periods, is computed and
payable monthly on the average daily outstanding principal balance of that Loan.
Principal amounts on a Revolving Credit Line Loan may be drawn down, subject to
a maximum amount as set forth in the related Prospectus Supplement, or repaid
under each Revolving Credit Line Loan from time to time, but may be subject to a
minimum periodic payment. The related Prospectus Supplement will indicate the
extent, if any, to which the Trust Fund will include any amounts borrowed under
a Revolving Credit Line Loan after the Cut-off Date.
The full amount of a Closed-End Loan is advanced at the inception of
the Loan and generally is repayable in equal (or substantially equal)
installments of an amount sufficient to amortize fully the Loan at its stated
maturity. Except to the extent provided in the related Prospectus Supplement,
the original terms to stated maturity of Closed-End Loans will not exceed 360
months. Under limited circumstances, under either a Revolving Credit Line Loan
or a Closed-End Loan, a borrower may choose an interest only payment option and
will be obligated to pay only the amount of interest which accrues on the Loan
during the billing cycle. An interest only payment option may be available for a
specified period before the borrower must begin paying at least the minimum
monthly payment of a specified percentage of the average outstanding balance of
the Loan.
Home Improvement Contracts. The Trust Fund Assets for a Series of
Securities may consist, in whole or in part, of Home Improvement Contracts
originated by a commercial bank, a savings and loan association, a commercial
mortgage banker or other financial institution in the ordinary course of
business. The Home Improvements securing the Home Improvement Contracts may
include, but are not limited to, replacement windows, house siding, new roofs,
swimming pools, satellite dishes, kitchen and bathroom remodeling goods and
solar heating panels. As specified in the related Prospectus Supplement, the
Home Improvement Contracts will either be unsecured or secured by mortgages on
Single Family Properties which are generally subordinate to other mortgages on
the same Property, or secured by purchase money security interests in the Home
Improvements financed thereby. Except as otherwise specified in the related
Prospectus Supplement, the Home Improvement Contracts will be fully amortizing
and may have fixed interest rates or adjustable interest rates and may provide
for other payment characteristics as described below and in the related
Prospectus Supplement. The initial Loan-to-Value Ratio of a Home Improvement
Contract is computed in the manner described in the related Prospectus
Supplement.
Manufactured Housing Contracts. The Trust Fund Assets for a Series may
consist, in whole or part, of conventional manufactured housing installment
sales contracts and installment loan agreements (the "Manufactured Housing
Contracts" and together with the Home Improvement Contracts, the "Contracts"),
originated by a manufactured housing dealer in the ordinary course of business.
As specified in the related Prospectus Supplement, the Manufactured Housing
Contracts will be secured by Manufactured Homes (as defined below), located in
any of the fifty states or the District of Columbia or by Mortgages on the real
estate on which the Manufactured Homes are located.
Unless otherwise specified in the related Prospectus Supplement, the
manufactured homes (the "Manufactured Homes") securing the Manufactured Housing
Contracts will consist of manufactured homes within the meaning of 42 United
States Code, Section 5402(6), which defines a "manufactured home" as "a
structure, transportable in one or more sections, which, in the traveling mode,
is eight body feet or more in width or forty body feet or more in length, or,
when erected on site, is three hundred twenty or more square feet, and which is
built on a permanent chassis and designed to be used as a dwelling with or
without a permanent foundation when connected to the required utilities, and
includes the plumbing, heating, air conditioning and electrical systems
contained therein; except that the term shall include any structure which meets
all the requirements of [this] paragraph except the size requirements and with
respect to which the manufacturer voluntarily files a certification required by
the Secretary of Housing and Urban Development and complies with the standards
established under [this] chapter."
Manufactured Homes, unlike Mortgaged Properties, and Home Improvements,
generally depreciate in value. Consequently, at any time after origination it is
possible, especially in the case of Contracts with high Loan-to-Value Ratios at
origination, that the market value of a Manufactured Home or Home Improvement
may be lower than the principal amount outstanding under the related Contract.
Additional Information. Each Prospectus Supplement will contain
information, as of the date of that Prospectus Supplement and to the extent then
specifically known to the Depositor, with respect to the Loans contained in the
related Pool, including:
(i) the aggregate outstanding principal balance and the
average outstanding principal balance of the Loans as of the
applicable Cut-off Date,
(ii) the type of property securing the Loan (e.g., single
family residences, individual units in condominium apartment buildings,
two- to four-family dwelling units, other real property, Home
Improvements or Manufactured Homes),
(iii) the original terms to maturity of the Loans,
(iv) the largest principal balance and the smallest principal
balance of any of the Loans,
(v) the earliest origination date and latest maturity date
of any of the Loans,
(vi) the Loan-to-Value Ratios or Combined Loan-to-Value
Ratios, as applicable, of the Loans,
(vii) the Loan Rates or annual percentage roes ("APR") or
range of Loan Rates or APR's borne by the Loans,
(viii) the maximum and minimum per annum Loan Rates, and
(ix) the geographical location of the Loans.
If specific information respecting the Loans is not known to the Depositor at
the time the related Securities are initially offered, more general information
of the nature described above will be provided in the related Prospectus
Supplement, and specific information will be set forth in the Detailed
Description.
The "Loan-to-Value Ratio" of a Loan at any given time is the fraction,
expressed as a percentage, the numerator of which is the original principal
balance of the related Loan and the denominator of which is the Collateral Value
of the related Property. Except as otherwise specified in the related Prospectus
Supplement, the "Combined Loan-to-Value Ratio" of a Loan at any given time is
the ratio, expressed as a percentage, of
(i) the sum of (a) the original principal balance of the Loan
(or, in the case of a Revolving Credit Line Loan, the maximum amount
thereof available) and (b) the outstanding principal balance at the
date of origination of the Loan of any senior mortgage loan(s) or, in
the case of any open-ended senior mortgage loan, the maximum available
line of credit with respect to that mortgage loan, regardless of any
lesser amount actually outstanding at the date of origination of the
Loan, to
(ii) the Collateral Value of the related Property.
Except as otherwise specified in the related Prospectus Supplement, the
"Collateral Value" of the Property, other than with respect to some Loans the
proceeds of which were used to refinance an existing mortgage loan (each, a
"Refinance Loan"), is the lesser of (a) the appraised value determined in an
appraisal obtained by the originator at origination of that Loan and (b) the
sales price for that Property. In the case of Refinance Loans, the "Collateral
Value" of the related Property is the appraised value thereof determined in an
appraisal obtained at the time of refinancing.
No assurance can be given that values of the Properties have remained
or will remain at their levels on the dates of origination of the related Loans.
If the residential real estate market should experience an overall decline in
property values such that the sum of the outstanding principal balances of the
Loans and any primary or secondary financing on the Properties, as applicable,
in a particular Pool become equal to or greater than the value of the
Properties, the actual rates of delinquencies, foreclosures and losses could be
higher than those now generally experienced in the mortgage lending industry. In
addition, adverse economic conditions and other factors (which may or may not
affect real property values) may affect the timely payment by borrowers of
scheduled payments of principal and interest on the Loans and, accordingly, the
actual rates of delinquencies, foreclosures and losses with respect to any Pool.
To the extent that losses are not covered by subordination provisions or
alternative arrangements, those losses will be borne, at least in part, by the
holders of the Securities of the related Series.
Underwriting Standards. The Loans will be acquired by the Depositor,
either directly or through affiliates, from the Sellers. The Depositor does not
originate Loans and has not identified specific Originators or Sellers of Loans
from whom the Depositor, either directly or through affiliates, will purchase
Loans. Unless otherwise specified in the related Prospectus Supplement, the
Loans will be originated in accordance with the following underwriting criteria.
Each Seller or Originator will represent and warrant that all Loans originated
and/or sold by it to the Depositor or one of its affiliates will have been
underwritten in accordance with standards consistent with those utilized by
lenders generally during the period of origination for similar types of loans.
As to any Loan insured by the FHA or partially guaranteed by the VA, the Seller
or Originator will represent that it has complied with underwriting policies of
the FHA or the VA, as the case may be.
Underwriting standards are applied by or on behalf of a lender to
evaluate the borrower's credit standing and repayment ability, and the value and
adequacy of the related Mortgaged Property, Home Improvements or Manufactured
Home, as applicable, as collateral. The specific underwriting guidelines used by
the Originator or the Seller will be described in the related Prospectus
Supplement.
The maximum loan amount will vary depending upon a borrower's credit
grade and loan program but will not generally exceed an amount specified in the
related Prospectus Supplement. Variations in maximum loan amount limits will be
permitted based on compensating factors. Compensating factors may generally
include, but are not limited to, and to the extent specified in the related
Prospectus Supplement, low loan-to-value ratio, low debt-to-income ratio, stable
employment, favorable credit history and the nature of the underlying first
mortgage loan, if applicable.
Modification of Loans
The Master Servicer may agree, subject to the terms and conditions set
forth in the related Agreement, to modify, waive or amend any term of a Loan in
a manner that is consistent with the servicing standard set forth in the related
Agreement and related Prospectus Supplement; provided however, that the
modification, waiver or amendment may not affect the tax status of the Trust
Fund or cause any tax to be imposed on the Trust Fund or materially impair the
security for the related Loan.
Agency Securities
Government National Mortgage Association. GNMA is a wholly-owned
corporate instrumentality of the United States within the United Stated
Department of Housing and Urban Development ("HUD"). Section 306(g) of Title II
of the National Housing Act of 1934, as amended (the "Housing Act"), authorizes
GNMA to, among other things, guarantee the timely payment of he principal of and
interest on certificates which represent an interest in a pool of mortgage loans
insured by the FHA under the Housing Act or Title V of the Housing Act of 1949
("FHA Loans"), or partially guaranteed by the VA under the Servicemen's
Readjustment Act of 1944, as amended, or chapter 37 of Title 38, United States
Code ("VA Loans").
Section 306 (g) of the Housing Act provides that "the full faith and
credit of the United States is pledged to the payment of all amounts which may
be required to be paid under any guarantee under this subsection." In order to
meet its obligations under any guarantee under Section 306 (g) of the Housing
Act, GNMA may, under Section 306(d) of the Housing Act, borrow from the United
States Treasury in an amount which is at any time sufficient to enable GNMA,
with no limitations as to amount, to perform its obligations under its
guarantee.
GNMA Certificates. Each GNMA Certificate held in a Trust Fund (which
may be a GNMA I Certificate or a GNMA II Certificate) will be a "fully modified
pass-through" mortgaged-backed certificate issued and serviced by a mortgage
banking company or other financial concern ("GNMA Issuer") approved by GNMA or
approved by FNMA as a seller-servicer of FHA Loans and/or VA Loans. The mortgage
loans underlying the GNMA Certificates held in a Trust Fund will consist of FHA
Loans and/or VA Loans. Each mortgage loan of this type is secured by a one- to
four-family residential property or a manufactured home. GNMA will approve the
issuance of each GNMA Certificate in accordance with a guaranty agreement (a
"Guaranty Agreement") between GNMA and the GNMA Issuer. Pursuant to its Guaranty
Agreement, a GNMA Issuer will be required to advance its own funds in order to
make timely payments of all amounts due on each of the related GNMA
Certificates, even if the payments received by the GNMA Issuer on the FHA Loans
or VA Loans underlying each of those GNMA Certificates are less than the amounts
due on those GNMA Certificates.
The full and timely payment of principal of and interest on each GNMA
Certificate will be guaranteed by GNMA, which obligation is backed by the full
faith and credit of the United States. Each GNMA Certificate will have an
original maturity of not more than 40 years (but may have original maturities of
substantially less than 40 years). Each GNMA Certificate will provide for the
payment by or on behalf of the GNMA Issuer to the registered holder of the GNMA
Certificate of scheduled monthly payments of principal and interest equal to the
registered holder's proportionate interest in the aggregate amount of the
monthly principal and interest payment on each FHA Loan or VA Loan underlying
the GNMA Certificate, less the applicable servicing and guarantee fee which
together equal the difference between the interest on the FHA Loans or VA Loans
and the pass-through rate on the GNMA Certificate. In addition, each payment
will include proportionate pass-through payments of any prepayments of principal
on the FHA Loans or VA Loans underlying the GNMA Certificate and liquidation
proceeds in the event of a foreclosure or other disposition of any the related
FHA Loans or VA Loans.
If a GNMA Issuer is unable to make the payments on a GNMA Certificate
as it becomes due, it must promptly notify GNMA and request GNMA to make the
payment. Upon notification and request, GNMA will make payments directly to the
registered holder of a GNMA Certificate. In the event no payment is made by a
GNMA Issuer and the GNMA Issuer fails to notify and request GNMA to make the
payment, the holder of the related GNMA Certificate will have recourse only
against GNMA to obtain the payment. The Trustee or its nominee, as registered
holder of the GNMA Certificates held in a Trust Fund, will have the right to
proceed directly against GNMA under the terms of the Guaranty Agreements
relating to the GNMA Certificates for any amounts that are not paid when due.
All mortgage loans underlying a particular GNMA Certificate must have
the same interest rate (except for pools of mortgage loans secured by
manufactured homes) over the term of the loan. The interest rate on a GNMA I
Certificate will equal the interest rate on the mortgage loans included in the
pool of mortgage loans underlying the GNMA I Certificate, less one-half
percentage point per annum of the unpaid principal balance of the mortgage
loans.
Mortgage loans underlying a particular GNMA II Certificate may have per
annum interest rates that vary from each other by up to one percentage point.
The interest rate on each GNMA II Certificate will be between one-half
percentage point and one and one-half percentage points lower than the highest
interest rate on the mortgage loans included in the pool of mortgage loans
underlying the GNMA II Certificate (except for pools of mortgage loans secured
by manufactured homes).
Regular monthly installment payments on each GNMA Certificate held in a
Trust Fund will be comprised of interest due as specified on a GNMA Certificate
plus the scheduled principal payments on the FHA Loans or VA Loans underlying a
GNMA Certificate due on the first day of the month in which the scheduled
monthly installments on a GNMA Certificate is due. Regular monthly installments
on each GNMA Certificate are required to be paid to the Trustee as registered
holder by the 15th day of each month in the case of a GNMA I Certificate and are
required to be mailed to the Trustee by the 20th day of each month in the case
of a GNMA II Certificate. Any principal prepayments on any FHA Loans or VA Loans
underlying a GNMA Certificate held in a Trust Fund or any other early recovery
of principal on a loan will be passed through to the Trustee as the registered
holder of a GNMA Certificate.
GNMA Certificates may be backed by graduated payment mortgage loans or
by "buydown" mortgage loans for which funds will have been provided (and
deposited into escrow accounts) for application to the payment of a portion of
the borrowers' monthly payments during the early years of the mortgage loan.
Payments due the registered holders of GNMA Certificates backed by pools
containing "buydown" mortgage loans will be computed in the same manner as
payments derived from other GNMA Certificates and will include amounts to be
collected from both the borrower and the related escrow account. The graduated
payment mortgage loans will provide for graduated interest payments that, during
the early years of the mortgage loans, will be less than the amount of stated
interest on the mortgage loans. The interest not so paid will be added to the
principal of the graduated payment mortgage loans and, together with interest
thereon, will be paid in subsequent years. The obligations of GNMA and of a GNMA
Issuer will be the same irrespective of whether the GNMA Certificates are backed
by graduated payment mortgage loans or "buydown" mortgage loans. No statistics
comparable to the FHA's prepayment experience on level payment, non-buydown
loans are available in inspect of graduated payment or buydown mortgages. GNMA
Certificates related to a Series of Certificates may be held in book-entry form.
GNMA also guarantees the timely payment of principal of and interest on
"fully modified pass-through" mortgage-backed securities issued and serviced by
certain mortgage banking companies and other financial concerns ("FNMA Project
Issuers") based upon and backed by pools of multi-family residential mortgage
loans coinsured by FHA and GNMA Project Issuers under the Housing Act ("GNMA
Project Certificates"). The Prospectus Supplement for a Series of Certificates
that includes GNMA Project Certificates will set forth additional information
regarding the GNMA guaranty program, servicing of the mortgage pool, the payment
of principal and interest on GNMA Project Certificates and other matters with
respect to multi-family residential mortgage loans that qualify for the GNMA
guaranty.
Federal National Mortgage Association. FNMA is a federally chartered
and privately owned corporation organized and existing under the Federal
National Mortgage Association Charter Act (the "Charter Act"). FNMA was
originally established in 1938 as a United States government agency to provide
supplemental liquidity to the mortgage market and was transformed into a
stockholder-owned and privately managed corporation by legislation enacted in
1968.
FNMA provides funds to the mortgage market primarily by purchasing
mortgage loans from lenders, thereby replenishing their funds for additional
lending. FNMA acquires funds to purchase mortgage loans from many capital market
investors that may not ordinarily invest in mortgages, thereby expanding the
total amount of funds available for housing. Operating nationwide, FNMA helps to
redistribute mortgage funds from capital-surplus to capital-short areas.
FNMA Certificates. FNMA Certificates are either Guaranteed Mortgage
Pass-Through Certificates ("FNMA MBS") or Stripped Mortgage-Backed Securities
("FNMA SMBS"). The following discussion of FNMA Certificates applies equally to
both FNMA MBS and FNMA SMBS, except as otherwise indicated. Each FNMA
Certificate included in the Trust Fund for a Series will represent a fractional
undivided interest in a pool of mortgage loans formed by FNMA. Each pool formed
by FNMA will consist of mortgage loans of one of the following types:
(i) fixed-rate level installment conventional mortgage loans;
(ii) fixed-rate level installment mortgage loans that are
insured by FHA or partially guaranteed by the VA;
(iii) adjustable rate conventional mortgage loans or
(iv) adjustable rate mortgage loans that are insured by the
FHA or partially guaranteed by the VA. Each mortgage loan must meet the
applicable standards set forth under the FNMA purchase program. Each of
those mortgage loans will be secured by a first lien on a one- to
four-family residential property.
Each FNMA Certificate will be issued pursuant to a trust indenture. Original
maturities of substantially all of the conventional, level payment mortgage
loans underlying a FNMA Certificate are expected to be between either 8 to 15
years or 20 to 40 years. The original maturities of substantially all of the
fixed rate level payment FHA Loans or VA Loans are expected to be 30 years.
Mortgage loans underlying a FNMA Certificate may have annual interest
rates that vary by as much as two percentage points from each other. The rate of
interest payable on a FNMA MBS (and the series pass-through rate payable with
respect to a FNMA SMBS) is equal to the lowest interest rate of any mortgage
loan in the related pool, less a specified minimum annual percentage
representing servicing compensation and FNMA's guaranty fee. Under a regular
servicing option (pursuant to which the mortgagee or other servicer assumes the
entire risk of foreclosure losses), the annual interest rates on the mortgage
loans underlying a FNMA Certificate will be between 50 basis points and 250
basis points greater than the annual pass-through rate if a FNMA MBS or the
series pass-through rate if a FNMA SMBS; and under a special servicing option
(pursuant to which FNMA assumes the entire risk for foreclosure losses), the
annual interest rates on the mortgage loans underlying a FNMA Certificate will
generally be between 55 basis points and 255 basis points greater than the
annual FNMA Certificate pass-through rate if a FNMA MBS, or the series
pass-through rate if a FNMA SMBS.
FNMA guarantees to each registered holder of a FNMA Certificate that it
will distribute on a timely basis amounts representing that holder's
proportionate share of scheduled principal and interest payments at the
applicable pass-through rate provided for by the FNMA Certificate on the
underlying mortgage loans, whether or not received, and the holder's
proportionate share of the full principal amount of any foreclosed or other
finally liquidated mortgage loan, whether or not the principal amount is
actually recovered. The obligations of FNMA under its guarantees are obligations
solely of FNMA and are not backed by, nor entitled to, the full faith and credit
of the United States. If FNMA were unable to satisfy its obligations,
distributions to holders of FNMA Certificates would consist solely of payments
and other recoveries on the underlying mortgage loans and, accordingly, monthly
distributions to holders of FNMA Certificates would be affected by delinquent
payments and defaults on those mortgage loans.
FNMA SMBS are issued in series of two or more classes, with each class
representing a specified undivided fractional interest in principal
distributions and interest distributions (adjusted to the series pass-through
rate) on the underlying pool of mortgage loans. The fractional interests of each
class in principal and interest distributions are not identical, but the classes
in the aggregate represent 100% of the principal distributions and interest
distributions (adjusted to the series pass-through rate) on the respective pool.
Because of the difference between the fractional interests in principal and
interest of each class, the effective rate of interest on the principal of each
class of FNMA SMBS may be significantly higher or lower than the series
pass-through rate and/or the weighted average interest rate of the underlying
mortgage loans.
Unless otherwise specified by FNMA, FNMA Certificates evidencing
interests in pools of mortgages formed on or after May 1, 1985 will be available
in book-entry form only. Distributions of principal and interest on each FNMA
Certificate will be made by FNMA on the 25th day of each month to the persons in
whose name the FNMA Certificate is entered in the books of the Federal Reserve
Banks (or registered on the FNMA Certificate register in the case of fully
registered FNMA Certificates) as of the close of business on the last day of the
preceding month. With respect to FNMA Certificates issued in book-entry form,
distributions thereon will be made by wire, and with respect to fully registered
FNMA Certificates, distributions thereon will be made by check.
Federal Home Loan Mortgage Corporation. FHLMC is a publicly held United
States government sponsored enterprise created pursuant to the Federal Home Loan
Mortgage Corporation Act, Title III of the Emergency Home Finance Act of 1970,
as amended (the "FHLMC Act"). The common stock of FHLMC is owned by the Federal
Home Loan Banks. FHLMC was established primarily for the purpose of increasing
the availability of mortgage credit for the financing of urgently needed
housing. It seeks to provide an enhanced degree of liquidity for residential
mortgage investments primarily by assisting in the development of secondary
markets for conventional mortgages. The principal activity of FHLMC currently
consists of the purchase of first lien conventional mortgage loans FHA Loans, VA
Loans or participation interests in those mortgage loans and the sale of the
loans or participations so purchased in the form of mortgage securities,
primarily FHLMC Certificates. FHLMC is confined to purchasing, so far as
practicable, mortgage loans that it deems to be of the quality, type and class
which meet generally the purchase standards imposed by private institutional
mortgage investors.
FHLMC Certificates. Each FHLMC Certificate represents an undivided
interest in a pool of mortgage loans that may consist of first lien conventional
loans, FHA Loans or VA Loans (a "FHLMC Certificate Group"). FHLMC Certificates
are sold under the terms of a Mortgage Participation Certificate Agreement. A
FHLMC Certificate may be issued under either FHLMC's Cash Program or Guarantor
Program. Unless otherwise described in the Prospectus Supplement, mortgage loans
underlying the FHLMC Certificates held by a Trust Fund will consist of mortgage
loans with original terms to maturity of between 10 and 40 years. Each of those
mortgage loans must meet the applicable standards set forth in the FHLMC Act. A
FHLMC Certificate Group may include whole loans, participation interests in
whole loans and undivided interests in whole loans and/or participations
comprising another FHLMC Certificate Group. Under the Guarantor Program, any
FHLMC Certificate Group may include only whole loans or participation interests
in whole loans.
FHLMC guarantees to each registered holder of a FHLMC Certificate the
timely payment of interest on the underlying mortgage loans to the extent of the
applicable certificate rate on the registered holder's pro rata share of the
unpaid principal balance outstanding on the underlying mortgage loans in the
FHLMC Certificate Group represented by a FHLMC Certificate, whether or not
received. FHLMC also guarantees to each registered holder of a FHLMC Certificate
ultimate receipt by a holder of all principal on the underlying mortgage loans,
without any offset or deduction, to the extent of that holder's pro rata share
thereof, but does not, except if and to the extent specified in the Prospectus
Supplement for a Series of Certificates guarantee the timely payment of
scheduled principal. Under FHLMC's Gold PC Program, FHLMC guarantees the timely
payment of principal based on the difference between the pool factor published
in the month preceding the month of distribution and the pool factor published
in the related month of distribution. Pursuant to its guarantees, FHLMC
indemnifies holders of FHLMC Certificates against any diminution in principal by
reason of charges for property repairs, maintenance and foreclosure. FHLMC may
remit the amount due on account of its guarantee of collection of principal at
any time after default on an underlying mortgage loan, but not later than (i) 30
days following foreclosure sale, (ii) 30 days following payment of the claim by
any mortgage insurer, or (iii) 30 days following the expiration of any right of
redemption, whichever occurs later, but in any event no later than one year
after demand has been made upon the mortgagor for accelerated payment of
principal. In taking actions regarding the collection of principal after default
on the mortgage loans underlying FHLMC Certificates, including the timing of
demand for acceleration, FHLMC reserves the right to exercise its judgment with
respect to the mortgage loans in the same manner as for mortgage loans which it
has purchased but not sold. The length of time necessary for FHLMC to determine
that a mortgage loan should be accelerated varies with the particular
circumstances of each mortgagor, and FHLMC has not adopted standards which
require that the demand be made within any specified period.
FHLMC Certificates are not guaranteed by the United States or by any
Federal Home Loan Bank and do not constitute debts or obligations of the United
States or any Federal Home Loan Bank. The obligations of FHLMC under its
guarantee are obligations solely of FHLMC and are not backed by, nor entitled
to, the full faith and credit of the United States. If FHLMC were unable to
satisfy its obligations, distributions to holders of FHLMC Certificates would
consist solely of payments and other recoveries on the underlying mortgage loans
and, accordingly, monthly distributions to holders of FHLMC Certificates would
be affected by delinquent payments and defaults on those mortgage loans.
Registered holders of FHLMC Certificates are entitled to receive their
monthly pro rata share of all principal payments on the underlying mortgage
loans received by FHLMC, including any scheduled principal payments, full and
partial prepayments of principal and principal received by FHLMC by virtue of
condemnation, insurance, liquidation or foreclosure, and repurchases of the
mortgage loans by FHLMC or the seller thereof. FHLMC is required to remit each
registered FHLMC Certificateholder's pro rata share of principal payments on the
underlying mortgage loans, interest at the FHLMC pass-through rate and any other
sums like prepayment fees, within 60 days of the date on which those payments
are deemed to have been received by FHLMC.
Under FHLMC's Cash Program, with respect to pools formed prior to June
1, 1987, there is no limitation on be amount by which interest rates on the
mortgage loans underlying a FHLMC Certificate may exceed the pass-through rate
on the FHLMC Certificate. With respect to FHLMC Certificates issued on or after
June 1, 1987, the maximum interest rate on the mortgage loans underlying those
FHLMC Certificates may exceed the pass-through rate of the FHLMC Certificates by
50 to 100 basis points. Under that program, FHLMC purchases groups of whole
mortgage loans from sellers at specified percentages of their unpaid principal
balances, adjusted for accrued or prepaid interest, which when applied to the
interest rate of the mortgage loans and participations purchased, results in the
yield (expressed as a percentage) required by FHLMC. The required yield, which
includes a minimum servicing fee retained by the servicer, is calculated using
the outstanding principal balance. The range of interest rates on the mortgage
loans and participations in a FHLMC Certificate Group under the Cash Program
will vary since mortgage loans and participations are purchased and assigned to
a FHLMC Certificate Group based upon their yield to FHLMC rather than on the
interest rate on the underlying mortgage loans.
Under FHLMC's Guarantor Program, the pass-through rate on a FHLMC
Certificate is established based upon the lowest interest rate on the underlying
mortgage loans, minus a minimum servicing fee and the amount of FHLMC's
management and guaranty income as agreed upon between the seller and FHLMC. For
FHLMC Certificate Groups formed under the Guarantor Program with certificate
numbers beginning with 18-012, the range between the lowest and the highest
annual interest rates on the mortgage loans in a FHLMC Certificate Group may not
exceed two percentage points.
FHLMC Certificates duly presented for registration of ownership on or
before the last business day of a month are registered effective as of the first
day of the month. The first remittance to a registered holder of a FHLMC
Certificate will be distributed so as to be received normally by the 15th day of
the second month following the month in which the purchaser became a registered
holder of the FHLMC Certificates. Thereafter, the remittance will be distributed
monthly to the registered holder so as to be received normally by the 15th day
of each month. The Federal Reserve Bank of New York maintains book-entry
accounts with respect to FHLMC Certificates sold by FHLMC on or after January 2,
1985, and makes payments of principal and interest each month to the registered
holders thereof in accordance with the holders' instructions.
FHLMC also issues mortgage participation certificates representing an
undivided interest in a group of multi-family residential mortgage loans or
participations in multi-family residential mortgage loans purchased by FHLMC
("FHLMC Project Certificates"). The Prospectus Supplement for a Series of
Securities issued by a Trust Fund that includes FHLMC Project Certificates will
set forth additional information regarding multi-family residential mortgage
loans that qualify for purchase by FHLMC.
Stripped Mortgage-Backed Securities. Agency Securities may consist of
one or more stripped mortgage-backed securities, each as described herein and in
the related Prospectus Supplement. Each Agency Security which consists of one or
more stripped mortgage-backed securities will represent an undivided interest in
all or part of either the principal distributions (but not the interest
distributions) or the interest distributions (but not the principal
distributions), or in some specified portion of the principal and interest
distributions (but not all of those distributions) on particular FHLMC, FNMA,
GNMA or other government agency or government-sponsored agency Certificates. The
underlying securities will be held under a trust agreement by FHLMC, FNMA, GNMA
or another government agency or government-sponsored agency, each as trustee, or
by another trustee named in the related Prospectus Supplement. FHLMC, FNMA, GNMA
or another government agency or government-sponsored agency will guarantee each
stripped Agency Security to the same extent as the applicable entity guarantees
the underlying securities backing the stripped Agency Security, unless otherwise
specified in the related Prospectus Supplement.
Other Agency Securities. If specified in the related Prospectus
Supplement, a Trust Fund may include other mortgage pass-through certificates
issued or guaranteed by GNMA, FNMA, FHLMC or other government agencies or
government-sponsored agencies. The characteristics of any other mortgage
pass-through certificates issued or guaranteed by GNMA, FNMA, FHLMC or other
government agencies or government-sponsored agencies will be described in that
Prospectus Supplement. If so specified, a combination of different types of
Agency Securities may be held in a Trust Fund.
Private Mortgage-Backed Securities
General. Private Mortgage-Backed Securities may consist of (a) mortgage
pass-through certificates evidencing an undivided interest in a pool of
single-family mortgage loans, or (b) collateralized mortgage obligations
("CMO's") secured by single-family mortgage loans. Private Mortgage-Backed
Securities will have been issued pursuant to a PMBS agreement (the "PMBS
Agreement"). The seller/servicer of the underlying mortgage loans (the "PMBS
Servicer") will have entered into the PMBS Agreement with a trustee (the "PMBS
Trustee") under the PMBS Agreement. The PMBS Trustee or its agent, or a
custodian, will possess the mortgage loans underlying the Private
Mortgage-Backed Security. Mortgage loans underlying a Private Mortgage-Backed
Security will be serviced by the PMBS Servicer directly or by one or more
sub-servicers who may be subject to the supervision of the PMBS Servicer.
The Issuer of the PMBS (the "PMBS Issuer") will be a financial
institution or other entity engaged generally in the business of mortgage
lending or the acquisition of mortgage loans, a public agency or instrumentality
of a state, local or federal government, or a limited purpose or other
corporation organized for the purpose of, among other things, establishing
trusts and acquiring and selling housing loans to those trusts and selling
beneficial interests in those trusts. If so specified in the Prospectus
Supplement, the PMBS Issuer may be an affiliate of the Depositor. If the PMBS
Issuer is not an affiliate of the Depositor, the related PMBS:
(i) will be acquired in the secondary market and not
pursuant to an initial offering of the PMBS,
(ii) the related PMBS Issuer will generally not be involved in
the issuance of the Securities other than as set forth in the next two
succeeding sentences and
(iii) the PMBS have previously been registered under the
Securities Act of 1933, as amended or will be freely transferable
pursuant to Rule 144(k) promulgated under the Act.
The obligations of the PMBS Issuer will generally be limited to representations
and warranties with respect to the assets conveyed by it to the related trust.
Unless otherwise specified in the related Prospectus Supplement, the PMBS Issuer
will not have guaranteed any of the assets conveyed to the related trust or any
of the Private Mortgage-Backed Securities issued under the PMBS Agreement.
Additionally, although the mortgage loans underlying the Private Mortgage-Backed
Securities may be guaranteed by an agency or instrumentality of the United
States, the Private Mortgage-Backed Securities themselves will not be so
guaranteed.
Distributions of principal and interest will be made on the Private
Mortgage-Backed Securities on the dates specified in the related Prospectus
Supplement. The Private Mortgage-Backed Securities may be entitled to receive
nominal or no principal distributions or nominal or no interest distributions.
Principal and interest distributions will be made on the Private Mortgage-Backed
Securities by the PMBS Trustee or the PMBS Servicer. The PMBS Issuer or the PMBS
Servicer may have the fight to repurchase assets underlying the Private
Mortgage-Backed Securities after a specified date or under other circumstances
specified in the related Prospectus Supplement.
Underlying Loans. The mortgage loans underlying the Private
Mortgage-Backed Securities may consist of, but are not limited to, fixed rate,
level payment, fully amortizing or graduated payment mortgage loans, buydown
loans, adjustable rate mortgage loans, loans having balloon or other special
payment features, home equity loans, including closed-end loans and revolving
lines of credit, home improvement contracts, manufactured housing contracts and
cooperative loans. The mortgage loans underlying Private Mortgage-Backed
Securities may be Single Family Loans or Multifamily Loans. Unless otherwise
specified in the related Prospectus Supplement,
(i) no mortgage loan underlying the Private Mortgage-Backed
Securities will have had a Combined Loan-to-Value Ratio at origination
in excess of the percentage set forth in the related Prospectus
Supplement,
(ii) each underlying mortgage loan will have had an original
term to stated maturity of not less than 5 years and not more than 40
years,
(iii) each underlying mortgage loan, other than Cooperative
Loans, will be required to be covered by a standard hazard insurance
policy, which may be a blanket policy, and
(iv) each mortgage loan other than Cooperative Loans or
Contracts secured by a Manufactured Home, will be covered by a title
insurance policy.
Credit Support Relating to Private Mortgage-Backed Securities. Credit
support in the form of subordination of other private mortgage certificates
issued under the PMBS Agreement, reserve funds, insurance policies, letters of
credit, financial guaranty insurance policies, guarantees or other types of
credit support may be provided with respect to the mortgage loans underlying the
Private Mortgage-Backed Securities or with respect to the Private
Mortgage-Backed Securities themselves.
Additional Information. The Prospectus Supplement for a Series for
which the related Trust Fund includes Private Mortgage-Backed Securities will
specify:
(i) the aggregate approximate principal amount and type of
the Private Mortgage-Backed Securities to be included in the Trust
Fund,
(ii) characteristics of the mortgage loans underlying the
Private Mortgage-Backed Securities including (A) the payment features
of the mortgage loans, (B) the approximate aggregate principal balance,
if known, of underlying mortgage loans insured or guaranteed by a
governmental entity, (C) the servicing fee or range of servicing fees
with respect to the underlying mortgage loans, and (D) the minimum and
maximum stated maturities of the underlying mortgage loans at
origination,
(iii) the maximum original term-to-stated maturity of the
Private Mortgage-Backed Securities,
(iv) the weighted average term-to-stated maturity of the
Private Mortgage-Backed Securities,
(v) the pass-through or certificate rate of the Private
Mortgage-Backed Securities,
(vi) the weighted average pass-through or certificate rate of
the Private Mortgage-Backed Securities,
(vii) the PMBS Issuer, the PMBS Servicer (if other than the
PMBS Issuer) and the PMBS Trustee for the Private Mortgage-Backed
Securities,
(viii) characteristics of credit support, if any, like reserve
funds, insurance policies, letters of credit or guarantees relating to
the mortgage loans underlying the Private Mortgage-Backed Securities or
to the Private Mortgage-Backed Securities themselves,
(ix) the terms on which the underlying mortgage loans for the
Private Mortgage-Backed Securities may, or are required to, be
purchased prior to their stated maturity or the stated maturity of the
Private Mortgage-Backed Securities and
(x) the terms on which other mortgage loans may be substituted
for those originally underlying the Private Mortgage-Backed Securities.
Representations by Sellers or Originators; Repurchases
Each Seller or Originator will have made representations and warranties
in respect of the Loans sold by that Seller or originated by that Originator and
evidenced by all, or a part, of a Series of Securities. Except as otherwise
specified in the related Prospectus Supplement, the representations and
warranties include, among other things:
(i) that title insurance (or in the case of Properties located
in areas where those policies are generally not available, an
attorney's certificate of title) and any required hazard insurance
policy were effective at origination of each Loan, other than a
Cooperative Loan, and that each policy (or certificate of title as
applicable) remained in effect on the date of purchase of the Loan from
the Originator by the Seller or the Depositor or from the Seller by or
on behalf of the Depositor;
(ii) that the Seller or Originator had good title to each Loan
and that Loan was subject to no offsets, defenses, counterclaims or
rights of rescission except to the extent that any buydown agreement
may forgive some indebtedness of a borrower;
(iii) that each Loan constituted a valid lien on, or a
perfected security interest with respect to, the Property (subject only
to permissible liens disclosed, if applicable, title insurance
exceptions, if applicable, and other exceptions described in the
Agreement) and that the Property was free from damage and was in
acceptable condition;
(iv) that there were no delinquent tax or assessment liens
against the Property;
(v) that no required payment on a Loan was delinquent more
than the number of days specified in the related Prospectus Supplement;
and
(vi) that each Loan was made in compliance with, and is
enforceable under, all applicable local, state and federal laws and
regulations in all material respects.
If so specified in the related Prospectus Supplement, the
representations and warranties of a Seller or Originator in respect of a Loan
will be made not as of the Cut-off Date but as of the date on which the
applicable Originator sold the Loan to the Seller or the Depositor or the
applicable Seller sold the Loan to the Depositor or one of its affiliates. Under
those circumstances, a substantial period of time may have elapsed between the
sale date and the date of initial issuance of the Series of Securities
evidencing an interest in the Loan. Since the representations and warranties of
a Seller or Originator do not address events that may occur following the sale
of a Loan by that Seller or Originator, its repurchase obligation described
below will not arise if the relevant event that would otherwise have given rise
to a repurchase obligation with respect to a Loan occurs after the date of sale
of the Loan by the applicable Originator to the Seller or the Depositor or by
the applicable Seller to the Depositor or its affiliates. However, the Depositor
will not include any Loan in the Trust Fund for any Series of Securities if
anything has come to the Depositor's attention that would cause it to believe
that the representations and warranties of a Seller or Originator will not be
accurate and complete in all material respects in respect of the Loan as of the
date of initial issuance of the related Series of Securities. If the Master
Servicer is also a Seller or Originator of Loans with respect to a particular
Series of Securities, the representations will be in addition to the
representations and warranties made by the Master Servicer in its capacity as a
Master Servicer.
The Master Servicer or the Trustee, if the Master Servicer is the
Seller or Originator, will promptly notify the relevant Seller or Originator of
any breach of any representation or warranty made by it in respect of a Loan
which materially and adversely affects the interests of the Securityholders in
the Loan. Unless otherwise specified in the related Prospectus Supplement, if
the applicable Seller or Originator cannot cure a breach within 90 days
following notice from the Master Servicer or the Trustee, as the case may be,
then that Seller or Originator will be obligated either (i) to repurchase the
Loan from the Trust Fund at a price (the "Purchase Price") equal to 100% of the
unpaid principal balance thereof as of the date of the repurchase plus accrued
interest thereon to the first day of the month following the month of repurchase
at the Loan Rate (less any Advances or amount payable as related servicing
compensation if the Seller or Originator is the Master Servicer) or (ii)
substitute for the Loan a replacement loan that satisfies the criteria specified
in the related Prospectus Supplement. If a REMIC election is to be made with
respect to a Trust Fund, unless otherwise specified in the related Prospectus
Supplement, the Master Servicer or a holder of the related residual certificate
generally will be obligated to pay any prohibited transaction tax which may
arise in connection with any repurchase or substitution and the Trustee must
have received a satisfactory opinion of counsel that the repurchase or
substitution will not cause the Trust Fund to lose its status as a REMIC or
otherwise subject the Trust Fund to a prohibited transaction tax. The Master
Servicer may be entitled to reimbursement for any payment from the assets of the
related Trust Fund or from any holder of the related residual certificate. See
"Description of the Securities -- General." Except in those cases in which the
Master Servicer is the Seller or Originator, the Master Servicer will be
required under the applicable Agreement to enforce this obligation for the
benefit of the Trustee and the holders of the Securities, following the
practices it would employ in its good faith business judgment were it the owner
of the Loan. This repurchase or substitution obligation will constitute the sole
remedy available to holders of Securities or the Trustee for a breach of
representation by a Seller or Originator.
Neither the Depositor nor the Master Servicer, unless the Master
Servicer is the Seller or Originator, will be obligated to purchase or
substitute a Loan if a Seller or Originator defaults on its obligation to do so,
and no assurance can be given that Sellers or Originators will carry out their
respective repurchase or substitution obligations with respect to Loans.
However, to the extent that a breach of a representation and warranty of a
Seller or Originator may also constitute a breach of a representation made by
the Master Servicer, the Master Servicer may have a repurchase or substitution
obligation as described below under "The Agreements -- Assignment of Trust Fund
Assets."
Substitution of Trust Fund Assets
Substitution of Trust Fund Assets will be permitted in the event of
breaches of representations and warranties with respect to any original Trust
Fund Asset or in the event the documentation with respect to any Trust Fund
Asset is determined by the Trustee to be incomplete. The period during which the
substitution will be permitted generally will be indicated in the related
Prospectus Supplement. Substitution of Trust Fund Assets will be permitted if,
among other things, the credit criteria relating to the origination of the
initial Trust Fund Assets is the same as the credit criteria relating to the
origination of the substitute Trust Fund Assets. The related Prospectus
Supplement will describe any other conditions upon which Trust Fund Assets may
be substituted for Trust Fund Assets initially included in the Trust Fund.
Use of Proceeds
The Depositor will apply all or substantially all of the net proceeds
from the sale of each Series of Securities for one or more of the following
purposes:
(i) to purchase the related Trust Fund Assets,
(ii) to establish any Pre-Funding Account, Capitalized
Interest Account or Reserve Account as described in the related
Prospectus Supplement and
(iii) to pay the costs of structuring and issuing the
Securities, including the costs of obtaining any credit enhancement as
described under "Credit Enhancement".
The Depositor expects to sell Securities in Series from time to time, but the
timing and amount of offerings of Securities will depend on a number of factors,
including the volume of Trust Fund Assets acquired by the Depositor, prevailing
interest rates, availability of funds and general market conditions.
The Depositor
J.P. Morgan Acceptance Corporation I, the Depositor, is a direct,
wholly-owned subsidiary of J.P. Morgan Securities Holdings Inc., which is a
direct, wholly-owned subsidiary of J.P. Morgan & Co. Incorporated and was
incorporated in the State of Delaware on June 27, 1988. The principal executive
offices of the Depositor are located at 60 Wall Street, New York, New York
10260. Its telephone number is (212) 648-7741. The Depositor does not have, nor
is it expected in the future to have, any significant assets.
Neither the Depositor nor any of the Depositor's affiliates will insure
or guarantee distributions on the Securities of any Series.
Description of the Securities
Each Series of Certificates will be issued pursuant to separate
agreements (each, a "Pooling and Servicing Agreement" or a "Trust Agreement")
among the Depositor, the Master Servicer and the Trustee. A form of each of the
Pooling and Servicing Agreement and Trust Agreement has been filed as an exhibit
to the Registration Statement of which this Prospectus forms a part. Each Series
of Notes will be issued pursuant to an indenture (the "Indenture") between the
related Trust Fund and the entity named in the related Prospectus Supplement as
trustee (the "Trustee") with respect to a Series, and the related Loans will be
serviced by the Master Servicer pursuant to a Master Servicing Agreement. A form
of Indenture and a form of Master Servicing Agreement have been filed as
exhibits to the Registration Statement of which this Prospectus forms a part. A
Series of Securities may consist of both Notes and Certificates. Each Agreement
will be among the Depositor, the Master Servicer and the Trustee for the benefit
of the holders of the Securities of the Series. The provisions of each Agreement
will vary depending upon the nature of the Securities to be issued thereunder
and the nature of the related Trust Fund. The following are descriptions of the
material provisions which may appear in each Agreement. The Prospectus
Supplement for a Series of Securities will describe any provision of the
Agreement relating to the Series that materially differs from the description
thereof contained in this Prospectus. The descriptions are subject to, and are
qualified in their entirety by reference to, all of the provisions of the
Agreement for each Series of Securities and the applicable Prospectus
Supplement.
General
Unless otherwise specified in the related Prospectus Supplement, the
Securities of each Series will be issued in book-entry or fully registered form,
in the authorized denominations specified in the related Prospectus Supplement,
will, in the case of Certificates, evidence specified beneficial ownership
interests in, and in the case of Notes, be secured by, the assets of the related
Trust Fund created pursuant to the related Agreement and will not be entitled to
payments in respect of the assets included in any other Trust Fund established
by the Depositor. Unless otherwise specified in the related Prospectus
Supplement, the Securities will not represent obligations of the Depositor or
any affiliate of the Depositor. Some Loans may be guaranteed or insured as set
forth in the related Prospectus Supplement. Each Trust Fund will consist of, to
the extent provided in the related Agreement,
(i) the Trust Fund Assets, as from time to time are subject to
the related Agreement (exclusive of any amounts specified in the
related Prospectus Supplement ("Retained Interest")), including all
payments of interest and principal received with respect to the Loans
after the Cutoff Date (to the extent not applied in computing the
principal balance of the Loans as of the Cut-off Date (the "Cut-off
Date Principal Balance"));
(ii) the assets as from time to time are required to be
deposited in the related Security Account, as described below under
"The Agreements -- Payments on Loans; Deposits to Security Account";
(iii) property which secured a Loan and which is acquired on
behalf of the Securityholders by foreclosure or deed in lieu of
foreclosure and
(iv) any insurance policies or other forms of credit
enhancement required to be maintained pursuant to the related
Agreement.
If so specified in the related Prospectus Supplement, a Trust Fund may also
include one or more of the following: reinvestment income on payments received
on the Trust Fund Assets, a Reserve Account, a mortgage pool insurance policy, a
special hazard insurance policy, a bankruptcy bond, one or more letters of
credit, a surety bond, guaranties or similar instruments or other agreements.
Each Series of Securities will be issued in one or more classes. Each
class of Certificates of a Series will evidence beneficial ownership of a
specified percentage (which may be 0%) or portion of future interest payments
and a specified percentage (which may be 0%) or portion of future principal
payments on, and each class of Notes of a Series will be secured by, the related
Trust Fund Assets. A Series of Securities may include one or more classes that
are senior in right to payment to one or more other classes of Securities of the
Series. Series or classes of Securities may be covered by insurance policies,
surety bonds or other forms of credit enhancement, in each case as described
under "Credit Enhancement" herein and in the related Prospectus Supplement. One
or more classes of Securities of a Series may be entitled to receive
distributions of principal, interest or any combination thereof. Distributions
on one or more classes of a Series of Securities may be made prior to one or
more other classes, after the occurrence of specified events, in accordance with
a schedule or formula or on the basis of collections from designated portions of
the related Trust Fund Assets, in each case as specified in the related
Prospectus Supplement. The timing and amounts of distributions may vary among
classes or over time as specified in the related Prospectus Supplement.
Distributions of principal and interest or of principal only or
interest only, as applicable, on the related Securities will be made by the
Trustee on each Distribution Date - i.e., monthly, quarterly, semi-annually or
at other intervals and on the dates as are specified in the related Prospectus
Supplement - in proportion to the percentages specified in the related
Prospectus Supplement. Distributions will be made to the persons in whose names
the Securities are registered at the close of business on the dates specified in
the related Prospectus Supplement (each, a "Record Date"). Distributions will be
made in the manner specified in the related Prospectus Supplement to the persons
entitled thereto at the address appearing in the register maintained for holders
of Securities (the "Security Register"); provided, however, that the final
distribution in retirement of the Securities will be made only upon presentation
and surrender of the Securities at the office or agency of the Trustee or other
person specified in the notice to Securityholders of that final distribution.
The Securities will be freely transferable and exchangeable at the
Corporate Trust Office of the Trustee as set forth in the related Prospectus
Supplement. No service charge will be made for any registration of exchange or
transfer of Securities of any Series, but the Trustee may require payment of a
sum sufficient to cover any related tax or other governmental charge.
Under current law the purchase and holding of a class of Securities
entitled only to a specified percentage of payments of either interest or
principal or a notional amount of either interest or principal on the related
Loans or a class of Securities entitled to receive payments of interest and
principal on the Loans only after payments to other classes or after the
occurrence of specified events by or on behalf of any employee benefit plan or
other retirement arrangement, including individual retirement accounts and
annuities, Keogh plans and collective investment funds in which those plans,
accounts or arrangements are invested, subject to provisions of ERISA or the
Code, may result in prohibited transactions, within the meaning of ERISA and the
Code. See "ERISA Considerations." Unless otherwise specified in the related
Prospectus Supplement, the transfer of Securities of a restricted class will not
be registered unless the transferee (i) represents that it is not, and is not
purchasing on behalf of, any plan, account or arrangement or (ii) provides an
opinion of counsel satisfactory to the Trustee and the Depositor that the
purchase of Securities of that class by or on behalf of that plan, account or
arrangement is permissible under applicable law and will not subject the
Trustee, the Master Servicer or the Depositor to any obligation or liability in
addition to those undertaken in the Agreements.
As to each Series, an election may be made to treat the related Trust
Fund or designated portions of the Trust Fund as a "real estate mortgage
investment conduit" or "REMIC" as defined in the Code. The related Prospectus
Supplement will specify whether a REMIC election is to be made. Alternatively,
the Agreement for a Series may provide that a REMIC election may be made at the
discretion of the Depositor or the Master Servicer and may only be made if
specified conditions are satisfied. As to any of those Series, the terms and
provisions applicable to the making of a REMIC election will be set forth in the
related Prospectus Supplement. If a REMIC election is made with respect to a
Series, one of the classes will be designated as evidencing the sole class of
"residual interests" in the related REMIC, as defined in the Code. All other
classes of Securities in that Series will constitute "regular interests" in the
related REMIC, as defined in the Code. As to each Series with respect to which a
REMIC election is to be made, the Trustee, the Master Servicer or a holder of
the related residual certificate will be obligated to take all actions required
in order to comply with applicable laws and regulations and will be obligated to
pay any prohibited transaction taxes. The Trustee or the Master Servicer, unless
otherwise provided in the related Prospectus Supplement, will be entitled to
reimbursement for any payment in respect of prohibited transaction taxes from
the assets of the Trust Fund or from any holder of the related residual
certificate.
Indexed Securities
To the extent specified in any Prospectus Supplement, any class of
Securities of a given Series may consist of Securities ("Indexed Securities") in
which the principal amount payable at the final scheduled payment date (the
"Indexed Principal Amount") is determined by reference to a measure (the
"Index") which will be related to:
(i) the difference in the rate of exchange between United
States dollars and a currency or composite currency (the "Indexed
Currency") specified in the applicable Prospectus Supplement (those
Indexed Securities, "Currency Indexed Securities");
(ii) the difference in the price of a specified commodity (the
"Indexed Commodity") on specified dates (those Indexed Securities,
"Commodity Indexed Securities");
(iii) the difference in the level of a specified stock index
(the "Stock Index"), which may be based on U.S. or foreign stocks, on
specified dates (those Indexed Securities, "Stock Indexed Securities");
or
(iv) any other objective price or economic measures as are
described in the applicable Prospectus Supplement.
The manner of determining the Indexed Currency, the Indexed Commodity, the Stock
Index or other price or economic measures used in that determination will be set
forth in the applicable Prospectus Supplement, together with information
concerning tax consequences to the holders of those Indexed Securities.
If the determination of the Indexed Principal Amount of an Indexed
Security is based on an Index calculated or announced by a third party and the
third party either suspends the calculation or announcement of the Index or
changes the basis upon which the Index is calculated, other than changes
consistent with policies in effect at the time the Indexed Security was issued
and permitted changes described in the applicable Prospectus Supplement, then
the Index shall be calculated for purposes of the Indexed Security by an
independent calculation agent named in the applicable Prospectus Supplement on
the same basis, and subject to the same conditions and controls, as applied to
the original third party. If for any reason the Index cannot be calculated on
the same basis and subject to the same conditions and controls as applied to the
original third party, then the Indexed Principal Amount of the Indexed Security
will be calculated in the manner set forth in the applicable Prospectus
Supplement. Any determination of the independent calculation agent will in the
absence of manifest error be binding on all parties.
Interest on an Indexed Security will be payable based on the amount
designated in the applicable Prospectus Supplement (the "Face Amount"). The
applicable Prospectus Supplement will describe whether the principal amount of
the related Indexed Security, if any, that would be payable upon redemption or
repayment prior to the applicable final scheduled Distribution Date will be the
Face Amount of the Indexed Security, the Indexed Principal Amount of the Indexed
Security at the time of redemption or repayment, or another amount described in
the related Prospectus Supplement.
Distributions on Securities
General. In general, the method of determining the amount of
distributions on a particular Series of Securities will depend on the type of
credit support, if any, that is used with respect to the Series. See "Credit
Enhancement." Set forth below are descriptions of various methods that may be
used to determine the amount of distributions on the Securities of a particular
Series. The Prospectus Supplement for each Series of Securities will describe
the method to be used in determining the amount of distributions on the
Securities of that Series.
Distributions allocable to principal and interest on the Securities
will be made by the Trustee out of, and only to the extent of, funds in the
related Security Account, including any funds transferred from any Reserve
Account (a "Reserve Account"). As between Securities of different classes and as
between distributions of principal (and, if applicable, between distributions of
Principal Prepayments, as defined below, and scheduled payments of principal)
and interest, distributions made on any Distribution Date will be applied as
specified in the related Prospectus Supplement. The Prospectus Supplement will
also describe the method for allocating the distributions among Securities of a
particular class.
Available Funds. All distributions on the Securities of each Series on
each Distribution Date will be made from the Available Funds described below, in
accordance with the terms described in the related Prospectus Supplement and
specified in the Agreement. "Available Funds" for each Distribution Date will
generally equal the amount on deposit in the related Security Account on that
Distribution Date (net of related fees and expenses payable by the related Trust
Fund) other than amounts to be held therein for distribution on future
Distribution Dates.
Distributions of Interest. Interest will accrue on the aggregate
principal balance of the Securities (or, in the case of Securities entitled only
to distributions allocable to interest, the aggregate notional amount) of each
class of Securities (the "Class Security Balance") entitled to interest from the
date, at the Pass-Through Rate or interest rate, as applicable, which in either
case may be a rate per annum specified, or calculated in the method described,
in the related Prospectus Supplement, and for the periods specified in that
Prospectus Supplement. To the extent funds are available therefor, interest
accrued during the specified period on each class of Securities entitled to
interest, other than a class of Securities that provides for interest that
accrues, but is not currently payable, referred to hereafter as "Accrual
Securities", will be distributable on the Distribution Dates specified in the
related Prospectus Supplement until the aggregate Class Security Balance of the
Securities of that class has been distributed in full or, in the case of
Securities entitled only to distributions allocable to interest, until the
aggregate notional amount of those Securities is reduced to zero or for the
period of time designated in the related Prospectus Supplement. The original
Class Security Balance of each Security will equal the aggregate distributions
allocable to principal to which that Security is entitled. Distributions
allocable to interest on each Security that is not entitled to distributions
allocable to principal will be calculated based on the notional amount of that
Security. The notional amount of a Security will not evidence an interest in or
entitlement to distributions allocable to principal but will be used solely for
convenience in expressing the calculation of interest and for other specified
purposes.
Interest payable on the Securities of a Series on a Distribution Date
will include all interest accrued during the period specified in the related
Prospectus Supplement. In the event interest accrues over a period ending two or
more days prior to a Distribution Date, the effective yield to Securityholders
will be reduced from the yield that would otherwise be obtainable if interest
payable on the Security were to accrue through the day immediately preceding
that Distribution Date, and the effective yield at par to Securityholders will
be less than the indicated coupon rate.
With respect to any class of Accrual Securities, if specified in the
related Prospectus Supplement, any interest that has accrued but is not paid on
a given Distribution Date will be added to the aggregate Class Security Balance
of that class of Securities on that Distribution Date. Distributions of interest
on any class of Accrual Securities will commence only after the occurrence of
the events specified in that Prospectus Supplement. Prior to that time, the
beneficial ownership interest in the Trust Fund or the principal balance, as
applicable, of a class of Accrual Securities, as reflected in the aggregate
Class Security Balance of that class of Accrual Securities, will increase on
each Distribution Date by the amount of interest that accrued on that class of
Accrual Securities during the preceding interest accrual period but that was not
required to be distributed to that class on that Distribution Date. Any class of
Accrual Securities will thereafter accrue interest on its outstanding Class
Security Balance as so adjusted.
Distributions of Principal. The related Prospectus Supplement will
specify the method by which the amount of principal to be distributed on the
Securities on each Distribution Date will be calculated and the manner in which
that amount will be allocated among the classes of Securities entitled to
distributions of principal. The aggregate Class Security Balance of any class of
Securities entitled to distributions of principal generally will be the
aggregate original Class Security Balance of that class of Securities specified
in that Prospectus Supplement, reduced by all distributions reported to the
holders of that Securities as allocable to principal and, (i) in the case of
Accrual Securities, unless otherwise specified in the related Prospectus
Supplement, increased by all interest accrued but not then distributable on the
Accrual Securities and (ii) in the case of adjustable rate Securities, subject
to the effect of negative amortization, if applicable.
If so provided in the related Prospectus Supplement, one or more
classes of Securities will be entitled to receive all or a disproportionate
percentage of the payments of principal which are received from borrowers,
including payments received in advance of their scheduled due dates and are not
accompanied by amounts representing scheduled interest due after the month of
those payments ("Principal Prepayments") in the percentages and under the
circumstances or for the periods specified in the Prospectus Supplement. Any
allocation of those principal payments to a class or classes of Securities will
have the effect of accelerating the amortization of those Securities while
increasing the interests evidenced by one or more other classes of Securities in
the Trust Fund. Increasing the interests of the some classes of Securities
relative to that of other Securities is intended to preserve the availability of
the subordination provided by the other Securities.
See "Credit Enhancement -- Subordination."
Unscheduled Distributions. If specified in the related Prospectus
Supplement, the Securities will be subject to receipt of distributions before
the next scheduled Distribution Date under the circumstances and in the manner
described below and in that Prospectus Supplement. If applicable, the Trustee
will be required to make unscheduled distributions on the day and in the amount
specified in the related Prospectus Supplement if, due to substantial payments
of principal (including Principal Prepayments) on the Trust Fund Assets, the
Trustee or the Master Servicer determines that the funds available or
anticipated to be available from the Security Account and, if applicable, any
Reserve Account, may be insufficient to make required distributions on the
Securities on the related Distribution Date. Unless otherwise specified in the
related Prospectus Supplement, the amount of any unscheduled distribution that
is allocable to principal will not exceed the amount that would otherwise have
been required to be distributed as principal on the Securities on the next
Distribution Date. Unless otherwise specified in the related Prospectus
Supplement, the unscheduled distributions will include interest at the
applicable Pass-Through Rate, if any, or interest rate, if any, on the amount of
the unscheduled distribution allocable to principal for the period and to the
date specified in that Prospectus Supplement.
Advances
To the extent provided in the related Prospectus Supplement, the Master
Servicer will be required to advance on or before each Distribution Date from
its own funds, funds advanced by Sub-Servicers or funds held in the Security
Account for future distributions to the holders of Securities of the related
Series, an amount equal to the aggregate of payments of interest and/or
principal that were delinquent on the related Determination Date (as that term
is defined in the related Prospectus Supplement) and were not advanced by any
Sub-Servicer, net of the Servicing Fee if so specified in the related Prospectus
Supplement, subject to the Master Servicer's determination that those advances
may be recoverable out of late payments by borrowers, Liquidation Proceeds,
Insurance Proceeds or otherwise. In the case of Cooperative Loans, the Master
Servicer also may be required to advance any unpaid maintenance fees and other
charges under the related proprietary leases as specified in the related
Prospectus Supplement. In addition, to the extent provided in the related
Prospectus Supplement, a cash account may be established to provide for Advances
to be made in the event of payment defaults or collection shortfalls on Trust
Fund Assets.
In making Advances, the Master Servicer will endeavor to maintain a
regular flow of scheduled interest and principal payments to holders of the
Securities, rather than to guarantee or insure against losses. If Advances are
made by the Master Servicer from cash being held for future distribution to
Securityholders, the Master Servicer will replace those funds on or before any
future Distribution Date to the extent that funds in the applicable Security
Account on that Distribution Date would be less than the amount required to be
available for distributions to Securityholders on that date. Any Master Servicer
funds advanced will be reimbursable to the Master Servicer out of recoveries on
the specific Loans with respect to which the Advances were made, e.g., late
payments made by the related borrower, any related Insurance Proceeds,
Liquidation Proceeds or proceeds of any Loan purchased by the Depositor, a
Sub-Servicer or a Seller pursuant to the related Agreement. Advances by the
Master Servicer, and any advances by a Sub-Servicer, also will be reimbursable
to the Master Servicer, or Sub-Servicer, from cash otherwise distributable to
Securityholders, including the holders of Senior Securities, to the extent that
the Master Servicer determines that any Advances previously made are not
ultimately recoverable as described above. To the extent provided in the related
Prospectus Supplement, the Master Servicer also will be obligated to make
Advances, to the extent recoverable out of Insurance Proceeds, Liquidation
Proceeds or otherwise, in respect of taxes and insurance premiums not paid by
borrowers on a timely basis. Funds so advanced are reimbursable to the Master
Servicer to the extent permitted by the related Agreement. The obligations of
the Master Servicer to make advances may be supported by a cash advance reserve
fund, a surety bond or other arrangement, in each case as described in the
related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, in the
event the Master Servicer or a Sub-Servicer fails to make a required Advance,
the Trustee will be obligated to make an Advance in its capacity as successor
servicer. If the Trustee makes an Advance, it will be entitled to be reimbursed
for that Advance to the same extent and degree as the Master Servicer or a
Sub-Servicer is entitled to be reimbursed for Advances.
See "-- Distributions on Securities" above.
Reports to Securityholders
Prior to or concurrently with each distribution on a Distribution Date,
the Master Servicer or the Trustee will furnish to each Securityholder of record
of the related Series a statement setting forth, to the extent applicable to
that Series of Securities, among other things:
(i) the amount of the distribution allocable to principal,
separately identifying the aggregate amount of any Principal
Prepayments and if so specified in the related Prospectus Supplement,
any applicable prepayment penalties included therein;
(ii) the amount of the distribution allocable to interest;
(iii) the amount of any Advance;
(iv) the aggregate amount (a) otherwise allocable to the
Subordinated Securityholders on that Distribution Date, and (b)
withdrawn from the Reserve Account, if any, that is included in the
amounts distributed to the Senior Securityholders;
(v) the outstanding principal balance or notional amount of
each class of the related Series after giving effect to the
distribution of principal on that Distribution Date;
(vi) the percentage of principal payments on the Loans
(excluding prepayments), if any, which each class will be entitled to
receive on the following Distribution Date;
(vii) the percentage of Principal Prepayments on the Loans, if
any, which each class will be entitled to receive on the following
Distribution Date;
(viii) the related amount of the servicing compensation
retained or withdrawn from the Security Account by the Master Servicer,
and the amount of additional servicing compensation received by the
Master Servicer attributable to penalties, fees, excess Liquidation
Proceeds and other similar charges and items;
(ix) the number and aggregate principal balances of Loans (A)
delinquent (exclusive of Loans in foreclosure) (1) 1 to 30 days, (2) 31
to 60 days, (3) 61 to 90 days and (4) 91 or more days, (B) in
foreclosure and delinquent (1) 1 to 30 days, (2) 31 to 60 days, (3) 61
to 90 days and (4) 91 or more days as of the close of business on the
last day of the calendar month preceding that Distribution Date;
(x) the book value of any real estate acquired through
foreclosure or grant of a deed in lieu of foreclosure;
(xi) the Pass-Through Rate or interest rate, as applicable, if
adjusted from the date of the last statement, of any class expected to
be applicable to the next distribution to that class;
(xii) if applicable, the amount remaining in any Reserve
Account at the close of business on the Distribution Date;
(xiii) the Pass-Through Rate or interest rate, as applicable,
as of the day prior to the immediately preceding Distribution Date; and
(xiv) any amounts remaining under letters of credit, pool
policies or other forms of credit enhancement.
Where applicable, any amount set forth above may be expressed as a
dollar amount per single Security of the relevant class having the Percentage
Interest specified in the related Prospectus Supplement. The report to
Securityholders for any Series of Securities may include additional or other
information of a similar nature to that specified above.
In addition, within a reasonable period of time after the end of each
calendar year, the Master Servicer or the Trustee will mail to each
Securityholder of record at any time during that calendar year a report (a) as
to the aggregate of amounts reported pursuant to (i) and (ii) above for that
calendar year or, in the event that person was a Securityholder of record during
a portion of that calendar year, for the applicable portion of that year and (b)
any other customary information as may be deemed necessary or desirable for
Securityholders to prepare their tax returns.
Categories of Classes of Securities
The Securities of any Series may be comprised of one or more classes.
Classes of Securities, in general, fall into different categories. The following
chart identifies and generally defines the more typical categories. The
Prospectus Supplement for a series of Securities may identify the classes which
comprise that Series by reference to the following categories.
<TABLE>
<CAPTION>
Categories of Classes Definition
- --------------------- -----------
<S> <C>
Principal Types
- ----------------
Accretion Directed................................... A class that receives principal payments from the
accreted interest from specified Accrual classes. An
Accretion Directed class also may receive principal
payments from principal paid on the underlying Trust
Fund Assets for the related Series.
Component Securities................................. A class consisting of "Components." The Components of a
class of Component Securities may have different
principal and/or interest payment characteristics but
together constitute a single class. Each Component of
a class of Component Securities may be identified as
falling into one or more of the categories in this
chart.
Notional Amount Securities........................... A class having no principal balance and bearing
interest on the related notional amount. The notional
amount is used for purposes of the determination of
interest distributions.
Planned Principal Class (also sometimes
Referred to as "PACs")............................. A class that is designed to receive principal payments
using a predetermined principal balance schedule
derived by assuming two constant prepayment rates for
the underlying Trust Fund Assets. These two rates are
the endpoints for the "structuring range" for the
Planned Principal Class. The Planned Principal Classes
in any Series of Securities may be subdivided into
different categories (e.g., Primary Planned Principal
Classes, Secondary Planned Principal Classes and so
forth) having different effective structuring ranges
and different principal payment priorities. The
structuring range for the Secondary Planned Principal
Class of a Series of Securities will be narrower than
that for the Primary Planned Principal Class of that
Series.
Scheduled Principal Class............................ A class that is designed to receive principal payments
using a predetermined principal balance schedule but is
not designated as a Planned Principal Class or Targeted
Principal Class. In many cases, the schedule is derived
by assuming two constant prepayment rates for the
underlying Trust Fund Assets. These two rates are the
endpoints for the "structuring range" for the Scheduled
Principal Class.
Sequential Pay Class................................. Classes that receive principal payments in a prescribed
sequence, that do not have predetermined principal
balance schedules and that under all circumstances
receive payments of principal continuously from the
first Distribution Date on which they receive principal
until they are retired. A single class that receives
principal payments before or after all other classes in
the same Series of Securities may be identified as a
Sequential Pay Class.
Strip................................................ A class that receives a constant proportion, or
"strip," of the principal payments on the underlying
Trust Fund Assets.
Support Class (also sometimes referred
to as "companion classes")......................... A class that receives principal payments on any
Distribution Date only if scheduled payments have been
made on specified Planned Principal Classes, Targeted
Principal Classes and/or Scheduled Principal Classes on that
Distribution Date.
Targeted Principal Class (also sometimes
referred to as "TACs")............................. A class that is designed to receive principal payments
using a predetermined principal balance schedule
derived by assuming a single constant prepayment rate
for the underlying Trust Fund Assets.
Interest Types
- --------------
Fixed Rate........................................... A class with an interest rate that is fixed throughout
the life of the class.
Floating Rate........................................ A class with an interest rate that resets periodically
based upon a designated index and that varies directly
with changes in that index as specified in the related
Prospectus Supplement. Interest payable to a Floating
Rate class on a Distribution Date may be subject to a
cap based on the amount of funds available to pay
interest on that Distribution Date.
Inverse Floating Rate................................ A class with an interest rate that resets periodically
based upon a designated index as specified in the
related Prospectus Supplement and that varies inversely
with changes in that index.
Variable Rate........................................ A class with an interest rate that resets periodically
and is calculated by reference to the rate or rates of
interest applicable to specified assets or instruments
(e.g., the Loan Rates borne by the underlying Loans).
Auction Rate......................................... A class with an interest rate that resets periodically
to an auction rate that is calculated on the basis of
auction procedures described in the related Prospectus
Supplement.
Interest Only........................................ A class that receives some or all of the interest
payments made on the underlying Trust Fund Assets or
other assets of the Trust Fund and little or no
principal. Interest Only classes have either a nominal
principal balance or a notional amount. A nominal
principal balance represents actual principal that will
be paid on the class. It is referred to as nominal
since it is extremely small compared to other classes.
A notional amount is the amount used as a reference to
calculate the amount of interest due on an Interest
Only class that is not entitled to any distributions in
respect of principal.
Principal Only....................................... A class that does not bear interest and is entitled to
receive only distributions in respect of principal.
Partial Accrual...................................... A class that accretes a portion of the amount of
accrued interest thereon, which amount will be added to
the principal balance of that class on each applicable
Distribution Date, with the remainder of the accrued
interest to be distributed currently as interest on
that class. Accretion may continue until a specified
event has occurred or until the Partial Accrual class
is retired.
Accrual.............................................. A class that accretes the amount of accrued interest
otherwise distributable on that class, which amount
will be added as principal to the principal balance of
that class on each applicable Distribution Date.
Accretion may continue until some specified event has
occurred or until the Accrual Class is retired.
</TABLE>
Indices Applicable to Floating Rate and Inverse Floating Rate Classes
Unless otherwise specified in the related Prospectus Supplement, the
indices applicable to Floating Rate and Inverse Floating Rate Classes either
will be LIBOR, the Eleventh District Cost of Funds Index, the Treasury Index or
the Prime Rate, in each case calculated as described below.
LIBOR
Unless otherwise specified in the related Prospectus Supplement, on the
LIBOR Determination Date (as that term is defined in the related Prospectus
Supplement) for each class of Securities of a Series as to which the applicable
interest rate is determined by reference to an index denominated as LIBOR, the
Person designated in the related Agreement (the "Calculation Agent") will
determine LIBOR by reference to the quotations, as set forth on the Reuters
Screen LIBO Page (as defined in the International Swap Dealers Association, Inc.
Code of Standard Wording, Assumptions and Provisions for Swaps, 1986 Edition),
offered by the principal London office of each of the designated reference banks
meeting the criteria set forth below (the "Reference Banks") for making
one-month United States dollar deposits in leading banks in the London Interbank
market, as of 11:00 a.m. (London time) on that LIBOR Determination Date. In lieu
of relying on the quotations for those Reference Banks that appear at that time
on the Reuters Screen LIBO Page, the Calculation Agent will request each of the
Reference Banks to provide offered quotations at that time.
LIBOR will be established by the Calculation Agent on each LIBOR
Determination Date as follows:
(a) If on any LIBOR Determination Date two or more Reference
Banks provide offered quotations, LIBOR for the next Interest Accrual
Period (as that term is defined in the related Prospectus Supplement)
shall be the arithmetic mean of the offered quotations (rounded upwards
if necessary to the nearest whole multiple of 1/32%).
(b) If on any LIBOR Determination Date only one or none of the
Reference Banks provides offered quotations, LIBOR for the next
Interest Accrual Period shall be whichever is the higher of (i) LIBOR
as determined on the previous LIBOR Determination Date or (ii) the
Reserve Interest Rate. The "Reserve Interest Rate" shall be the rate
per annum which the Calculation Agent determines to be either (i) the
arithmetic mean (rounded upwards if necessary to the nearest whole
multiple of 1/32%) of the one-month United States dollar lending rates
that New York City banks selected by the Calculation Agent are quoting,
on the relevant LIBOR Determination Date, to the principal London
offices of at least two of the Reference Banks to which quotations are,
in the opinion of the Calculation Agent, being so made, or (ii) in the
event that the Calculation Agent can determine no arithmetic mean, the
lowest one-month United States dollar lending rate which New York City
banks selected by the Calculation Agent are quoting on the LIBOR
Determination Date to leading European banks.
(c) If on any LIBOR Determination Date for a class specified
in the related Prospectus Supplement, the Calculation Agent is required
but is unable to determine the Reserve Interest Rate in the manner
provided in paragraph (b) above, LIBOR for the next Interest Accrual
Period shall be LIBOR as determined on the preceding LIBOR
Determination Date, or, in the case of the first LIBOR Determination
Date, LIBOR shall be deemed to be the per annum rate specified as such
in the related Prospectus Supplement.
Each Reference Bank (i) shall be a leading bank engaged in transactions
in Eurodollar deposits in the international Eurocurrency market; (ii) shall not
control, be controlled by, or be under common control with the Calculation
Agent; and (iii) shall have an established place of business in London. If any
Reference Bank should be unwilling or unable to act as such or if appointment of
any Reference Bank is terminated, another leading bank meeting the criteria
specified above will be appointed.
The establishment of LIBOR on each LIBOR Determination Date by the
Calculation Agent and its calculation of the rate of interest for the applicable
classes for the related Interest Accrual Period shall (in the absence of
manifest error) be final and binding.
COFI
The Eleventh District Cost of Funds Index is designed to represent the
monthly weighted average cost of funds for savings institutions in Arizona,
California and Nevada that are member institutions of the Eleventh Federal Home
Loan Bank District (the "Eleventh District"). The Eleventh District Cost of
Funds Index for a particular month reflects the interest costs paid on all types
of funds held by Eleventh District member institutions and is calculated by
dividing the cost of funds by the average of the total amount of those funds
outstanding at the end of that month and of the prior month and annualizing and
adjusting the result to reflect the actual number of days in the particular
month. If necessary, before these calculations are made, the component figures
are adjusted by the Federal Home Loan Bank of San Francisco ("FHLBSF") to
neutralize the effect of events such as member institutions leaving the Eleventh
District or acquiring institutions outside the Eleventh District. The Eleventh
District Cost of Funds Index is weighted to reflect the relative amount of each
type of funds held at the end of the relevant month. The major components of
funds of Eleventh District member institutions re: (i) savings deposits, (ii)
time deposits, (iii) FHLBSF advances, (iv) repurchase agreements and (v) all
other borrowings. Because the component funds represent a variety of maturities
whose costs may react in different ways to changing conditions, the Eleventh
District Cost of Funds Index does not necessarily reflect current market rates.
A number of factors affect the performance of the Eleventh District
Cost of Funds Index, which may cause it to move in a manner different from
indices tied to specific interest rates, such as United States Treasury bills or
LIBOR. Because the liabilities upon which the Eleventh District Cost of Funds
Index is based were issued at various times under various market conditions and
with various maturities, the Eleventh District Cost of Funds Index may not
necessarily reflect the prevailing market interest rates on new liabilities of
similar maturities. Moreover, as stated above, the Eleventh District Cost of
Funds Index is designed to represent the average cost of funds for Eleventh
District savings institutions for the month prior to the month in which it is
due to be published. Additionally, the Eleventh District Cost of Funds Index may
not necessarily move in the same direction as market interest rates at all
times, since, as longer term deposits or borrowings mature and are renewed at
prevailing market interest rates, the Eleventh District Cost of Funds Index is
influenced by the differential between the prior and the new rates on those
deposits or borrowings. In addition, movements of the Eleventh District Cost of
Funds Index, as compared to other indices tied to specific interest rates, may
be affected by changes instituted by the FHLBSF in the method used to calculate
the Eleventh District Cost of Funds Index.
The FHLBSF publishes the Eleventh District Cost of Funds Index in its
monthly Information Bulletin. Any individual may request regular receipt by mail
of Information Bulletins by writing the Federal Home Loan Bank of San Francisco,
P.O. Box 7948, 600 California Street, San Francisco, California 94120, or by
calling (415) 616-1000. The Eleventh District Cost of Funds Index may also be
obtained by calling the FHLBSF at (415) 616-2600.
The FHLBSF has stated in its Information Bulletin that the Eleventh
District Cost of Funds Index for a month "will be announced on or near the last
working day" of the following month and also has stated that it "cannot
guarantee the announcement" of the index on an exact date. So long as the index
for a month is announced on or before the tenth day of the second following
month, the interest rate for each class of Securities of a Series as to which
the applicable interest rate is determined by reference to an index denominated
as COFI (each, a class of "COFI Securities") for the Interest Accrual Period
commencing in the second following month will be based on the Eleventh District
Cost of Funds Index for the second preceding month. If publication is delayed
beyond the tenth day, the interest rate will be based on the Eleventh District
Cost of Funds Index for the third preceding month.
Unless otherwise specified in the related Prospectus Supplement, if on
the tenth day of the month in which any Interest Accrual Period commences for a
class of COFI Securities the most recently published Eleventh District Cost of
Funds Index relates to a month prior to the third preceding month, the index for
the current Interest Accrual Period and for each succeeding Interest Accrual
Period will, except as described in the next to last sentence of this paragraph,
be based on the National Monthly Median Cost of Funds Ratio to SAIF-Insured
Institutions (the "National Cost of Funds Index") published by the Office of
Thrift Supervision (the "OTS") for the third preceding month (or the fourth
preceding month if the National Cost of Funds Index for the third preceding
month has not been published on the tenth day of an Interest Accrual Period).
Information on the National Cost of Funds Index may be obtained by writing the
OTS at 1700 G Street, N.W., Washington, D.C. 20552 or calling (202) 906-6677,
and the current National Cost of Funds Index may be obtained by calling (202)
906-6988. If on any tenth day of the month in which an Interest Accrual Period
commences the most recently published National Cost of Funds Index relates to a
month prior to the fourth preceding month, the applicable index for that
Interest Accrual Period and each succeeding Interest Accrual Period will be
based on LIBOR, as determined by the Calculation Agent in accordance with the
Agreement relating to the Series of Securities. A change of index from the
Eleventh District Cost of Funds Index to an alternative index will result in a
change in the index level, and, particularly if LIBOR is the alternative index,
could increase its volatility.
The establishment of COFI by the Calculation Agent and its calculation
of the rates of interest for the applicable classes for the related Interest
Accrual Period shall (in the absence of manifest error) be final and binding.
Treasury Index
Unless otherwise specified in the related Prospectus Supplement, on the
Treasury Index Determination Date (as that term is defined in the related
Prospectus Supplement) for each class of Securities of a Series as to which the
applicable interest rate is determined by reference to an index denominated as a
Treasury Index, the Calculation Agent will ascertain the Treasury Index for
Treasury securities of the maturity and for the period (or, if applicable, date)
specified in the related Prospectus Supplement. Unless otherwise specified in
the related Prospectus Supplement, the Treasury Index for any period means the
average of the yield for each business day during the period specified therein
(and for any date means the yield for that date), expressed as a per annum
percentage rate, on (i) U.S. Treasury securities adjusted to the "constant
maturity" (as further described below) specified in that Prospectus Supplement
or (ii) if no "constant maturity" is so specified, U.S. Treasury securities
trading on the secondary market having the maturity specified in that Prospectus
Supplement, in each case as published by the Federal Reserve Board in its
Statistical Release No. H.15(519). Statistical Release No. H.15(519) is
published on Monday or Tuesday of each week and may be obtained by writing or
calling the Publications Department at the Board of Governors of the Federal
Reserve System, 21st and C Streets, Washington, D.C. 20551 (202) 452-3244. If
the Calculation Agent has not yet received Statistical Release No. H.15(519) for
that week, then it will use the Statistical Release from the immediately
preceding week.
Yields on U.S. Treasury securities at "constant maturity" are derived
from the U.S. Treasury's daily yield curve. This curve, which relates the yield
on a security to its time to maturity, is based on the closing market bid yields
on actively traded Treasury securities in the over-the-counter market. These
market yields are calculated from composites of quotations reported by five
leading U.S. Government securities dealers to the Federal Reserve Bank of New
York. This method provides a yield for a given maturity even if no security with
that exact maturity is outstanding. In the event that the Treasury Index is no
longer published, a new index based upon comparable data and methodology will be
designated in accordance with the Agreement relating to the particular Series of
Securities. The Calculation Agent's determination of the Treasury Index, and its
calculation of the rates of interest for the applicable classes for the related
Interest Accrual Period, shall (in the absence of manifest error) be final and
binding.
Prime Rate
Unless otherwise specified in the related Prospectus Supplement, on the
Prime Rate Determination Date (as that term is defined in the related Prospectus
Supplement) for each class of Securities of a Series as to which the applicable
interest rate is determined by reference to an index denominated as the Prime
Rate, the Calculation Agent will ascertain the Prime Rate for the related
Interest Accrual Period. Unless otherwise specified in the related Prospectus
Supplement, the Prime Rate for an Interest Accrual Period will be the "Prime
Rate" as published in the "Money Rates" section of The Wall Street Journal (or
if not so published, the "Prime Rate" as published in a newspaper of general
circulation selected by the Calculation Agent in its sole discretion) on the
related Prime Rate Determination Date. If a prime rate range is given, then the
average of the range will be used. In the event that the Prime Rate is no longer
published, a new index based upon comparable data and methodology will be
designated in accordance with the Agreement relating to the particular Series of
Securities. The Calculation Agent's determination of the Prime Rate and its
calculation of the rates of interest for the related Interest Accrual Period
shall (in the absence of manifest error) be final and binding.
Book-Entry Registration of Securities
As described in the related Prospectus Supplement, if not issued in
fully registered form, each class of Securities will be registered as book-entry
certificates (the "Book-Entry Securities"). Persons acquiring beneficial
ownership interests in the Securities ("Security Owners") will hold their
Securities through The Depository Trust Company ("DTC") in the United States, or
Cedelbank ("Cedelbank") or the Euroclear System ("Euroclear") in Europe if they
are participants ("Participants") of the systems, or indirectly through
organizations that are Participants in those systems. The Book-Entry Securities
will be issued in one or more certificates which equal the aggregate principal
balance of the Securities and will initially be registered in the name of Cede &
Co., the nominee of DTC. Cedelbank and Euroclear will hold omnibus positions on
behalf of their Participants through customers' securities accounts in
Cedelbank's and Euroclear's names on the books of their respective depositaries
which in turn will hold those positions in customers' securities accounts in the
depositaries' names on the books of DTC. Citibank, N.A., will act as depositary
for Cedelbank and The Chase Manhattan Bank will act as depositary for Euroclear
(in those capacities, individually the "Relevant Depositary" and collectively
the "European Depositaries"). Except as described below, no person acquiring a
Book-Entry Security (each, a "beneficial owner") will be entitled to receive a
physical certificate representing that Security (a "Definitive Security").
Unless and until Definitive Securities are issued, it is anticipated that the
only "Securityholders" of the Securities will be Cede & Co., as nominee of DTC.
Security Owners are only permitted to exercise their rights indirectly through
Participants and DTC.
The beneficial owner's ownership of a Book-Entry Security will be
recorded on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
beneficial owner's account for that purpose. In turn, the Financial
Intermediary's ownership of a Book-Entry Security will be recorded on the
records of DTC (or of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the beneficial owner's Financial Intermediary is not a DTC Participant, and on
the records of Cedelbank or Euroclear, as appropriate).
Security Owners will receive all distributions of principal of, and
interest on, the Securities from the Trustee through DTC and DTC participants.
While the Securities are outstanding (except under the circumstances described
below), under the rules, regulations and procedures creating and affecting DTC
and its operations (the "Rules"), DTC is required to make book-entry transfers
among Participants on whose behalf it acts with respect to the Securities and is
required to receive and transmit distributions of principal of, and interest on,
the Securities. Participants and indirect participants with whom Security Owners
have accounts with respect to Securities are similarly required to make
book-entry transfers and receive and transmit the distributions on behalf of
their respective Security Owners. Accordingly, although Security Owners will not
possess certificates, the Rules provide a mechanism by which Security Owners
will receive distributions and will be able to transfer their interest.
Security Owners will not receive or be entitled to receive certificates
representing their respective interests in the Securities, except under the
limited circumstances described below. Unless and until Definitive Securities
are issued, Security Owners who are not Participants may transfer ownership of
Securities only through Participants and indirect participants by instructing
the Participants and indirect participants to transfer Securities, by book-entry
transfer, through DTC for the account of the purchasers of those Securities,
which account is maintained with their respective Participants. Under the Rules
and in accordance with DTC's normal procedures, transfers of ownership of
Securities will be executed through DTC and the accounts of the respective
Participants at DTC will be debited and credited. Similarly, the Participants
and indirect participants will make debits or credits, as the case may be, on
their records on behalf of the selling and purchasing Security Owners.
Because of time zone differences, credits of securities received in
Cedelbank or Euroclear as a result of a transaction with a Participant will be
made during subsequent securities settlement processing and dated the business
day following the DTC settlement date. Credits or any transactions in securities
settled during the processing will be reported to the relevant Euroclear or
Cedelbank Participants on that business day. Cash received in Cedelbank or
Euroclear as a result of sales of securities by or through a Cedelbank
Participant (as defined herein) or Euroclear Participant (as defined herein) to
a DTC Participant will be received with value on the DTC settlement date but
will be available in the relevant Cedelbank or Euroclear cash account only as of
the business day following settlement in DTC.
Transfers between Participants will occur in accordance with the Rules.
Transfers between Cedelbank Participants and Euroclear Participants will occur
in accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Cedelbank
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, cross-market transactions
will require delivery of instructions to the relevant European international
clearing system by the counterparty in that system in accordance with its rules
and procedures and within its established deadlines (European time). The
relevant European international clearing system will, if the transaction meets
its settlement requirements, deliver instructions to the Relevant Depositary to
take action to effect final settlement on its behalf by delivering or receiving
securities in DTC, and making or receiving payment in accordance with normal
procedures for same day funds settlement applicable to DTC. Cedelbank
Participants and Euroclear Participants may not deliver instructions directly to
the European Depositaries.
DTC is a limited-purpose trust company organized under the New York
Banking Law, a "banking organization" within the meaning of the New York Banking
Law, a member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Securities Exchange
Act of 1934. DTC is owned by a number of its direct Participants and by the New
York Stock Exchange, Inc., the American Stock Exchange, Inc. and the National
Association of Securities Dealers, Inc.
Cedelbank is a duly licensed bank organized as a "societe anonyme"
(limited company) under the laws of Luxembourg. Cedelbank holds securities for
its participating organizations ("Cedelbank Participants") and facilitates the
clearance and settlement of securities transactions between Cedelbank
Participants through electronic book-entry changes in accounts of Cedelbank
Participants, thereby eliminating the need for physical movement of
certificates. Transactions may be settled in Cedelbank in any of 37 currencies,
including United States dollars. Cedelbank provides to As Cedelbank
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. Cedelbank interfaces with domestic markets in several
countries. As a licensed bank, Cedelbank is subject to regulation by the
Luxembourg Monetary Institute. Cedelbank Participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and other organizations.
Indirect access to Cedelbank is also available to others, such as banks,
brokers, dealers and trust companies that clear through or maintain a custodial
relationship with a Cedelbank Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for its participants
("Euroclear Participants") and to clear and settle transactions between
Euroclear Participants through simultaneous electronic book-entry delivery
against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may be settled in any of 32 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Brussels, Belgium office of Morgan
Guaranty Trust Company of New York ("Morgan" and in that capacity, the
"Euroclear Operator"), under contract with Euroclear Clearance Systems S.C., a
Belgian cooperative corporation (the "Belgian Cooperative"). All operations are
conducted by Morgan, and all Euroclear securities clearance accounts and
Euroclear cash accounts are accounts with the Euroclear Operator, not the
Belgian Cooperative. The Belgian Cooperative establishes policy for Euroclear on
behalf of Euroclear Participants. Euroclear Participants include banks
(including central banks), securities brokers and dealers and other professional
financial intermediaries. Indirect access to Euroclear is also available to
other firms that clear through or maintain a custodial relationship with a
Euroclear Participant, either directly or indirectly.
Morgan is the Belgian branch of a New York banking corporation which is
a member bank of the Federal Reserve System. As a member bank of the Federal
Reserve System, it is regulated and examined by the Board of Governors of the
Federal Reserve System and the New York State Banking Department, as well as the
Belgian Banking Commission.
Securities clearance accounts and cash accounts with Morgan are
governed by the Terms and Conditions Governing Use of Euroclear and the related
Operating Procedures of the Euroclear System and applicable Belgian law
(collectively the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Under a book-entry format, beneficial owners of the Book-Entry
Securities may experience some delay in their receipt of payments, since
payments will be forwarded by the Trustee to Cede & Co., as nominee of DTC.
Distributions with respect to Securities held through Cedelbank or Euroclear
will be credited to the cash accounts of Cedelbank Participants or Euroclear
Participants in accordance with the relevant system's rules and procedures, to
the extent received by the Relevant Depositary. Distributions will be subject to
tax reporting in accordance with relevant United States tax laws and
regulations. See "Federal Income Tax Consequences -- Tax Treatment of Foreign
Investors" and "-- Tax Consequences to Holders of the Notes -- Backup
Withholding." Because DTC can only act on behalf of Financial Intermediaries,
the ability of a beneficial owner to pledge Book-Entry Securities to persons or
entities that do not participate in the Depository system, may be limited due to
the lack of physical certificates for Book-Entry Securities. In addition,
issuance of the Book-Entry Securities in book-entry form may reduce the
liquidity of those Securities in the secondary market since some potential
investors may be unwilling to purchase Securities for which they cannot obtain
physical certificates.
Monthly and annual reports on the Trust Fund will be provided to Cede &
Co., as nominee of DTC, and may be made available by Cede & Co. to beneficial
owners upon request, in accordance with the rules, regulations and procedures
creating and affecting the Depository, and to the Financial Intermediaries to
whose DTC accounts the Book-Entry Securities of those beneficial owners are
credited.
DTC has advised the Trustee that, unless and until Definitive
Securities are issued, DTC will take any action permitted to be taken by the
holders of the Book-Entry Securities under the applicable Agreement only at the
direction of one or more Financial Intermediaries to whose DTC accounts the
Book-Entry Securities are credited, to the extent that actions are taken on
behalf of Financial Intermediaries whose holdings include those Book-Entry
Securities. Cedelbank or the Euroclear Operator, as the case may be, will take
any other action permitted to be taken by a Securityholder under the Agreement
on behalf of a Cedelbank Participant or Euroclear Participant only in accordance
with its relevant rules and procedures and subject to the ability of the
Relevant Depositary to effect those actions on its behalf through DTC. DTC may
take actions, at the direction of the related Participants, with respect to some
Securities which conflict with actions taken with respect to other Securities.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all beneficial
owners of the occurrence of that event and the availability through DTC of
Definitive Securities. Upon surrender by DTC of be global certificate or
certificates representing the Book-Entry Securities and instructions for re-
registration, the Trustee will issue Definitive Securities, and thereafter the
Trustee will recognize the holders of the Definitive Securities as
Securityholders under the applicable Agreement.
Although DTC, Cedelbank and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Securities among participants of
DTC, Cedelbank and Euroclear, they are under no obligation to perform or
continue to perform those procedures and those procedures may be discontinued at
any time.
None of the Master Servicer, the Depositor or the Trustee will have any
responsibility for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the Book-Entry Securities held by
Cede & Co., as nominee of DTC, or for maintaining, supervising or reviewing any
records relating to the beneficial ownership interests.
Credit Enhancement
General
Credit enhancement may be provided with respect to one or more classes
of a Series of Securities or with respect to the related Trust Fund Assets.
Credit enhancement may be in the form of a limited financial guaranty policy
issued by an entity named in the related Prospectus Supplement, the
subordination of one or more classes of the Securities of that Series, the
establishment of one or more Reserve Accounts, the use of a
cross-collateralization feature, use of a mortgage pool insurance policy, FHA
Insurance, VA Guarantee, bankruptcy bond, special hazard insurance policy,
surety bond, letter of credit, guaranteed investment contract,
overcollateralization, interest rate swap agreement, interest rate cap agreement
or another method of credit enhancement contemplated herein and described in the
related Prospectus Supplement, or any combination of the foregoing. Unless
otherwise specified in the related Prospectus Supplement, credit enhancement
will not provide protection against all risks of loss and will not guarantee
repayment of the entire principal balance of the Securities and interest
thereon. If losses occur which exceed the amount covered by credit enhancement
or which are not covered by the credit enhancement, Securityholders will bear
their allocable share of any deficiencies.
Subordination
If so specified in the related Prospectus Supplement, protection
afforded to holders of one or more classes of Securities of a Series by means of
the subordination feature may be accomplished by the preferential right of
holders of one or more other classes of that Series (the "Senior Securities") to
distributions in respect of scheduled principal, Principal Prepayments, interest
or any combination thereof that otherwise would have been payable to holders of
one or more classes of subordinate Securities (the "Subordinated Securities")
under the circumstances and to the extent specified in the related Prospectus
Supplement. Protection may also be afforded to the holders of Senior Securities
of a Series by:
(i) reducing the ownership interest (if applicable) of the related
Subordinated Securities;
(ii) a combination of the immediately preceding sentence and clause
(i) above; or
(iii) as otherwise described in the related Prospectus Supplement.
If so specified in the related Prospectus Supplement, delays in receipt of
scheduled payments on the Loans and losses on defaulted Loans may be borne first
by the various classes of Subordinated Securities and thereafter by the various
classes of Senior Securities, in each case under the circumstances and subject
to the limitations specified in that Prospectus Supplement the aggregate
distributions in respect of delinquent payments on the Loans over the lives of
the Securities or at any time, the aggregate losses in respect of defaulted
Loans which must be borne by the Subordinated Securities by virtue of
subordination and the amount of the distributions otherwise distributable to the
Subordinated Securityholders that will be distributable to Senior
Securityholders on any Distribution Date may be limited as specified in the
related Prospectus Supplement. If aggregate distributions in respect of
delinquent payment on the Loans or aggregate losses in respect of those Loans
were to exceed an amount specified in the related Prospectus Supplement, holders
of Senior Securities would experience losses on the Securities.
In addition to or in lieu of the foregoing, if so specified in the
related Prospectus Supplement, all or any portion of distributions otherwise
payable to holders of Subordinated Securities on any Distribution Date may
instead be deposited into one or more Reserve Accounts established with the
Trustee or distributed to holders of Senior Securities. Deposits may be made on
each Distribution Date, for specified periods or until the balance in the
Reserve Account has reached a specified amount and, following payments from the
Reserve Account to holders of Senior Securities or otherwise, thereafter to the
extent necessary to restore the balance in the Reserve Account to required
levels, in each case as specified in the related Prospectus Supplement. Amounts
on deposit in the Reserve Account may be released to the holders of classes of
Securities at the times and under the circumstances specified in that Prospectus
Supplement.
If specified in the related Prospectus Supplement, various classes of
Senior Securities and Subordinated Securities may themselves be subordinate in
their right to receive specified distributions to other classes of Senior and
Subordinated Securities, respectively, through a cross-collateralization
mechanism or otherwise.
As between classes of Senior Securities and as between classes of
Subordinated Securities, distributions may be allocated among those classes:
(i) in the order of their scheduled final distribution dates,
(ii) in accordance with a schedule or formula,
(iii) in relation to the occurrence of events, or
(iv) otherwise, in each case as specified in the related Prospectus
Supplement.
As between classes of Subordinated Securities, payments to holders of Senior
Securities on account of delinquencies or losses and payments to any Reserve
Account will be allocated as specified in the related Prospectus Supplement.
Letter of Credit
The letter of credit, if any, with respect to a Series of Securities
will be issued by the bank or financial institution specified in the related
Prospectus Supplement (the "L/C Bank"). Under the letter of credit, the L/C Bank
will be obligated to honor drawings thereunder in an aggregate fixed dollar
amount, net of unreimbursed payments thereunder, equal to the percentage
specified in the related Prospectus Supplement of the aggregate principal
balance of the Loans on the related Cut-off Date or of one or more Classes of
Securities (the "L/C Percentage"). If so specified in the related Prospectus
Supplement, the letter of credit may permit drawings in the event of losses not
covered by insurance policies or other credit support, such as losses arising
from damage not covered by standard hazard insurance policies, losses resulting
from the bankruptcy of a borrower and the application of applicable provisions
of the federal Bankruptcy Code, or losses resulting from denial of insurance
coverage due to misrepresentations in connection with the origination of a Loan.
The amount available under the letter of credit will, in all cases, be reduced
to the extent of the unreimbursed payments thereunder. The obligations of the
L/C Bank under the letter of credit for each Series of Securities will expire at
the earlier of the date specified in the related Prospectus Supplement or the
termination of the Trust Fund. See "The Agreements -- Termination; Optional
Termination." A copy of the letter of credit for a Series, if any, will be filed
with the Commission as an exhibit to a Current Report on Form 8-K to be filed
within 15 days of issuance of the Securities of the related Series.
Insurance Policies, Surety Bonds and Guaranties
If so provided in the Prospectus Supplement for a Series of Securities,
deficiencies in amounts otherwise payable on those Securities or classes thereof
will be covered by insurance policies and/or surety bonds provided by one or
more insurance companies or sureties. Those instruments may cover, with respect
to one or more classes of Securities of the related Series, timely distributions
of interest and/or full distributions of principal on the basis of a schedule of
principal distributions set forth in or determined in the manner specified in
the related Prospectus Supplement. In addition, if specified in the related
Prospectus Supplement, a Trust Fund may also include bankruptcy bonds, special
hazard insurance policies, other insurance or guaranties for the purpose of:
(i) maintaining timely payments or providing additional protection
against losses on the assets included in that Trust Fund,
(ii) paying administrative expenses or
(iii) establishing a minimum reinvestment rate on the payments made
in respect of those assets or principal payment rate on those
assets.
Arrangements may include agreements under which Securityholders are entitled to
receive amounts deposited in various accounts held by the Trustee upon the terms
specified in the related Prospectus Supplement. A copy of any arrangement
instrument for a Series will be filed with the Commission as an exhibit to a
Current Report on Form 8-K to be filed with the Commission within 15 days of
issuance of the Securities of the related Series.
Over-Collateralization
If so provided in the Prospectus Supplement for a Series of Securities,
a portion of the interest payment on each Loan may be applied as an additional
distribution in respect of principal to reduce the principal balance of a class
or classes of Securities and, thus, accelerate the rate of payment of principal
on that class or those classes of Securities.
Spread Account
If so specified in the related Prospectus Supplement, support for a
Series or one or more Classes of a Series of Securities may be provided by the
periodic deposit of a portion of available excess cash flow from the Trust Fund
assets into an account (the "Spread Account") intended to assure the subsequent
distribution of interest and principal on the Securities of that Series or Class
or Classes of a Series of Securities in the manner specified in the related
Prospectus Supplement.
Reserve Accounts
If specified in the related Prospectus Supplement, credit support with
respect to a Series of Securities will be provided by the establishment and
maintenance with the Trustee for that Series of Securities, in trust, of one or
more Reserve Accounts for that Series. The Prospectus Supplement relating to a
Series will specify whether or not any Reserve Accounts will be included in the
Trust Fund for that Series.
The Reserve Account for a Series will be funded:
(i) by the deposit therein of cash, United States Treasury
securities, instruments evidencing ownership of principal or
interest payments thereon, letters of credit, demand notes,
certificates of deposit or a combination thereof in the
aggregate amount specified in the related Prospectus
Supplement,
(ii) by the deposit therein from time to time of amounts, as
specified in the related Prospectus Supplement to which the
Subordinate Securityholders, if any, would otherwise be
entitled or
(iii) in any other manner as may be specified in the related
Prospectus Supplement.
Any amounts on deposit in the Reserve Account and the proceeds of any
other instrument upon maturity will be held in cash or will be invested in
"Permitted Investments" which may include:
(i) obligations of the United States or any agency thereof,
provided those obligations are backed by the full faith and
credit of the United States;
(ii) general obligations of or obligations guaranteed by any state
of the United States or the District of Columbia receiving the
highest long-term debt rating of each Rating Agency rating the
related Series of Securities, or a lower rating as will not
result in he downgrading or withdrawal of the ratings then
assigned to those Securities by each Rating Agency rating
those Securities;
(iii) commercial or finance company paper which is then receiving
the highest commercial or finance company paper rating of each
Rating Agency rating those Securities, or a lower rating as
will not result in the downgrading or withdrawal of the
ratings then assigned to those Securities by each Rating
Agency rating those securities;
(iv) certificates of deposit, demand or time deposits, or bankers'
acceptances issued by any depository institution or trust
company incorporated under the laws of the United States or
of any state thereof and subject to supervision and
examination by federal and/or state banking authorities,
provided that the commercial paper and/or long-term
unsecured debt obligations of that depository institution or
trust company (or in the case of the principal depository
institution in a holding company system, the commercial
paper or long-term unsecured debt obligations of the holding
company, but only if Moody's Investors Service, Inc.
("Moody's") is not a Rating Agency) are then rated in one of
the two highest long term and the highest short-term ratings
of each Rating Agency for those securities, or any lower
ratings as will not result in the downgrading or withdrawal
of the rating then assigned to those Securities by any
Rating Agency;
(v) demand or time deposits or certificates of deposit issued by
any bank or trust company or savings institution to the extent
that the deposits are fully insured by the FDIC;
(vi) guaranteed reinvestment agreements issued by any bank,
insurance company or other corporation containing, at the time
of the issuance of those agreements, the terms and conditions
as will not result in the downgrading or withdrawal of the
rating then assigned to the related Securities by any Rating
Agency rating those Securities;
(vii) repurchase obligations with respect to any security described
in clauses (i) and (ii) above, in either case entered into
with a depository institution or trust company (acting as
principal) described in clause (iv) above;
(viii) securities (other than stripped bonds, stripped coupons or
instruments sold at a purchase price in excess of 115% of
the face amount thereof) bearing interest or sold at a
discount and issued by any corporation incorporated under
the laws of the United States or any state thereof which, at
the time of the investment, have one of the two highest
ratings of each Rating Agency (except that if the Rating
Agency is Moody's, the rating shall be the highest
commercial paper rating of Moody's for any securities), or a
lower rating as will not result in the downgrading or
withdrawal of the rating then assigned to the Securities by
any Rating Agency rating those Securities;
(ix) interests in any money market fund which at the date of
acquisition of the interests in that fund and throughout the
time those interests are held in the fund has the highest
applicable rating by each Rating Agency rating those
Securities or any lower rating as will not result in the
downgrading or withdrawal of the ratings then assigned to the
Securities by each Rating Agency rating those Securities; and
(x) short term investment funds sponsored by any trust company or
national banking association incorporated under the laws of
the United States or any state thereof which on the date of
acquisition has been rated by each Rating Agency rating those
Securities in their respective highest applicable rating
category or any lower rating as will not result in the
downgrading or withdrawal of the ratings then assigned to
those Securities by each Rating Agency rating those
Securities;
provided, that no instrument shall be a Permitted Investment if that instrument
evidences the right to receive interest only payments with respect to the
obligations underlying that instrument. If a letter of credit is deposited with
the Trustee, the letter of credit will be irrevocable. Unless otherwise
specified in the related Prospectus Supplement, any instrument deposited therein
will name the Trustee, in its capacity as trustee for the holders of the
Securities, as beneficiary and will be issued by an entity acceptable to each
Rating Agency that rates the Securities of the related Series. Additional
information with respect to instruments deposited in the Reserve Accounts will
be set forth in the related Prospectus Supplement.
Any amounts so deposited and payments on instruments so deposited will
be available for withdrawal from the Reserve Account for distribution to the
holders of Securities of the related Series for the purposes, in the manner and
at the times specified in the related Prospectus Supplement.
Pool Insurance Policies
If specified in the related Prospectus Supplement, a separate pool
insurance policy ("Pool Insurance Policy") will be obtained for the Pool and
issued by the insurer (the "Pool Insurer") named in that Prospectus Supplement.
Each Pool Insurance Policy will, subject to the limitations described
below, cover loss by reason of default in payment on Loans in the Pool in an
amount equal to a percentage specified in the related Prospectus Supplement of
the aggregate principal balance of the Loans on the Cut-off Date which are not
covered as to their entire outstanding principal balances by Primary Mortgage
Insurance Policies. As more fully described below, the Master Servicer will
present claims thereunder to the Pool Insurer on behalf of itself, the Trustee
and the holders of the Securities of the related Series. The Pool Insurance
Policies, however, are not blanket policies against loss, since claims
thereunder may only be made respecting particular defaulted Loans and only upon
satisfaction of the conditions precedent described below. Unless otherwise
specified in the related Prospectus Supplement, the Pool Insurance Policies will
not cover losses due to a failure to pay or denial of a claim under a Primary
Mortgage Insurance Policy.
Unless otherwise specified in the related Prospectus Supplement, the
Pool Insurance Policy will provide that no claims may be validly presented
unless:
(i) any required Primary Mortgage Insurance Policy is in effect
for the defaulted Loan and a claim thereunder has been
submitted and settled;
(ii) hazard insurance on the related Property has been kept in
force and real estate taxes and other protection and
preservation expenses have been paid;
(iii) if there has been physical loss or damage to the Property, it
has been restored to its physical condition (reasonable wear
and tear excepted) at the time of issuance of the policy; and
(iv) the insured has acquired good and merchantable title to the
Property free and clear of liens except limited, permitted
encumbrances.
Upon satisfaction of these conditions, the Pool Insurer will have the option
either (a) to purchase the property securing the defaulted Loan at a price equal
to the principal balance thereof plus accrued and unpaid interest at the Loan
Rate to the date of the purchase and a portion of expenses incurred by the
Master Servicer on behalf of the Trustee and Securityholders, or (b) to pay the
amount by which the sum of the principal balance of the defaulted Loan plus
accrued and unpaid interest at the Loan Rate to the date of payment of the claim
and the aforementioned expenses exceeds the proceeds received from an approved
sale of the Property, in either case net of a portion of amounts paid or assumed
to have been paid under the related Primary Mortgage Insurance Policy.
If any Property securing a defaulted Loan is damaged and proceeds, if
any, from the related hazard insurance policy or the applicable special hazard
insurance policy are insufficient to restore the damaged Property to a condition
sufficient to permit recovery under the Pool Insurance Policy, the Master
Servicer will not be required to expend its own funds to restore the damaged
Property unless it determines that (i) the restoration will increase the
proceeds to Securityholders on liquidation of the Loan after reimbursement of
the Master Servicer for its expenses and (ii) the expenses will be recoverable
by it through proceeds of the sale of the Property or proceeds of the related
Pool Insurance Policy or any related Primary Mortgage Insurance Policy.
Unless otherwise specified in the related Prospectus Supplement, the
Pool Insurance Policy will not insure (and many Primary Mortgage Insurance
Policies do not insure) against loss sustained by reason of a default arising
from, among other things, (i) fraud or negligence in the origination or
servicing of a Loan, including misrepresentation by the borrower, the originator
or persons involved in the origination thereof, or (ii) failure to construct a
Property in accordance with plans and specifications. A failure of coverage
attributable to one of the foregoing events might result in a breach of the
related Seller's or Originator's representations described above, and, might
give rise to an obligation on the part of the applicable Seller or Originator to
repurchase the defaulted Loan if the breach cannot be cured by that Seller or
Originator. No Pool Insurance Policy will cover (and many Primary Mortgage
Insurance Policies do not cover) a claim in respect of a defaulted Loan
occurring when the servicer of that Loan, at the time of default or thereafter,
was not approved by the applicable insurer.
Unless otherwise specified in the related Prospectus Supplement, the
original amount of coverage under each Pool Insurance Policy will be reduced
over the life of the related Securities by the aggregate dollar amount of claims
paid less the aggregate of the net amounts realized by the Pool Insurer upon
disposition of all foreclosed properties. The amount of claims paid will include
a portion of expenses incurred by the Master Servicer as well as accrued
interest on delinquent Loans to the date of payment of the claim, unless
otherwise specified in the related Prospectus Supplement. Accordingly, if
aggregate net claims paid under any Pool Insurance Policy reach the original
policy limit, coverage under that Pool Insurance Policy will be exhausted and
any further losses will be borne by the related Securityholders.
Cross-Collateralization
If specified in the related Prospectus Supplement, the beneficial
ownership of separate groups of assets included in a Trust Fund may be evidenced
by separate classes of the related Series of Securities. In that case, credit
support may be provided by a cross-collateralization feature which requires that
distributions be made with respect to Securities evidencing a beneficial
ownership interest in, or secured by, one or more asset groups within the same
Trust Fund prior to distributions to Subordinated Securities evidencing a
beneficial ownership interest in, or secured by, one or more other asset groups
within that Trust Fund. Cross-collateralization may be provided by (i) the
allocation of a portion of excess amounts generated by one or more asset groups
within the same Trust Fund to one or more other asset groups within the same
Trust Fund or (ii) the allocation of losses with respect to one or more asset
groups to one or more other asset groups within the same Trust Fund. Excess
amounts will be applied and/or losses will be allocated to the class or classes
of Subordinated Securities of the related Series then outstanding having the
lowest rating assigned by any Rating Agency or the lowest payment priority, in
each case to the extent and in the manner more specifically described in the
related Prospectus Supplement. The Prospectus Supplement for a Series which
includes a cross-collateralization feature will describe the manner and
conditions for applying the cross-collateralization feature.
If specified in the related Prospectus Supplement, the coverage
provided by one or more forms of credit support described in this Prospectus may
apply concurrently to two or more related Trust Funds. If applicable, the
related Prospectus Supplement will identify the Trust Funds to which credit
support relates and the manner of determining the amount of the coverage
provided thereby and of the application of the coverage to the identified Trust
Funds.
Other Insurance, Surety Bonds, Guaranties, and Letters of Credit
If specified in the related Prospectus Supplement, a Trust Fund may
also include bankruptcy bonds, special hazard insurance policies, other
insurance, guaranties, or similar arrangements for the purpose of:
(i) maintaining timely payments or providing additional protection
against losses on the assets included in that Trust Fund,
(ii) paying administrative expenses or
(iii) establishing a minimum reinvestment rate on the payments made
in respect of the assets or principal payment rate on the
assets.
Those arrangements may include agreements under which Securityholders are
entitled to receive amounts deposited in various accounts held by the Trustee
upon the terms specified in the related Prospectus Supplement.
Derivative Products
If specified in the related Prospectus Supplement, a Trust Fund may
also include a derivative arrangement with respect to the Securities of any
Series or any Class or Classes of a Series of Securities. A derivative
arrangement may include a guaranteed rate agreement, a maturity liquidity
facility, a tax protection agreement, an interest rate cap or floor agreement,
an interest rate or currency swap agreement or any other similar arrangement, in
each case as described in the related Prospectus Supplement.
Yield and Prepayment Considerations
The yields to maturity and weighted average lives of the Securities
will be affected primarily by the amount and timing of principal payments
received on or in respect of the Trust Fund Assets included in the related Trust
Fund. The original terms to maturity of the Loans in a given Pool will vary
depending upon the type of Loans included therein. Each Prospectus Supplement
will contain information with respect to the type and maturities of the Loans in
the related Pool. The related Prospectus Supplement will specify the
circumstances, if any, under which the related Loans will be subject to
prepayment penalties. The prepayment experience on the Loans in a Pool will
affect the weighted average life of the related Series of Securities.
The rate of prepayment on the Loans cannot be predicted. Home equity
loans and home improvement contracts have been originated in significant volume
only during the past few years and the Depositor is not aware of any publicly
available studies or statistics on the rate of prepayment of those loans.
Generally, home equity loans and home improvement contracts are not viewed by
borrowers as permanent financing. Accordingly, the Loans may experience a higher
rate of prepayment than traditional first mortgage loans. On the other hand,
because home equity loans such as the Revolving Credit Line Loans generally are
not fully amortizing, the absence of voluntary borrower prepayments could cause
rates of principal payments lower than, or similar to, those of traditional
fully-amortizing first mortgage loans. The prepayment experience of the related
Trust Fund may be affected by a wide variety of factors, including general
economic conditions, prevailing interest rate levels, the availability of
alternative financing, homeowner mobility and the frequency and amount of any
future draws on any Revolving Credit Line Loans. Other factors that might be
expected to affect the prepayment rate of a pool of home equity mortgage loans
or home improvement contracts include the amounts of, and interest rates on, the
underlying senior mortgage loans, and the use of first mortgage loans as
long-term financing for home purchase and subordinate mortgage loans as
shorter-term financing for a variety of purposes, including home improvement,
education expenses and purchases of consumer durables such as automobiles.
Accordingly, the Loans may experience a higher rate of prepayment than
traditional fixed-rate mortgage loans. In addition, any future limitations on
the fight of borrowers to deduct interest payments on home equity loans for
federal income tax purposes may further increase the rate of prepayments of the
Loans. The enforcement of a "due-on-sale" provision (as described below) will
have the same effect as a prepayment of the related Loan. See "Material Legal
Aspects of the Loans -- Due-on-Sale Clauses." The yield to an investor who
purchases Securities in the secondary market at a price other than par will vary
from the anticipated yield if the rate of prepayment on the Loans is actually
different than the rate anticipated by that investor at the time those
Securities were purchased.
Collections on Revolving Credit Line Loans may vary because, among
other things, borrowers may (i) make payments during any month as low as the
minimum monthly payment for the month or, during the interest-only period for a
portion of Revolving Credit Line Loans and, in more limited circumstances,
Closed-End Loans, with respect to which an interest-only payment option has been
selected, the interest and the fees and charges for the month or (ii) make
payments as high as the entire outstanding principal balance plus accrued
interest and the fees and charges thereon. It is possible that borrowers may
fail to make the required periodic payments. In addition, collections on the
Loans may vary due to seasonal purchasing and the payment habits of borrowers.
Unless otherwise specified in the related Prospectus Supplement, all
conventional Loans will contain due-on-sale provisions permitting the mortgagee
to accelerate the maturity of the loan upon sale or transfers by the borrower of
the related Property. Loans insured by the FHA, and Single Family Loans
partially guaranteed by the VA, are assumable with the consent of the FHA and
the VA, respectively. Thus, the rate of prepayments on the Loans may be lower
than that of conventional Loans bearing comparable interest rates. Unless
otherwise specified in the related Prospectus Supplement, the Master Servicer
generally will enforce any due-on-sale or due-on-encumbrance clause, to the
extent it has knowledge of the conveyance or further encumbrance or the proposed
conveyance or proposed further encumbrance of the Property and reasonably
believes that it is entitled to do so under applicable law; provided, however,
that the Master Servicer will not take any enforcement action that would impair
or threaten to impair any recovery under any related insurance policy. See "The
Agreements -- Collection Procedures" and "Material Legal Aspects of the Loans"
for a description of the applicable provisions of each Agreement and legal
developments that may affect the prepayment experience on the Loans.
The rate of prepayments with respect to conventional mortgage loans has
fluctuated significantly in recent years. In general, if prevailing rates fall
significantly below the Loan Rates home by the Loans, those Loans are more
likely to be subject to higher prepayment rates than if prevailing interest
rates remain at or above those Loan Rates. Conversely, if prevailing interest
rates rise appreciably above the Loan Rates borne by the Loans, those Loans are
more likely to experience a lower prepayment rate than if prevailing rates
remain at or below those Loan Rates. However, there can be no assurance that the
preceding sentence will be the case.
When a full prepayment is made on a Loan, the borrower is charged
interest on the principal amount of the Loan so prepaid only for the number of
days in the month actually elapsed up to the date of the prepayment, rather than
for a full month. Unless otherwise provided in the related Prospectus
Supplement, the effect of prepayments in full will be to reduce the amount of
interest passed through or paid in the following month to holders of Securities
because interest on the principal amount of any Loan so prepaid generally will
be paid only to the date of prepayment. Partial prepayments in a given month may
be applied to the outstanding principal balances of the Loans so prepaid on the
first day of the month of receipt or the month following receipt. In the latter
case, partial prepayments will not reduce the amount of interest passed through
or paid in that month. Unless otherwise specified in the related Prospectus
Supplement, neither full nor partial prepayments will be paved through or paid
until the month following receipt.
Even assuming that the Properties provide adequate security for the
Loans, substantial delays could be encountered in connection with the
liquidation of defaulted Loans and corresponding delays in the receipt of
related proceeds by Securityholders could occur. An action to foreclose on a
Property securing a Loan is regulated by state statutes and rules and is subject
to many of the delays and expenses of other lawsuits if defenses or
counterclaims are interposed, sometimes requiring several years to complete.
Furthermore, in some states an action to obtain a deficiency judgment is not
permitted following a nonjudicial sale of a property. In the event of a default
by a borrower, these restrictions among other things, may impede the ability of
the Master Servicer to foreclose on or sell the Property or to obtain
liquidation proceeds sufficient to repay all amounts due on the related Loan. In
addition, the Master Servicer will be entitled to deduct from related
liquidation proceeds all expenses reasonably incurred in attempting to recover
amounts due on defaulted Loans and not yet repaid, including payments to senior
lienholders, legal fees and costs of legal action, real estate taxes and
maintenance and preservation expenses.
Liquidation expenses with respect to defaulted mortgage loans do not
vary directly with the outstanding principal balance of the loan at the time of
default. Therefore, assuming that a servicer took the same steps in realizing
upon a defaulted mortgage loan having a small remaining principal balance as it
would in the case of a defaulted mortgage loan having a large remaining
principal balance, the amount realized after expenses of liquidation would be
smaller as a percentage of the remaining principal balance of the small mortgage
loan than would be the case with the other defaulted mortgage loan having a
large remaining principal balance.
Applicable state laws generally regulate interest rates and other
charges, require disclosures, and require licensing of some originators and
servicers of Loans. In addition, most have other laws, public policy and general
principles of equity relating to the protection of consumers, unfair and
deceptive practices and practices which may apply to the origination, servicing
and collection of the Loans. Depending on the provisions of the applicable law
and the specific facts and circumstances involved, violations of these laws,
policies and principles may limit the ability of the Master Servicer to collect
all or part of the principal of or may entitle the borrower to a refund of
amounts previously paid and, in addition, could interest on the Loans, subject
the Master Servicer to damages and administrative sanctions.
If the rate at which interest is passed through or paid to the holders
of Securities of a Series is calculated on a Loan-by-Loan basis,
disproportionate principal prepayments among Loans with different Loan Rates
will affect the yield on those Securities. In most cases, the effective yield to
Securityholders will be lower than the yield otherwise produced by the
applicable Pass-Through Rate or interest rate and purchase price, because while
interest will accrue on each Loan from the first day of the month (unless
otherwise specified in the related Prospectus Supplement), the distribution of
that interest will not be made earlier than the month following the month of
accrual.
Under some circumstances, the Master Servicer, the holders of the
residual interests in a REMIC or any person specified in the related Prospectus
Supplement may have the option to purchase the assets of a Trust Fund thereby
effecting earlier retirement of the related Series of Securities. See "The
Agreements -Termination; Optional Termination."
The relative contribution of the various factors affecting prepayment
may also vary from time to time. There can be no assurance as to the rate of
payment of principal of the Trust Fund Assets at any time or over the lives of
the Securities.
The Prospectus Supplement relating to a Series of Securities will
discuss in greater detail the effect of the rate and timing of principal
payments (including prepayments), delinquencies and losses on the yield,
weighted average lives and maturities of those Securities.
The Agreements
Set forth below is a description of the material provisions of each
Agreement which are not described elsewhere in this Prospectus. The description
is subject to, and qualified in its entirety by reference to, the provisions of
each Agreement. Where particular provisions or terms used in the Agreements are
referred to, the provisions or terms are as specified in the Agreements.
Assignment of the Trust Fund Assets
Assignment of the Loans. At the time of issuance of the Securities of a
Series, and except as otherwise specified in the related Prospectus Supplement,
the Depositor will cause the Loans comprising the related Trust Fund to be
assigned to the Trustee, without recourse, together with all principal and
interest received by or on behalf of the Depositor on or with respect to those
Loans after the Cut-off Date, other than principal and interest due on or before
the Cut-off Date and other than any Retained Interest specified in the related
Prospectus Supplement. The Trustee will, concurrently with the assignment,
deliver the Securities to the Depositor in exchange for the Loans. Each Loan
will be identified in a schedule appearing as an exhibit to the related
Agreement. The schedule will include information as to the outstanding principal
balance of each Loan after application of payments due on or before the Cut-off
Date, as well as information regarding the Loan Rate or APR, the maturity of the
Loan, the Loan-to-Value Ratios or Combined Loan-to-Value Ratios, as applicable,
at origination and other information.
Unless otherwise specified in the related Prospectus Supplement, the
Agreement will require that, within the time period specified therein, the
Depositor will also deliver or cause to be delivered to the Trustee (or to the
custodian hereinafter referred to) as to each Mortgage Loan or Home Equity Loan,
among other things:
(i) the mortgage note or contract endorsed without recourse in
blank or to the order of the Trustee,
(ii) the mortgage, deed of trust or similar instrument (a
"Mortgage") with evidence of recording indicated thereon
(except for any Mortgage not returned from the public
recording office, in which case the Depositor will deliver or
cause to be delivered a copy of the Mortgage together with a
certificate that the original of the Mortgage was delivered to
the applicable recording office),
(iii) an assignment of the Mortgage to the Trustee, which assignment
will be in recordable form in the case of a Mortgage
assignment, and
(iv) the other security documents, including those relating to any
senior interests in the Property, as may be specified in the
related Prospectus Supplement or the related Agreement.
Unless otherwise specified in the related Prospectus Supplement, the Depositor
will promptly cause the assignments of the related Loans to be recorded in the
appropriate public office for real property records, except in states in which,
in the opinion of counsel acceptable to the Trustee, the recording is not
required to protect the Trustee's interest in the Loans against the claim of any
subsequent transferee or any successor to or creditor of the Depositor or the
Originators of the Loans.
With respect to any Loans that are Cooperative Loans, the Depositor
will cause to be delivered to the Trustee the related original cooperative note
endorsed without recourse in blank or to the order of the Trustee, the original
security agreement, the proprietary lease or occupancy agreement, the
recognition agreement, an executed financing agreement and the relevant stock
certificate, related blank stock powers and any other document specified in the
related Prospectus Supplement. The Depositor will cause to be filed in the
appropriate office an assignment and a financing statement evidencing the
Trustee's security interest in each Cooperative Loan.
Unless otherwise specified in the related Prospectus Supplement, the
Depositor will as to each Contract, deliver or cause to be delivered to the
Trustee the original Contract and copies of documents and instruments related to
each Contract and, other than in the case of unsecured Contracts, the security
interest in the Property securing that Contract. In order to give notice of the
right, title and interest of Securityholders to the Contracts, the Depositor
will cause a UCC-1 financing statement to be executed by the Depositor or the
Seller identifying the Trustee as the secured party and identifying all
Contracts as collateral. Unless otherwise specified in the related Prospectus
Supplement, the Contracts will not be stamped or otherwise marked to reflect
their assignment to the Trustee. Therefore, if, through negligence, fraud or
otherwise, a subsequent purchaser were able to take physical possession of the
Contracts without notice of the assignment, the interest of Securityholders in
the Contracts could be defeated. See "Material Legal Aspects of the Loans -- The
Contracts."
The Trustee (or the custodian hereinafter referred to) will review the
Loan documents within the time period specified in the related Prospectus
Supplement after receipt thereof, and the Trustee will hold those documents in
trust for the benefit of the related Securityholders. Unless otherwise specified
in the related Prospectus Supplement, if any document is found to be missing or
defective in any material respect, the Trustee (or the custodian) will notify
the Master Servicer and the Depositor, and the Master Servicer will notify the
related Seller or Originator.
If the applicable Seller or Originator cannot cure the omission or
defect within the time period specified in the related Prospectus Supplement
after receipt of notice, that Seller or Originator will be obligated to either
(i) purchase the related Loan from the Trust Fund at the Purchase Price or (ii)
if so specified in the related Prospectus Supplement, remove that Loan from the
Trust Fund and substitute in its place one or more other Loans that meets
requirements set forth therein. There can be no assurance that a Seller or
Originator will fulfill this purchase or substitution obligation. Although the
Master Servicer may be obligated to enforce the obligation to the extent
described above under "The Trust Fund -- Representations by Sellers or
Originators; Repurchases," neither the Master Servicer nor the Depositor will be
obligated to purchase or replace the Loan if the Seller or Originator defaults
on its obligation, unless the breach also constitutes a breach of the
representations or warranties of the Master Servicer or the Depositor, as the
case may be. Unless otherwise specified in the related Prospectus Supplement,
this obligation to cure, purchase or substitute constitutes the sole remedy
available to the Securityholders or the Trustee for omission of, or a material
defect in, a constituent document.
The Trustee will be authorized to appoint a custodian pursuant to a
custodial agreement to maintain possession of and, if applicable, to review the
documents relating to the Loans as agent of the Trustee.
The Master Servicer will make representations and warranties regarding
its authority to enter into, and its ability to perform its obligations under,
the Agreement. Upon a breach of any representation of the Master Servicer
regarding its authority or its ability which materially and adversely affects
the interests of the Securityholders in a Loan, the Master Servicer will be
obligated either to cure the breach in all material respects or to purchase (at
the Purchase Price) or if so specified in the related Prospectus Supplement,
replace the Loan. Unless otherwise specified in the related Prospectus
Supplement, this obligation to cure, purchase or substitute constitutes the sole
remedy available to the Securityholders or the Trustee for that breach of
representation by the Master Servicer.
Notwithstanding the foregoing provisions, with respect to a Trust Fund
for which a REMIC election is to be made, no purchase or substitution of a Loan
will be made if the purchase or substitution would result in a prohibited
transaction tax under the Code.
No Recourse to Sellers, Originators, Depositor or Master Servicer
As described above under "-- Assignment of the Trust Fund Assets," the
Depositor will cause the Loans comprising the related Trust Fund to be assigned
to the Trustee, without recourse. However, each Seller or Originator will be
obligated to repurchase or substitute for any Loan as to which representations
and warranties are breached or for failure to deliver the required documents
relating to the Loans as described above under "-- Assignment of the Trust Fund
Assets" and under "The Trust Fund -- Representations by Sellers or Originators;
Repurchases." These obligations to purchase or substitute constitute the sole
remedy available to the Securityholders or the Trustee for a breach of any
representation or failure to deliver a constituent document.
Payments on Loans; Deposits to Security Account
The Master Servicer will establish and maintain or cause to be
established and maintained with respect to the related Trust Fund a separate
account or accounts for the collection of payments on the related Trust Fund
Assets in the Trust Fund (the "Security Account") which, unless otherwise
specified in the related Prospectus Supplement, must be either (i) maintained
with a depository institution the debt obligations of which (or in the case of a
depository institution that is the principal subsidiary of a holding company,
the obligations of which) are rated in one of the two highest rating categories
by the Rating Agency or Rating Agencies that rated one or more classes of the
related Series of Securities, (ii) an account or accounts the deposits in which
are fully insured by either the Bank Insurance Fund (the "BIF") of the FDIC or
the Savings Association Insurance Fund (as successor to the Federal Savings and
Loan Insurance Corporation ("SAIF")), (iii) an account or accounts the deposits
in which are insured by the BIF or SAIF (to the limits established by the FDIC),
and the uninsured deposits in which are otherwise secured such that, as
evidenced by an opinion of counsel, the Securityholders have a claim with
respect to the funds in the Security Account or a perfected first priority
security interest against any collateral securing those funds that is superior
to the claims of any other depositors or general creditors of the depository
institution with which the Security Account is maintained, or (iv) an account or
accounts otherwise acceptable to each Rating Agency. The collateral eligible to
secure amounts in the Security Account is limited to Permitted Investments. A
Security Account may be maintained as an interest bearing account or the funds
held therein may be invested pending each succeeding Distribution Date in
Permitted Investments. Unless otherwise specified in the related Prospectus
Supplement, the Master Servicer or its designee will be entitled to receive any
interest or other income earned on funds in the Security Account as additional
compensation and will be obligated to deposit in the Security Account the amount
of any loss immediately as realized. The Security Account may be maintained with
the Master Servicer or with a depository institution that is an affiliate of the
Master Servicer, provided it meets the standards set forth above.
The Master Servicer will deposit or cause to be deposited in the
Security Account for each Trust Fund, to the extent applicable and unless
otherwise specified in the related Prospectus Supplement and provided in the
Agreement, the following payments and collections received or advances made by
or on behalf of it subsequent to the Cut-off Date (other than payments due on or
before the Cut-off Date and exclusive of any amounts representing Retained
Interest):
(i) all payments on account of principal, including Principal
Prepayments and, if specified in the related Prospectus Supplement, any
applicable prepayment penalties, on the Loans;
(ii) all payments on account of interest on the Loans,
net of applicable servicing compensation;
(iii) all proceeds (net of unreimbursed payments of property
taxes, insurance premiums and similar items ("Insured Expenses")
incurred, and unreimbursed Advances made, by the Master Servicer, if
any) of the hazard insurance policies and any Primary Mortgage
Insurance Policies, to the extent those proceeds are not applied to the
restoration of the property or released to the Mortgagor in accordance
with the Master Servicer's normal servicing procedures (collectively,
"Insurance Proceeds") and all other cash amounts (net of unreimbursed
expenses incurred in connection with liquidation or foreclosure
("Liquidation Expenses") and unreimbursed Advances made, by the Master
Servicer, if any) received and retained in connection with the
liquidation of defaulted Loans, by foreclosure or otherwise
("Liquidation Proceeds"), together with any net proceeds received on a
monthly basis with respect to any properties acquired on behalf of the
Securityholders by foreclosure or deed in lieu of foreclosure;
(iv) all proceeds of any Loan or property in respect thereof
purchased by the Master Servicer, the Depositor or any Seller or
Originators as described under "The Trust Funds -- Representations by
Sellers or Originators; Repurchases" or under "-- Assignment of Trust
Fund Assets" above and all proceeds of any Loan repurchased as
described under "-- Termination; Optional Termination" below;
(v) all payments required to be deposited in the Security
Account with respect to any deductible clause in any blanket insurance
policy described under "-- Hazard Insurance" below;
(vi) any amount required to be deposited by the Master
Servicer in connection with losses realized on investments for the
benefit of the Master Servicer of funds held in the Security Account
and, to the extent specified in the related Prospectus Supplement, any
payments required to be made by the Master Servicer in connection with
prepayment interest shortfalls; and
(vii) all other amounts required to be deposited in the
Security Account pursuant to the Agreement.
The Master Servicer (or the Depositor, as applicable) will from time to
time direct the institution that maintains the Security Account to withdraw
funds from the Security Account for specified purposes which, unless otherwise
specified in the related Prospectus Supplement, will include the following:
(i) to pay to the Master Servicer the servicing fees described
in the related Prospectus Supplement, the master servicing fees
(subject to reduction) and, as additional servicing compensation,
earnings on or investment income with respect to funds in the amounts
in the Security Account credited thereto;
(ii) to reimburse the Master Servicer for Advances, the right
of reimbursement with respect to any Loan being limited to amounts
received that represent late recoveries of payments of principal and/or
interest on the Loan (or Insurance Proceeds or Liquidation Proceeds
with respect thereto) with respect to which the Advance was made;
(iii) to reimburse the Master Servicer for any Advances
previously made which the Master Servicer has determined to be
nonrecoverable;
(iv) to reimburse the Master Servicer from Insurance Proceeds
for expenses incurred by the Master Servicer and covered by the related
insurance policies;
(v) to reimburse the Master Servicer for unpaid master
servicing fees and unreimbursed out-of-pocket costs and expenses
incurred by the Master Servicer in the performance of its servicing
obligations, the right of reimbursement being limited to amounts
received representing late recoveries of the payments for which the
advances were made;
(vi) to pay to the Master Servicer, with respect to each Loan
or property acquired in respect thereof that has been purchased by the
Master Servicer pursuant to the Agreement, all amounts received thereon
and not taken into account in determining the principal balance of the
repurchased Loan;
(vii) to reimburse the Master Servicer or the Depositor for
expenses incurred and reimbursable pursuant to the Agreement;
(viii) to withdraw any amount deposited in the Security
Account and not required to be deposited therein; and
(ix) to clear and terminate the Security Account upon
termination of the Agreement.
In addition, unless otherwise specified in the related Prospectus
Supplement, on or prior to the business day immediately preceding each
Distribution Date, the Master Servicer shall withdraw from the Security Account
the amount of Available Funds, to the extent on deposit, for deposit in an
account maintained by the Trustee for the related Series of Securities.
Pre-Funding Account
If so provided in the related Prospectus Supplement, the Master
Servicer will establish and maintain a Pre-Funding Account, in the name of the
related Trustee on behalf of the related Securityholders, into which the
Depositor will deposit cash from the proceeds of the issuance of the related
Securities in an amount equal to the Pre-Funded Amount on the related Closing
Date. The Pre-Funded Amount will not exceed 25% of the initial aggregate
principal amount of the Certificates and/or Notes of the related Series. The
Pre-Funding Account will be maintained with the Trustee for the related Series
of Securities and is designed solely to hold funds to be applied by the related
Trustee during the Funding Period to pay to the Depositor the purchase price for
Subsequent Loans. Monies on deposit in the Pre-Funding Account will not be
available to cover losses on or in respect of the related Loans. The Pre-Funded
Amount will be used by the related Trustee to purchase Subsequent Loans from the
Depositor from time to time during the Funding Period. Each Subsequent Loan that
is purchased by the related Trustee will be required to be underwritten in
accordance with the eligibility criteria set forth in the related Agreement and
in the related Prospectus Supplement. The eligibility criteria will be
determined in consultation with the applicable Rating Agency or Rating Agencies
prior to the issuance of the related Series of Securities and are designed to
ensure that if Subsequent Loans were included as part of the initial Loans, the
credit quality of the assets would be consistent with the initial rating or
ratings of the Securities of that Series. The Depositor will certify to the
Trustee that all conditions precedent to the transfer of the Subsequent Loans to
the Trust Fund, including, among other things, the satisfaction of the related
eligibility criteria, have been satisfied. It is a condition precedent to the
transfer of any Subsequent Loans to the Trust Fund that the applicable Rating
Agency or Rating Agencies, after receiving prior notice of the proposed transfer
of the Subsequent Loans to the Trust Fund, will not have advised the Depositor
or the related Trustee that the conveyance of the Subsequent Loans to the Trust
Fund will result in a qualification, modification or withdrawal of their current
rating of any Securities of that Series. Upon the purchase by the Trustee of a
Subsequent Loan, that Subsequent Loan will be included in the related Trust Fund
Assets. The Funding Period, if any, for a Trust Fund will begin on the related
Closing Date and will end on the date specified in the related Prospectus
Supplement, which in no event will be later than the date that is three months
after the related Closing Date. Monies on deposit in the Pre-Funding Account may
be invested in Permitted Investments under the circumstances and in the manner
described in the related Agreement. See the "Index of Defined Terms" on page 119
of this Prospectus for the location of the defined term "Permitted Investments."
Earnings on investment of funds in the Pre-Funding Account will be deposited
into the related Security Account or any other trust account as is specified in
the related Prospectus Supplement or released to the Depositor or the Master
Servicer or any other party and in the manner specified in the related
Prospectus Supplement. Losses on the investment of funds in the Pre-Funding
Account will be charged against the funds on deposit in the Pre-Funding Account
unless otherwise specified in the related Prospectus Supplement. Any amounts
remaining in the Pre-Funding Account at the end of the Funding Period will be
distributed to the related Securityholders in the manner and priority specified
in the related Prospectus Supplement, as a prepayment of principal of the
related Securities. The Depositor will include information regarding the
additional Subsequent Loans in a Current Report on Form 8-K, to be filed after
the end of the Funding Period, to the extent that the information, individually
or in the aggregate, is material.
In addition, if so provided in the related Prospectus Supplement, the
Master Servicer will establish and maintain, in the name of the Trustee on
behalf of the related Securityholders, an account (the "Capitalized Interest
Account") into which the Depositor will deposit cash from the proceeds of the
issuance of the related Securities in an amount necessary to cover shortfalls in
interest on the related Series of Securities that may arise as a result of a
portion of the assets of the Trust Fund not being invested in Loans and the
utilization of the Pre-Funding Account as described above. The Capitalized
Interest Account shall be maintained with the Trustee for the related Series of
Securities and is designed solely to cover the above-mentioned interest
shortfalls. Monies on deposit in the Capitalized Interest Account will not be
available to cover losses on or in respect of the related Loans. Amounts on
deposit in the Capitalized Interest Account will be distributed to
Securityholders on the Distribution Dates occurring in the Funding Period to
cover any shortfalls in interest on the related Series of Securities as
described in the related Prospectus Supplement. Monies on deposit in the
Capitalized Interest Account may be invested in Permitted Investments under the
circumstances and in the manner described in the related Agreement. Earnings on
and investment of funds in the Capitalized Interest Account will be deposited
into the related Security Account or any other trust account as specified in the
related Prospectus Supplement or released to the Depositor or the Master
Servicer or any other party and in the manner specified in the related
Prospectus Supplement. Losses on the investment of funds in the Capitalized
Interest Account will be charged against the funds on deposit in the Capitalized
Interest Account unless otherwise specified in the related Prospectus
Supplement. To the extent that the entire amount on deposit in the Capitalized
Interest Account has not been applied to cover shortfalls in interest on the
related Series of Securities by the end of the Funding Period, any amounts
remaining in the Capitalized Interest Account will be paid to the Depositor.
Sub-Servicing by Sellers
Each Seller of a Loan or any other servicing entity may act as the
Sub-Servicer for a Loan pursuant to an agreement (each, a "Sub-Servicing
Agreement"), which will not contain any terms inconsistent with the related
Agreement. While each Sub-Servicing Agreement will be a contract solely between
the Master Servicer and the Sub-Servicer, the Agreement pursuant to which a
Series of Securities is issued will provide that, if for any reason the Master
Servicer for that Series of Securities is no longer the Master Servicer of the
related Loans, the Trustee or any successor Master Servicer may assume the
Master Servicer's rights and obligations under the Sub-Servicing Agreement.
Notwithstanding any subservicing arrangement, unless otherwise provided in the
related Prospectus Supplement, the Master Servicer will remain liable for its
servicing duties and obligations under the Master Servicing Agreement as if the
Master Servicer alone were servicing the Loans.
Hazard Insurance
Except as otherwise specified in the related Prospectus Supplement, the
Master Servicer will require the mortgagor or obligor on each Loan to maintain a
hazard insurance policy providing for no less than the coverage of the standard
form of fire insurance policy with extended coverage customary for the type of
Property in the state in which the Property is located. Coverage will be in an
amount that is at least equal to the lesser of (i) the maximum insurable value
of the improvements securing the Loan or (ii) the greater of (y) the outstanding
principal balance of the Loan and (z) an amount such that the proceeds of the
policy shall be sufficient to prevent the mortgagor and/or the mortgagee from
becoming a co-insurer. All amounts collected by the Master Servicer under any
hazard policy (except for amounts to be applied to the restoration or repair of
the Property or released to the mortgagor or obligor in accordance with the
Master Servicer's normal servicing procedures) will be deposited in the related
Security Account. In the event that the Master Servicer maintains a blanket
policy insuring against hazard losses on all the Loans comprising part of a
Trust Fund, it will conclusively be deemed to have satisfied its obligation
relating to the maintenance of hazard insurance. A blanket policy may contain a
deductible clause, in which case the Master Servicer will be required to deposit
from its own funds into the related Security Account the amounts which would
have been deposited therein but for that clause.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements securing a Loan by
fire, lightning, explosion, smoke, windstorm and hail, riot, strike and civil
commotion, subject to the conditions and exclusions particularized in each
policy. Although the policies relating to the Loans may have been underwritten
by different insurers under different state laws in accordance with different
applicable forms and therefore may not contain identical terms and conditions,
the basic terms thereof are dictated by respective state laws, and most policies
typically do not cover any physical damage resulting from the following: war,
revolution, governmental actions, floods and other water-related causes, earth
movement (including earthquakes, landslides and mud flows), nuclear reactions,
wet or dry rot, vermin, rodents, insects or domestic animals, theft and, in some
cases, vandalism. The foregoing list is merely indicative of a subset of the
kinds of uninsured risks and is not intended to be all inclusive. If the
Property securing a Loan is located in a federally designated special flood area
at the time of origination, the Master Servicer will require the mortgagor or
obligor to obtain and maintain flood insurance.
The hazard insurance policies covering properties securing the Loans
typically contain a clause which in effect requires the insured at all time to
carry insurance of a specified percentage of a specified percentage (generally
80% to 90%) of the full replacement value of the insured property in order to
recover the full amount of any partial loss. If the insured's coverage falls
below this specified percentage, then the insurer's liability in the event of
partial loss will not exceed the larger of (i) the actual cash value (generally
defined as replacement cost at the time and place of loss, less physical
depreciation) of the improvements damaged or destroyed or (ii) the proportion of
the loss as the amount of insurance carried bears to the specified percentage of
the full replacement cost of the improvements. Since the amount of hazard
insurance the Master Servicer may cause to be maintained on the improvements
securing the Loans declines as the principal balances owing thereon decrease,
and since improved real estate generally has appreciated in value over time in
the past, the effect of this requirement in the event of partial loss may be
that hazard insurance proceeds will be insufficient to restore fully the damaged
property. If specified in the related Prospectus Supplement, a special hazard
insurance policy will be obtained to insure against a portion of the uninsured
risks described above. See "Credit Enhancement."
Unless otherwise specified in the related Prospectus Supplement, the
Master Servicer will not require that a standard hazard or flood insurance
policy be maintained on the cooperative dwelling relating to any Cooperative
Loan. Generally, the Cooperative itself is responsible for maintenance of hazard
insurance for the property owned by the Cooperative and the tenant-stockholders
of that Cooperative do not maintain individual hazard insurance policies. To the
extent, however, that a Cooperative and the related borrower on a Cooperative
Loan do not maintain insurance or do not maintain adequate coverage or any
insurance proceeds are not applied to the restoration of damaged property, any
damage to the borrower's cooperative dwelling or the Cooperative's building
could significantly reduce the value of the collateral securing that Cooperative
Loan to the extent not covered by other credit support.
If the Property securing a defaulted Loan is damaged and proceeds, if
any, from the related hazard insurance policy are insufficient to restore the
damaged Property, the Master Servicer is not required to expend its own funds to
restore the damaged Property unless it determines (i) that the restoration will
increase the proceeds to Securityholders on liquidation of the Loan after
reimbursement of the Master Servicer for its expenses and (ii) that the related
expenses will be recoverable by it from related Insurance Proceeds or
Liquidation Proceeds.
If recovery on a defaulted Loan under any related Insurance Policy is
not available for the reasons set forth in the preceding paragraph, or if the
defaulted Loan is not covered by an Insurance Policy, the Master Servicer will
be obligated to follow or cause to be followed the normal practices and
procedures it deems necessary or advisable to realize upon the defaulted Loan.
If the proceeds of any liquidation of the Property securing the defaulted Loan
are less than the principal balance of that Loan plus interest accrued thereon
that is payable to Securityholders, the Trust Fund will realize a loss in the
amount of that difference plus the aggregate of expenses incurred by the Master
Servicer in connection with the proceedings and which are reimbursable under the
Agreement. In the unlikely event that any of those proceedings result in a total
recovery which is, after reimbursement to the Master Servicer of its expenses,
in excess of the principal balance of that Loan plus interest accrued thereon
that is payable to Securityholders, the Master Servicer will be entitled to
withdraw or retain from the Security Account amounts representing its normal
servicing compensation with respect to that Loan and, unless otherwise specified
in the related Prospectus Supplement, amounts representing the balance of the
excess, exclusive of any amount required by law to be forwarded to the related
borrower, as additional servicing compensation.
Unless otherwise specified in the related Prospectus Supplement, if the
Master Servicer or its designee recovers Insurance Proceeds which, when added to
any related Liquidation Proceeds and after deduction of a portion of expenses
reimbursable to the Master Servicer, exceed the principal balance of the related
Loan plus interest accrued thereon that is payable to Securityholders, the
Master Servicer will be entitled to withdraw or retain from the Security Account
amounts representing its normal servicing compensation with respect to that
Loan. In the event that the Master Servicer has expended its own funds to
restore the damaged Property and those funds have not been reimbursed under the
related hazard insurance policy, it will be entitled to withdraw from the
Security Account out of related Liquidation Proceeds or Insurance Proceeds an
amount equal to the expenses incurred by it, in which event the Trust Fund may
realize a loss up to the amount so charged. Since Insurance Proceeds cannot
exceed deficiency claims and a portion of expenses incurred by the Master
Servicer, no payment or recovery will result in a recovery to the Trust Fund
which exceeds the principal balance of the defaulted Loan together with accrued
interest thereon. See "Credit Enhancement."
Unless otherwise specified in the related Prospectus Supplement or the
related Agreement, the proceeds from any liquidation of a Loan will be applied
in the following order of priority:
o first, to reimburse the Master Servicer for any unreimbursed
expenses incurred by it to restore the related Property and any
unreimbursed servicing compensation payable to the Master Servicer
with respect to that Loan;
o second, to reimburse the Master Servicer for any unreimbursed
Advances with respect to that Loan;
o third, to accrued and unpaid interest (to the extent no Advance
has been made for the amount) on that Loan; and
o fourth, as a recovery of principal of that Loan.
Realization Upon Defaulted Loans
General. The Master Servicer will use its reasonable best efforts to
foreclose upon, repossess or otherwise comparably convert the ownership of the
Properties securing the related Loans as come into and continue in default and
as to which no satisfactory arrangements can be made for the collection of
delinquent payments. In connection with a foreclosure or other conversion, the
Master Servicer will follow the practices and procedures as deems necessary or
advisable and as are normal and usual in its servicing activities with respect
to comparable loans serviced by it. However, the Master Servicer will not be
required to expend its own funds in connection with any foreclosure or towards
the restoration of the Property unless it determines that: (i) the restoration
or foreclosure will increase the Liquidation Proceeds in respect of the related
Loan available to the Security holders after reimbursement to itself for the
expenses and (ii) the expenses will be recoverable by it either through
Liquidation Proceeds or the proceeds of insurance. Notwithstanding anything to
the contrary herein, in the case of a Trust Fund for which a REMIC election has
been made, the Master Servicer shall liquidate any Property acquired through
foreclosure within two years after the acquisition of the beneficial ownership
of that Property. While the holder of a Property acquired through foreclosure
can often maximize its recovery by providing financing to a new purchaser, the
Trust Fund, if applicable, will have no ability to do so and neither the Master
Servicer nor the Depositor will be required to do so.
The Master Servicer may arrange with the obligor on a defaulted Loan, a
modification of that Loan (a "Modification") to the extent provided in the
related Prospectus Supplement. Modifications may only be entered into if they
meet the underwriting policies and procedures employed by the Master Servicer in
servicing receivables for its own account and meet the other conditions
described in the related Prospectus Supplement.
Primary Mortgage Insurance Policies. If so specified in the related
Prospectus Supplement, the Master Servicer will maintain or cause to be
maintained, as the case may be, in full force and effect, a Primary Mortgage
Insurance Policy with regard to each Loan for which the coverage is required.
Primary Mortgage Insurance Policies reimburse specified losses sustained by
reason of defaults in payments by borrowers. Although the terms and conditions
of Primary Mortgage Insurance Policies differ, each Primary Mortgage Insurance
Policy will generally cover losses up to an amount equal to the excess of the
unpaid principal amount of a defaulted Loan (plus accrued and unpaid interest
thereon and approved expenses) over a specified percentage of the value of the
related Mortgaged Property. The Master Servicer will not cancel or refuse to
renew any Primary Mortgage Insurance Policy in effect at the time of the initial
issuance of a Series of Securities that is required to be kept in force under
the applicable Agreement unless the replacement Primary Mortgage Insurance
Policy for the cancelled or nonrenewed policy is maintained with an insurer
whose claims-paying ability is sufficient to maintain the current rating of the
classes of Securities of that Series that have been rated.
FHA Insurance; VA Guaranties. Loans designated in the related
Prospectus Supplement as insured by the FHA will be insured by the FHA as
authorized under the United States Housing Act of 1937, as amended. In addition
to the Title I Program of the FHA, see "Material Legal Aspects of the Loans --
The Title I Program," some Loans will be insured under various FHA programs
including the standard FHA 203(b) program to finance the acquisition of one- to
four-family housing units and the FHA 245 graduated payment mortgage program.
These programs generally limit the principal amount and interest rates of the
mortgage loans insured. Loans insured by FHA generally require a minimum down
payment of approximately 5% of the original principal amount of the loan. No
FHA-insured Loans relating to a Series may have an interest rate or original
principal amount exceeding the applicable FHA limits at the time of origination
of the related loan.
Loans designated in the related Prospectus Supplement as guaranteed by
the VA will be partially guaranteed by the VA under the Serviceman's
Readjustment Act of 1944, as amended (a "VA Guaranty"). The Serviceman's
Readjustment Act of 1944, as amended, permits a veteran--or a spouse in some
instances--to obtain a mortgage loan guaranty by the VA covering mortgage
financing of the purchase of a one-to four-family dwelling unit at interest
rates permitted by the VA. The program has no mortgage loan limits, requires no
down payment from the purchaser and permits the guaranty of mortgage loans of up
to 30 years' duration. However, no Loan guaranteed by the VA will have an
original principal amount greater than five times the partial VA guaranty for
that Loan. The maximum guaranty that may be issued by the VA under a VA
guaranteed mortgage loan depends upon the original principal amount of the
mortgage loan, as further described in 38 United States Code Section 1803(a), as
amended.
Servicing and Other Compensation and Payment of Expenses
The principal servicing compensation to be paid to the Master Servicer
in respect of its master servicing activities for each Series of Securities will
be equal to the percentage per annum described in the related Prospectus
Supplement, which may vary, of the outstanding principal balance of each Loan,
and the compensation will be retained by it from collections of interest on the
related Loan in the related Trust Fund (the "Master Servicing Fee"). Unless
otherwise specified in the related Prospectus Supplement, as compensation for
its servicing duties, a Sub-Servicer or, if there is no Sub-Servicer, the Master
Servicer will be entitled to a monthly servicing fee as described in the related
Prospectus Supplement. In addition, unless otherwise specified in the related
Prospectus Supplement, the Master Servicer or Sub-Servicer will retain all
prepayment charges, assumption fees and late payment charges, to the extent
collected from borrowers, and any benefit that may accrue as a result of the
investment of funds in the applicable Security Account (unless otherwise
specified in the related Prospectus Supplement).
The Master Servicer will pay or cause to be paid specified ongoing
expenses associated with each Trust Fund and incurred by it in connection with
its responsibilities under the related Agreement, including, without limitation,
payment of any fee or other amount payable in respect of any credit enhancement
arrangements, payment of the fees and disbursements of the Trustee, any
custodian appointed by the Trustee, the certificate registrar and any paying
agent, and payment of expenses incurred in enforcing the obligations of
Sub-Servicers and Sellers. The Master Servicer will be entitled to reimbursement
of expenses incurred in enforcing the obligations of Sub-Servicers and Sellers
under limited circumstances.
Evidence as to Compliance
Each Agreement will provide that on or before a specified date in each
year, a firm of independent public accountants will furnish a statement to the
Trustee to the effect that, on the basis of the examination by that firm
conducted substantially in compliance with the Uniform Single Attestation
Program for Mortgage Bankers, the Audit Program for Mortgages serviced for FHLMC
or other program as specified in the related Prospectus Supplement, the
servicing by or on behalf of the Master Servicer of mortgage loans or private
asset backed securities, or under pooling and servicing agreements substantially
similar to each other (including the related Agreement), was conducted in
compliance with those agreements except for any significant exceptions or errors
in records that, in the opinion of the firm, the Audit Program for Mortgages
serviced for FHLMC, or the Uniform Single Attestation Program for Mortgage
Bankers, it is required to report. In rendering its statement the firm may rely,
as to matters relating to the direct servicing of Loans by Sub-Servicers, upon
comparable statements for examinations conducted substantially in compliance
with the Uniform Single Attestation Program for Mortgage Bankers or the Audit
Program for Mortgages serviced for FHLMC (rendered within one year of that
statement) of firms of independent public accountants with respect to the
related Sub-Servicer.
Each Agreement will also provide for delivery to the Trustee, on or
before a specified date in each year, of an annual statement signed by two
officers of the Master Servicer to the effect that the Master Servicer has
fulfilled its obligations under the Agreement throughout the preceding year.
Copies of the annual accountants' statement and the statement of
officers of the Master Servicer may be obtained by Securityholders of the
related Series without charge upon written request to the Master Servicer at the
address set forth in the related Prospectus Supplement.
Matters Regarding the Master Servicer and the Depositor
The Master Servicer under each Pooling and Servicing Agreement or
Master Servicing Agreement, as applicable, will be named in the related
Prospectus Supplement. Each Agreement will provide that the Master Servicer may
not resign from its obligations and duties under the Agreement except upon a
determination that its duties thereunder are no longer permissible under
applicable law. The Master Servicer may, however, be removed from its
obligations and duties as set forth in the Agreement. No resignation will become
effective until the Trustee or a successor servicer has assumed the Master
Servicer's obligations and duties under the Agreement.
Each Agreement will further provide that neither the Master Servicer,
the Depositor nor any director, officer, employee, or agent of the Master
Servicer or the Depositor will be under any liability to the related Trust Fund
or Securityholders for any action taken or for refraining from the taking of any
action in good faith pursuant to the Agreement, or for errors in judgment;
provided, however, that neither the Master Servicer, the Depositor nor any
director, officer, employee, or agent of the Master Servicer or the Depositor
will be protected against any liability which would otherwise be imposed by
reason of willful misfeasance, bad faith or gross negligence in the performance
of duties thereunder or by reason of reckless disregard of obligations and
duties thereunder. Each Agreement will further provide that the Master Servicer,
the Depositor and any director, officer, employee or agent of the Master
Servicer or the Depositor will be entitled to indemnification by the related
Trust Fund and will be held harmless against any loss, liability or expense
incurred in connection with any legal action relating to the Agreement or the
Securities, other than any loss, liability or expense related to any specific
Loan or Loans (except any loss, liability or expense otherwise reimbursable
pursuant to the Agreement) and any loss, liability or expense incurred by reason
of willful misfeasance, bad faith or gross negligence in the performance of
duties thereunder or by reason of reckless disregard of obligations and duties
thereunder. In addition, each Agreement will provide that neither the Master
Servicer nor the Depositor will be under any obligation to appear in, prosecute
or defend any legal action which is not incidental to its respective
responsibilities under the Agreement and which in its opinion may involve it in
any expense or liability. The Master Servicer or the Depositor may, however, in
its discretion undertake any action which it may deem necessary or desirable
with respect to the Agreement and the rights and duties of the parties thereto
and the interests of the Securityholders thereunder. In that event, the legal
expenses and costs of the action and any liability resulting therefrom will be
expenses, costs and liabilities of the Trust Fund and the Master Servicer or the
Depositor, as the case may be, will be entitled to be reimbursed therefor out of
funds otherwise distributable to Securityholders.
Except as otherwise specified in the related Prospectus Supplement, any
person into which the Master Servicer may be merged or consolidated, or any
person resulting from any merger or consolidation to which the Master Servicer
is a party, or any person succeeding to the business of the Master Servicer,
will be the successor of the Master Servicer under each Agreement and further
provided that the merger, consolidation or succession does not adversely affect
the then current rating or ratings of the class or classes of Securities of that
Series that have been rated.
Events of Default; Rights Upon Event of Default
Pooling and Servicing Agreement; Master Servicing Agreement. Except as
otherwise specified in the related Prospectus Supplement, Events of Default
under each Agreement will consist of :
(i) any failure by the Master Servicer to distribute or cause to
be distributed to Securityholders of any class any required
payment (other than an Advance) which continues unremedied for
five days after the giving of written notice of the failure to
the Master Servicer by the Trustee or the Depositor, or to the
Master Servicer, the Depositor and the Trustee by the holders
of Securities of that class evidencing not less than 25% of
the total distributions allocated to that class ("Percentage
Interests");
(ii) any failure by the Master Servicer to make an Advance as
required under the Agreement, unless cured as specified
therein;
(iii) any failure by the Master Servicer duly to observe or perform
in any material respect any of its other covenants or
agreements in the Agreement which continues unremedied for
thirty days after the giving of written notice of the failure
to the Master Servicer by the Trustee or the Depositor, or to
the Master Servicer, the Depositor and the Trustee by the
holders of Securities of any class evidencing not less than
25% of the aggregate Percentage Interests constituting that
class; and
(iv) events of insolvency, readjustment of debt, marshalling of
assets and liabilities or similar proceeding and actions by or
on behalf of the Master Servicer indicating its insolvency,
reorganization or inability to pay its obligations.
If specified in the related Prospectus Supplement, the Agreement will
permit the Trustee to sell the Trust Fund Assets and the other assets of the
Trust Fund described under "Credit Enhancement" herein in the event that
payments in respect thereto are insufficient to make payments required in the
Agreement. The assets of the Trust Fund will be sold only under the
circumstances and in the manner specified in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, so
long as an Event of Default under an Agreement remains unremedied, the Depositor
or the Trustee may, and at the direction of holders of Securities of any class
evidencing not less than 25% of the aggregate Percentage Interests constituting
a class and under the other circumstances specified in the related Agreement,
the Trustee shall terminate all of the rights and obligations of the Master
Servicer under the Agreement relating to that Trust Fund and in and to the
related Trust Fund Assets, whereupon the Trustee will succeed to all of the
responsibilities, duties and liabilities of the Master Servicer under the
Agreement, including, if specified in the related Prospectus Supplement, the
obligation to make Advances, and will be entitled to similar compensation
arrangements. In the event that the Trustee is unwilling or unable so to act, it
may appoint, or petition a court of competent jurisdiction for the appointment
of, a mortgage loan servicing institution meeting the qualifications set forth
in the related Agreement to act as successor to the Master Servicer under the
Agreement. Pending the appointment, the Trustee is obligated to act in that
capacity. The Trustee and any successor may agree upon the servicing
compensation to be paid, which in no event may be greater than the compensation
payable to the Master Servicer under the Agreement.
Unless otherwise specified in the related Prospectus Supplement, no
Securityholder, solely by virtue of that holder's status as a Securityholder,
will have any right under any Agreement to institute any proceeding with respect
to the related Agreement, unless that holder previously has given to the Trustee
written notice of default and unless the holders of Securities of any class of
that Series evidencing not less than 25% of the aggregate Percentage Interests
constituting that class have made written request upon the Trustee to institute
a proceeding in its own name as Trustee thereunder and have offered to the
Trustee reasonable indemnity, and the Trustee for 60 days has neglected or
refused to institute any proceeding.
Indenture. Except as otherwise specified in the related Prospectus
Supplement, Events of Default under the Indenture for each Series of Notes
include:
(i) a default in the payment of any principal of or interest on
any Note of that Series which continues unremedied for five
days after the giving of written notice of the default is
given as specified in the related Prospectus Supplement;
(ii) failure to perform in any material respect any other covenant
of the Depositor or the Trust Fund in the Indenture which
continues for a period of thirty (30) days after notice
thereof is given in accordance with the procedures described
in the related Prospectus Supplement;
(iii) events of bankruptcy, insolvency, receivership or liquidation
of the Depositor or the Trust Fund; or
(iv) any other Event of Default provided with respect to Notes of
that Series including but not limited to defaults on the part
of the issuer, if any, of a credit enhancement instrument
supporting the Notes.
If an Event of Default with respect to the Notes of any Series at the
time outstanding occurs and is continuing, either the Trustee or the holders of
a majority of the then aggregate outstanding amount of the Notes of that Series
may declare the principal amount (or, if the Notes of that Series have an
interest rate of 0%, that portion of the principal amount as may be specified in
the terms of that Series, as provided in the related Prospectus Supplement) of
all the Notes of the Series to be due and payable immediately. That declaration
may, under limited circumstances, be rescinded and annulled by the holders of
more than 50% of the Percentage Interests of the Notes of that Series.
If, following an Event of Default with respect to any Series of Notes,
the Notes of that Series have been declared to be due and payable, the Trustee
may, in its discretion, notwithstanding the acceleration, elect to maintain
possession of the collateral securing the Notes of that Series and to continue
to apply distributions on the collateral as if there had been no declaration of
acceleration if the collateral continues to provide sufficient funds for the
payment of principal of and interest on the Notes of that Series as they would
have become due if there had not been a declaration. In addition, the Trustee
may not sell or otherwise liquidate the collateral securing the Notes of a
Series following an Event of Default, other than a default in the payment of any
principal or interest on any Note of that Series for five days or more, unless:
(a) the holders of 100% of the Percentage Interests of the Notes of
that Series consent to the sale,
(b) the proceeds of the sale or liquidation are sufficient to pay in
full the principal of and accrued interest, due and unpaid, on the
outstanding Notes of that Series at the date of the sale or
(c) the Trustee determines that the collateral would not be sufficient
on an ongoing basis to make all payments on those Notes as the
payments would have become due if the Notes had not been declared
due and payable, and the Trustee obtains the consent of the
holders of 66 2/3% of the Percentage Interests of the Notes of
that Series.
In the event that the Trustee liquidates the collateral in connection
with an Event of Default involving a default for five days or more in the
payment of principal of or interest on the Notes of a Series, the Indenture
provides that the Trustee will have a prior lien on the proceeds of any
liquidation for unpaid fees and expenses. As a result, upon the occurrence of an
Event of Default, the amount available for distribution to the Noteholders would
be less than would otherwise be the case. However, the Trustee may not institute
a proceeding for the enforcement of its lien except in connection with a
proceeding for the enforcement of the lien of the Indenture for the benefit of
the Noteholders after the occurrence of an Event of Default.
Except as otherwise specified in the related Prospectus Supplement, in
the event the principal of the Notes of a Series is declared due and payable, as
described above, the holders of any Notes declared due and payable which was
issued at a discount from par may be entitled to receive no more than an amount
equal to the unpaid principal amount thereof less the amount of the discount
which is unamortized.
Subject to the provisions of the Indenture relating to the duties of
the Trustee, in case an Event of Default shall occur and be continuing with
respect to a Series of Notes, the Trustee shall be under no obligation to
exercise any of the rights or powers under the Indenture at the request or
direction of any of the holders of Notes of that Series, unless those holders
offered to the Trustee security or indemnity satisfactory to it against the
costs, expenses and liabilities which might be incurred by it in complying with
that request or direction. Subject to those provisions for indemnification and
limitations contained in the Indenture, the holders of a majority of the then
aggregate outstanding amount of the Notes of that Series shall have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee or exercising any trust or power conferred on the
Trustee with respect to the Notes of that Series, and the holders of a majority
of the then aggregate outstanding amount of the Notes of that Series may, in
some cases, waive any default with respect thereto, except a default in the
payment of principal or interest or a default in respect of a covenant or
provision of the Indenture that cannot be modified without the waiver or consent
of all the holders of the outstanding Notes of that Series affected thereby.
Amendment
Except as otherwise specified in the related Prospectus Supplement,
each Agreement may be amended by the Depositor, the Master Servicer and the
Trustee, without the consent of any of the Securityholders:
(i) to cure any ambiguity;
(ii) to correct or supplement any provision therein which may be
defective or inconsistent with any other provision therein; or
(iii) to make any other revisions with respect to matters or
questions arising under the Agreement which are not
inconsistent with the provisions thereof, provided that the
amendment will not adversely affect in any material respect
the interests of any Securityholder.
An amendment will be deemed not to adversely affect in any material respect the
interests of the Securityholders if the person requesting that amendment obtains
a letter from each Rating Agency requested to rate the class or classes of
Securities of that Series stating that the amendment will not result in the
downgrading or withdrawal of the respective ratings then assigned to the related
Securities. In addition, to the extent provided in the related Agreement, an
Agreement may be amended without the consent of any of the Securityholders, to
change the manner in which the Security Account is maintained, provided that any
change does not adversely affect the then current rating on the class or classes
of Securities of that Series that have been rated. In addition, if a REMIC
election is made with respect to a Trust Fund, the related Agreement may be
amended to modify, eliminate or add to any of its provisions to the extent
necessary to maintain the qualification of the related Trust Fund as a REMIC,
provided that the Trustee has received an opinion of counsel to the effect that
the action is necessary or helpful to maintain that qualification.
Except as otherwise specified in the related Prospectus Supplement,
each Agreement may also be amended by the Depositor, the Master Servicer and the
Trustee with consent of holders of Securities of the related Series evidencing
not less than 66% of the aggregate Percentage Interests of each class affected
thereby for the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of the Agreement or of modifying in any manner
the rights of the holders of the related Securities; provided, however, that no
amendment of this type may (i) reduce in any manner the amount of or delay the
timing of, payments received on Loans which are required to be distributed on
any Security without the consent of the holder of that Security, or (ii) reduce
the aforesaid percentage of Securities of any class the holders of which are
required to consent to that amendment without the consent of the holders of all
Securities of the class covered by the related Agreement then outstanding. If a
REMIC election is made with respect to a Trust Fund, the Trustee will not be
entitled to consent to an amendment to the related Agreement without having
first received an opinion of counsel to the effect that the amendment will not
cause the related Trust Fund to fail to qualify as a REMIC.
Termination; Optional Termination
Pooling and Servicing Agreement; Trust Agreement. Unless otherwise
specified in the related Agreement, the obligations created by each Pooling and
Servicing Agreement and Trust Agreement for each Series of Securities will
terminate upon the payment to the related Securityholders of all amounts held in
the Security Account or by the Master Servicer and required to be paid to them
pursuant to that Agreement following the later of (i) the final payment of or
other liquidation of the last of the Trust Fund Assets subject thereto or the
disposition of all property acquired upon foreclosure of any Trust Fund Assets
remaining in the Trust Fund and (ii) the purchase by the Master Servicer or, if
REMIC treatment has been elected and if specified in the related Prospectus
Supplement, by the holder of the residual interest in the REMIC (see "Federal
Income Tax Consequences"), from the related Trust Fund of all of the remaining
Trust Fund Assets and all property acquired in respect of those Trust Fund
Assets.
Unless otherwise specified by the related Prospectus Supplement, any
purchase of Trust Fund Assets and property acquired in respect of Trust Fund
Assets evidenced by a Series of Securities will be made at the option of the
Master Servicer, any other person or, if applicable, the holder of the REMIC
residual interest, at a price specified in the related Prospectus Supplement.
The exercise of that option will effect early retirement of the Securities of
that Series, but the right of the Master Servicer, any other person or, if
applicable, the holder of the REMIC residual interest, to so purchase is subject
to the principal balance of the related Trust Fund Assets being less than the
percentage specified in the related Prospectus Supplement of the aggregate
principal balance of the Trust Fund Assets at the Cut-off Date for the Series.
Upon that requirement being satisfied, the parties specified in the related
Prospectus Supplement may purchase all Trust Fund Assets and thereby effect
retirement of the related Series of Securities. In that event, the applicable
purchase price will be sufficient to pay the aggregate outstanding principal
balance of that Series of Securities and any undistributed shortfall in interest
of that Series of Securities as will be described in the related Prospectus
Supplement. The foregoing is subject to the provision that if a REMIC election
is made with respect to a Trust Fund, any repurchase pursuant to clause (ii)
above will be made only in connection with a "qualified liquidation" of the
REMIC within the meaning of Section 860F(g)(4) of the Code.
Indenture. The Indenture will be discharged with respect to a Series of
Notes--other than continuing rights specified in the Indenture--upon the
delivery to the Trustee for cancellation of all the Notes of that Series or,
with specified limitations, upon deposit with the Trustee of funds sufficient
for the payment in full of all of the Notes of that Series.
In addition to that discharge with limitations, the Indenture will
provide that, if so specified with respect to the Notes of any Series, the
related Trust Fund will be discharged from any and all obligations in respect of
the Notes of that Series (except for specified obligations relating to temporary
Notes and exchange of Notes, to register the transfer of or exchange Notes of
that Series, to replace stolen, lost or mutilated Notes of that Series, to
maintain paying agencies and to hold monies for payment in trust) upon the
deposit with the Trustee, in trust, of money and/or direct obligations of or
obligations guaranteed by the United States of America which through the payment
of interest and principal in respect thereof in accordance with their terms will
provide money in an amount sufficient to pay the principal of and each
installment of interest on the Notes of that Series on the last scheduled
Distribution Date for the Notes and any installment of interest on those Notes
in accordance with the terms of the Indenture and the Notes of that Series. In
the event of that defeasance and discharge of Notes of a Series, holders of
Notes of that Series would be able to look only to money and/or direct
obligations for payment of principal and interest, if any, on their Notes until
maturity.
The Trustee
The Trustee under each Agreement will be named in the applicable
Prospectus Supplement. The commercial bank or trust company serving as Trustee
may have normal banking relationships with the Depositor, the Master Servicer
and any of their respective affiliates.
Material Legal Aspects of the Loans
The following discussion contains summaries, which are general in
nature, of material legal matters relating to the Loans. Because legal aspects
are governed primarily by applicable state law (which laws may differ
substantially), the descriptions do not, except as expressly provided below,
reflect the laws of any particular state, nor to encompass the laws of all
states in which the security for the Loans is situated. The descriptions are
qualified in their entirety by reference to the applicable federal laws and the
appropriate laws of the states in which Loans may be originated.
General
The Loans for a Series may be secured by deeds of trust, mortgages,
security deeds or deeds to secure debt, depending upon the prevailing practice
in the state in which the property subject to the loan is located. Deeds of
trust are used almost exclusively in California instead of mortgages. A mortgage
creates a lien upon the real property encumbered by the mortgage, which lien is
generally not prior to the lien for real estate taxes and assessments. Priority
between mortgages depends on their terms and generally on the order of recording
with a state or county office. There are two parties to a mortgage, the
mortgagor, who is the borrower and owner of the mortgaged property, and the
mortgagee, who is the lender. Under the mortgage instrument, the mortgagor
delivers to the mortgagee a note or bond and the mortgage. Although a deed of
trust is similar to a mortgage, a deed of trust formally has three parties, the
borrower-property owner called the trustor (similar to a mortgagor), a lender
(similar to a mortgagee) called the beneficiary, and a third-party grantee
called the trustee. Under a deed of trust, the borrower grants the property,
irrevocably until the debt is paid, in trust, generally with a power of sale, to
the trustee to secure payment of the obligation. A security deed and a deed to
secure debt are special types of deeds which indicate on their face that they
are granted to secure an underlying debt. By executing a security deed or deed
to secure debt, the grantor conveys title to, as opposed to merely creating a
lien upon, the subject property to the grantee until the time at which the
underlying debt is repaid. The trustee's authority under a deed of trust, the
mortgagee's authority under a mortgage and the grantee's authority under a
security deed or deed to secure debt are governed by law and, with respect to
some deeds of trust, the directions of the beneficiary.
Cooperatives. A portion of the Loans may be Cooperative Loans. The
Cooperative owns all the real property that comprises the project, including the
land, separate dwelling units and all common areas. The Cooperative is directly
responsible for project management and, in most cases, payment of real estate
taxes and hazard and liability insurance. If there is a blanket mortgage on the
Cooperative and/or underlying land, as is generally the case, the Cooperative,
as project mortgagor, is also responsible for meeting these mortgage
obligations. A blanket mortgage is ordinarily incurred by the Cooperative in
connection with the construction or purchase of the Cooperative's apartment
building. The interest of the occupant under proprietary leases or occupancy
agreements to which that Cooperative is a party are generally subordinate to the
interest of the holder of the blanket mortgage in that building. If the
Cooperative is unable to meet the payment obligations arising under its blanket
mortgage, the mortgagee holding the blanket mortgage could foreclose on that
mortgage and terminate all subordinate proprietary leases and occupancy
agreements. In addition, the blanket mortgage on a Cooperative may provide
financing in the form of a mortgage that does not fully amortize with a
significant portion of principal being due in one lump sum at final maturity.
The inability of the Cooperative to refinance this mortgage and its consequent
inability to make the final payment could lead to foreclosure by the mortgagee
providing the financing. A foreclosure in either event by the holder of the
blanket mortgage could eliminate or significantly diminish the value of any
collateral held by the lender who financed the purchase by an individual
tenant-stockholder of Cooperative shares or, in the case of a Trust Fund
including Cooperative Loans, the collateral securing the Cooperative Loans.
The Cooperative is owned by tenant-stockholders who, through ownership
of stock, shares or membership certificates in the corporation, receive
proprietary leases or occupancy agreements which confer exclusive rights to
occupy specific units. Generally, a tenant-stockholder of a Cooperative must
make a monthly payment to the Cooperative representing that tenant-stockholder's
pro rata share of the Cooperative's payments for its blanket mortgage, real
property taxes, maintenance expenses and other capital or ordinary expenses. An
ownership interest in a Cooperative and accompanying rights is financed through
a Cooperative share loan evidenced by a promissory note and secured by a
security interest in the occupancy agreement or proprietary lease and in the
related Cooperative shares. The lender takes possession of the share certificate
and a counterpart of the proprietary lease or occupancy agreement, and a
financing statement covering the proprietary lease or occupancy agreement and
the Cooperative shares is filed in the appropriate state and local offices to
perfect the lender's interest in its collateral. Subject to the limitations
discussed below, upon default of the tenant-stockholder, the lender may sue for
judgment on the promissory note, dispose of the collateral at a public or
private sale or otherwise proceed against the collateral or tenant-stockholder
as an individual as provided in the security agreement covering the assignment
of the proprietary lease or occupancy agreement and the pledge of Cooperative
shares.
Foreclosure/Repossession
Deed of Trust. Foreclosure of a deed of trust is generally accomplished
by a non-judicial sale under a specific provision in the deed of trust which
authorizes the trustee to sell the property at public auction upon any default
by the borrower under the terms of the note or deed of trust. In some states,
that foreclosure also may be accomplished by judicial action in the manner
provided for foreclosure of mortgages. In addition to any notice requirements
contained in a deed of trust, in some states, like California, the trustee must
record a notice of default and send a copy to the borrower-trustor, to any
person who has recorded a request for a copy of any notice of default and notice
of sale, to any successor in interest to the borrower-trustor, to the
beneficiary of any junior deed of trust and to other specified persons. In some
states, including California, the borrower-trustor has the right to reinstate
the loan at any time following default until shortly before the trustee's sale.
In general, the borrower, or any other person having a junior encumbrance on the
real estate, may, during a statutorily prescribed reinstatement period, cure a
monetary default by paying the entire amount in arrears plus other designated
costs and expenses incurred in enforcing the obligation. Generally, state law
controls the amount of foreclosure expenses and costs, including attorney's
fees, which may be recovered by a lender. After the reinstatement period has
expired without the default having been cured, the borrower or junior lienholder
no longer has the right to reinstate the loan and must pay the loan in full to
prevent the scheduled foreclosure sale. If the deed of trust is not reinstated
within any applicable cure period, a notice of sale must be posted in a public
place and, in most states (including California), published for a specific
period of time in one or more newspapers. In addition, some state laws require
that a copy of the notice of sale be posted on the property and sent to all
parties having an interest of record in the real property. In California, the
entire process from recording a notice of default to a non-judicial sale usually
takes four to five months.
Mortgages. Foreclosure of a mortgage is generally accomplished by
judicial action. The action is initiated by the service of legal pleadings upon
all parties having an interest in the 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
parties. When the mortgagee's right to foreclosure is contested, the legal
proceedings necessary to resolve the issue can be time consuming. After the
completion of a judicial foreclosure proceeding, the court generally issues a
judgment of foreclosure and appoints a referee or other court officer to conduct
the sale of the property. In some states, mortgages may also be foreclosed by
advertisement, pursuant to a power of sale provided in the mortgage.
Although foreclosure sales are typically public sales, frequently no
third party purchaser bids in excess of the lender's lien because of the
difficulty of determining the exact status of title to the property, the
possible deterioration of the property during the foreclosure proceedings and a
requirement that the purchaser pay for the property in cash or by cashier's
check. Thus the foreclosing lender often purchases the property from the trustee
or referee for an amount equal to the principal amount outstanding under the
loan, accrued and unpaid interest and the expenses of foreclosure in which event
the mortgagor's debt will be extinguished or the lender may purchase for a
lesser amount in order to preserve its right against a borrower to seek a
deficiency judgment in states where that judgment is available. Thereafter,
subject to the right of the borrower in some states to remain in possession
during the redemption period, the lender will assume the burden of ownership,
including obtaining hazard insurance and making those repairs at its own expense
as are necessary to render the property suitable for sale. The lender will
commonly obtain the services of a real estate broker and pay the broker's
commission in connection with the sale of the property. Depending upon market
conditions, the ultimate proceeds of the sale of the property may not equal the
lender's investment in the property. Any loss may be reduced by the receipt of
any mortgage guaranty insurance proceeds.
Courts have imposed general equitable principles upon foreclosure,
which are generally designed to mitigate the legal consequences to the borrower
of the borrower's defaults under the loan documents.
Some courts have been faced with the issue of whether federal or state
constitutional provisions reflecting due process concerns for fair notice
require that borrowers under deeds of trust receive notice longer than that
prescribed by statute. For the most part, these cases have upheld the notice
provisions as being reasonable or have found that the sale by a trustee under a
deed of trust does not involve sufficient state action to afford constitutional
protection to the borrower.
When the beneficiary under a junior mortgage or deed of trust cures the
default and reinstates or redeems by paying the full amount of the senior
mortgage or deed of trust, the amount paid by the beneficiary so to cure or
redeem becomes a part of the indebtedness secured by the junior mortgage or deed
of trust. See "--Junior Mortgages; Rights of Senior Mortgagees" below.
Cooperative Loans. The Cooperative shares owned by the
tenant-stockholder and pledged to the lender are, in almost all cases, subject
to restrictions on transfer as set forth in the Cooperative's certificate of
incorporation and bylaws, as well as the proprietary lease or occupancy
agreement, and may be cancelled by the Cooperative for failure by the
tenant-stockholder to pay rent or other obligations or charges owed by that
tenant-stockholder, including mechanics' liens against the cooperative apartment
building incurred by that tenant-stockholder. The proprietary lease or occupancy
agreement generally permits the Cooperative to terminate that lease or agreement
in the event an obligor fails to make payments or defaults in the performance of
covenants required thereunder. Typically, the lender and the Cooperative enter
into a recognition agreement which establishes the rights and obligations of
both parties in the event of a default by the tenant-stockholder on its
obligations under the proprietary lease or occupancy agreement. A default by the
tenant-stockholder under the proprietary lease or occupancy agreement will
usually constitute a default under the security agreement between the lender and
the tenant-stockholder.
The recognition agreement generally provides that, in the event that
the tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate the lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the Cooperative will recognize the
lender's lien against proceeds form the sale of the Cooperative apartment,
subject, however, to the Cooperative's right to sums due under that proprietary
lease or occupancy agreement. The total amount owed to the Cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the value of the collateral below the outstanding
principal balance of the Cooperative Loan and accrued and unpaid interest
thereon.
Recognition agreements also provide that in the event of a foreclosure
on a Cooperative Loan, the lender must obtain the approval or consent of the
Cooperative as required by the proprietary lease before transferring the
Cooperative shares or assigning the proprietary lease. Generally, the lender is
not limited in any rights it may have to dispossess the tenant-stockholders.
In some states, foreclosure on the Cooperative shares is accomplished
by a sale in accordance with the provisions of Article 9 of the Uniform
Commercial Code (the "UCC") and the security agreement relating to those shares.
Article 9 of the UCC requires that a sale be conducted in a "commercially
reasonable" manner. Whether a foreclosure sale has been conducted in a
"commercially reasonable" manner will depend on the facts in each case. In
determining commercial reasonableness, a court will look to the notice given the
debtor and the method, manner, time, place and terms of the foreclosure.
Generally, a sale conducted according to the usual practice of banks selling
similar collateral will be considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be
applied first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the Cooperative to receive sums due under the
proprietary lease or occupancy agreement. If there are proceeds remaining, the
lender must account to the tenant-stockholder for the surplus. Conversely, if a
portion of the indebtedness remains unpaid, the tenant-stockholder is generally
responsible for the deficiency. See "--Anti-Deficiency Legislation and Other
Limitations on Lenders" below.
In the case of foreclosure on a building which was converted from a
rental building to a building owned by a Cooperative under a non-eviction plan,
some states require that a purchaser at a foreclosure sale take the property
subject to rent control and rent stabilization laws which apply to some tenants
who elected to remain in the building but who did not purchase shares in the
Cooperative when the building was so converted.
Environmental Risks
Real property pledged as security to a lender may subject the lender to
unforeseen environmental risks. Under the laws of some states, contamination of
a property may give rise to a lien on the property to assure the payment of the
costs of clean-up. In several states a lien to assure the payment of the costs
of clean-up has priority over the lien of an existing mortgage against that
property. In addition, under the federal Comprehensive Environmental Response,
Compensation and Liability Act of 1980 ("CERCLA"), the United States
Environmental Protection Agency ("EPA") may impose a lien on property where EPA
has incurred clean-up costs. However, a CERCLA lien is subordinate to
pre-existing, perfected security interests.
Under the laws of some states, and under CERCLA, there are
circumstances under which a secured lender may be held liable as an "owner" or
"operator" for the costs of addressing releases or threatened releases of
hazardous substances at a property, even though the environmental damage or
threat was caused by a prior or current owner or operator. CERCLA imposes
liability for those costs on any and all "responsible parties," including owners
or operators. However, CERCLA excludes from the definition of "owner or
operator" a secured creditor who holds indicia of ownership primarily to protect
its security interest (the "secured creditor exclusion") but without
"participating in the management" of the property. Thus, if a lender's
activities begin to encroach on the actual management of a contaminated facility
or property, the lender may incur liability as an "owner or operator" under
CERCLA. Similarly, if a lender forecloses and takes title to a contaminated
facility or property, the lender may incur CERCLA liability in various
circumstances, including, but not limited to, when it holds the facility or
property as an investment (including leasing the facility or property to a third
party), or fails to dispose of the property in a commercially reasonable time
frame.
The Asset Conservation, Lender Liability and Deposit Insurance
Protection Act of 1996 amended CERCLA to clarify when actions taken by a lender
constitute participation in the management of a mortgaged property, or the
business of a borrower, so as to render the secured creditor exemption
unavailable to a lender. It provides that, in order to be deemed to have
participated in the management of a mortgaged property, a lender must actually
participate in the operational affairs of the property or the borrower. The
legislation also provides that participation in the management of the property
does not include "merely having the capacity to influence, or unexercised right
to control" operations. Rather, a lender will lose the protection of the secured
creditor exemption only if it exercises decision-making control over the
borrower's environmental compliance and hazardous substance handling and
disposal practices, or assumes day-to-day management of all operational
functions of the mortgaged property.
If a lender is or becomes liable, it can bring an action for
contribution against any other "responsible parties," including a previous owner
or operator, who created the environmental hazard, but those persons or entities
may be bankrupt or otherwise judgment proof. The costs associated with
environmental cleanup may be substantial. It is conceivable that costs arising
from the circumstances set forth above could result in a loss to
Certificateholders.
A secured creditor exclusion does not govern liability for cleanup
costs under federal laws other than CERCLA except with respect to underground
petroleum storage tanks regulated under the federal Resource Conservation and
Recovery Act ("RCRA"). The Asset Conservation, Lender Liability and Deposit
Insurance Protection Act of 1996 amended RCRA so that the protections accorded
to lenders under CERCLA are also accorded to the holders of security interests
in underground petroleum storage tanks. It also endorsed EPA's lender liability
rule for underground petroleum storage tanks under Subtitle I of RCRA. Under
this rule, a holder of a security interest in an underground petroleum storage
tank or real property containing an underground petroleum storage tank is not
considered an operator of the underground petroleum storage tank as long as
petroleum is not added to, stored in or dispensed from the tank. It should be
noted, however, that liability for cleanup of petroleum contamination may be
governed by state law, which may not provide for any specific protection for
secured creditors.
Except as otherwise specified in the related Prospectus Supplement, at
the time the Loans were originated, no environmental assessment or a very
limited environmental assessment of the Properties was conducted.
Rights of Redemption
In some states, after sale pursuant to a deed of trust or foreclosure
of a mortgage, the borrower and foreclosed junior lienors are given a statutory
period in which to redeem the property from the foreclosure sale. In other
states, including California, this right of redemption applies only to sales
following judicial foreclosure, and not to sales pursuant to a non-judicial
power of sale. In most states where the right of redemption is available,
statutory redemption may occur upon payment of the foreclosure purchase price,
accrued interest and taxes. In other states, redemption may be authorized if the
former borrower pays only a portion of the sums due. The effect of a statutory
right of redemption is to diminish the ability of the lender to sell the
foreclosed property. The exercise of a right of redemption would defeat the
title of any purchaser from the lender subsequent to foreclosure or sale under a
deed of trust. Consequently, the practical effect of the redemption right is to
force the lender to retain the property and pay the expenses of ownership until
the redemption period has run. In some states, there is no right to redeem
property after a trustee's sale under a deed of trust.
Anti-deficiency Legislation and Other Limitations on Lenders
Some states have imposed statutory and judicial restrictions that limit
the remedies of a beneficiary under a deed of trust or a mortgagee under a
mortgage. In some states, including California, statutes and case law limit the
right of the beneficiary or mortgagee to obtain a deficiency judgment against
borrowers financing the purchase of their residence or following sale under a
deed of trust or other foreclosure proceedings. A deficiency judgment is a
personal judgment against the borrower equal in most cases to the difference
between the amount due to the lender and the fair market value of the real
property at the time of the foreclosure sale. As a result of these prohibitions,
it is anticipated that in most instances the Master Servicer will utilize the
non-judicial foreclosure remedy and will not seek deficiency judgments against
defaulting borrowers.
Some state statutes require the beneficiary or mortgagee to exhaust the
security afforded under a deed of trust or mortgage by foreclosure in an attempt
to satisfy the full debt before bringing a personal action against the borrower.
In other states, the lender has the option of bringing a personal action against
the borrower on the debt without first exhausting the security; however, in some
of these states, the lender, following judgment on that personal action, may be
deemed to have elected a remedy and may be precluded from exercising remedies
with respect to the security. Consequently, the practical effect of the election
requirement, when applicable, is that lenders will usually proceed first against
the security rather than bringing a personal action against the borrower. In
some states, exceptions to the anti-deficiency statutes are provided for in
specific instances where the value of the lender's security has been impaired by
acts or omissions of the borrower, for example, in the event of waste of the
property. Finally, other statutory provisions limit any deficiency judgment
against the former borrower following a foreclosure sale to the excess of the
outstanding debt over the fair market value of the property at the time of the
public sale. The purpose of these statutes is generally to prevent a beneficiary
or a mortgagee from obtaining a large deficiency judgment against the former
borrower as a result of low or no bids at the foreclosure sale.
Generally, Article 9 of the UCC governs foreclosure on Cooperative
shares and the related proprietary lease or occupancy agreement. Some courts
have interpreted section 9-504 of the UCC to prohibit a deficiency award unless
the creditor establishes that the sale of the collateral (which, in the case of
a Cooperative Loan, would be the shares of the Cooperative and the related
proprietary lease or occupancy agreement) was conducted in a commercially
reasonable manner.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws
and state laws affording relief to debtors, may interfere with or affect the
ability of the secured mortgage lender to realize upon its security. For
example, in a proceeding under the federal Bankruptcy Code, a lender may not
foreclose on a mortgaged property without the permission of the bankruptcy
court. The rehabilitation plan proposed by the debtor may provide, if the
mortgaged property is not the debtor's principal residence and the court
determines that the value of the mortgaged property is less than the principal
balance of the mortgage loan, for the reduction of the secured indebtedness to
the value of the mortgaged property as of the date of the commencement of the
bankruptcy, rendering the lender a general unsecured creditor for the
difference, and also may reduce the monthly payments due under that mortgage
loan, change the rate of interest and alter the mortgage loan repayment
schedule. The effect of any of those proceedings under the federal Bankruptcy
Code, including but not limited to any automatic stay, could result in delays in
receiving payments on the Loans underlying a Series of Securities and possible
reductions in the aggregate amount of those payments.
The federal tax laws provide priority of specific tax liens over the
lien of a mortgage or secured party.
Due-on-Sale Clauses
Unless otherwise specified in the related Prospectus Supplement, each
conventional Loan will contain a due-on-sale clause which will generally provide
that if the mortgagor or obligor sells, transfers or conveys the Property, the
loan or contract may be accelerated by the mortgagee or secured party. Court
decisions and legislative actions have placed substantial restriction on the
right of lenders to enforce those clauses in many states. For instance, the
California Supreme Court in August 1978 held that due-on-sale clauses were
generally unenforceable. However, the Garn-St Germain Depository Institutions
Act of 1982 (the "Garn-St Germain Act"), subject to exceptions, preempts state
constitutional, statutory and case law prohibiting the enforcement of
due-on-sale clauses. As a result, due-on-sale clauses have become generally
enforceable except in those states whose legislatures exercised their authority
to regulate the enforceability of those clauses with respect to mortgage loans
that were (i) originated or assumed during the "window period" under the Garn-St
Germain Act which ended in all cases not later than October 15, 1982, and (ii)
originated by lenders other than national banks, federal savings institutions
and federal credit unions. FHLMC has taken the position in its published
mortgage servicing standards that, out of a total of eleven "window period
states," five states (Arizona, Michigan, Minnesota, New Mexico and Utah) have
enacted statutes extending, on various terms and for varying periods, the
prohibition on enforcement of due-on-sale clauses with respect to particular
categories of window period loans. Also, the Garn-St Germain Act does
"encourage" lenders to permit assumption of loans at the original rate of
interest or at some other rate less than the average of the original rate and
the market rate.
As to loans secured by an owner-occupied residence, the Garn-St Germain
Act sets forth nine specific instances in which a mortgagee covered by the Act
may not exercise its rights under a due-on-sale clause, notwithstanding the fact
that a transfer of the property may have occurred. The inability to enforce a
due-on-sale clause may result in transfer of the related Property to an
uncreditworthy person, which could increase the likelihood of default or may
result in a mortgage bearing an interest rate below the current market rate
being assumed by a new home buyer, which may affect the average life of the
Loans and the number of Loans which may extend to maturity.
In addition, under federal bankruptcy law, due-on-sale clauses may not
be enforceable in bankruptcy proceedings and may, under limited circumstances,
be eliminated in any modified mortgage resulting from that bankruptcy
proceeding.
Enforceability of Prepayment and Late Payment Fees
Forms of notes, mortgages and deeds of trust used by lenders may
contain provisions obligating the borrower to pay a late charge if payments are
not timely made, and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In some states, there are
or may be specific limitations upon the late charges which a lender may collect
from a borrower for delinquent payments. Some states also limit the amounts that
a lender may collect from a borrower as an additional charge if the loan is
prepaid. Under some state laws, prepayment charges may not be imposed after a
specified period of time following the origination of mortgage loans with
respect to prepayments on loans secured by liens encumbering owner-occupied
residential properties. Since many of the Properties will be owner-occupied, it
is anticipated that prepayment charges may not be imposed with respect to many
of the Loans. The absence of that type of a restraint on prepayment,
particularly with respect to fixed rate Loans having higher Loan Rates, may
increase the likelihood of refinancing or other early retirement of those loans
or contracts. Late charges and prepayment fees are typically retained by
servicers as additional servicing compensation.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980, enacted in March 1980 ("Title V") provides that state usury
limitations shall not apply to some types of residential first mortgage loans
originated by particular lenders after March 31, 1980. The Office of Thrift
Supervision, as successor to the Federal Home Loan Bank Board, is authorized to
issue rules and regulations and to publish interpretations governing
implementation of Title V. The statute authorized the states to reimpose
interest rate limits by adopting, before April 1, 1983, a law or constitutional
provision which expressly rejects an application of the federal law. Fifteen
states adopted a similar law prior to the April 1, 1983 deadline. In addition,
even where Title V is not so rejected, any state is authorized by the law to
adopt a provision limiting discount points or other charges on mortgage loans
covered by Title V. Some states have taken action to reimpose interest rate
limits and/or to limit discount points or other charges.
The Contracts
General. The Contracts, other than those Contracts that are unsecured
or secured by mortgages on real estate (referred to in this section as
"contracts") generally are "chattel paper" or constitute "purchase money
security interests" each as defined in the UCC. Pursuant to the UCC, the sale of
chattel paper is treated in a manner similar to perfection of a security
interest in chattel paper. Under the related Agreement, the Depositor will
transfer physical possession of the contracts to the Trustee or a designated
custodian or may retain possession of the contracts as custodian for the
Trustee. In addition, the Depositor will make an appropriate filing of a UCC-1
financing statement in the appropriate states to, among other things, give
notice of the Trust Fund's ownership of the contracts. Unless otherwise
specified in the related Prospectus Supplement, the contracts will not be
stamped or otherwise marked to reflect their assignment from the Depositor to
the Trustee. With respect to each transaction, a decision will be made as to
whether or not the contracts will be stamped or otherwise marked to reflect
their assignment from the Depositor to the Trustee, based upon, among other
things, the practices and procedures of the related Originator and Master
Servicer and after consultation with the applicable Rating Agency or Rating
Agencies. Therefore, if the contracts are not stamped or otherwise marked to
reflect their assignment from the Depositor to the Trustee and through
negligence, fraud or otherwise, a subsequent purchaser were able to take
physical possession of the contracts without notice of the assignment, the Trust
Fund's interest in the contracts could be defeated.
Security Interests in Home Improvements. The contracts that are secured
by the Home Improvements financed thereby grant to the originator of those
contracts a purchase money security interest in the Home Improvements to secure
all or part of the purchase price of the Home Improvements and related services.
A financing statement generally is not required to be filed to perfect a
purchase money security interest in consumer goods. The purchase money security
interests are assignable. In general, a purchase money security interest grants
to the holder a security interest that has priority over a conflicting security
interest in the same collateral and the proceeds of that collateral. However, to
the extent that the collateral subject to a purchase money security interest
becomes a fixture, in order for the related purchase money security interest to
take priority over a conflicting interest in the fixture, the holder's interest
in that Home Improvement must generally be perfected by a timely fixture filing.
In general, a security interest does not exist under the UCC in ordinary
building material incorporated into an improvement on land. Home Improvement
Contracts that finance lumber, bricks, other types of ordinary building material
or other goods that are deemed to lose that characterization upon incorporation
of those materials into the related property, will not be secured by a purchase
money security interest in the Home Improvement being financed.
Enforcement of Security Interest in Home Improvements. So long as the
Home Improvement has not become subject to the real estate law, a creditor can
repossess a Home Improvement securing a contract by voluntary surrender, by
"self-help" repossession that is "peaceful" (i.e., without breach of the peace)
or, in the absence of voluntary surrender and the ability to repossess without
breach of the peace, by judicial process. The holder of a contract must give the
debtor a number of days' notice, which varies from 10 to 30 days depending on
the state, prior to commencement of any repossession. The UCC and consumer
protection laws in most states place restrictions on repossession sales,
including requiring prior notice to the debtor and commercial reasonableness in
effecting a repossession sale. The law in most states also requires that the
debtor be given notice of any sale prior to resale of the unit that the debtor
may redeem at or before the resale.
Under the laws applicable in most states, a creditor is entitled to
obtain a deficiency judgment from a debtor for any deficiency on repossession
and resale of the property securing the debtor's loan. However, some states
impose prohibitions or limitations on deficiency judgments, and in many cases
the defaulting borrower would have no assets with which to pay a judgment.
Certain other statutory provisions, including federal and state
bankruptcy and insolvency laws and general equitable principles, may limit or
delay the ability of a lender to repossess and resell collateral or enforce a
deficiency judgment.
Security Interests in the Manufactured Homes. The Manufactured Homes
securing the Manufactured Housing Contracts may be located in all 50 states and
the District of Columbia. Security interests in manufactured homes may be
perfected either by notation of the secured party's lien on the certificate of
title or by delivery of the required documents and payment of a fee to the state
motor vehicle authority, depending on state law. Unless otherwise specified in
the related Prospectus Supplement, the security interests of the related Trustee
in the Manufactured Homes will not be noted on the certificates of title or by
delivery of the required documents and payment of fees to the applicable state
motor vehicle authorities. With respect to each transaction, a decision will be
made as to whether or not the security interests of the related Trustee in the
Manufactured Homes will be noted on the certificates of title and the required
documents and fees will be delivered to the applicable state motor vehicle
authorities based upon, among other things, the practices and procedures of the
related Originator and Master Servicer and after consultation with the
applicable Rating Agency or Rating Agencies. In some nontitle states, perfection
pursuant to the provisions of the UCC is required. As manufactured homes have
become large and often have been attached to their sites without any apparent
intention to move them, courts in many states have held that manufactured homes,
under certain circumstances, may become subject to real estate title and
recording laws. As a result, a security interest in a manufactured home could be
rendered subordinate to the interests of other parties claiming an interest in
the manufactured home under applicable state real estate law. In order to
perfect a security interest in a manufactured home under real estate laws, the
secured party must file either a "fixture filing" under the provisions of the
UCC or a real estate mortgage under the real estate laws of the state where the
home is located. These filings must be made in the real estate records office of
the county where the manufactured home is located. If so specified in the
related Prospectus Supplement, the Manufactured Housing Contracts may contain
provisions prohibiting the borrower from permanently attaching the Manufactured
Home to its site. So long as the borrower does not violate this agreement, a
security interest in the Manufactured Home will be governed by the certificate
of title laws or the UCC, and the notation of the security interest on the
certificate of title or the filing of a UCC financing statement will be
effective to maintain the priority of the security interest in the Manufactured
Home. If, however, a Manufactured Home is permanently attached to its site, the
related lender may be required to perfect a security interest in the
Manufactured Home under applicable real estate laws.
In the event that the owner of a Manufactured Home moves it to a state
other than the state in which the Manufactured Home initially is registered,
under the laws of most states the perfected security interest in the
Manufactured Home would continue for four months after that relocation and
thereafter only if and after the owner re-registers the Manufactured Home in
that state. If the owner were to relocate a Manufactured Home to another state
and not re-register a security interest in that state, the security interest in
the Manufactured Home would cease to be perfected. A majority of states
generally require surrender of a certificate of title to re-register a
Manufactured Home; accordingly, the secured party must surrender possession if
it holds the certificate of title to that Manufactured Home or, in the case of
Manufactured Homes registered in states which provide for notation of lien on
the certificate of title, notice of surrender would be given to the secured
party noted on the certificate of title. In states which do not require a
certificate of title for registration of a manufactured home, re-registration
could defeat perfection.
Under the laws of most states, liens for repairs performed on a
Manufactured Home and liens for personal property taxes take priority over a
perfected security interest in the Manufactured Home.
Consumer Protection Laws. The so-called "Holder-in-Due Course" rule of
the Federal Trade Commission is intended to defeat the ability of the transferor
of a consumer credit contract which is the seller of goods which gave rise to
the transaction (and particular, related lenders and assignees) to transfer that
contract free of notice of claims by the debtor thereunder. The effect of this
rule is to subject the assignee of a contract of this type to all claims and
defenses which the debtor could assert against the seller of goods. Liability
under this rule is limited to amounts paid under a contract; however, the
obligor also may be able to assert the rule to set off remaining amounts due as
a defense against a claim brought by the Trustee against that obligor. Numerous
other federal and state consumer protection laws impose requirements applicable
to the origination and lending pursuant to the contracts, including the Truth in
Lending Act, the Federal Trade Commission Act, the Fair Credit Billing Act, the
Fair Credit Reporting Act, the Equal Credit Opportunity Act, the Fair Debt
Collection Practices Act and the Uniform Consumer Credit Code. In the case of
some of these laws, the failure to comply with their provisions may affect the
enforceability of the related contract.
Applicability of Usury Laws. Title V of the Depository Institutions
Deregulation and Monetary Control Act of 1980, as amended ("Title V"), provides
that, subject to the following conditions, state usury limitations shall not
apply to any contract which is secured by a first lien on certain kinds of
consumer goods. The contracts would be covered if they satisfy certain
conditions governing, among other things, the terms of any prepayments, late
charges and deferral fees and requiring a 30-day notice period prior to
instituting any action leading to repossession of the related unit.
Title V authorized any state to reimpose limitations on interest rates
and finance charges by adopting before April 1, 1983 a law or constitutional
provision which expressly rejects application of the federal law. Fifteen states
adopted a similar law prior to the April 1, 1983 deadline. In addition, even
where Title V was not so rejected, any state is authorized by the law to adopt a
provision limiting discount points or other charges on loans covered by Title V.
Installment Contracts
The Loans may also consist of installment contracts. Under an
installment contract ("Installment Contract") the seller (hereinafter referred
to in this section as the "lender") retains legal title to the property and
enters into an agreement with the purchaser hereinafter referred to in this
section as the "borrower") for the payment of the purchase price, plus interest,
over the term of that contract. Only after full performance by the borrower of
the contract is the lender obligated to convey title to the property to the
purchaser. As with mortgage or deed of trust financing, during the effective
period of the Installment Contract, the borrower is generally responsible for
maintaining the property in good condition and for paying real estate taxes,
assessments and hazard insurance premiums associated with the property.
The method of enforcing the rights of the lender under an Installment
Contract varies on a state-by-state basis depending upon the extent to which
state courts are willing, or able pursuant to state statute, to enforce the
contract strictly according to its terms. The terms of Installment Contracts
generally provide that upon a default by the borrower, the borrower loses his or
her right to occupy the property, the entire indebtedness is accelerated, and
the buyer's equitable interest in the property is forfeited. The lender in that
type of a situation does not have to foreclose in order to obtain title to the
property, although in some cases a quiet title action is in order if the
borrower has filed the Installment Contract in local land records and an
ejectment action may be necessary to recover possession. In a few states,
particularly in cases of borrower default during the early years of an
Installment Contract, the courts will permit ejectment of the buyer and a
forfeiture of his or her interest in the property. However, most state
legislatures have enacted provisions by analogy to mortgage law protecting
borrowers under Installment Contracts from the harsh consequences of forfeiture.
Under those statutes, a judicial or nonjudicial foreclosure may be required, the
lender may be required to give notice of default and the borrower may be granted
some grace period during which the Installment Contract may be reinstated upon
full payment of the default amount and the borrower may have a post-foreclosure
statutory redemption right. In other states, courts in equity may permit a
borrower with significant investment in the property under an Installment
Contract for the sale of real estate to share in the proceeds of sale of the
property after the indebtedness is repaid or may otherwise refuse to enforce the
forfeiture clause. Nevertheless, generally speaking, the lender's procedures for
obtaining possession and clear title under an Installment Contract in a given
state are simpler and less time-consuming and costly than are the procedures for
foreclosing and obtaining clear title to a property subject to one or more
liens.
Soldiers' and Sailors' Civil Relief Act
Generally, under the terms of the Soldiers' and Sailors' Civil Relief
Act of 1940, as amended (the "Relief Act"), a borrower who enters military
service after the origination of that borrower's Loan (including a borrower who
is a member of the National Guard or is in reserve status at the time of the
origination of the Loan and is later called to active duty) may not be charged
interest above an annual rate of 6% during the period of that borrower's active
duty status, unless a court orders otherwise upon application of the lender. It
is possible that the interest rate limitation could have an effect, for an
indeterminate period of time, on the ability of the Master Servicer to collect
full amounts of interest on some of the Loans. Unless otherwise provided in the
related Prospectus Supplement, any shortfall in interest collections resulting
from the application of the Relief Act could result in losses to
Securityholders. The Relief Act also imposes limitations which would impair the
ability of the Master Servicer to foreclose on an affected Loan during the
borrower's period of active duty status. Moreover, the Relief Act permits the
extension of a Loan's maturity and the re-adjustment of its payment schedule
beyond the completion of military service. Thus, in the event that a Loan of
this type goes into default, there may be delays and losses occasioned by the
inability to realize upon the Property in a timely fashion.
Junior Mortgages; Rights of Senior Mortgagees
To the extent that the Loans comprising the Trust Fund for a Series are
secured by mortgages which are junior to other mortgages held by other lenders
or institutional investors, the rights of the Trust Fund (and therefore the
Securityholders), as mortgagee under any junior mortgage, are subordinate to
those of any mortgagee under any senior mortgage. The senior mortgagee has the
right to receive hazard insurance and condemnation proceeds and to cause the
property securing the Loan to be sold upon default of the mortgagor, thereby
extinguishing the junior mortgagee's lien unless the junior mortgagee asserts
its subordinate interest in the property in foreclosure litigation and,
possibly, satisfies the defaulted senior mortgage. A junior mortgagee may
satisfy a defaulted senior loan in full and, in some states, may cure a default
and bring the senior loan current, in either event adding the amounts expended
to the balance due on the junior loan. In most states, absent a provision in the
mortgage or deed of trust, no notice of default is required to be given to a
junior mortgagee.
The standard form of the mortgage used by most institutional lenders
confers on the mortgagee the right both to receive all proceeds collected under
any hazard insurance policy and all awards made in connection with condemnation
proceedings, and to apply the proceeds and awards to any indebtedness secured by
the mortgage, in that order as the mortgagee may determine. Thus, in the event
improvements on the property are damaged or destroyed by fire or other casualty,
or in the event the property is taken by condemnation, the mortgagee or
beneficiary under senior mortgages will have the prior right to collect any
insurance proceeds payable under a hazard insurance policy and any award of
damages in connection with the condemnation and to apply the same to the
indebtedness secured by the senior mortgages. Proceeds in excess of the amount
of senior mortgage indebtedness, in most cases, may be applied to the
indebtedness of a junior mortgage.
Another provision sometimes found in the form of the mortgage or deed
of trust used by institutional lenders obligates the mortgagor to pay before
delinquency all taxes and assessments on the property and, when due, all
encumbrances, charges and liens on the property which appear prior to the
mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste thereof, and to appear in and defend any action or proceeding purporting
to affect the property or the rights of the mortgagee under the mortgage. Upon a
failure of the mortgagor to perform any of these obligations, the mortgagee is
given the right under some mortgages to perform the obligation itself, at its
election, with the mortgagor agreeing to reimburse the mortgagee for any sums
expended by the mortgagee on behalf of the mortgagor. All sums so expended by
the mortgagee become part of the indebtedness secured by the mortgage.
The form of credit line trust deed or mortgage generally used by most
institutional lenders which make Revolving Credit Line Loans typically contains
a "future advance" clause, which provides, in essence, that additional amounts
advanced to or on behalf of the borrower by the beneficiary or lender are to be
secured by the deed of trust or mortgage. Any amounts so advanced after the
Cut-off Date with respect to any Mortgage will not be included in the Trust
Fund. The priority of the lien securing any advance made under the clause may
depend in most states on whether the deed of trust or mortgage is called and
recorded as a credit line deed of trust or mortgage. If the beneficiary or
lender advances additional amounts, the advance is entitled to receive the same
priority as amounts initially advanced under the trust deed or mortgage,
notwithstanding the fact that there may be junior trust deeds or mortgages and
other liens which intervene between the date of recording of the trust deed or
mortgage and the date of the future advance, and notwithstanding that the
beneficiary or lender had actual knowledge of the intervening junior trust deeds
or mortgages and other liens at the time of the advance. In most states, the
trust deed or mortgage lien securing mortgage loans of the type which includes
home equity credit lines applies retroactively to the date of the original
recording of the trust deed or mortgage, provided that the total amount of
advances under the home equity credit line does not exceed the maximum specified
principal amount of the recorded trust deed or mortgage, except as to advances
made after receipt by the lender of a written notice of lien from a judgment
lien creditor of the trustor.
The Title I Program
General. Some of the Loans contained in a Trust Fund may be loans
insured under the FHA Title I Credit Insurance program created pursuant to
Sections 1 and 2(a) of the National Housing Act of 1934 (the "Title I Program").
Under the Title I Program, the FHA is authorized and empowered to insure
qualified lending institutions against losses on eligible loans. The Title I
Program operates as a coinsurance program in which the FHA insures up to 90% of
specified losses incurred on an individual insured loan, including the unpaid
principal balance of the loan, but only to the extent of the insurance coverage
available in the lender's FHA insurance coverage reserve account. The owner of
the loan bears the uninsured loss on each loan.
The types of loans which are eligible for insurance by the FHA under
the Title I Program include property improvement loans ("Property Improvement
Loans" or "Title I Loans"). A Property Improvement Loan or Title I Loan means a
loan made to finance actions or items that substantially protect or improve the
basic livability or utility of a property and includes single family improvement
loans.
There are two basic methods of lending or originating loans which
include a "direct loan" or a "dealer loan." With respect to a direct loan, the
borrower makes application directly to a lender without any assistance from a
dealer, which application may be filled out by the borrower or by a person
acting at the direction of the borrower who does not have a financial interest
in the loan transaction, and the lender may disburse the loan proceeds solely to
the borrower or jointly to the borrower and other parties to the transaction.
With respect to a dealer loan, the dealer, who has a direct or indirect
financial interest in the loan transaction, assists the borrower in preparing
the loan application or otherwise assists the borrower in obtaining the loan
from lender and the lender may distribute proceeds solely to the dealer or the
borrower or jointly to the borrower and the dealer or other parties. With
respect to a dealer Title I Loan, a dealer may include a seller, a contractor or
supplier of goods or services.
Loans insured under the Title I Program are required to have fixed
interest rates and, generally, provide for equal installment payments due
weekly, biweekly, semi-monthly or monthly, except that a loan may be payable
quarterly or semi-annually in order to correspond with the borrower's irregular
flow of income. The first or last payments (or both) may vary in amount but may
not exceed 150% of the regular installment payment, and the first payment may be
due no later than two months from the date of the loan. The note must contain a
provision permitting full or partial prepayment of the loan. The interest rate
may be established by the lender and must be fixed for the term of the loan and
recited in the note. Interest on an insured loan must accrue from the date of
the loan and be calculated according to the actuarial method. The lender must
assure that the note and all other documents evidencing the loan are in
compliance with applicable federal, state and local laws.
Each insured lender is required to use prudent lending standards in
underwriting individual loans and to satisfy the applicable loan underwriting
requirements under the Title I Program prior to its approval of the loan and
disbursement of loan proceeds. Generally, the lender must exercise prudence and
diligence to determine whether the borrower and any co-maker is solvent and an
acceptable credit risk, with a reasonable ability to make payments on the loan
obligation. The lender's credit application and review must determine whether
the borrower's income will be adequate to meet the periodic payments required by
the loan, as well as the borrower's other housing and recurring expenses, which
determination must be made in accordance with the expense-to-income ratios
published by the Secretary of HUD.
Under the Title I Program, the FHA does not review or approve for
qualification for insurance the individual loans insured thereunder at the time
of approval by the lending institution (as is typically the case with other
federal loan programs). If, after a loan has been made and reported for
insurance under the Title I Program, the lender discovers any material
misstatement of fact or that the loan proceeds have been misused by the
borrower, dealer or any other party, it shall promptly report this to the FHA.
In that case, provided that the validity of any lien on the property has not
been impaired, the insurance of the loan under the Title I Program will not be
affected unless the material misstatements of fact or misuse of loan proceeds
was caused by (or was knowingly sanctioned by) the lender or its employees.
Requirements for Title I Loans. The maximum principal amount for Title
I Loans must not exceed the actual cost of the project plus any applicable fees
and charges allowed under the Title I Program; provided that the maximum amount
does not exceed $25,000 (or the current applicable amount) for a single family
property improvement loan. Generally, the term of a Title I Loan may not be less
than six months nor greater than 20 years and 32 days. A borrower may obtain
multiple Title I Loans with respect to multiple properties, and a borrower may
obtain more than one Title I Loan with respect to a single property, in each
case as long as the total outstanding balance of all Title I Loans in the same
property does not exceed the maximum loan amount for the type of Title I Loan
thereon having the highest permissible loan amount.
Borrower eligibility for a Title I Loan requires that the borrower have
at least a one-half interest in either fee simple title to the real property, a
lease thereof for a term expiring at least six months after the final maturity
of the Title I Loan or a recorded land installment contract for the purchase of
the real property, and that the borrower have equity in the property being
improved at least equal to the amount of the Title I Loan if the loan amount
exceeds $15,000. Any Title I Loan in excess of $7,500 must be secured by a
recorded lien on the improved property which is evidenced by a mortgage or deed
of trust executed by the borrower and all other owners in fee simple.
The proceeds from a Title I Loan may be used only to finance property
improvements which substantially protect or improve the basic livability or
utility of the property as disclosed in the loan application. The Secretary of
HUD has published a list of items and activities which cannot be financed with
proceeds from any Title I Loan and from time to time the Secretary of HUD may
amend the list of items and activities. With respect to any dealer Title I Loan,
before the lender may disburse funds, the lender must have in its possession a
completion certificate on a HUD approved form, signed by the borrower and the
dealer. With respect to any direct Title I Loan, the lender is required to
obtain, promptly upon completion of the improvements but not later than six
months after disbursement of the loan proceeds with one six month extension if
necessary, a completion certificate, signed by the borrower. The lender is
required to conduct an on-site inspection on any Title I Loan where the
principal obligation is $7,500 or more, and on any direct Title I Loan where the
borrower fails to submit a completion certificate.
FHA Insurance Coverage. Under the Title I Program, the FHA establishes
an insurance coverage reserve account for each lender which has been granted a
Title I insurance contract. The amount of insurance coverage in this account is
10% of the amount disbursed, advanced or expended by the lender in originating
or purchasing eligible loans registered with FHA for Title I insurance, with
adjustments. The balance in the insurance coverage reserve account is the
maximum amount of insurance claims the FHA is required to pay. Loans to be
insured under the Title I Program will be registered for insurance by the FHA
and the insurance coverage attributable to those loans will be included in the
insurance coverage reserve account for the originating or purchasing lender
following the receipt and acknowledgment by the FHA of a loan report on the
prescribed form pursuant to the Title I regulations. The FHA charges a fee of
0.50% per annum of the net proceeds (the original balance) of any eligible loan
so reported and acknowledged for insurance by the originating lender. The FHA
bills the lender for the insurance premium on each insured loan annually, on
approximately the anniversary date of the loan's origination. If an insured loan
is prepaid during the year, FHA will not refund or abate the insurance premium.
Under the Title I Program the FHA will reduce the insurance coverage
available in the lender's FHA insurance coverage reserve account with respect to
loans insured under the lender's contract of insurance by (i) the amount of the
FHA insurance claims approved for payment relating to the insured loans and (ii)
the amount of insurance coverage attributable to insured loans sold by the
lender, and the insurance coverage may be reduced for any FHA insurance claims
rejected by the FHA. The balance of the lender's FHA insurance coverage reserve
account will be further adjusted as required under Title I or by the FHA, and
the insurance coverage therein may be earmarked with respect to each or any
eligible loans insured thereunder, if a determination is made by the Secretary
of HUD that it is in its interest to do so. Origination and acquisitions of new
eligible loans will continue to increase a lender's insurance coverage reserve
account balance by 10% of the amount disbursed, advanced or expended in
originating or acquiring the eligible loans registered with the FHA for
insurance under the Title I Program. The Secretary of HUD may transfer insurance
coverage between insurance coverage reserve accounts with earmarking with
respect to a particular insured loan or group of insured loans when a
determination is made that it is in the Secretary's interest to do so.
The lender may transfer (except as collateral in a bona fide
transaction) insured loans and loans reported for insurance only to another
qualified lender under a valid Title I contract of insurance. Unless an insured
loan is transferred with recourse or with a guaranty or repurchase agreement,
the FHA, upon receipt of written notification of the transfer of that loan in
accordance with the Title I regulations, will transfer from the transferor's
insurance coverage reserve account to the transferee's insurance coverage
reserve account an amount, if available, equal to 10% of the actual purchase
price or the net unpaid principal balance of that loan--whichever is less.
However, under the Title I Program not more than $5,000 in insurance coverage
shall be transferred to or from a lender's insurance coverage reserve account
during any October 1 to September 30 period without the prior approval of the
Secretary of HUD.
Claims Procedures Under Title I. Under the Title I Program the lender
may accelerate an insured loan following a default on that loan only after the
lender or its agent has contacted the borrower in a face-to-face meeting or by
telephone to discuss the reasons for the default and to seek its cure. If the
borrower does not cure the default or agree to a modification agreement or
repayment plan, the lender will notify the borrower in writing that, unless
within 30 days the default is cured or the borrower enters into a modification
agreement or repayment plan, the loan will be accelerated and that, if the
default persists, the lender will report the default to an appropriate credit
agency. The lender may rescind the acceleration of maturity after full payment
is due and reinstate the loan only if the borrower brings the loan current,
executes a modification agreement or agrees to an acceptable repayment plan.
Following acceleration of maturity upon a secured Title I Loan, the
lender may either (a) proceed against the property under any security
instrument, or (b) make a claim under the lender's contract of insurance. If the
lender chooses to proceed against the property under a security instrument (or
if it accepts a voluntary conveyance or surrender of the property), the lender
may file an insurance claim only with the prior approval of the Secretary of
HUD.
When a lender files an insurance claim with the FHA under the Title I
Program, the FHA reviews the claim, the complete loan file and documentation of
the lender's efforts to obtain recourse against any dealer who has agreed
thereto, certification of compliance with applicable state and local laws in
carrying out any foreclosure or repossession, and evidence that the lender has
properly filed proofs of claims, where the borrower is bankrupt or deceased.
Generally, a claim for reimbursement for loss on any Title I Loan must be filed
with the FHA no later than nine months after the date of default of that loan.
Concurrently with filing the insurance claim, the lender shall assign to the
United States of America the lender's entire interest in the loan note (or a
judgment in lieu of the note), in any security held and in any claim filed in
any legal proceedings. If, at the time the note is assigned to the United
States, the Secretary has reason to believe that the note is not valid or
enforceable against the borrower, the FHA may deny the claim and reassign the
note to the lender. If either defect is discovered after the FHA has paid a
claim, the FHA may require the lender to repurchase the paid claim and to accept
a reassignment of the loan note. If the lender subsequently obtains a valid and
enforceable judgment against the borrower, the lender may resubmit a new
insurance claim with an assignment of the judgment. The FHA may contest any
insurance claim and make a demand for repurchase of the loan at any time up to
two years from the date the claim was certified for payment and may do so
thereafter in the event of fraud or misrepresentation on the part of the lender.
Under the Title I Program the amount of an FHA insurance claim payment,
when made, is equal to the Claimable Amount, up to the amount of insurance
coverage in the lender's insurance coverage reserve account. For the purposes
hereof, the "Claimable Amount" means an amount equal to 90% of the sum of:
(a) the unpaid loan obligation (net unpaid principal and the
uncollected interest earned to the date of default) with
adjustments thereto if the lender has proceeded against property
securing that loan;
(b) the interest on the unpaid amount of the loan obligation from the
date of default to the date of the claim's initial submission for
payment plus 15 calendar days (but not to exceed 9 months from the
date of default), calculated at the rate of 7% per annum;
(c) the uncollected court costs;
(d) the attorney's fees not to exceed $500; and
(e) the expenses for recording the assignment of the security to the
United States.
Consumer Protection Laws
Numerous federal and state consumer protection laws impose substantive
requirements upon mortgage lenders in connection with the origination, servicing
and enforcement of loans secured by Single Family Properties. These laws include
the federal Truth-in-Lending Act and Regulation Z promulgated thereunder, Real
Estate Settlement Procedures Act and Regulation B promulgated thereunder, Equal
Credit Opportunity Act, Fair Credit Billing Act, Fair Credit Reporting Act and
related statutes and regulations. In particular, Regulation Z requires
disclosures to the borrowers regarding the terms of the Loans; the Equal Credit
Opportunity Act and Regulation B promulgated thereunder prohibit discrimination
on the basis of age, race, color, sex, religion, marital status, national
origin, receipt of public assistance or the exercise of any right under the
Consumer Credit Protection Act, in the extension of credit; and the Fair Credit
Reporting Act regulates the use and reporting of information related to the
borrower's credit experience. Particular provisions of these laws impose
specific statutory liabilities upon lenders who fail to comply therewith. In
addition, violations of those laws may limit the ability of the Sellers to
collect all or part of the principal of or interest on the Loans and could
subject the Sellers and in some case their assignees to damages and
administrative enforcement.
Federal Income Tax Consequences
General
The following is a summary of the material anticipated federal income
tax consequences of the purchase, ownership, and disposition of the Securities
and is based on advice of Brown & Wood LLP, special counsel to the Depositor, or
other counsel identified in the Prospectus Supplement. The summary is based upon
the provisions of the Code, the regulations promulgated thereunder, including,
where applicable, proposed regulations, and the judicial and administrative
rulings and decisions now in effect, all of which are subject to change or
possible differing interpretations. The statutory provisions, regulations, and
interpretations on which this interpretation is based are subject to change, and
such a change could apply retroactively.
The summary does not purport to deal with all aspects of federal income
taxation that may affect particular investors in light of their individual
circumstances, nor with certain types of investors subject to special treatment
under the federal income tax laws. This summary focuses primarily upon investors
who will hold Securities as "capital assets" (generally, property held for
investment) within the meaning of Section 1221 of the Code, but much of the
discussion is applicable to other investors as well. Prospective investors are
advised to consult their own tax advisers concerning the federal, state, local
and any other tax consequences to them of the purchase, ownership and
disposition of the Securities.
The federal income tax consequences to holders of Securities will vary
depending on whether:
(i) the Securities of a Series are classified as indebtedness;
(ii) an election is made to treat the Trust Fund relating to a
particular Series of Securities as a real estate mortgage
investment conduit ("REMIC") under the Internal Revenue Code
of 1986, as amended (the "Code");
(iii) the Securities represent an ownership interest in some or all
of the assets included in the Trust Fund for a Series; or
(iv) the Trust Fund relating to a particular Series of
Certificates is treated as a partnership.
The Prospectus Supplement for each Series of Securities will specify how the
Securities will be treated for federal income tax purposes and will discuss
whether a REMIC election, if any, will be made with respect to such Series.
Prior to issuance of each Series of Securities, the Depositor shall file with
the Commission a Form 8-K on behalf of the related Trust Fund containing an
opinion of counsel to the Depositor with respect to the validity of the
information set forth under "Federal Income Tax Consequences" herein and in the
related Prospectus Supplement.
Taxation of Debt Securities
General. If Securities of a Series being issued as Certificates or
Notes are structured as indebtedness secured by the assets of the Trust Fund,
assuming compliance with all provisions of the related documents and applicable
law, Brown & Wood LLP, special counsel to the Depositor, or other counsel
identified in the Prospectus Supplement is of the opinion that the Securities
will be treated as debt for United States federal income tax purposes, and at
the time such Securities are issued will deliver an opinion generally to that
effect.
Status as Real Property Loans. Except to the extent otherwise provided
in the related Prospectus Supplement, special counsel to the Depositor
identified in the Prospectus Supplement will have advised the Depositor that:
(i) Securities held by a domestic building and loan association
will constitute "loans...secured by an interest in real
property" within the meaning of Code Section
7701(a)(19)(C)(v);
(ii) Securities held by a real estate investment trust will
constitute "real estate assets" within the meaning of Code
Section 856(c)(4)(A) and interest on 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) and
(iii) Securities representing interests in obligations secured by
manufactured housing treated as single family residences under
Code Section 25(e)(10) will be considered interests in
"qualified mortgages" as defined in Code Section 860G(a)(3).
The Small Business Job Protection Act of 1996, as part of the repeal of
the bad debt reserve method for thrift institutions, repealed the application of
Code Section 593(d) to any taxable year beginning after December 31, 1995.
Interest and Acquisition Discount. Securities representing regular
interests in a REMIC ("Regular Interest Securities") are generally taxable to
holders in the same manner as evidences of indebtedness issued by the REMIC.
Stated interest on the Regular Interest Securities will be taxable as ordinary
income and taken into account using the accrual method of accounting, regardless
of the Holder's normal accounting method. Interest (other than original issue
discount) on Securities (other than Regular Interest Securities) that are
characterized as indebtedness for federal income tax purposes will be includible
in income by holders thereof in accordance with their usual methods of
accounting. Securities characterized as debt for federal income tax purposes and
Regular Interest Securities will be referred to hereinafter collectively as
"Debt Securities."
Debt Securities that are Compound Interest Securities (generally,
securities all or a portion of the interest on which is not paid currently)
will, and certain of the other Debt Securities may, be issued with "original
issue discount" ("OID"). The following discussion is based in part on the rules
governing OID which are set forth in Sections 1271-1275 of the Code and the
Treasury regulations issued thereunder on February 2, 1994 (the "OID
Regulations"). A holder of Debt Securities should be aware, however, that the
OID Regulations do not adequately address certain issues relevant to prepayable
securities, such as the Debt Securities.
In general, OID, if any, will equal the difference between the stated
redemption price at maturity of a Debt Security and its issue price. A holder of
a Debt Security must include such OID in gross income as ordinary interest
income as it accrues under a method taking into account an economic accrual of
the discount. In general, OID must be included in income in advance of the
receipt of the cash representing that income. The amount of OID on a Debt
Security will be considered to be zero if it is less than a de minimis amount
determined under the Code.
The issue price of a Debt Security is the first price at which a
substantial amount of Debt Securities of that class are sold to the public
(excluding bond houses, brokers, underwriters or wholesalers). If less than a
substantial amount of a particular class of Debt Securities is sold for cash on
or prior to the related closing date, the issue price for such class will be
treated as the fair market value of such class on such closing date. The issue
price of a Debt Security also includes the amount paid by an initial Debt
Security holder for accrued interest that relates to a period prior to the issue
date of the Debt Security. The stated redemption price at maturity of a Debt
Security includes the original principal amount of the Debt Security, but
generally will not include distributions of interest if such distributions
constitute "qualified stated interest."
Under the OID Regulations, qualified stated interest generally means
interest payable at a single fixed rate or qualified variable rate (as described
below) provided that such interest payments are unconditionally payable at
intervals of one year or less during the entire term of the Debt Security. The
OID Regulations state that interest payments are unconditionally payable only if
a late payment or nonpayment is expected to be penalized or reasonable remedies
exist to compel payment. Certain Debt Securities may provide for default
remedies in the event of late payment or nonpayment of interest. The interest on
such Debt Securities will be unconditionally payable and constitute qualified
stated interest, not OID. However, absent clarification of the OID Regulations,
where Debt Securities do not provide for default remedies, the interest payments
will be included in the Debt Security's stated redemption price at maturity and
taxed as OID. Interest is payable at a single fixed rate only if the rate
appropriately takes into account the length of the interval between payments.
Distributions of interest on Debt Securities with respect to which deferred
interest will accrue, will not constitute qualified stated interest payments, in
which case the stated redemption price at maturity of such Debt Securities
includes all distributions of interest as well as principal thereon. Where the
interval between the issue date and the first Distribution Date on a Debt
Security is either longer or shorter than the interval between subsequent
Distribution Dates, all or part of the interest foregone, in the case of the
longer interval, and all of the additional interest, in the case of the shorter
interval, will be included in the stated redemption price at maturity and tested
under the de minimis rule described below. In the case of a Debt Security with a
long first period which has non-de minimis OID, all stated interest in excess of
interest payable at the effective interest rate for the long first period will
be included in the stated redemption price at maturity and the Debt Security
will generally have OID. Holders of Debt Securities should consult their own tax
advisors to determine the issue price and stated redemption price at maturity of
a Debt Security.
Under the de minimis rule OID on a Debt Security will be considered to
be zero if such OID is less than 0.25% of the stated redemption price at
maturity of the Debt Security multiplied by the weighted average maturity of the
Debt Security. For this purpose, the weighted average maturity of the Debt
Security is computed as the sum of the amounts determined by multiplying the
number of full years (i.e., rounding down partial years) from the issue date
until each distribution in reduction of stated redemption price at maturity is
scheduled to be made by a fraction, the numerator of which is the amount of each
distribution included in the stated redemption price at maturity of the Debt
Security and the denominator of which is the stated redemption price at maturity
of the Debt Security. Holders generally must report de minimis OID pro rata as
principal payments are received, and such income will be capital gain if the
Debt Security is held as a capital asset. However, accrual method holders may
elect to accrue all de minimis OID as well as market discount under a constant
interest method.
Debt Securities may provide for interest based on a qualified variable
rate. Under the OID Regulations, interest is treated as payable at a qualified
variable rate and not as contingent interest if, generally, (i) such interest is
unconditionally payable at least annually at a "current value" of the index,
(ii) the issue price of the debt instrument does not exceed the total
noncontingent principal payments, (iii) interest is based on a "qualified
floating rate," an "objective rate," or a combination of "qualified floating
rates" that do not operate in a manner that significantly accelerates or defers
interest payments on such Debt Security and (iv) the principal payments are not
contingent. In the case of Compound Interest Securities, certain Interest
Weighted Securities (as defined herein), and certain of the other Debt
Securities, none of the payments under the instrument will be considered
qualified stated interest, and thus the aggregate amount of all payments will be
included in the stated redemption price.
In addition, the Internal Revenue Service (the "IRS") has issued
regulations (the "Contingent Regulations") governing the calculation of OID on
instruments having contingent interest payments. The Contingent Regulations
specifically do not apply for purposes of calculating OID on debt instruments
subject to Code Section 1272(a)(6), such as the Debt Securities. Additionally,
the OID Regulations do not contain provisions specifically interpreting Code
Section 1272(a)(6). Until the Treasury issues guidance to the contrary, the
Trustee intends to base its computation on Code Section 1272(a)(6) and the OID
Regulations as described in this Prospectus. However, because no regulatory
guidance currently exists under Code Section 1272(a)(6), there can be no
assurance that such methodology represents the correct manner of calculating
OID.
The holder of a Debt Security issued with OID must include in gross
income, for all days during its taxable year on which it holds such Debt
Security, the sum of the "daily portions" of such original issue discount. The
daily portion of OID includible in income by a holder will be computed by
allocating to each day during a taxable year a pro rata portion of the original
issue discount that accrued during the relevant accrual period. In the case of a
Debt Security that is not a Regular Interest Security and the principal payments
on which are not subject to acceleration resulting from prepayments on the Trust
Fund Accounts, the amount of OID for an accrual period (generally the period
over which interest accrues on the debt instrument) will equal the product of
the yield to maturity of the Debt Security and the adjusted issue price of the
Debt Security on the first day of such accrual period, reduced by any payments
of qualified stated interest allocable to such accrual period. The adjusted
issue price of a Debt Security on the first day of an accrual period is the sum
of the issue price of the Debt Security plus prior accruals of OID, reduced by
the total payments made with respect to such Debt Security on or before the
first day of such accrual period, other than qualified stated interest payments.
The amount of OID to be included in income by a holder of a debt
instrument, such as certain classes of the Debt Securities, that is subject to
acceleration due to prepayments on other debt obligations securing such
instruments (a "Pay-Through Security"), is computed by taking into account the
anticipated rate of prepayments assumed in pricing the debt instrument (the
"Prepayment Assumption"). The amount of OID that will accrue during an accrual
period on a Pay-Through Security is the excess (if any) of the sum of (a) the
present value of all payments remaining to be made on the Pay-Through Security
as of the close of the accrual period and (b) the payments during the accrual
period of amounts included in the stated redemption price at maturity of the
Pay-Through Security, over the adjusted issue price of the Pay-Through Security
at the beginning of the accrual period. The present value of the remaining
payments is to be determined on the basis of three factors: (i) the original
yield to maturity of the Pay-Through Security (determined on the basis of
compounding at the end of each accrual period and properly adjusted for the
length of the accrual period), (ii) events which have occurred before the end of
the accrual period and (iii) the assumption that the remaining payments will be
made in accordance with the original Prepayment Assumption. The effect of this
method is to increase the portions of OID required to be included in income by a
holder of a Pay-Through Security to take into account prepayments with respect
to the Loans at a rate that exceeds the Prepayment Assumption, and to decrease
(but not below zero for any period) the portions of original issue discount
required to be included in income by a holder of a Pay-Through Security to take
into account prepayments with respect to the Loans at a rate that is slower than
the Prepayment Assumption. Although original issue discount will be reported to
holders of Pay-Through Securities based on the Prepayment Assumption, no
representation is made to holders of Pay-Through Securities that Loans will be
prepaid at that rate or at any other rate.
The Depositor may adjust the accrual of OID on a class of Regular
Interest Securities (or other regular interests in a REMIC) in a manner that it
believes to be appropriate, to take account of realized losses on the Loans,
although the OID Regulations do not provide for such adjustments. If the IRS
were to require that OID be accrued without such adjustments, the rate of
accrual of OID for a class of Regular Interest Securities could increase.
Certain classes of Regular Interest Securities may represent more than
one class of REMIC regular interests. Unless otherwise provided in the related
Prospectus Supplement, the Trustee intends, based on the OID Regulations, to
calculate OID on such Securities as if, solely for the purposes of computing
OID, the separate regular interests were a single debt instrument.
A subsequent holder of a Debt Security will also be required to include
OID in gross income, but such a holder who purchases such Debt Security for an
amount that exceeds its adjusted issue price will be entitled (as will an
initial holder who pays more than a Debt Security's issue price) to offset such
OID by comparable economic accruals of portions of such excess.
Effects of Defaults and Delinquencies. Holders of Securities will be
required to report income with respect to the related Securities under an
accrual method without giving effect to delays and reductions in distributions
attributable to a default or delinquency on the Trust Fund Assets, except
possibly to the extent that it can be established that such amounts are
uncollectible. As a result, the amount of income (including OID) reported by a
holder of such a Security in any period could significantly exceed the amount of
cash distributed to such holder in that period. The holder will eventually be
allowed a loss (or will be allowed to report a lesser amount of income) to the
extent that the aggregate amount of distributions on the Securities is deducted
as a result of a Trust Fund Asset default. However, the timing and character of
such losses or reductions in income are uncertain and, accordingly, holders of
Securities should consult their own tax advisors on this point.
Interest Weighted Securities. It is not clear how income should be
accrued with respect to Regular Interest Securities or Stripped Securities (as
defined under "-- Tax Status as a Grantor Trust -- General" herein) the payments
on which consist solely or primarily of a specified portion of the interest
payments on qualified mortgages held by the REMIC or on Loans underlying
Pass-Through Securities ("Interest Weighted Securities"). The Depositor intends
to take the position that all of the income derived from an Interest Weighted
Security should be treated as OID and that the amount and rate of accrual of
such OID should be calculated by treating the Interest Weighted Security as a
Compound Interest Security. However, in the case of Interest Weighted Securities
that are entitled to some payments of principal and that are Regular Interest
Securities the IRS could assert that income derived from an Interest Weighted
Security should be calculated as if the Security were a security purchased at a
premium equal to the excess of the price paid by such holder for such Security
over its stated principal amount, if any. Under this approach, a holder would be
entitled to amortize such premium only if it has in effect an election under
Section 171 of the Code with respect to all taxable debt instruments held by
such holder, as described below. Alternatively, the IRS could assert that an
Interest Weighted Security should be taxable under the rules governing bonds
issued with contingent payments. Such treatment may be more likely in the case
of Interest Weighted Securities that are Stripped Securities as described below.
See "--Tax Status as a Grantor Trust -- Discount or Premium on Pass-Through
Securities."
Variable Rate Debt Securities. In the case of Debt Securities bearing
interest at a rate that varies directly, according to a fixed formula, with an
objective index, it appears that (i) the yield to maturity of such Debt
Securities and (ii) in the case of Pay-Through Securities, the present value of
all payments remaining to be made on such Debt Securities, should be calculated
as if the interest index remained at its value as of the issue date of such
Securities. Because the proper method of adjusting accruals of OID on a variable
rate Debt Security is uncertain, holders of variable rate Debt Securities should
consult their own tax advisers regarding the appropriate treatment of such
Securities for federal income tax purposes.
Market Discount. A purchaser of a Security may be subject to the market
discount rules of Sections 1276-1278 of the Code. A holder of a Debt Security
that acquires a Debt Security with more than a prescribed de minimis amount of
"market discount" (generally, the excess of the principal amount of the Debt
Security over the purchaser's purchase price) will be required to include
accrued market discount in income as ordinary income in each month, but limited
to an amount not exceeding the principal payments on the Debt Security received
in that month and, if the Securities are sold, the gain realized. Such market
discount would accrue in a manner to be provided in Treasury regulations but,
until such regulations are issued, such market discount would in general accrue
either (i) on the basis of a constant yield (in the case of a Pay-Through
Security, taking into account a prepayment assumption) or (ii) in the ratio of
(a) in the case of Securities (or in the case of a Pass-Through Security, as set
forth below, the Loans underlying such Security) not originally issued with
original issue discount, stated interest payable in the relevant period to total
stated interest remaining to be paid at the beginning of the period or (b) in
the case of Securities (or, in the case of a Pass-Through Security, as described
below, the Loans underlying such Security) originally issued at a discount, OID
in the relevant period to total OID remaining to be paid.
Section 1277 of the Code provides that, regardless of the origination
date of the Debt Security (or, in the case of a Pass-Through Security, the
Loans), the excess of interest paid or accrued to purchase or carry a Security
(or, in the case of a Pass-Through Security, as described below, the underlying
Loans) with market discount over interest received on such Security is allowed
as a current deduction only to the extent such excess is greater than the market
discount that accrued during the taxable year in which such interest expense was
incurred. In general, the deferred portion of any interest expense will be
deductible when such market discount is included in income, including upon the
sale, disposition, or repayment of the Security (or in the case of a
Pass-Through Security, an underlying Loan). A holder may elect to include market
discount in income currently as it accrues, on all market discount obligations
acquired by such holder during the taxable year such election is made and
thereafter, in which case the interest deferral rule will not apply.
Premium. A holder who purchases a Debt Security (other than an Interest
Weighted Security to the extent described above) at a cost greater than its
stated redemption price at maturity, generally will be considered to have
purchased the Security at a premium, which it may elect to amortize as an offset
to interest income on such Security (and not as a separate deduction item) on a
constant yield method. Although no regulations addressing the computation of
premium accrual on securities similar to the Securities have been issued, the
legislative history of the Tax Reform Act of 1986 (the "1986 Act") indicates
that premium is to be accrued in the same manner as market discount.
Accordingly, it appears that the accrual of premium on a class of Pay-Through
Securities will be calculated using the prepayment assumption used in pricing
such class. If a holder of a Debt Security makes an election to amortize premium
on a Debt Security, such election will apply to all taxable debt instruments
(including all REMIC regular interests and all pass-through certificates
representing ownership interests in a trust holding debt obligations) held by
the holder at the beginning of the taxable year in which the election is made,
and to all taxable debt instruments acquired thereafter by such holder, and will
be irrevocable without the consent of the IRS. Purchasers who pay a premium for
the Securities should consult their tax advisers regarding the election to
amortize premium and the method to be employed.
The IRS has issued regulations (the "Amortizable Bond Premium
Regulations") dealing with amortizable bond premium. These regulations
specifically do not apply to prepayable debt instruments subject to Code Section
1272(a)(6) such as the Securities. Absent further guidance from the IRS, the
Trustee intends to account for amortizable bond premium in the manner described
above. Prospective purchasers of the Securities should consult their tax
advisors regarding the possible application of the Amortizable Bond Premium
Regulations.
Election to Treat All Interest as Original Issue Discount. The OID
Regulations permit a holder of a Debt Security to elect to accrue all interest,
discount (including de minimis market or original issue discount) and premium in
income as interest, based on a constant yield method for Debt Securities
acquired on or after April 4, 1994. If such an election were to be made with
respect to a Debt Security with market discount, the holder of the Debt Security
would be deemed to have made an election to include in income currently market
discount with respect to all other debt instruments having market discount that
such holder of the Debt Security acquires during the year of the election or
thereafter. Similarly, a holder of a Debt Security that makes this election for
a Debt Security that is acquired at a premium will be deemed to have made an
election to amortize bond premium with respect to all debt instruments having
amortizable bond premium that such holder owns or acquires. The election to
accrue interest, discount and premium on a constant yield method with respect to
a Debt Security is irrevocable.
Taxation of the REMIC and Its Holders
General. If a REMIC election is made with respect to a Series of
Securities, then upon the issuance of those Securities, assuming such election
is properly made, the provisions of the applicable Agreements are compiled with,
and the statutory and regulatory requirements are satisfied, Brown & Wood LLP,
special counsel to the Depositor, or other counsel identified in the Prospectus
Supplement is of the opinion that the arrangement by which the Securities of
that Series are issued will be treated as a REMIC and at the time the Securities
are issued will deliver an opinion generally to that effect and to the effect
that the Securities designated as "regular interests" in the REMIC will be
regular interests in a REMIC and will be treated as indebtedness issued by the
REMIC, and that the Securities designated as the sole class of "residual
interests" in the REMIC will be treated as the "residual interest" in the REMIC
for United States federal income tax purposes for as long as all of the
provisions of the applicable Agreement are complied with and the statutory and
regulatory requirements are satisfied. Securities will be designated as "Regular
Interests" or "Residual Interests" in a REMIC, as specified in the related
Prospectus Supplement.
Except to the extent specified otherwise in a Prospectus Supplement, if
a REMIC election is made with respect to a Series of Securities, (i) Securities
held by a domestic building and loan association will constitute "a regular or a
residual interest in a REMIC" within the meaning of Code Section
7701(a)(19)(C)(xi) (assuming that at least 95% of the REMIC's assets consist of
cash, government securities, "loans secured by an interest in real property,"
and other types of assets described in Code Section 7701(a)(19)(C)); and (ii)
Securities held by a real estate investment trust will constitute "real estate
assets" within the meaning of Code Section 856(c)(5)(B), and income with respect
to the Securities will be considered "interest on obligations secured by
mortgages on real property or on interests in real property" within the meaning
of Code Section 856(c)(3)(B) (assuming, for both purposes, that at least 95% of
the REMIC's assets are qualifying assets), and (iii) effective September 1,
1997, Regular Interest Securities held by a financial asset securitization
investment trust (a "FASIT") will qualify for treatment as "permitted assets"
within the meaning of section 860L(c)(1)(G) of the Code. If less than 95% of the
REMIC's assets consist of assets described in (i) or (ii) above, then a Security
will qualify for the tax treatment described in (i) or (ii) in the proportion
that such REMIC assets are qualifying assets.
Status of Manufactured Housing Contracts. The federal income tax
regulations relating to a REMIC (the "REMIC Regulations") provide that
obligations secured by interests in manufactured housing that qualify as "single
family residences" within the meaning of Code Section 25(e)(10) may be treated
as "qualified mortgages" of the REMIC.
Under Section 25(e)(10), the term "single family residence" includes
any manufactured home which has a minimum of 400 square feet of living space and
a minimum width in excess of 102 inches and which is a kind customarily used at
a fixed location.
The Small Business Job Protection Act of 1996, as part of the repeal of
the bad debt reserve method for thrift institutions, repealed the application of
Code Section 593(d) to any taxable year beginning after December 31, 1995.
REMIC Expenses; Single Class REMICS
As a general rule, all of the expenses of a REMIC will be taken into
account by holders of the Residual Interest Securities. In the case of a "single
class REMIC," however, the expenses will be allocated, under Treasury
regulations, among the holders of the Regular Interest Securities and the
holders of the Residual Interest Securities on a daily basis in proportion to
the relative amounts of income accruing to each holder of a Residual Interest
Security or Regular Interest Security on that day. In the case of a holder of a
Regular Interest Security who is an individual or a "pass-through interest
holder" (including certain pass-through entities but not including real estate
investment trusts), such expenses will be deductible only to the extent that
such expenses, plus other "miscellaneous itemized deductions" of the holder of a
Regular Interest Security, exceed 2% of such holder's adjusted gross income. In
addition, the amount of itemized deductions otherwise allowable for the taxable
year for an individual whose adjusted gross income exceeds the applicable amount
(which amount will be adjusted for inflation for taxable years beginning after
1990) will be reduced by the lesser of (i) 3% of the excess of adjusted gross
income over the applicable amount, or (ii) 80% of the amount of itemized
deductions otherwise allowable for such taxable year. The reduction or
disallowance of this deduction may have a significant impact on the yield of the
Regular Interest Security to such a holder. In general terms, a single class
REMIC is one that either (i) would qualify, under existing Treasury regulations,
as a grantor trust if it were not a REMIC (treating all interests as ownership
interests, even if they would be classified as debt for federal income tax
purposes) or (ii) is similar to such a trust and which is structured with the
principal purpose of avoiding the single class REMIC rules. Unless otherwise
specified in the related Prospectus Supplement, the expenses of the REMIC will
be allocated to holders of the related Residual Interest Securities.
Taxation of the REMIC
General. Although a REMIC is a separate entity for federal income tax
purposes, a REMIC is not generally subject to entity-level tax. Rather, the
taxable income or net loss of a REMIC is taken into account by the holders of
residual interests. As described above, the regular interests are generally
taxable as debt of the REMIC.
Calculation of REMIC Income. The taxable income or net loss of a REMIC
is determined under an accrual method of accounting and in the same manner as in
the case of an individual, with certain adjustments. In general, the taxable
income or net loss will be the difference between (i) the gross income produced
by the REMIC's assets, including stated interest and any original issue discount
or market discount on loans and other assets, and (ii) deductions, including
stated interest and original issue discount accrued on Regular Interest
Securities, amortization of any premium with respect to Loans, and servicing
fees and other expenses of the REMIC. A holder of a Residual Interest Security
that is an individual or a "pass-through interest holder" (including certain
pass-through entities, but not including real estate investment trusts) will be
unable to deduct servicing fees payable on the loans or other administrative
expenses of the REMIC for a given taxable year, to the extent that such
expenses, when aggregated with such holder's other miscellaneous itemized
deductions for that year, do not exceed two percent of such holder's adjusted
gross income.
For purposes of computing its taxable income or net loss, the REMIC
should have an initial aggregate tax basis in its assets equal to the aggregate
fair market value of the regular interests and the residual interests on the
startup day (generally, the day that the interests are issued) (the "Startup
Day"). That aggregate basis will be allocated among the assets of the REMIC in
proportion to their respective fair market values.
The OID provisions of the Code apply to loans of individuals originated
on or after March 2, 1984, and the market discount provisions apply to loans
originated after July 18, 1984. Subject to possible application of the de
minimis rules, the method of accrual by the REMIC of OID income on such loans
will be equivalent to the method under which holders of Pay-Through Securities
accrue original issue discount (i.e., under the constant yield method taking
into account the Prepayment Assumption). The REMIC will deduct OID on the
Regular Interest Securities in the same manner that the holders of the Regular
Interest Securities include such discount in income, but without regard to the
de minimis rules. See "Federal Income Tax Consequences -- General" above.
However, a REMIC that acquires loans at a market discount must include such
market discount in income currently, as it accrues, on a constant interest
basis.
To the extent that the REMIC's basis allocable to loans that it holds
exceeds their principal amounts, the resulting premium, if attributable to
mortgages originated after September 27, 1985, will be amortized over the life
of the loans (taking into account the Prepayment Assumption) on a constant yield
method. Although the law is somewhat unclear regarding recovery of premium
attributable to loans originated on or before such date, it is possible that
such premium may be recovered in proportion to payments of loan principal.
Prohibited Transactions and Contributions Tax. The REMIC will be
subject to a 100% tax on any net income derived from a "prohibited transaction."
For this purpose, net income will be calculated without taking into account any
losses from prohibited transactions or any deductions attributable to any
prohibited transaction that resulted in a loss. In general, prohibited
transactions include: (i) subject to limited exceptions, the sale or other
disposition of any qualified mortgage transferred to the REMIC; (ii) subject to
a limited exception, the sale or other disposition of a cash flow investment;
(iii) the receipt of any income from assets not permitted to be held by the
REMIC pursuant to the Code; or (iv) the receipt of any fees or other
compensation for services rendered by the REMIC. It is anticipated that a REMIC
will not engage in any prohibited transactions in which it would recognize a
material amount of net income. In addition, subject to a number of exceptions, a
tax is imposed at the rate of 100% on amounts contributed to a REMIC after the
close of the three-month period beginning on the Startup Day. The holders of
Residual Interest Securities will generally be responsible for the payment of
any such taxes imposed on the REMIC. To the extent not paid by such holders or
otherwise, however, such taxes will be paid out of the Trust Fund and will be
allocated pro rata to all outstanding classes of Securities of such REMIC.
Taxation of Holders of Residual Interest Securities
The holder of a Security representing a residual interest (a "Residual
Interest Security") will take into account the "daily portion" of the taxable
income or net loss of the REMIC for each day during the taxable year on which
such holder held the Residual Interest Security. The daily portion is determined
by allocating to each day in any calendar quarter its ratable portion of the
taxable income or net loss of the REMIC for such quarter, and by allocating that
amount among the holders (on such day) of the Residual Interest Securities in
proportion to their respective holdings on such day.
The holder of a Residual Interest Security must report its
proportionate share of the taxable income of the REMIC whether or not it
receives cash distributions from the REMIC attributable to such income or loss.
The reporting of taxable income without corresponding distributions could occur,
for example, in certain REMIC issues in which the loans held by the REMIC were
issued or acquired at a discount, since mortgage prepayments cause recognition
of discount income, while the corresponding portion of the prepayment could be
used in whole or in part to make principal payments on REMIC Regular Interests
issued without any discount or at an insubstantial discount (if this occurs, it
is likely that cash distributions will exceed taxable income in later years).
Taxable income may also be greater in earlier years of certain REMIC issues as a
result of the fact that interest expense deductions, as a percentage of
outstanding principal on REMIC Regular Interest Securities, will typically
increase over time as lower yielding Securities are paid, whereas interest
income with respect to loans will generally remain constant over time as a
percentage of loan principal.
In any event, because the holder of a residual interest is taxed on the
net income of the REMIC, the taxable income derived from a Residual Interest
Security in a given taxable year will not be equal to the taxable income
associated with investment in a corporate bond or stripped instrument having
similar cash flow characteristics and pretax yield. Therefore, the after-tax
yield on the Residual Interest Security may be less than that of such a bond or
instrument.
Limitation on Losses. The amount of the REMIC's net loss that a holder
may take into account currently is limited to the holder's adjusted basis at the
end of the calendar quarter in which such loss arises. A holder's basis in a
Residual Interest Security will initially equal such holder's purchase price,
and will subsequently be increased by the amount of the REMIC's taxable income
allocated to the holder, and decreased (but not below zero) by the amount of
distributions made and the amount of the REMIC's net loss allocated to the
holder. Any disallowed loss may be carried forward indefinitely, but may be used
only to offset income of the REMIC generated by the same REMIC. The ability of
holders of Residual Interest Securities to deduct net losses may be subject to
additional limitations under the Code, as to which such holders should consult
their tax advisers.
Distributions. Distributions on a Residual Interest Security (whether
at their scheduled times or as a result of prepayments) will generally not
result in any additional taxable income or loss to a holder of a Residual
Interest Security. If the amount of such payment exceeds a holder's adjusted
basis in the Residual Interest Security, however, the holder will recognize gain
(treated as gain from the sale of the Residual Interest Security) to the extent
of such excess.
Sale or Exchange. A holder of a Residual Interest Security will
recognize gain or loss on the sale or exchange of a Residual Interest Security
equal to the difference, if any, between the amount realized and such holder's
adjusted basis in the Residual Interest Security at the time of such sale or
exchange. Except to the extent provided in regulations, which have not yet been
issued, any loss upon disposition of a Residual Interest Security will be
disallowed if the selling holder acquires any residual interest in a REMIC or
similar mortgage pool within six months before or after such disposition.
Excess Inclusions. The portion of the REMIC taxable income of a holder
of a Residual Interest Security consisting of "excess inclusion" income may not
be offset by other deductions or losses, including net operating losses, on such
holder's federal income tax return. Further, if the holder of a Residual
Interest Security is an organization subject to the tax on unrelated business
income imposed by Code Section 511, such holder's excess inclusion income will
be treated as unrelated business taxable income of such holder. In addition,
under Treasury regulations yet to be issued, if a real estate investment trust,
a regulated investment company, a common trust fund, or certain cooperatives
were to own a Residual Interest Security, a portion of dividends (or other
distributions) paid by the real estate investment trust (or other entity) would
be treated as excess inclusion income. If a Residual Security is owned by a
foreign person, excess inclusion income is subject to tax at a rate of 30% which
may not be reduced by treaty, is not eligible for treatment as "portfolio
interest" and is subject to certain additional limitations. See "-- Tax
Treatment of Foreign Investors." The Small Business Job Protection Act of 1996
eliminated the special rule permitting Section 593 institutions ("thrift
institutions") to use net operating losses and other allowable deductions to
offset their excess inclusion income from REMIC residual certificates that have
"significant value" within the meaning of the REMIC Regulations, effective for
taxable years beginning after December 31, 1995, except with respect to residual
certificates continuously held by a thrift institution since November 1, 1995.
In addition, the Small Business Job Protection Act of 1996 provides
three rules for determining the effect on excess inclusions on the alternative
minimum taxable income of a residual holder. First, alternative minimum taxable
income for such residual holder is determined without regard to the special rule
that taxable income cannot be less than excess inclusions. Second, a residual
holder's alternative minimum taxable income for a tax year cannot be less than
excess inclusions for the year. Third, the amount of any alternative minimum tax
net operating loss deductions must be computed without regard to any excess
inclusions. These rules are effective for tax years beginning after December 31,
1995, unless a residual holder elects to have such rules apply only to tax years
beginning after August 20, 1996.
The excess inclusion portion of a REMIC's income is generally equal to
the excess, if any, of REMIC taxable income for the quarterly period allocable
to a Residual Interest Security, over the daily accruals for such quarterly
period of (i) 120% of the long term applicable federal rate on the Startup Day
multiplied by (ii) the adjusted issue price of such Residual Interest Security
at the beginning of such quarterly period. The adjusted issue price of a
Residual Interest Security at the beginning of each calendar quarter will equal
its issue price (calculated in a manner analogous to the determination of the
issue price of a Regular Interest Security), increased by the aggregate of the
daily accruals for prior calendar quarters, and decreased (but not below zero)
by the amount of loss allocated to a holder and the amount of distributions made
on the Residual Interest Security before the beginning of the quarter. The
long-term federal rate, which is announced monthly by the Treasury Department,
is an interest rate that is based on the average market yield of outstanding
marketable obligations of the United States government having remaining
maturities in excess of nine years.
Under the REMIC Regulations, in certain circumstances, transfers of
Residual Interest Securities may be disregarded. See "-- Restrictions on
Ownership and Transfer of Residual Interest Securities" and "-- Tax Treatment of
Foreign Investors" below.
Restrictions on Ownership and Transfer of Residual Interest Securities.
As a condition to qualification as a REMIC, reasonable arrangements must be made
to prevent the ownership of a REMIC residual interest by any "Disqualified
Organization." Disqualified Organizations include the United States, any State
or political subdivision thereof, any foreign government, any international
organization, or any agency or instrumentality of any of the foregoing, a rural
electric or telephone cooperative described in Section 1381(a)(2)(C) of the
Code, or any entity exempt from the tax imposed by Sections 1-1399 of the Code,
if such entity is not subject to tax on its unrelated business income.
Accordingly, the applicable Agreement will prohibit Disqualified Organizations
from owning a Residual Interest Security. In addition, no transfer of a Residual
Interest Security will be permitted unless the proposed transferee shall have
furnished to the Trustee an affidavit representing and warranting that it is
neither a Disqualified Organization nor an agent or nominee acting on behalf of
a Disqualified Organization.
If a Residual Interest Security is transferred to a Disqualified
Organization after March 31, 1988 (in violation of the restrictions set forth
above), a substantial tax will be imposed on the transferor of such Residual
Interest Security at the time of the transfer. In addition, if a Disqualified
Organization holds an interest in a pass-through entity after March 31, 1988
(including, among others, a partnership, trust, real estate investment trust,
regulated investment company, or any person holding as nominee), that owns a
Residual Interest Security, the pass-through entity will be required to pay an
annual tax on its allocable share of the excess inclusion income of the REMIC.
Under the REMIC Regulations, if a Residual Interest Security is a
"noneconomic residual interest," as described below, a transfer of a Residual
Interest Security to a United States person will be disregarded for all Federal
tax purposes unless no significant purpose of the transfer was to impede the
assessment or collection of tax. A Residual Interest Security is a "noneconomic
residual interest" unless, at the time of the transfer (i) the present value of
the expected future distributions on the Residual Interest Security at least
equals the product of the present value of the anticipated excess inclusions and
the highest rate of tax for the year in which the transfer occurs, and (ii) the
transferor reasonably expects that the transferee will receive distributions
from the REMIC at or after the time at which the taxes accrue on the anticipated
excess inclusions in an amount sufficient to satisfy the accrued taxes. If a
transfer of a Residual Interest Security is disregarded, the transferor would be
liable for any Federal income tax imposed upon taxable income derived by the
transferee from the REMIC. The REMIC Regulations provide no guidance as to how
to determine if a significant purpose of a transfer is to impede the assessment
or collection of tax. A similar type of limitation exists with respect to
certain transfers of residual interests by foreign persons to United States
persons. See "-- Tax Treatment of Foreign Investors."
Mark to Market Rules. Under IRS regulations, a REMIC Residual Interest
Security acquired after January 3, 1995 cannot be marked-to-market.
Administrative Matters
The REMIC's books must be maintained on a calendar year basis and the
REMIC must file an annual federal income tax return. The REMIC will also be
subject to the procedural and administrative rules of the Code applicable to
partnerships, including the determination of any adjustments to, among other
things, items of REMIC income, gain, loss, deduction, or credit, by the IRS in a
unified administrative proceeding.
Tax Status as a Grantor Trust
General. If the related Prospectus Supplement does not specify that an
election will be made to treat the assets of the Trust Fund as one or more
REMICs or to treat the Trust Fund as a partnership, then Depositor will have
structured the Trust Fund (or the portion of its assets for which a REMIC
election will not be made) to be classified for United States federal income tax
purposes as a grantor trust under Subpart E, Part I of Subchapter J of the Code,
in which case, Brown & Wood LLP, special counsel to the Depositor, or other
counsel identified in the Prospectus Supplement, is of the opinion that,
assuming compliance with the Agreements and with applicable law, such
arrangement will not be treated as an association taxable as a corporation for
United States federal income tax purposes, and the Securities will be treated as
representing ownership interests in the related Trust Fund assets (the
Securities of such Series, "Pass-Through Securities") and at the time such
Pass-Through Securities are issued, special counsel to the Depositor will
deliver an opinion generally to that effect. In some Series there will be no
separation of the principal and interest payments on the Loans. In such
circumstances, a holder of a Pass-Through Security will be considered to have
purchased a pro rata undivided interest in each of the Loans. In other cases
("Stripped Securities"), sale of the Securities will produce a separation in the
ownership of all or a portion of the principal payments from all or a portion of
the interest payments on the Loans.
Each holder of a Pass-Through Security must report on its federal
income tax return its share of the gross income derived from the Loans (not
reduced by the amount payable as fees to the Trustee and the Servicer and
similar fees (collectively, the "Servicing Fee"), at the same time and in the
same manner as such items would have been reported under the holder's tax
accounting method had it held its interest in the Loans directly, received
directly its share of the amounts received with respect to the Loans, and paid
directly its share of the Servicing Fees. In the case of Pass-Through Securities
other than Stripped Securities, such income will consist of a pro rata share of
all of the income derived from all of the Loans and, in the case of Stripped
Securities, such income will consist of a pro rata share of the income derived
from each stripped bond or stripped coupon in which the holder owns an interest.
The holder of a Security will generally be entitled to deduct such Servicing
Fees under Section 162 or Section 212 of the Code to the extent that such
Servicing Fees represent "reasonable" compensation for the services rendered by
the Trustee and the Servicer (or third parties that are compensated for the
performance of services). In the case of a noncorporate holder, however,
Servicing Fees (to the extent not otherwise disallowed, e.g., because they
exceed reasonable compensation) will be deductible in computing such holder's
regular tax liability only to the extent that such fees, when added to other
miscellaneous itemized deductions, exceed 2% of adjusted gross income and may
not be deductible to any extent in computing such holder's alternative minimum
tax liability. In addition, the amount of itemized deductions otherwise
allowable for the taxable year for an individual whose adjusted gross income
exceeds the applicable amount (which amount will be adjusted for inflation in
taxable years beginning after 1990) will be reduced by the lesser of (i) 3% of
the excess of adjusted gross income over the applicable amount or (ii) 80% of
the amount of itemized deductions otherwise allowable for such taxable year.
Discount or Premium on Pass-Through Securities. The holder's purchase
price of a Pass-Through Security is to be allocated among the Loans in
proportion to their fair market values, determined as of the time of purchase of
the Securities. In the typical case, the Trustee (to the extent necessary to
fulfill its reporting obligations) will treat each Loan as having a fair market
value proportional to the share of the aggregate principal balances of all of
the Loans that it represents, since the Securities, unless otherwise specified
in the related Prospectus Supplement, will have a relatively uniform interest
rate and other common characteristics. To the extent that the portion of the
purchase price of a Pass-Through Security allocated to a Loan (other than to a
right to receive any accrued interest thereon and any undistributed principal
payments) is less than or greater than the portion of the principal balance of
the Loan allocable to the Security, the interest in the Loan allocable to the
Pass-Through Security will be deemed to have been acquired at a discount or
premium, respectively.
The treatment of any discount will depend on whether the discount
represents OID or market discount. In the case of a Loan with OID in excess of a
prescribed de minimis amount or a Stripped Security, a holder of a Security will
be required to report as interest income in each taxable year its share of the
amount of OID that accrues during that year in the manner described above. OID
with respect to a Loan could arise, for example, by virtue of the financing of
points by the originator of the Loan, or by virtue of the charging of points by
the originator of the Loan in an amount greater than a statutory de minimis
exception, in circumstances under which the points are not currently deductible
pursuant to applicable Code provisions. Any market discount or premium on a Loan
will be includible in income, generally in the manner described above, except
that in the case of Pass-Through Securities, market discount is calculated with
respect to the Loans underlying the Security, rather than with respect to the
Security. A holder of a Security that acquires an interest in a Loan originated
after July 18, 1984 with more than a de minimis amount of market discount
(generally, the excess of the principal amount of the Loan over the purchaser's
allocable purchase price) will be required to include accrued market discount in
income in the manner set forth above. See "-- Taxation of Debt Securities;
Market Discount" and "-- Premium" above.
In the case of market discount on a Pass-Through Security attributable
to Loans originated on or before July 18, 1984, the holder generally will be
required to allocate the portion of such discount that is allocable to a loan
among the principal payments on the Loan and to include the discount allocable
to each principal payment in ordinary income at the time such principal payment
is made. Such treatment would generally result in discount being included in
income at a slower rate than discount would be required to be included in income
using the method described in the preceding paragraph.
Stripped Securities. A Stripped Security may represent a right to
receive only a portion of the interest payments on the Loans, a right to receive
only principal payments on the Loans, or a right to receive certain payments of
both interest and principal. Certain Stripped Securities ("Ratio Strip
Securities") may represent a right to receive differing percentages of both the
interest and principal on each Loan. Pursuant to Section 1286 of the Code, the
separation of ownership of the right to receive some or all of the interest
payments on an obligation from ownership of the right to receive some or all of
the principal payments results in the creation of "stripped bonds" with respect
to principal payments and "stripped coupons" with respect to interest payments.
Section 1286 of the Code applies the OID rules to stripped bonds and stripped
coupons. For purposes of computing original issue discount, a stripped bond or a
stripped coupon is treated as a debt instrument issued on the date that such
stripped interest is purchased with an issue price equal to its purchase price
or, if more than one stripped interest is purchased, the ratable share of the
purchase price allocable to such stripped interest.
Servicing fees in excess of reasonable servicing fees ("excess
servicing") will be treated under the stripped bond rules. If the excess
servicing fee is less than 100 basis points (i.e., 1% interest on the Loan
principal balance) or the Securities are initially sold with a de minimis
discount (assuming no prepayment assumption is required), any non-de minimis
discount arising from a subsequent transfer of the Securities should be treated
as market discount. The IRS appears to require that reasonable servicing fees be
calculated on a Loan by Loan basis, which could result in some Loans being
treated as having more than 100 basis points of interest stripped off.
The Code, OID Regulations and judicial decisions provide no direct
guidance as to how the interest and original issue discount rules are to apply
to Stripped Securities and other Pass-Through Securities. Under the method
described above for Pay-Through Securities (the "Cash Flow Bond Method"), a
prepayment assumption is used and periodic recalculations are made which take
into account with respect to each accrual period the effect of prepayments
during such period. However, the 1986 Act does not, absent Treasury regulations,
appear specifically to cover instruments such as the Stripped Securities which
technically represent ownership interests in the underlying Loans, rather than
being debt instruments "secured by" those loans. Nevertheless, it is believed
that the Cash Flow Bond Method is a reasonable method of reporting income for
such Securities, and it is expected that OID will be reported on that basis
unless otherwise specified in the related Prospectus Supplement. In applying the
calculation to Pass-Through Securities, the Trustee will treat all payments to
be received by a holder with respect to the underlying Loans as payments on a
single installment obligation. The IRS could, however, assert that original
issue discount must be calculated separately for each Loan underlying a
Security.
Under certain circumstances, if the Loans prepay at a rate faster than
the Prepayment Assumption, the use of the Cash Flow Bond Method may accelerate a
holder's recognition of income. If, however, the Loans prepay at a rate slower
than the Prepayment Assumption, in some circumstances the use of this method may
decelerate a holder's recognition of income.
In the case of a Stripped Security that is an Interest Weighted
Security, the Trustee intends, absent contrary authority, to report income to
holders of Securities as OID, in the manner described above for Interest
Weighted Securities.
Possible Alternative Characterizations. The characterizations of the
Stripped Securities described above are not the only possible interpretations of
the applicable Code provisions. Among other possibilities, the IRS could contend
that (i) in certain Series, each non-Interest Weighted Security is composed of
an unstripped undivided ownership interest in Loans and an installment
obligation consisting of stripped principal payments; (ii) the non-Interest
Weighted Securities are subject to the contingent payment provisions of the
Contingent Regulations; or (iii) each Interest Weighted Stripped Security is
composed of an unstripped undivided ownership interest in Loans and an
installment obligation consisting of stripped interest payments.
Given the variety of alternatives for treatment of the Stripped
Securities and the different federal income tax consequences that result from
each alternative, potential purchasers are urged to consult their own tax
advisers regarding the proper treatment of the Securities for federal income tax
purposes.
Character as Qualifying Loans. In the case of Stripped Securities,
there is no specific legal authority existing regarding whether the character of
the Securities, for federal income tax purposes, will be the same as the Loans.
The IRS could take the position that the Loans' character is not carried over to
the Securities in such circumstances. Pass-Through Securities will be, and,
although the matter is not free from doubt, Stripped Securities should be,
considered to represent "real estate assets" within the meaning of Section
856(c)(5)(B) of the Code, and "loans secured by an interest in real property"
within the meaning of Section 7701(a)(19)(C)(v) of the Code; interest income
attributable to the Securities should be considered to represent "interest on
obligations secured by mortgages on real property or on interests in real
property" within the meaning of Section 856(c)(3)(B) of the Code. Reserves or
funds underlying the Securities may cause a proportionate reduction in the
above-described qualifying status categories of Securities.
Sale or Exchange
Subject to the discussion below with respect to Trust Funds as to which
a partnership election is made, a holder's tax basis in its Security is the
price such holder pays for a Security, plus amounts of original issue or market
discount included in income and reduced by any payments received (other than
qualified stated interest payments) and any amortized premium. Gain or loss
recognized on a sale, exchange, or redemption of a Security, measured by the
difference between the amount realized and the Security's basis as so adjusted,
will generally be capital gain or loss, assuming that the Security is held as a
capital asset. Such capital gain or loss will generally be long-term capital
gain if a holder held the Security for more than one year prior to the
disposition of the Security. In the case of a Security held by a bank, thrift,
or similar institution described in Section 582 of the Code, however, gain or
loss realized on the sale or exchange of a Regular Interest Security will be
taxable as ordinary income or loss. In addition, gain from the disposition of a
Regular Interest Security that might otherwise be capital gain will be treated
as ordinary income to the extent of the excess, if any, of (i) the amount that
would have been includible in the holder's income if the yield on such Regular
Interest Security had equaled 110% of the applicable federal rate as of the
beginning of such holder's holding period, over the amount of ordinary income
actually recognized by the holder with respect to such Regular Interest
Security.
Miscellaneous Tax Aspects
Backup Withholding. Subject to the discussion below with respect to
Trust Funds as to which a partnership election is made, a holder of a Security,
other than a holder of a REMIC Residual Security, may, under certain
circumstances, be subject to "backup withholding" at a rate of 31% with respect
to distributions or the proceeds of a sale of certificates to or through brokers
that represent interest or original issue discount on the Securities. This
withholding generally applies if the holder of a Security (i) fails to furnish
the Trustee with its taxpayer identification number ("TIN"); (ii) furnishes the
Trustee an incorrect TIN; (iii) fails to report properly interest, dividends or
other "reportable payments" as defined in the Code; or (iv) under certain
circumstances, fails to provide the Trustee or such holder's securities broker
with a certified statement, signed under penalty of perjury, that the TIN
provided is its correct number and that the holder is not subject to backup
withholding. Backup withholding will not apply, however, with respect to certain
payments made to holders of Securities, including payments to certain exempt
recipients (such as exempt organizations) and to certain Nonresidents (as
defined below). Holders of Securities should consult their tax advisers as to
their qualification for exemption from backup withholding and the procedure for
obtaining the exemption.
The Trustee will report to the holders of Securities and to the Master
Servicer for each calendar year the amount of any "reportable payments" during
such year and the amount of tax withheld, if any, with respect to payments on
the Securities.
Tax Treatment of Foreign Investors
Subject to the discussion below with respect to Trust Funds as to which
a partnership election is made, under the Code, unless interest (including OID)
paid on a Security (other than a Residual Interest Security) is considered to be
"effectively connected" with a trade or business conducted in the United States
by a nonresident alien individual, foreign partnership or foreign corporation
("Nonresidents"), such interest will normally qualify as portfolio interest
(except where (i) the recipient is a holder, directly or by attribution, of 10%
or more of the capital or profits interest in the issuer, or (ii) the recipient
is a controlled foreign corporation to which the issuer is a related person) and
will be exempt from federal income tax. Upon receipt of appropriate ownership
statements, the issuer normally will be relieved of obligations to withhold tax
from such interest payments. These provisions supersede the generally applicable
provisions of United States law that would otherwise require the issuer to
withhold at a 30% rate (unless such rate were reduced or eliminated by an
applicable tax treaty) on, among other things, interest and other fixed or
determinable, annual or periodic income paid to Nonresidents. Holders of
Pass-Through Securities and Stripped Securities, including Ratio Strip
Securities, however, may be subject to withholding to the extent that the Loans
were originated on or before July 18, 1984.
Interest and OID of holders of Securities who are foreign persons are
not subject to withholding if they are effectively connected with a United
States business conducted by the holder. They will, however, generally be
subject to the regular United States income tax.
Payments to holders of Residual Interest Securities who are foreign
persons will generally be treated as interest for purposes of the 30% (or lower
treaty rate) United States withholding tax. Holders of Residual Interest
Securities should assume that such income does not qualify for exemption from
United States withholding tax as "portfolio interest." It is clear that, to the
extent that a payment represents a portion of REMIC taxable income that
constitutes excess inclusion income, a holder of a Residual Interest Security
will not be entitled to an exemption from or reduction of the 30% (or lower
treaty rate) withholding tax rule. If the payments are subject to United States
withholding tax, they generally will be taken into account for withholding tax
purposes only when paid or distributed (or when the Residual Interest Security
is disposed of). The Treasury has statutory authority, however, to promulgate
regulations which would require such amounts to be taken into account at an
earlier time in order to prevent the avoidance of tax. Such regulations could,
for example, require withholding prior to the distribution of cash in the case
of Residual Interest Securities that do not have significant value. Under the
REMIC Regulations, if a Residual Interest Security has tax avoidance potential,
a transfer of a Residual Interest Security to a Nonresident will be disregarded
for all federal tax purposes. A Residual Interest Security has tax avoidance
potential unless, at the time of the transfer the transferor reasonably expects
that the REMIC will distribute to the transferee residual interest holder
amounts that will equal at least 30% of each excess inclusion, and that such
amounts will be distributed at or after the time at which the excess inclusions
accrue and not later than the calendar year following the calendar year of
accrual. If a Nonresident transfers a Residual Interest Security to a United
States person, and if the transfer has the effect of allowing the transferor to
avoid tax on accrued excess inclusions, then the transfer is disregarded and the
transferor continues to be treated as the owner of the Residual Interest
Security for purposes of the withholding tax provisions of the Code. See "--
Taxation of Holders of Residual Interest Securities -- Excess Inclusions."
Final regulations dealing with withholding tax on income paid to
foreign persons and related matters (the "New Withholding Regulations") were
issued by the Treasury Department on October 6, 1997. The New Withholding
Regulations will generally be effective for payments made after December 31,
1999, subject to certain transition rules. Prospective Securityholders who are
foreign persons are strongly urged to consult their own tax advisors with
respect to the New Withholding Regulations.
Tax Characterization of the Trust Fund as a Partnership
If the related Prospectus Supplement specifies that an election will be
made to treat the Trust Fund as a partnership, pursuant to Agreements upon which
counsel shall conclude that (1) the Trust Fund will not have certain
characteristics necessary for a business trust to be classified as an
association taxable as a corporation and (2) the nature of the income of the
Trust Fund will exempt it from the rule that certain publicly traded
partnerships are taxable as corporations or the issuance of the Securities has
been structured as a private placement under an IRS safe harbor, so that the
Trust Fund will not be characterized as a publicly traded partnership taxable as
a corporation, then assuming compliance with the related Agreement and related
documents and applicable law, Brown & Wood LLP, special counsel to the
Depositor, or other counsel identified in the Prospectus Supplement, is of the
opinion that the Trust Fund will not be treated as an association (or as a
publicly traded partnership) taxable as a corporation for United States federal
income tax purposes, and upon the issuance of such Securities, will deliver an
opinion generally to that effect. If the Securities are structured as
indebtedness issued by the partnership, special counsel to the Depositor also
will opine that the Securities should be treated as debt for United States
federal income tax purposes, and, if the Securities are structured as equity
interests in the partnership, will opine that the Securities should be treated
as equity interest in the partnership for United States federal income tax
purposes, in each case assuming compliance with the related Agreements and
applicable law.
If the Trust Fund were taxable as a corporation for federal income tax
purposes, the Trust Fund would be subject to corporate income tax on its taxable
income. The Trust Fund's taxable income would include all its income, possibly
reduced by its interest expense on the Notes. Any such corporate income tax
could materially reduce cash available to make payments on the Notes and
distributions on the Certificates, and holders of Certificates could be liable
for any such tax that is unpaid by the Trust Fund.
Tax Consequences to Holders of the Notes
Treatment of the Notes as Indebtedness. In the case of a Trust Fund
that issues Notes intended to be debt for federal income tax purposes, the Trust
Fund will agree, and the holders of Notes will agree by their purchase of Notes,
to treat the Notes as debt for federal income tax purposes. Special counsel to
the Depositor will, except as otherwise provided in the related Prospectus
Supplement, advise the Depositor that the Notes will be classified as debt for
federal income tax purposes. The discussion below assumes this characterization
of the Notes is correct.
OID, Indexed Securities, etc. The discussion below assumes that all
payments on the Notes are denominated in U.S. dollars, and that the Notes are
not Indexed Securities or Stripped Securities. Moreover, the discussion assumes
that the interest formula for the Notes meets the requirements for "qualified
stated interest" under the OID regulations, and that any OID on the Notes (i.e.,
any excess of the principal amount of the Notes over their issue price) does not
exceed a de minimis amount (i.e., 0.25% of their principal amount multiplied by
the number of full years included in their term), all within the meaning of the
OID regulations. If these conditions are not satisfied with respect to any given
Series of Notes, additional tax considerations with respect to such Notes will
be disclosed in the applicable Prospectus Supplement.
Interest Income on the Notes. Based on the above assumptions, except as
discussed in the following paragraph, the Notes will not be considered issued
with OID. The stated interest thereon will be taxable to a holder of a Note as
ordinary interest income when received or accrued in accordance with such
holder's method of tax accounting. Under the OID regulations, a holder of a Note
issued with a de minimis amount of OID must include such OID in income, on a pro
rata basis, as principal payments are made on the Note. It is believed that any
prepayment premium paid as a result of a mandatory redemption will be taxable as
contingent interest when it becomes fixed and unconditionally payable. A
purchaser who buys a Note for more or less than its principal amount will
generally be subject, respectively, to the premium amortization or market
discount rules of the Code.
A holder of a Note that has a fixed maturity date of not more than one
year from the issue date of such Note (a "Short-Term Note") may be subject to
special rules. An accrual basis holder of a Short-Term Note (and certain cash
method holders, including regulated investment companies, as set forth in
Section 1281 of the Code) generally would be required to report interest income
as interest accrues on a straight-line basis over the term of each interest
period. Other cash basis holders of a Short-Term Note would, in general, be
required to report interest income as interest is paid (or, if earlier, upon the
taxable disposition of the Short-Term Note). However, a cash basis holder of a
Short-Term Note reporting interest income as it is paid may be required to defer
a portion of any interest expense otherwise deductible on indebtedness incurred
to purchase or carry the Short-Term Note until the taxable disposition of the
Short-Term Note. A cash basis taxpayer may elect under Section 1281 of the Code
to accrue interest income on all nongovernment debt obligations with a term of
one year or less, in which case the taxpayer would include interest on the
Short-Term Note in income as it accrues, but would not be subject to the
interest expense deferral rule referred to in the preceding sentence. Certain
special rules apply if a Short-Term Note is purchased for more or less than its
principal amount.
Sale or Other Disposition. If a holder of a Note sells a Note, the
holder will recognize gain or loss in an amount equal to the difference between
the amount realized on the sale and the holder's adjusted tax basis in the Note.
The adjusted tax basis of a Note to a particular holder of a Note will equal the
holder's cost for the Note, increased by any market discount, acquisition
discount, OID and gain previously included by such holder in income with respect
to the Note and decreased by the amount of bond premium (if any) previously
amortized and by the amount of principal payments previously received by such
holder with respect to such Note. Any such gain or loss will be capital gain or
loss if the Note was held as a capital asset, except for gain representing
accrued interest and accrued market discount not previously included in income.
Capital losses generally may be used only to offset capital gains.
Foreign Holders. Interest payments made (or accrued) to a holder of a
Note who is a nonresident alien, foreign corporation or other non-United States
person (a "foreign person") generally will be considered "portfolio interest,"
and generally will not be subject to United States federal income tax and
withholding tax, if the interest is not effectively connected with the conduct
of a trade or business within the United States by the foreign person and the
foreign person (i) is not actually or constructively a "10 percent shareholder"
of the Trust Fund or the Seller (including a holder of 10% of the outstanding
Certificates) or a "controlled foreign corporation" with respect to which the
Trust Fund or the Seller is a "related person" within the meaning of the Code
and (ii) provides the Depositor or other person who is otherwise required to
withhold U.S. tax with respect to the Notes with an appropriate statement (on
Form W-8 or a similar form), signed under penalties of perjury, certifying that
the beneficial owner of the Note is a foreign person and providing the foreign
person's name and address. If a Note is held through a securities clearing
organization or certain other financial institutions, the organization or
institution may provide the relevant signed statement to the withholding agent;
in that case, however, the signed statement must be accompanied by a Form W-8 or
substitute form provided by the foreign person that owns the Note. If such
interest is not portfolio interest, then it will be subject to United States
federal income and withholding tax at a rate of 30 percent, unless reduced or
eliminated pursuant to an applicable tax treaty.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Note by a foreign person will be exempt from United
States federal income and withholding tax, provided that (i) such gain is not
effectively connected with the conduct of a trade or business in the United
States by the foreign person and (ii) in the case of an individual foreign
person, the foreign person is not present in the United States for 183 days or
more in the taxable year.
Backup Withholding. Each holder of a Note (other than an exempt holder
such as a corporation, tax-exempt organization, qualified pension and
profit-sharing trust, individual retirement account or nonresident alien who
provides certification as to status as a nonresident) will be required to
provide, under penalties of perjury, a certificate containing the holder's name,
address, correct federal taxpayer identification number and a statement that the
holder is not subject to backup withholding. Should a nonexempt holder of a Note
fail to provide the required certification, the Trust Fund will be required to
withhold 31 percent of the amount otherwise payable to the holder, and remit the
withheld amount to the IRS as a credit against the holder's federal income tax
liability.
Possible Alternative Treatments of the Notes. If, contrary to the
opinion of special counsel to the Depositor, the IRS successfully asserted that
one or more of the Notes did not represent debt for federal income tax purposes,
the Notes might be treated as equity interests in the Trust Fund. If so treated,
the Trust Fund might be taxable as a corporation with the adverse consequences
described above (and the taxable corporation would not be able to reduce its
taxable income by deductions for interest expense on Notes recharacterized as
equity). Alternatively, and most likely in the view of special counsel to the
Depositor, the Trust Fund might be treated as a publicly traded partnership that
would not be taxable as a corporation because it would meet certain qualifying
income tests. Nonetheless, treatment of the Notes as equity interests in such a
publicly traded partnership could have adverse tax consequences to certain
holders. For example, income to certain tax-exempt entities (including pension
funds) would be "unrelated business taxable income," income to foreign holders
generally would be subject to U.S. tax and U.S. tax return filing and
withholding requirements, and individual holders might be subject to certain
limitations on their ability to deduct their share of the Trust Fund's expenses.
Tax Consequences to Holders of the Certificates
Treatment of the Trust Fund as a Partnership. In the case of a Trust
Fund that will elect to be treated as a partnership, the Trust Fund and the
Master Servicer will agree, and the holders of Certificates will agree by their
purchase of Certificates, to treat the Trust Fund as a partnership for purposes
of federal and state income tax, franchise tax and any other tax measured in
whole or in part by income, with the assets of the partnership being the assets
held by the Trust Fund, the partners of the partnership being the holders of
Certificates, and the Notes being debt of the partnership. However, the proper
characterization of the arrangement involving the Trust Fund, the Certificates,
the Notes, the Trust Fund and the Master Servicer is not clear because there is
no authority on transactions closely comparable to that contemplated herein.
A variety of alternative characterizations are possible. For example,
because the Certificates have certain features characteristic of debt, the
Certificates might be considered debt of the Trust Fund. Any such
characterization would not result in materially adverse tax consequences to
holders of Certificates as compared to the consequences from treatment of the
Certificates as equity in a partnership, described below. The following
discussion assumes that the Certificates represent equity interests in a
partnership.
Indexed Securities, etc. The following discussion assumes that all
payments on the Certificates are denominated in U.S. dollars, none of the
Certificates are Indexed Securities or Stripped Securities, and that a Series of
Securities includes a single class of Certificates. If these conditions are not
satisfied with respect to any given Series of Certificates, additional tax
considerations with respect to such Certificates will be disclosed in the
applicable Prospectus Supplement.
Partnership Taxation. As a partnership, the Trust Fund will not be
subject to federal income tax. Rather, each holder of a Certificate will be
required to separately take into account such holder's allocated share of
income, gains, losses, deductions and credits of the Trust Fund. The Trust
Fund's income will consist primarily of interest and finance charges earned on
the Loans (including appropriate adjustments for market discount, OID and bond
premium) and any gain upon collection or disposition of Loans. The Trust Fund's
deductions will consist primarily of interest accruing with respect to the
Notes, servicing and other fees, and losses or deductions upon collection or
disposition of Loans.
The tax items of a partnership are allocable to the partners in
accordance with the Code, Treasury regulations and the partnership agreement
(here, the Trust Agreement and related documents). The Trust Agreement will
provide, in general, that the Certificateholders will be allocated taxable
income of the Trust Fund for each month equal to the sum of (i) the interest
that accrues on the Certificates in accordance with their terms for such month,
including interest accruing at the Pass-Through Rate for such month and interest
on amounts previously due on the Certificates but not yet distributed; (ii) any
Trust Fund income attributable to discount on the Loans that corresponds to any
excess of the principal amount of the Certificates over their initial issue
price (iii) prepayment premium payable to the holders of Certificates for such
month; and (iv) any other amounts of income payable to the holders of
Certificates for such month. Such allocation will be reduced by any amortization
by the Trust Fund of premium on Loans that corresponds to any excess of the
issue price of Certificates over their principal amount. All remaining taxable
income of the Trust Fund will be allocated to the Depositor. Based on the
economic arrangement of the parties, this approach for allocating Trust Fund
income should be permissible under applicable Treasury regulations, although no
assurance can be given that the IRS would not require a greater amount of income
to be allocated to holders of Certificates. Moreover, even under the foregoing
method of allocation, holders of Certificates may be allocated income equal to
the entire Pass-Through Rate plus the other items described above even though
the Trust Fund might not have sufficient cash to make current cash distributions
of such amount. Thus, cash basis holders will in effect be required to report
income from the Certificates on the accrual basis and holders of Certificates
may become liable for taxes on Trust Fund income even if they have not received
cash from the Trust Fund to pay such taxes. In addition, because tax allocations
and tax reporting will be done on a uniform basis for all holders of
Certificates but holders of Certificates may be purchasing Certificates at
different times and at different prices, holders of Certificates may be required
to report on their tax returns taxable income that is greater or less than the
amount reported to them by the Trust Fund.
All of the taxable income allocated to a holder of a Certificate 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 such a holder under the Code.
An individual taxpayer's share of expenses of the Trust Fund (including
fees to the Master Servicer but not interest expense) would be miscellaneous
itemized deductions. Such deductions might be disallowed to the individual in
whole or in part and might result in such holder being taxed on an amount of
income that exceeds the amount of cash actually distributed to such holder over
the life of the Trust Fund.
The Trust Fund intends to make all tax calculations relating to income
and allocations to holders of Certificates on an aggregate basis. If the IRS
were to require that such calculations be made separately for each Loan, the
Trust Fund might be required to incur additional expense but it is believed that
there would not be a material adverse effect on holders of Certificates.
Discount and Premium. It is believed that the Loans were not issued
with OID, and, therefore, the Trust Fund should not have OID income. However,
the purchase price paid by the Trust Fund for the Loans may be greater or less
than the remaining principal balance of the Loans at the time of purchase. If
so, the Loan will have been acquired at a premium or discount, as the case may
be. (As indicated above, the Trust Fund will make this calculation on an
aggregate basis, but might be required to recompute it on a Loan by Loan basis.)
If the Trust Fund acquires the Loans at a market discount or premium,
the Trust Fund will elect to include any such discount in income currently as it
accrues over the life of the Loans or to offset any such premium against
interest income on the Loans. As indicated above, a portion of such market
discount income or premium deduction may be allocated to holders of
Certificates.
Section 708 Termination. Under Section 708 of the Code, the Trust Fund
will be deemed to terminate for federal income tax purposes if 50% or more of
the capital and profits interests in the Trust Fund are sold or exchanged within
a 12-month period. If such a termination occurs, the Trust Fund will be
considered to contribute all of its assets and liabilities to a new partnership
and, immediately thereafter, to liquidate by distributing interests in the new
partnership to the Certificateholders, with the Trust Fund, as the new
partnership, thereafter continuing the business of the partnership deemed
liquidated. The Trust Fund will not comply with certain technical requirements
that might apply when such a constructive termination occurs. As a result, the
Trust Fund may be subject to certain tax penalties and may incur additional
expenses if it is required to comply with those requirements. Furthermore, the
Trust Fund might not be able to comply due to lack of data.
Disposition of Certificates. Generally, capital gain or loss will be
recognized on a sale of Certificates in an amount equal to the difference
between the amount realized and the seller's tax basis in the Certificates sold.
A holder's tax basis in a Certificate will generally equal the holder's cost
increased by the holder's share of Trust Fund income (includible in income) and
decreased by any distributions received with respect to such Certificate. In
addition, both the tax basis in the Certificates and the amount realized on a
sale of a Certificate would include the holder's share of the Notes and other
liabilities of the Trust Fund. A holder acquiring Certificates at different
prices may be required to maintain a single aggregate adjusted tax basis in such
Certificates, and, upon sale or other disposition of some of the Certificates,
allocate a portion of such aggregate tax basis to the Certificates sold (rather
than maintaining a separate tax basis in each Certificate for purposes of
computing gain or loss on a sale of that Certificate).
Any gain on the sale of a Certificate attributable to the holder's
share of unrecognized accrued market discount on the Loans would generally be
treated as ordinary income to the holder and would give rise to special tax
reporting requirements. The Trust Fund does not expect to have any other assets
that would give rise to such special reporting requirements. Thus, to avoid
those special reporting requirements, the Trust Fund will elect to include
market discount in income as it accrues.
If a holder of a Certificate is required to recognize an aggregate
amount of income (not including income attributable to disallowed itemized
deductions described above) over the life of the Certificates that exceeds the
aggregate cash distributions with respect thereto, such excess will generally
give rise to a capital loss upon the retirement of the Certificates.
Allocations Between Transferors and Transferees. In general, the Trust
Fund's taxable income and losses will be determined monthly and the tax items
for a particular calendar month will be apportioned among the holders of
Certificates in proportion to the principal amount of Certificates owned by them
as of the close of the last day of such month. As a result, a holder purchasing
Certificates may be allocated tax items (which will affect its tax liability and
tax basis) attributable to periods before the actual transaction.
The use of such a monthly convention may not be permitted by existing
regulations. If a monthly convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the Trust Fund might be reallocated among the holders of Certificates. The
Trust Fund's method of allocation between transferors and transferees may be
revised to conform to a method permitted by future regulations.
Section 754 Election. In the event that a holder of a Certificate sells
its Certificates at a profit (loss), the purchasing holder of a Certificate will
have a higher (lower) basis in the Certificates than the selling holder of a
Certificate had. The tax basis of the Trust Fund's assets will not be adjusted
to reflect that higher (or lower) basis unless the Trust Fund were to file an
election under Section 754 of the Code. In order to avoid the administrative
complexities that would be involved in keeping accurate accounting records, as
well as potentially onerous information reporting requirements, the Trust Fund
will not make such election. As a result, holders of Certificates might be
allocated a greater or lesser amount of Trust Fund income than would be
appropriate based on their own purchase price for Certificates.
Administrative Matters. The Owner Trustee (as defined in the applicable
Prospectus Supplement) is required to keep or have kept complete and accurate
books of the Trust Fund. Such books will be maintained for financial reporting
and tax purposes on an accrual basis and the fiscal year of the Trust Fund will
be the calendar year. The Owner Trustee will file a partnership information
return (IRS Form 1065) with the IRS for each taxable year of the Trust Fund and
will report each holder's allocable share of items of Trust Fund income and
expense to holders and the IRS on Schedule K-1. The Trust Fund will provide the
Schedule K-l information to nominees that fail to provide the Trust Fund with
the information statement described below and such nominees will be required to
forward such information to the beneficial owners of the Certificates.
Generally, holders must file tax returns that are consistent with the
information return filed by the Trust Fund or be subject to penalties unless the
holder notifies the IRS of all such inconsistencies.
Under Section 6031 of the Code, any person that holds Certificates as a
nominee at any time during a calendar year is required to furnish the Trust Fund
with a statement containing certain information on the nominee, the beneficial
owners and the Certificates so held. Such information includes (i) the name,
address and taxpayer identification number of the nominee and (ii) as to each
beneficial owner (x) the name, address and identification number of such person,
(y) whether such person is a United States person, a tax-exempt entity or a
foreign government, an international organization, or any wholly owned agency or
instrumentality of either of the foregoing, and (z) certain information on
Certificates that were held, bought or sold on behalf of such person throughout
the year. In addition, brokers and financial institutions that hold Certificates
through a nominee are required to furnish directly to the Trust Fund information
as to themselves and their ownership of Certificates. A clearing agency
registered under Section 17A of the Exchange Act is not required to furnish any
such information statement to the Trust Fund. The information referred to above
for any calendar year must be furnished to the Trust Fund on or before the
following January 31. Nominees, brokers and financial institutions that fail to
provide the Trust Fund with the information described above may be subject to
penalties.
The Depositor will be designated as the tax matters partner in the
related Agreement and, as such, will be responsible for representing the holders
of Certificates in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years after the date on which the
partnership information return is filed. Any adverse determination following an
audit of the return of the Trust Fund by the appropriate taxing authorities
could result in an adjustment of the returns of the holders of Certificates,
and, under certain circumstances, a holder of a Certificate may be precluded
from separately litigating a proposed adjustment to the items of the Trust Fund.
An adjustment could also result in an audit of a holder's returns and
adjustments of items not related to the income and losses of the Trust Fund.
Tax Consequences to Foreign Holders of Certificates. It is not clear
whether the Trust Fund would be considered to be engaged in a trade or business
in the United States for purposes of federal withholding taxes with respect to
non-U.S. persons because there is no clear authority dealing with that issue
under facts substantially similar to those described herein. Although it is not
expected that the Trust Fund would be engaged in a trade or business in the
United States for such purposes, the Trust Fund will withhold as if it were so
engaged in order to protect the Trust Fund from possible adverse consequences of
a failure to withhold. The Trust Fund expects to withhold on the portion of its
taxable income that is allocable to foreign holders of Certificates pursuant to
Section 1446 of the Code, as if such income were effectively connected to a U.S.
trade or business, at a rate of 35% for foreign holders that are taxable as
corporations and 39.6% for all other foreign holders. Subsequent adoption of
Treasury regulations or the issuance of other administrative pronouncements may
require the Trust Fund to change its withholding procedures. In determining a
holder's withholding status, the Trust Fund may rely on IRS Form W-8, IRS Form
W-9 or the holder's certification of nonforeign status signed under penalties of
perjury.
The term "U.S. Person" means a citizen or resident of the United
States, a corporation or partnership, including an entity treated as a
corporation or partnership for U.S. federal income tax purposes created in the
United States or organized under the laws of the United States or any state
thereof or the District of Columbia (except, in the case of a partnership as
otherwise provided by regulations), an estate, the income of which is includible
in gross income for U.S. federal income tax purposes regardless of its source or
a trust whose administration is subject to the primary supervision of a United
States court and has one or more United States persons who have authority to
control all substantial decisions of the trust.
Each foreign holder might be required to file a U.S. individual or
corporate income tax return (including, in the case of a corporation, the branch
profits tax) on its share of the Trust Fund's income. Each foreign holder must
obtain a taxpayer identification number from the IRS and submit that number to
the Trust Fund on Form W-8 in order to assure appropriate crediting of the taxes
withheld. A foreign holder generally would be entitled to file with the IRS a
claim for refund with respect to taxes withheld by the Trust Fund taking the
position that no taxes were due because the Trust Fund was not engaged in a U.S.
trade or business. However, interest payments made (or accrued) to a holder of a
Certificate who is a foreign person generally will be considered guaranteed
payments to the extent such payments are determined without regard to the income
of the Trust Fund. If these interest payments are properly characterized as
guaranteed payments, then the interest will not be considered "portfolio
interest." As a result, holders of Certificates will be subject to United States
federal income tax and withholding tax at a rate of 30 percent, unless reduced
or eliminated pursuant to an applicable treaty. In such case, a foreign holder
would only be entitled to claim a refund for that portion of the taxes in excess
of the taxes that should be withheld with respect to the guaranteed payments.
Backup Withholding. Distributions made on the Certificates and proceeds
from the sale of the Certificates will be subject to a "backup" withholding tax
of 31% if, in general, the Certificateholder fails to comply with certain
identification procedures, unless the holder is an exempt recipient under
applicable provisions of the Code.
Taxation of Trust as FASIT
In the opinion of Brown & Wood LLP, special tax counsel to the Trust
Fund, if a FASIT election is made with respect to a Series of Securities, the
Trust Fund will be formed to qualify as a FASIT. The Small Business and Job
Protection Act of 1996 added Section 860H through 860L to the Code (the "FASIT
Provisions"), which provide for a new type of entity for federal income tax
purposes known as a "financial asset securitization investment trust" (a
"FASIT"). Although the FASIT provisions of the Code became effective on
September 1, 1997, no Treasury regulations or other administrative guidance have
been issued with respect for those provisions. Accordingly, definitive guidance
cannot be provided with respect to many aspects of the tax treatment of FASIT
Regular Securityholders. Investors should also note that the FASIT discussion
contained herein constitutes only a summary of the U.S. federal income tax
consequences to the holders of FASIT Securities. With respect to each Series of
FASIT Regular Securities, the related Prospectus Supplement will provide a
detailed discussion regarding the federal income tax consequences associated
with the particular transaction.
FASIT Securities will be classified as either FASIT Regular Securities,
which generally will be treated as debt for U.S. federal income tax purposes, or
FASIT Ownership Securities, which generally are not treated as debt for such
purposes, but rather as representing rights and responsibilities with respect to
the taxable income or loss of the related Series FASIT. The Prospectus
Supplement for each Series of Securities will indicate which Securities of such
Series will be designated as FASIT Regular Securities, and which, if any, will
be designated as FASIT Ownership Securities.
Qualification as a FASIT. The Trust Fund will qualify under the Code as
a FASIT in which FASIT Regular Securities (the "FASIT Regular Securities") and
the Ownership Interest Security (the "FASIT Ownership Security") will constitute
the "regular interests" and the "ownership interest," respectively, if:
(i) a FASIT election is in effect,
(ii) certain tests concerning (A) the composition of the FASIT's
assets and (B) the nature of the Securityholders' interests in
the FASIT are met on a continuing basis, and
(iii) the Trust Fund is not a regulated investment company as
defined in section 851(a) of the Code.
Asset Composition. In order for the Trust Fund to be eligible for FASIT
status, substantially all of the assets of the Trust Fund must consist of
"permitted assets" as of the close of the third month beginning after the
closing date and at all times thereafter (the "FASIT Qualification Test").
Permitted assets include:
(i) cash or cash equivalents,
(ii) debt instruments with fixed terms that would qualify as
regular interests if issued by a REMIC as defined in section
860D of the Code ("REMIC") (generally, instruments that
provide for interest at a fixed rate, a qualifying variable
rate, or a qualifying interest-only ("10") type rate),
(iii) foreclosure property,
(iv) certain hedging instruments (generally, interest and currency
rate swaps and credit enhancement contracts) that are
reasonably required to guarantee or hedge against the FASIT's
risks associated with being the obligor on FASIT interests,
(v) contract rights to acquire qualifying debt instruments or
qualifying hedging instruments,
(vi) FASIT regular interests, and
(vii) REMIC regular interests.
Permitted assets do not include any debt instruments issued by the holder of the
FASIT's ownership interest or by any person related to such holder.
Interest in a FASIT. In addition to the foregoing asset qualification
requirements, the interests in a FASIT also must meet certain requirements. All
of the interests in a FASIT must belong to either of the following: (i) one or
more classes of regular interests or (ii) a single class of ownership interest
that is held by a fully taxable domestic C Corporation.
A FASIT interest generally qualifies as a regular interest if:
(i) it is designated as a regular interest,
(ii) it has a stated maturity no greater than thirty years,
(iii) it entitles its holder to a specified principal amount,
(iv) the issue price of the interest does not exceed 125% of its
stated principal amount,
(v) the yield to maturity of the interest is less than the
applicable Treasury rate published by the IRS plus 5%, and
(vi) if it pays interest, such interest is payable at either (a) a
fixed rate with respect to the principal amount of the regular
interest or (b) a permissible variable rate with respect to
such principal amount. Permissible variable rates for FASIT
regular interests are the same as those for REMIC regular
interests (i.e., certain qualified floating rates and weighted
average rates).
Interest will be considered to be based on a permissible variable rate if
generally:
(i) such interest is unconditionally payable at least annually,
(ii) the issue price of the debt instrument does not exceed the
total noncontingent principal payments and
(iii) interest is based on a "qualified floating rates," an
"objective rate," a combination of a single fixed rate and one
or more "qualified floating rates," one "qualified inverse
floating rate," or a combination of "qualified floating rates"
that do not operate in a manner that significantly accelerates
or defers interest payments on such FASIT regular interest.
If an interest in a FASIT fails to meet one or more of the requirements
set out in clause (iii), (iv) or (v) in the immediately preceding paragraph, but
otherwise meets all requirements to be treated as a FASIT, it may still qualify
as a type of regular interest known as a "High-Yield Interest." In addition, if
an interest in a FASIT fails to meet the requirement of clause (vi), but the
interest payable on the interest consists of a specified portion of the interest
payments on permitted assets and that portion does not vary over the life of the
security, the interest will also qualify as a High-Yield Interest. A High-Yield
Interest may be held only by domestic C corporations that are fully subject to
corporate income tax ("Eligible Corporations"), other FASITs, and dealers in
securities who acquire such interests as inventory, rather than for investment.
In addition, holders of High-Yield Interests are subject to limitations on
offset of income derived from such interest. See "Certain Federal Income Tax
Consequences--Taxation of Trust as a FASIT--Treatment of High-Yield Interests."
Consequences of Disqualification. If the Trust Fund fails to comply
with one or more of the Code's ongoing requirements for FASIT status during any
taxable year, the Code provides that its FASIT status may be lost for that year
and thereafter. If FASIT status is lost, the treatment of the former FASIT and
interests therein for U.S. federal income tax purposes is uncertain. Although
the Code authorizes the Treasury to issue regulations that address situations
where a failure to meet the requirements for FASIT status occurs inadvertently
and in good faith, such regulations have not yet been issued. It is possible
that disqualification relief might be accompanied by sanctions, such as the
imposition of a corporate tax on all or a portion of the FASIT's income for the
period of time in which the requirements for FASIT status are not satisfied.
Nevertheless, in the opinion of Tax Counsel, if the Trust Fund fails to qualify
as a FASIT it will qualify as a partnership. See "Taxation of the Trust Fund as
Partnership."
Treatment of FASIT Regular Securities
Payments received by holders of FASIT Regular Securities generally will
be accorded the same tax treatment under the Code as payments received on other
taxable debt instruments. Holders of FASIT Regular Securities must report income
from such Securities under an accrual method of accounting, even if they
otherwise would have used the cash receipts and disbursements method. Except in
the case of FASIT Regular Securities issued with original issue discount,
interest paid or accrued on a FASIT Regular Security generally will be treated
as ordinary income to the Holder and a principal payment on such Security will
be treated as a return of capital to the extent that the Securityholder's basis
is allocable to that payment. FASIT Regular Securities issued with original
issue discount or acquired with market discount or premium generally will treat
interest and principal payments on such Securities in the same manner described
for Senior Securities. See "Taxation of Trust as Partnership--Treatment of
Senior Securities--OID, Indexed Securities" below. High-Yield Securities may be
held only by Eligible Corporations, other FASITs, and certain securities
dealers. Holders of High-Yield Securities are subject to limitations on their
ability to use current losses or net operating loss carryforwards or carrybacks
to offset any income derived from those Securities.
If the FASIT Regular Security is sold, the Securityholder generally
will recognize gain or loss upon the sale in the manner described below for
Offered Senior Securities. See "Taxation of Trust as Partnership--Treatment of
Senior Securities--Sale or Other Disposition." In addition, if a FASIT regular
interest becomes wholly or partially worthless as a result of losses on the
Underlying Assets, certain holders of such Security may be allowed to deduct the
loss sustained.
Treatment of High-Yield Interests
High-Yield Interests are subject to special rules regarding the
eligibility of holders of such interest, and the ability of such holders to
offset income derived from their FASIT Security with losses. High-Yield
Interests only may be held by Eligible Corporations, other FASITs, and dealers
in securities who acquire such interests as inventory. If a securities dealer
(other than an Eligible Corporation) initially acquires a High-Yield Interest as
inventory, but later begins to hold it for investment, the dealer will be
subject to an excise tax equal to the income from the High-Yield Interest
multiplied by the highest corporate income tax rate. In addition, transfers of
High-Yield Interests to disqualified holders will be disregarded for federal
income tax purposes, and the transferor will continue to be treated as the
holder of the High-Yield Interest.
The holder of a High-Yield Interest may not use non-FASIT current
losses or net operating loss carryforwards or carrybacks to offset any income
derived from the High-Yield Interest, for either regular federal income tax
purposes or for alternative minimum tax purposes. In addition, the FASIT
provisions contain an anti-abuse rule that imposes corporate income tax on
income derived from a FASIT Regular Security that is held by a pass-through
entity (other than another FASIT) that issues debt or equity securities backed
by the FASIT Regular Security and that have the same features as High-Yield
Interests.
Tax Treatment of FASIT Ownership Securities
A FASIT Ownership Security represents the residual equity interest in a
FASIT. As such, the holder of a FASIT Ownership Security determines its taxable
income by taking into account all assets, liabilities, and items of income,
gain, deduction, loss, and credit of a FASIT. In general, the character of the
income to the holder of a FASIT Ownership Interest will be the same as the
character of such income to the FASIT, except that any tax-exempt interest
income taken into account by the holder of a FASIT Ownership Interest is treated
as ordinary income. In determining that taxable income, the holder of a FASIT
Ownership Security must determine the amount of interest, original issue
discount, market discount, and premium recognized with respect to the FASIT's
assets and the FASIT Regular Securities issued by the FASIT according to a
constant yield methodology and under an accrual method of accounting. In
addition, holders of FASIT Ownership Securities are subject to the same
limitations on their ability to use losses to offset income from their FASIT
Regular Securities as are holders of High-Yield Interest. See "Certain Federal
Income Tax Consequences--FASIT Regular Securities--Tax Treatment of FASIT
Regular Securities-Treatment of High-Yield Interests."
Rules similar to the wash sale rules applicable to REMIC residual
securities also will apply to FASIT Ownership Securities. Accordingly, losses on
dispositions of a FASIT Ownership Security generally will be disallowed where
within six months before or after the disposition, the seller of such Security
acquires any other FASIT Ownership Security that is economically comparable to a
FASIT Ownership Security. In addition, if any security that is sold or
contributed to a FASIT by the holders of the related FASIT Ownership Security
was required to be marked-to-market under section 475 of the Code by such
holder, then section 475 of the Code will continue to apply to such securities,
except that the amount realized under the mark-to-market rules or the
securities' value after applying special valuation rules contained in the FASIT
provisions. Those special valuation rules generally require that the value of
debt instruments that are not traded on an established securities market be
determined by calculating the present value of the reasonably expected payments
under the instrument using a discount rate of 120% of the applicable Federal
rate, compounded semi-annually.
The holder of a FASIT Ownership Security will be subject to a tax equal
to 100% of the net income derived by the FASIT from any "prohibited
transactions." Prohibited transactions include (i) the receipt of income derived
from assets that are not permitted assets, (ii) certain dispositions of
permitted assets, (iii) the receipt of any income derived from any loan
originated by a FASIT, and (iv) in certain cases, the receipt of income
representing a servicing fee or other compensation. Any Series for which a FASIT
election is made generally will be structured in order to avoid application of
the prohibited transaction tax.
State Tax Considerations
In addition to the federal income tax consequences described in
"Federal Income Tax Consequences," potential investors should consider the state
and local income tax consequences of the acquisition, ownership, and disposition
of the Securities. State and local income tax law may differ substantially from
the corresponding federal law, and this discussion does not purport to describe
any aspect of the income tax laws of any state or locality. Therefore, potential
investors should consult their own tax advisors with respect to the various
state and local tax consequences of an investment in the Securities.
ERISA Considerations
General
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and the Code impose certain requirements on employee benefit plans
and certain other retirement plans and arrangements (including, but not limited
to, individual retirement accounts and annuities), as well as on collective
investment funds and certain separate and general accounts in which such plans
or arrangements are invested (all of which are hereinafter referred to as a
"Plan"). Generally, ERISA applies to investments made by Plans. Among other
things, ERISA requires that the assets of Plans be held in trust and that the
trustee, or other duly authorized fiduciary, have exclusive authority and
discretion to manage and control the assets of such Plans. ERISA also imposes
certain duties on persons who are fiduciaries of Plans. Under ERISA, any person
who exercises any authority or control respecting the management or disposition
of the assets of a Plan is considered to be a fiduciary of such Plan (subject to
certain exceptions not here relevant).
Any Plan fiduciary or other person which proposes to cause a Plan to
acquire any of the Securities should determine whether such an investment is
permitted under the governing Plan instruments and is prudent and appropriate
for the Plan in view of its overall investment policy and the composition and
diversification of its portfolio. More generally, any Plan fiduciary which
proposes to cause a Plan to acquire any of the Securities or any other person
proposing to use the assets of a Plan to acquire any of the Securities should
consult with its counsel with respect to the potential consequences under ERISA
and the Code (including under the prohibited transactions rules described below)
of the acquisition and ownership of such Securities.
Certain employee benefit plans, such as governmental plans and church
plans (if no election has been made under section 410(d) of the Code), are not
subject to the restrictions of ERISA, and assets of such plans may be invested
in the Securities without regard to the ERISA considerations described below,
subject to other applicable federal and state law. However, any such
governmental or church plan which is qualified under section 401(a) of the Code
and exempt from taxation under section 501(a) of the Code is subject to the
prohibited transaction rules set forth in section 503 of the Code.
Prohibited Transactions
General
Sections 406 and 407 of ERISA and section 4975 of the Code prohibit
certain transactions involving the assets of a Plan and "disqualified persons"
(within the meaning of the Code) and "parties in interest" (within the meaning
of ERISA; collectively "Parties in Interest") who have certain specified
relationships to the Plan, unless an exemption applies (see below). Therefore, a
Plan fiduciary or any other person using the assets of a Plan considering an
investment in the Securities should also consider whether such an investment
might constitute or give rise to a prohibited transaction under ERISA or the
Code, or whether there is an applicable exemption.
Plan Asset Regulation
The United States Department of Labor ("DOL") has issued final
regulations defining the "assets" of a Plan for purposes of ERISA and the
prohibited transaction provisions of the Code (29 C.F.R. ss.ss. 2510.3-101, the
"Plan Asset Regulation"). The Plan Asset Regulation describes the circumstances
under which the assets of an entity in which a Plan invests will be considered
to be "plan assets" so that any person who exercises control over such assets
would be subject to ERISA's fiduciary standards. Under the Plan Asset
Regulation, generally when a Plan invests in another entity, the Plan's assets
do not include, solely by reason of such investment, any of the underlying
assets of the entity. However, the Plan Asset Regulation provides that, if a
Plan acquires an "equity interest" in an entity that is neither a
"publicly-offered security" (defined as a security which is widely held, freely
transferable and registered under the Securities Exchange Act of 1934, as
amended) nor a security issued by an investment company registered under the
Investment Company Act of 1940, as amended, the assets of the entity will be
treated as assets of the Plan unless certain exceptions apply. If the Securities
were deemed to be equity interests and no statutory, regulatory or
administrative exemption applies, the Trust Fund could be considered to hold
plan assets by reason of a Plan's investment in the Securities. Such plan assets
would include an undivided interest in any assets held by the Trust Fund. In
such an event, the Trustee and other persons, in providing services with respect
to the Trust Fund's assets, may be Parties in Interest with respect to such
Plans, subject to the fiduciary responsibility provisions of ERISA, including
the prohibited transaction provisions with respect to transactions involving the
Trust Fund's assets.
Under the Plan Asset Regulation, the term "equity interest" is defined
as any interest in an entity other than an instrument that is treated as
indebtedness under "applicable local law" and which has no "substantial equity
features." Although the Plan Assets Regulation is silent with respect to the
question of which law constitutes "applicable local law" for this purpose, the
DOL has stated that these determinations should be made under the state law
governing interpretation of the instrument in question. In the preamble to the
Plan Assets Regulation, the DOL declined to provide a precise definition of what
features are equity features or the circumstances under which such features
would be considered "substantial," noting that the question of whether a plan's
interest has substantial equity features is an inherently factual one, but that
in making a determination it would be appropriate to take into account whether
the equity features are such that a Plan's investment would be a practical
vehicle for the indirect provision of investment management services. The
Prospectus Supplement issued in connection with a particular Series of
Securities will indicate the anticipated treatment of these Securities under the
Plan Asset Regulation.
Exemption 83-1
In Prohibited Transaction Class Exemption 83-1 ("PTE 83-1"), the DOL
exempted from ERISA's prohibited transaction rules certain transactions relating
to the operation of residential mortgage pool investment trusts and the
purchase, sale and holding of "mortgage pool pass-through certificates" in the
initial issuance of such certificates. PTE 83-1 permits, subject to certain
conditions, transactions which might otherwise be prohibited between Plans and
Parties in Interest with respect to those Plans related to the origination,
maintenance and termination of mortgage pools consisting of mortgage loans
secured by first or second mortgages or deeds of trust on single-family
residential property, and the acquisition and holding of certain mortgage pool
pass-through certificates representing an interest in such mortgage pools by
Plans. If the general conditions (discussed below) of PTE 83-1 are satisfied,
investments by a Plan in Certificates that represent interests in a Pool
consisting of Loans ("Single Family Securities") will be exempt from the
prohibitions of ERISA Sections 406(a) and 407 (relating generally to
transactions with Parties in Interest who are not fiduciaries) if the Plan
purchases the Single Family Securities at no more than fair market value and
will be exempt from the prohibitions of ERISA Sections 406(b)(1) and (2)
(relating generally to transactions with fiduciaries) if, in addition, the
purchase is approved by an independent fiduciary, no sales commission is paid to
the pool sponsor, the Plan does not purchase more than 25% of all Single Family
Securities, and at least 50% of all Single Family Securities are purchased by
persons independent of the pool sponsor or pool trustee. PTE 83-1 does not
provide an exemption for transactions involving Subordinate Securities.
Accordingly, unless otherwise provided in the related Prospectus Supplement, no
transfer of a Subordinate Security or a Security which is not a Single Family
Security may be made to a Plan pursuant to this exemption.
The discussion in this and the next succeeding paragraph applies only
to Single Family Securities. The Depositor believes that, for purposes of PTE
83-1, the term "mortgage pool pass-through certificate" would include Securities
issued in a Series consisting of only a single class of Securities provided that
the Securities evidence the beneficial ownership of both a specified percentage
of future interest payments (greater than 0%) and a specified percentage of
future principal payments (greater than 0%) on the Loans. It is not clear
whether a class of Securities that evidences the beneficial ownership in a Trust
Fund divided into Loan groups, beneficial ownership of a specified percentage of
interest payments only or principal payments only, or a notional amount of
either principal or interest payments, or a class of Securities entitled to
receive payments of interest and principal on the Loans only after payments to
other classes or after the occurrence of certain specified events would be a
"mortgage pass-through certificate" for purposes of PTE 83-1.
PTE 83-1 sets forth three general conditions which must be satisfied
for any transaction to be eligible for exemption:
(i) the maintenance of a system of insurance or other protection
for the pooled mortgage loans and property securing such
loans, and for indemnifying Securityholders against reductions
in pass-through payments due to property damage or defaults in
loan payments in an amount not less than the greater of one
percent of the aggregate principal balance of all covered
pooled mortgage loans or the principal balance of the largest
covered pooled mortgage loan;
(ii) the existence of a pool trustee who is not an affiliate of
the pool sponsor; and
(iii) a limitation on the amount of the payment retained by the pool
sponsor, together with other funds inuring to its benefit, to
not more than adequate consideration for selling the mortgage
loans plus reasonable compensation for services provided by
the pool sponsor to the Pool.
The Depositor believes that the first general condition referred to
above will be satisfied with respect to the Single Family Securities in a Series
if any Reserve Account, subordination by shifting of interests, pool insurance
or other form of credit enhancement described under "Credit Enhancement" herein
(such reserve account, subordination, pool insurance or other form of credit
enhancement being the system of insurance or other protection referred to above)
with respect to such Single Family Securities is maintained in an amount not
less than the greater of one percent of the aggregate principal balance of the
Loans or the principal balance of the largest Loan. See "Description of the
Securities" herein. In the absence of a ruling that the system of insurance or
other protection with respect to a Series of Single Family Securities satisfies
the first general condition referred to above, there can be no assurance that
these features will be so viewed by the DOL. The Trustee will not be affiliated
with the Depositor.
Each Plan fiduciary or other person who is responsible for making the
investment decisions whether to purchase or commit to purchase and to hold
Single Family Securities must make its own determination as to whether the first
and third general conditions, and the specific conditions described briefly in
the preceding paragraph, of PTE 83-1 have been satisfied, or as to the
availability of any other prohibited transaction exemptions.
The Underwriter's Exemption
The DOL has granted to J.P. Morgan Securities Inc. an administrative
exemption (Prohibited Transaction Exemption 90-23, 55 Fed. Reg. 20545 (1990)
(the "Exemption") from certain of the prohibited transaction rules of ERISA and
the related excise tax provisions of Section 4975 of the Code with respect to
the initial purchase, the holding and the subsequent resale by Plans of
certificates in pass-through trusts that consist of certain receivables, loans,
and other obligations that meet the conditions and requirements of the
Exemption. Identical exemptions have been granted to other underwriters. If J.P.
Morgan Securities Inc. is not the underwriter of a Series of Certificates, the
related Prospectus Supplement will indicate whether the underwriter of that
Series has received such an exemption.
Among the conditions that must be satisfied for the Exemption to apply
are the following:
(1) the acquisition of the Certificates by a Plan is on terms
(including the price for such Securities) that are at least as
favorable to the Plan as they would be in an arm's length transaction
with an unrelated party;
(2) the rights and interests evidenced by the Certificates
acquired by the Plan are not subordinated to the rights and interests
evidenced by other certificates of the Trust Fund;
(3) the Certificates acquired by the Plan have received a
rating at the time of such acquisition that is one of the three highest
generic rating categories from one of Standard & Poor's Ratings Group
("S&P"), Moody's Investors Service, Inc. ("Moody's"), Duff & Phelps
Inc. ("Duff & Phelps") or Fitch IBCA, Inc. ("Fitch") (each, a "Rating
Agency");
(4) the Trustee must not be an affiliate of any other member
of the Restricted Group (as defined below);
(5) the sum of all payments made to and retained by the
underwriter in connection with the distribution of the Certificates
represents not more than reasonable compensation for underwriting such
Certificates; the sum of all payments made to and retained by the
Depositor pursuant to the assignment of the Trust Fund Assets to the
Trust Fund represents not more than the fair market value of such Trust
Fund Assets; the sum of all payments made to and retained by the Master
Servicer and any other servicer represents not more than reasonable
compensation for such person's services under the related Agreement and
reimbursements of such person's reasonable expenses in connection
therewith; and
(6) the Plan investing in the Certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the
Securities and Exchange Commission under the Securities Act of 1933, as
amended.
The Trust Fund must also meet the following requirements:
(i) the corpus of the Trust Fund must consist solely of assets
of the type that have been included in other investment pools;
(ii) certificates evidencing interests in such other
investment pools must have been rated in one of the three highest
rating categories of S&P, Moody's, Fitch or Duff & Phelps for at least
one year prior to the Plan's acquisition of the Securities; and
(iii) certificates evidencing interests in such other
investment pools must have been purchased by investors other than Plans
for at least one year prior to any Plan's acquisition of the
Securities.
On July 21, 1997, the DOL published in the Federal Register an
amendment to the Exemption, which extends exemptive relief to certain
mortgage-backed and asset-backed securities transactions using
pre-funding accounts for trusts issuing pass-through certificates. The
amendment generally allows mortgage loans or other secured receivables
(the "Obligations") supporting payments to certificateholders, and
having a value equal to no more than twenty-five percent (25%) of the
total principal amount of the certificates being offered by the trust,
to be transferred to the trust within a 90-day or three-month period
following the closing date (the "Pre-Funding Period"), instead of
requiring that all such Obligations be either identified or transferred
on or before the Closing Date. The relief is available when the
following conditions are met:
(1) The ratio of the amount allocated to the
pre-funding account to the total principal amount of the
certificates being offered (the "Pre-Funding Limit") must not
exceed twenty-five percent (25%).
(2) All Obligations transferred after the Closing
Date (the "Additional Obligations") must meet the same terms
and conditions for eligibility as the original Obligations
used to create the trust, which terms and conditions have been
approved by a Rating Agency.
(3) The transfer of such Additional Obligations to
the trust during the Pre-Funding Period must not result in the
certificates to be covered by the Exemption receiving a lower
credit rating from a Rating Agency upon termination of the
Pre-Funding Period than the rating that was obtained at the
time of the initial issuance of the certificates by the trust.
(4) Solely as a result of the use of pre-funding, the
weighted average annual percentage interest rate for all of
the Obligations in the trust at the end of the Pre-Funding
Period must not be more than 100 basis points lower than the
average interest rate for the Obligations transferred to the
trust on the Closing Date.
(5) In order to insure that the characteristics of
the Additional Obligations are substantially similar to the
original Obligations which were transferred to the Trust Fund:
(i) the characteristics of the Additional
Obligations must be monitored by an insurer or other
credit support provider that is independent of the
depositor; or
(ii) an independent accountant retained by
the depositor must provide the depositor with a
letter (with copies provided to each Rating Agency
rating the certificates, the related underwriter and
the related trustee) stating whether or not the
characteristics of the Additional Obligations conform
to the characteristics described in the related
prospectus or prospectus supplement and/or pooling
and servicing agreement. In preparing such letter,
the independent accountant must use the same type of
procedures as were applicable to the Obligations
transferred to the trust as of the Closing Date.
(6) The Pre-Funding Period must end no later than
three months or 90 days after the Closing Date or earlier in
certain circumstances if the pre-funding account falls below
the minimum level specified in the pooling and servicing
agreement or an Event of Default occurs.
(7) Amounts transferred to any pre-funding account
and/or capitalized interest account used in connection with
the pre-funding may be invested only in certain permitted
investments ("Permitted Investments").
(8) The related prospectus or prospectus supplement
must describe:
(i) any pre-funding account and/or
capitalized interest account used in connection
with a pre-funding account;
(ii) the duration of the Pre-Funding Period;
(iii) the percentage and/or dollar amount of
the Pre-Funding Limit for the trust; and
(iv) that the amounts remaining in the
pre-funding account at the end of the Pre-Funding
Period will be remitted to certificateholders as
repayments of principal.
(9) The related pooling and servicing agreement must describe
the Permitted Investments for the pre-funding account and/or
capitalized interest account and, if not disclosed in the related
prospectus or prospectus supplement, the terms and conditions for
eligibility of Additional Obligations.
Moreover, the Exemption provides relief from certain
self-dealing/conflict of interest prohibited transactions that may occur when
any person who has discretionary authority or renders investment advice with
respect to the investment of plan assets causes a Plan to acquire certificates
in a trust, provided that, among other requirements:
(i) such person (or its affiliate) is an obligor with respect to
five percent or less of the fair market value of the
obligations or receivables contained in the trust;
(ii) the Plan is not a plan with respect to which any member of the
Restricted Group (as defined below) is the "plan sponsor" (as
defined in Section 3(16)(B) of ERISA);
(iii) 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 (as defined below)
and at least fifty percent of the aggregate interest in the
trust fund is acquired by persons independent of the
Restricted Group;
(iv) a 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; and
(v) immediately after the acquisition, no more than twenty-five
percent of the assets of any Plan with respect to which such
person has discretionary authority or renders investment
advice are invested in certificates representing an interest
in one or more trusts containing assets sold or serviced by
the same entity.
The Exemption does not apply to Plans sponsored by the Seller, the Depositor,
J.P. Morgan and the other underwriters set forth in the related Prospectus
Supplement, the Trustee, the Master Servicer, any Sub-Servicer, the Pool
Insurer, any obligor with respect to the Trust Fund Asset included in the Trust
Fund constituting more than five percent of the aggregate unamortized principal
balance of the assets in the Trust Fund, or any affiliate of any of such parties
(the "Restricted Group").
The Exemption may apply to the acquisition, holding and transfer of the
Certificates by Plans if all of the conditions of the Exemption are met,
including those within the control of the investor. As of the date hereof, there
is no single Trust Fund Asset included in the Trust Fund that constitutes more
than five percent of the aggregate unamortized principal balance of the assets
of the Trust Fund.
Insurance Company Purchasers
Purchasers that are insurance companies should consult with their legal
advisors with respect to the applicability of Prohibited Transaction Class
Exemption ("PTE") 95-60, regarding transactions by insurance company general
accounts. In addition to any exemption that may be available under PTE 95-60 for
the purchase and holding of Securities by an insurance company general account,
the Small Business Job Protection Act of 1996 added a new Section 401(c) to
ERISA, which provides certain exemptive relief from the provisions of Part 4 of
Title I of ERISA and Section 4975 of the Code, including the prohibited
transaction restrictions imposed by ERISA and the Code, for transactions
involving an insurance company general account. Pursuant to Section 401(c) of
ERISA, the DOL published proposed regulations on December 22, 1997, but the
required final regulations (the "401(c) Regulations") have not been issued as of
the date thereof. The 401(c) Regulations which are to provide guidance for the
purpose of determining, in cases where insurance policies supported by an
insurer's general account are issued to or for the benefit of a Plan on or
before December 31, 1998, which general account assets constitute plan assets.
Section 401(c) of ERISA generally provides that, until the date which is 18
months after the 401(c) Regulations become final, no person shall be subject to
liability under Part 4 of Title I of ERISA and Section 4975 of the Code on the
basis of a claim that the assets of an insurance company general account
constitute plan assets, unless (i) as otherwise provided by the Secretary of
Labor in the 401(c) Regulations to prevent avoidance of the regulations or (ii)
an action is brought by the Secretary of Labor for certain breaches of fiduciary
duty which would also constitute a violation of federal or state criminal law.
Any assets of an insurance company general account which support insurance
policies issued to a Plan after December 31, 1998 or issued to Plans on or
before December 31, 1998 for which the insurance company does not comply with
the 401(c) Regulations may be treated as plan assets. In addition, because
Section 401(c) does not relate to insurance company separate accounts, separate
account assets are still treated as plan assets of any Plan invested in such
separate account. Insurance companies contemplating the investment of general
account assets in the Securities should consult with their legal counsel with
respect to the applicability of Section 401(c) of ERISA, including the general
account's ability to continue to hold the Securities after the date which is 18
months after the date the 401(c) Regulations become final.
Consultation with Counsel
There can be no assurance that the Exemption or any other DOL exemption
will apply with respect to any particular Plan that acquires the Securities or,
even if all of the conditions specified therein were satisfied, that the
exemption would apply to all transactions involving a Trust Fund. Prospective
Plan investors should consult with their legal counsel concerning the impact of
ERISA and the Code and the potential consequences to their specific
circumstances prior to making an investment in the Securities.
Any fiduciary or other investor of plan assets that proposes to acquire
or hold Securities on behalf of a Plan or with plan assets should consult with
its counsel with respect to the potential applicability of the fiduciary
responsibility provisions of ERISA and the prohibited transaction provisions of
ERISA and Section 4975 of the Code to the proposed investment and the Exemption
and the availability of exemptive relief under any class exemption.
Legal Investment
The Prospectus Supplement for each series of Securities will specify
which, if any, of the classes of Securities offered thereby constitute "mortgage
related securities" for purposes of the Secondary Mortgage Market Enhancement
Act of 1984 ("SMMEA"). Classes of Securities that qualify as "mortgage related
securities" will be legal investments for persons, trusts, corporations,
partnerships, associations, business trusts, and business entities (including
depository institutions, life insurance companies and pension funds) created
pursuant to or existing under the laws of the United States or of any state
(including the District of Columbia and Puerto Rico) whose authorized
investments are subject to state regulations to the same extent as, under
applicable law, obligations issued by or guaranteed as to principal and interest
by the United States or any such entities. Under SMMEA, if a state enacts
legislation prior to October 4, 1991 specifically limiting the legal investment
authority of any such entities with respect to "mortgage related securities,"
securities will constitute legal investments for entities subject to such
legislation only to the extent provided therein. Approximately twenty-one states
adopted such legislation prior to the October 4, 1991 deadline. SMMEA provides,
however, that in no event will the enactment of any such legislation affect the
validity of any contractual commitment to purchase, hold or invest in
securities, or require the sale or other disposition of securities, so long as
such contractual commitment was made or such securities were acquired prior to
the enactment of such legislation.
SMMEA also amended the legal investment authority of
federally-chartered depository institutions as follows: federal savings and loan
associations and federal savings banks may invest in, sell or otherwise deal in
Securities without limitations as to the percentage of their assets represented
thereby, federal credit unions may invest in mortgage related securities, and
national banks may purchase securities for their own account without regard to
the limitations generally applicable to investment securities set forth in 12
U.S.C. 24 (Seventh), subject in each case to such regulations as the applicable
federal authority may prescribe. In this connection, federal credit unions
should review the National Credit Union Administration ("NCUA") Letter to Credit
Unions No. 96, as modified by Letter to Credit Unions No. 108, which includes
guidelines to assist federal credit unions in making investment decisions for
mortgage related securities and the NCUA's regulation "Investment and Deposit
Activities" (12 C.F.R. Part 703), which sets forth certain restrictions on
investment by federal credit unions in mortgage related securities (in each case
whether or not the class of Securities under consideration for purchase
constituted a "mortgage related security").
All depository institutions considering an investment in the Securities
(whether or not the class of Securities under consideration for purchase
constitutes a "mortgage related security") should review the Federal Financial
Institutions Examination Council's Supervisory Policy Statement on the
Securities Activities (to the extent adopted by their respective regulators)
(the "Policy Statement") setting forth, in relevant part, certain securities
trading and sales practices deemed unsuitable for an institution's investment
portfolio, and guidelines for (and restrictions on) investing in mortgage
derivative products, including "mortgage related securities," which are
"high-risk mortgage securities" as defined in the Policy Statement. According to
the Policy Statement, such "high-risk mortgage securities" include securities
such as Securities not entitled to distributions allocated to principal or
interest, or Subordinated Securities. Under the Policy Statement, it is the
responsibility of each depository institution to determine, prior to purchase
(and at stated intervals thereafter), whether a particular mortgage derivative
product is a "high-risk mortgage security," and whether the purchase (or
retention) of such a product would be consistent with the Policy Statement.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to "prudent investor" provisions which may restrict or prohibit investment in
securities which are not "interest bearing" or "income paying."
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase Securities or to purchase
Securities representing more than a specified percentage of the investor's
assets. Investors should consult their own legal advisors in determining whether
and to what extent the Securities constitute legal investments for such
investors.
Method of Distribution
The Securities offered hereby and by the related Prospectus Supplement
will be offered in Series. The distribution of the Securities may be effected
from time to time in one or more transactions, including negotiated
transactions, at a fixed public offering price or at varying prices to be
determined at the time of sale or at the time of commitment therefor. If so
specified in the related Prospectus Supplement, the Securities will be
distributed in a firm commitment underwriting, subject to the terms and
conditions of the underwriting agreement, by J.P. Morgan Securities Inc. ("J.P.
Morgan"), an affiliate of the Depositor, acting as underwriter with other
underwriters, if any, named therein. In such event, the Prospectus Supplement
may also specify that the underwriters will not be obligated to pay for any
Securities agreed to be purchased by purchasers pursuant to purchase agreements
acceptable to the Depositor. In connection with the sale of Securities,
underwriters may receive compensation from the Depositor or from purchasers of
Securities in the form of discounts, concessions or commissions. The Prospectus
Supplement will describe any such compensation paid by the Depositor.
Alternatively, the Prospectus Supplement may specify that Securities
will be distributed by J.P. Morgan acting as agent or in some cases as principal
with respect to Securities that it has previously purchased or agreed to
purchase. If J.P. Morgan acts as agent in the sale of Securities, J.P. Morgan
will receive a selling commission with respect to such Securities, depending on
market conditions, expressed as a percentage of the aggregate principal balance
or notional amount of such Securities as of the Cut-off Date. The exact
percentage for each Series of Securities will be disclosed in the related
Prospectus Supplement. To the extent that J.P. Morgan elects to purchase
Securities as principal, J.P. Morgan may realize losses or profits based upon
the difference between its purchase price and the sales price. The Prospectus
Supplement with respect to any Series offered other than through underwriters
will contain information regarding the nature of such offering and any
agreements to be entered into between the Depositor and purchasers of Securities
of such Series.
The Depositor will indemnify J.P. Morgan and any underwriters against
certain civil liabilities, including liabilities under the Securities Act of
1933, or will contribute to payments J.P. Morgan and any underwriters may be
required to make in respect thereof.
Securities will be sold primarily to institutional investors.
Purchasers of Securities, including dealers, may, depending on the facts and
circumstances of such purchases, be deemed to be "underwriters" within the
meaning of the Securities Act of 1933 in connection with reoffers and sales by
them of Securities. Certificateholders should consult with their legal advisors
in this regard prior to any such reoffer or sale.
As to each Series of Securities, only those classes rated in an
investment grade rating category by any Rating Agency will be offered hereby.
Any non-investment grade class may be initially retained by the Depositor, and
may be sold by the Depositor at any time in private transactions.
Legal Matters
The validity of the Securities of each Series, including certain
federal income tax consequences with respect thereto, will be passed upon for
the Depositor by Brown & Wood LLP or other counsel identified in the Prospectus
Supplement.
Financial Information
A new Trust Fund will be formed with respect to each Series of
Securities and no Trust Fund will engage in any business activities or have any
assets or obligations prior to the issuance of the related Series of Securities.
Accordingly, no financial statements with respect to any Trust Fund will be
included in this Prospectus or in the related Prospectus Supplement.
Rating
It is a condition to the issuance of the Securities of each Series
offered hereby and by the Prospectus Supplement that they shall have been rated
in one of the four highest rating categories by the nationally recognized
statistical rating agency or agencies (each, a "Rating Agency") specified in the
related Prospectus Supplement.
Any such rating would be based on, among other things, the adequacy of
the value of the Trust Fund Assets and any credit enhancement with respect to
such class and will reflect such Rating Agency's assessment solely of the
likelihood that holders of a class of Securities of such class will receive
payments to which such Securityholders are entitled under the related Agreement.
Such rating will not constitute an assessment of the likelihood that principal
prepayments on the related Loans will be made, the degree to which the rate of
such prepayments might differ from that originally anticipated or the likelihood
of early optional termination of the Series of Securities. Such rating should
not be deemed a recommendation to purchase, hold or sell Securities, inasmuch as
it does not address market price or suitability for a particular investor. Each
security rating should be evaluated independently of any other security rating.
Such rating will not address the possibility that prepayment at higher or lower
rates than anticipated by an investor may cause such investor to experience a
lower than anticipated yield or that an investor purchasing a Security at a
significant premium might fail to recoup its initial investment under certain
prepayment scenarios.
There is also no assurance that any such rating will remain in effect
for any given period of time or that it may not be lowered or withdrawn entirely
by the Rating Agency in the future if in its judgment circumstances in the
future so warrant. In addition to being lowered or withdrawn due to any erosion
in the adequacy of the value of the Trust Fund Assets or any credit enhancement
with respect to a Series, such rating might also be lowered or withdrawn among
other reasons, because of an adverse change in the financial or other condition
of a credit enhancement provider or a change in the rating of such credit
enhancement provider's long term debt.
The amount, type and nature of credit enhancement, if any, established
with respect to a Series of Securities will be determined on the basis of
criteria established by each Rating Agency rating classes of such Series. Such
criteria are sometimes based upon an actuarial analysis of the behavior of
mortgage loans in a larger group. Such analysis is often the basis upon which
each Rating Agency determines the amount of credit enhancement required with
respect to each such class. There can be no assurance that the historical data
supporting any such actuarial analysis will accurately reflect future experience
nor any assurance that the data derived from a large pool of mortgage loans
accurately predicts the delinquency, foreclosure or loss experience of any
particular pool of Loans. No assurance can be given that values of any
Properties have remained or will remain at their levels on the respective dates
of origination of the related Loans. If the residential real estate markets
should experience an overall decline in property values such that the
outstanding principal balances of the Loans in a particular Trust Fund and any
secondary financing on the related Properties become equal to or greater than
the value of the Properties, the rates of delinquencies, foreclosures and losses
could be higher than those now generally experienced in the mortgage lending
industry. In additional, adverse economic conditions (which may or may not
affect real property values) may affect the timely payment by mortgagors of
scheduled payments of principal and interest on the Loans and, accordingly, the
rates of delinquencies, foreclosures and losses with respect to any Trust Fund.
To the extent that such losses are not covered by credit enhancement, such
losses will be borne, at least in part, by the holders of one or more classes of
the Securities of the related Series.
Index of Defined Terms
Term Page
- ---- ----
1986 Act...............................................................89
401(c) Regulations....................................................117
Accrual Securities.....................................................29
Agreement...............................................................8
Amortizable Bond Premium Regulations...................................90
APR....................................................................13
Available Funds........................................................29
balloon payment........................................................10
Belgian Cooperative....................................................41
beneficial owner.......................................................39
BIF....................................................................55
Book-Entry Securities..................................................39
borrower...............................................................78
Buydown Fund...........................................................10
Buydown Loans..........................................................10
Calculation Agent......................................................36
Capitalized Interest Account...........................................58
Cash Flow Bond Method..................................................97
Cedelbank..............................................................39
Cedelbank Participants.................................................41
CERCLA.................................................................72
Charter Act............................................................16
Claimable Amount.......................................................83
Class Security Balance.................................................29
Closed-End Loans........................................................9
CMO's..................................................................20
Code...................................................................84
COFI Securities........................................................38
Collateral Value.......................................................13
Combined Loan-to-Value Ratio...........................................13
Commodity Indexed Securities...........................................28
companion classes......................................................34
Components.............................................................33
Contingent Regulations.................................................87
contracts..............................................................75
Contracts..............................................................12
Cooperative Loans.......................................................9
Cooperatives............................................................9
Currency Indexed Securities............................................28
Cut-off Date............................................................8
Cut-off Date Principal Balance.........................................26
Debt Securities........................................................85
Definitive Security....................................................39
Detailed Description....................................................9
Disqualified Organization..............................................94
DOL...................................................................112
DTC....................................................................39
Duff & Phelps.........................................................114
Eleventh District......................................................37
EPA....................................................................72
ERISA.................................................................111
Euroclear..............................................................39
Euroclear Operator.....................................................41
Euroclear Participants.................................................41
European Depositaries..................................................39
excess servicing.......................................................97
Exemption.............................................................114
Face Amount............................................................28
FASIT..................................................................91
FHA Loans..............................................................14
FHLBSF.................................................................37
FHLMC Act..............................................................18
FHLMC Certificate Group................................................18
FHLMC Project Certificates.............................................20
Financial Intermediary.................................................40
Fitch.................................................................114
FNMA MBS...............................................................17
FNMA Project Issuers...................................................16
FNMA SMBS..............................................................17
foreign person........................................................102
Garn-St Germain Act....................................................74
GNMA Issuer............................................................15
GNMA Project Certificates..............................................16
Guaranty Agreement.....................................................15
Home Equity Loans.......................................................9
Housing Act............................................................14
HUD....................................................................14
Indenture..............................................................25
Index..................................................................28
Indexed Commodity......................................................28
Indexed Currency.......................................................28
Indexed Principal Amount...............................................28
Indexed Securities.....................................................27
Installment Contract...................................................78
Insurance Proceeds.....................................................55
Insured Expenses.......................................................55
Interest Weighted Securities...........................................88
IRS....................................................................87
J.P. Morgan...........................................................119
L/C Bank...............................................................44
L/C Percentage.........................................................44
lender.................................................................78
Liquidation Expenses...................................................55
Liquidation Proceeds...................................................55
Loan Rate..............................................................10
Loan-to-Value Ratio....................................................13
lockout periods........................................................10
Manufactured Homes.....................................................12
Manufactured Housing Contracts.........................................12
Master Servicing Agreement..............................................8
Master Servicing Fee...................................................62
mixed used properties..................................................11
Moody's...........................................................46, 114
Morgan.................................................................41
Mortgage...............................................................53
mortgage related security.............................................119
Mortgaged Properties...................................................11
National Cost of Funds Index...........................................38
NCUA..................................................................119
New Withholding Regulations...........................................100
Nonresidents...........................................................99
OID....................................................................86
OID Regulations........................................................86
OTS....................................................................38
PACs...................................................................33
Participants...........................................................39
Parties in Interest...................................................112
Pass-Through Securities................................................96
Pay-Through Security...................................................87
Percentage Interests...................................................64
Permitted Investments..................................................46
Plan..................................................................111
Plan Asset Regulation.................................................112
PMBS Agreement.........................................................20
PMBS Issuer............................................................21
PMBS Servicer..........................................................20
PMBS Trustee...........................................................20
Policy Statement......................................................119
Pool....................................................................7
Pool Insurance Policy..................................................47
Pool Insurer...........................................................47
Pooling and Servicing Agreement........................................25
Prepayment Assumption..................................................87
Primary Mortgage Insurance Policy......................................11
Prime Rate.............................................................39
Principal Prepayments..................................................30
Properties.............................................................11
Property Improvement Loans.............................................80
PTE...................................................................117
PTE 83-1..............................................................113
Purchase Price.........................................................24
Rating Agency.........................................................120
Ratio Strip Securities.................................................97
RCRA...................................................................73
Record Date............................................................27
Reference Banks........................................................36
Refinance Loan.........................................................13
Regular Interest Securities............................................85
Regular Interests......................................................90
Relevant Depositary....................................................39
Relief Act.............................................................79
REMIC..............................................................27, 84
REMIC Regulations......................................................91
Reserve Account........................................................29
Reserve Interest Rate..................................................36
Residual Interest Security.............................................93
Residual Interests.....................................................90
Restricted Group......................................................117
Retained Interest......................................................26
Revolving Credit Line Loans.............................................9
Rules..................................................................40
S&P...................................................................114
SAIF...................................................................55
secured creditor exclusion.............................................72
Security Account.......................................................55
Security Owners........................................................39
Security Register......................................................27
Securityholders........................................................40
Sellers.................................................................8
Senior Securities......................................................43
Servicing Fee..........................................................96
Short-Term Note.......................................................101
Single Family Properties...............................................11
Single Family Securities..............................................113
SMMEA.................................................................118
Startup Day............................................................92
Stock Index............................................................28
Stock Indexed Securities...............................................28
strip..................................................................34
Stripped Securities....................................................96
Subordinated Securities................................................43
Sub-Servicers...........................................................8
Sub-Servicing Agreement................................................58
TACs...................................................................34
Terms and Conditions...................................................42
thrift institutions....................................................94
TIN....................................................................99
Title I Loans..........................................................80
Title I Program........................................................80
Title V............................................................75, 78
Trust Agreement.....................................................9, 25
Trust Fund Assets.......................................................7
Trustee................................................................25
U.S. Person...........................................................106
UCC....................................................................71
VA Guaranty............................................................62
VA Loans...............................................................15
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.*
The following table sets forth the estimated expenses to be incurred
in connection with the offering of the Securities, other than underwriting
discounts and commissions:
SEC Registration Fee....................................... $ **
Trustee's Fees and Expenses................................ **
Printing and Engraving..................................... **
Legal Fees and Expenses.................................... **
Blue Sky Fees.............................................. **
Accounting Fees and Expenses............................... **
Rating Agency Fees......................................... **
Miscellaneous.............................................. **
Total...................................................... $ **
========
- ----------------------------------
* All amounts, except the SEC Registration Fee, are estimates of aggregate
expenses incurred or to be incurred in connection with the issuance and
distribution of Securities in an aggregate principal amount assumed for these
purposes to be equal to $_____ of Securities registered hereby.
** To be filed by amendment.
Item 15. Indemnification of Directors and Officers.
Under Section 8(b) of the proposed form of Underwriting Agreement,
the Underwriters are obligated under certain circumstances to indemnify
certain controlling persons of the Registrant against certain liabilities,
including liabilities under the Securities Act of 1933, as amended (the
"Act").
The Registrant's Certificate of Incorporation provides for
indemnification of directors and officers of the Registrant to the full extent
permitted by Delaware law.
Section 145 of the Delaware General Corporation Law provides, in
substance, that Delaware corporations shall have the power, under specified
circumstances, to indemnify their directors, officers, employees and agents in
connection with actions, suits or proceedings brought against them by a third
party or in the right of the corporation, by reason of the fact that they were
or are such directors, officers, employees or agents, against expenses
incurred in any such action, suit or proceeding. The Delaware General
Corporation Law also provides that the Registrant may purchase insurance on
behalf of any such director, officer, employee or agent.
Item 16. Exhibits.
(a) Financial Statements:
None.
(b) Exhibits:
1.1 Form of Underwriting Agreement.*
3.1 Restated Certificate of Incorporation of the Registrant.*
3.2 By-laws of the Registrant.*
4.1 Forms of Pooling and Servicing Agreement.*
4.2 Form of Trust Agreement.*
4.3 Form of Indenture.*
5.1 Opinion of Brown & Wood LLP as to legality of the Securities.
8.1 Opinion of Brown & Wood LLP as to certain tax matters.
10.1 Form of Mortgage Loan Purchase Agreement.*
23.1 Consent of Brown & Wood LLP (included in
Exhibits 5.1 and 8.1 hereto).
24.1 Powers of Attorney (included on Page II-4).
- --------------------
* To be filed by amendment.
Item 17. Undertakings.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933, as amended;
(ii) To reflect in the Prospectus any facts or events
arising after the effective date of the registration statement (or
the most recent post-effective amendment thereof) which, individually
or in the aggregate, represent a fundamental change in the
information set forth in the registration statement; and
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, as amended, each such post-effective amendment shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered that remain unsold at the termination
of the offering.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, as amended, each
filing of the registrant's annual report pursuant to Section 13(a) or Section
15(d) of the Securities Exchange Act of 1934, as amended (and, where
applicable, each filing of an employee benefit plan's annual report pursuant
to Section 15(d) of the Securities Exchange Act of 1934, as amended), that is
incorporated by reference in the registration statement shall be deemed a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended, may be permitted to directors, officers
and controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against
public policy as expressed in the Securities Act of 1933, as amended, and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act of 1933, as
amended, and will be governed by the final adjudication of such issue.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the Registrant certifies that it has reasonable grounds to believe
that it meets all of the requirements for filing on Form S-3 and has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in New York, New York, on the 19th day
of April, 1999.
J.P. MORGAN ACCEPTANCE CORPORATION I
By: /s/ David M. Duzyk
-----------------------------
Name: David M. Duzyk
Title: President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints each of David M. Duzyk, James R. Pomposelli, Jayme J.
Laurash, or any of them, his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for him and his name,
place and stead, in any and all capacities, to sign any or all amendments
(including post-effective amendments) to the Registration Statement, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their or his substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
---------- ----- -----
<S> <C> <C>
/s/ David M. Duzyk President (Principal Executive Officer) April 19, 1999
- -----------------------
David M. Duzyk
/s/ Aashish R. Kamaat Controller (Principal Financial and Accounting April 19, 1999
- ------------------------ Officer)
Aashish R. Kamat
/s/ William S. Demchak Director , Chairman of the Board April 19, 1999
- ------------------------
William S. Demchak
/s/ Debra F. Stone Director April 19, 1999
- ------------------------
Debra F. Stone
/s/ Edwin F. McMichael Director April 19, 1999
- ------------------------
Edwin F. McMichael
</TABLE>
