As filed with the Securities and Exchange Commission on December 28, 1999
REGISTRATION STATEMENT NO. 333-77275
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________
AMENDMENT NO. 3
TO
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. [ ]
<TABLE>
CALCULATION OF REGISTRATION FEE
<CAPTION>
===========================================================================================================================
PROPOSED PROPOSED
MAXIMUM MAXIMUM
AMOUNT AGGREGATE AGGREGATE AMOUNT OF
TITLE OF TO BE PRICE OFFERING PRICE* REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER UNIT* FEE
===========================================================================================================================
<S> <C> <C> <C> <C>
Asset Backed Securities..................... $1,656,379,452(2) 100% $1,656,379,452(2) $331,275.89(3)
===========================================================================================================================
</TABLE>
* Estimated for the purpose of calculating the registration fee.
(1) This Registration Statement relates to the offering from time to time of
$1,656,379,452 aggregate principal amount of Asset Backed Securities and
to any resales of them in market making transactions by an underwriter,
to the extent required.
(2) $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 in connection with
such unsold amount of securities was paid previously under the foregoing
Registration Statement.
(3) 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.
===============================================================================
<PAGE>
Subject To Completion, Dated December 27, 1999
Prospectus supplement 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 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 SEC 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.
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 TRUST
o will issue [6] classes of senior class A certificates which are offered
by this prospectus supplement
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
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.
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. This prospectus supplement and the attached
prospectus may be used by [______], which is an affiliate of [ ] and therefore
may also be viewed as an affiliate of the trust, in connection with offers and
sales related to market making transactions in the class A certificates. These
transactions will be at prevailing market prices at the time of sale. [ ] may
act as principal or agent in these transactions.
NEITHER THE SEC 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_
<PAGE>
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 to this prospectus
supplement. Purchasers are urged to read both this prospectus supplement and
the prospectus in full. Sales of the offered certificates by this prospectus
supplement may not be consummated unless the purchaser has received both this
prospectus supplement and the prospectus. There is a Glossary on page S-77
where you will find definitions of the capitalized terms used in this
prospectus supplement.
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, that 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 by this
prospectus supplement in any jurisdiction in which, or to any person to whom,
it is unlawful to make the offer or solicitation in that jurisdiction.
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.
<PAGE>
NYLIB1/642540
S-3
TABLE OF CONTENTS
Page
<PAGE>
PROSPECTUS SUPPLEMENT
Summary.....................................................S-4
Risk Factors...............................................S-10
The Certificate Insurer....................................S-14
The Seller And The Master Servicer.........................S-14
Description Of The Mortgage Loans..........................S-15
Prepayment And Yield Considerations........................S-35
Description Of The Certificates............................S-41
Use Of Proceeds............................................S-68
Material Federal Income Tax Consequences...................S-68
State Taxes................................................S-71
Erisa Considerations.......................................S-71
Legal Investment...........................................S-74
Underwriting...............................................S-74
Experts....................................................S-75
Legal Matters..............................................S-75
Ratings....................................................S-75
Glossary...................................................S-77
PROSPECTUS
Risk Factors..................................................5
The Trust Fund................................................7
Use of Proceeds..............................................27
The Depositor................................................27
Description of the Securities................................28
Credit Enhancement...........................................46
Yield and Prepayment Considerations..........................54
The Agreements...............................................57
Material Legal Aspects of the Loans..........................76
Material Federal Income Tax Consequences.....................94
State Tax Considerations....................................126
ERISA Considerations........................................126
Legal Investment............................................134
Method of Distribution......................................135
Legal Matters...............................................137
Financial Information.......................................137
Rating......................................................137
Where You Can Find More Information.........................138
Incorporation of Certain Documents by Reference.............138
Glossary....................................................140
<PAGE>
SUMMARY
This summary highlights selected information from this document and
does not contain all of the information that you need to consider in making
your investment decision. Please read this entire prospectus supplement and the
accompanying prospectus carefully for additional information about the class A
certificates.
<TABLE>
<CAPTION>
HOME EQUITY LOAN ASSET-BACKED CERTIFICATES, SERIES 199_-_
------------------------- ------------------ ------------------------- ----------------------
<S> <C> <C> <C>
INITIAL CLASS
PRINCIPAL LAST SCHEDULED
CLASS CERTIFICATE RATE BALANCE (+/- 5%) DISTRIBUTION DATE
----- ---------------- ---------------- -----------------
Class A-1 % $ -
------------------------- ------------------ ------------------------- ----------------------
Class A-2 % $ -
------------------------- ------------------ ------------------------- ----------------------
Class A-3 % $ -
------------------------- ------------------ ------------------------- ----------------------
Class A-4 % $ -
------------------------- ------------------ ------------------------- ----------------------
Class A-5 % $ -
------------------------- ------------------ ------------------------- ----------------------
Class A-6 Variable $ -
------------------------- ------------------ ------------------------- ----------------------
Class R N/A $0 -
------------------------- ------------------ ------------------------- ----------------------
</TABLE>
We expect the actual last distribution date for each class A
certificate to be significantly earlier than its last scheduled distribution
date in the table above.
The class R certificates are not being offered pursuant to this
registration statement.
<PAGE>
THE SELLER AND MASTER SERVICER
o ________________.
o _______________ maintains its principal office at _________________.
Its telephone number is (___) ___________.
o The master servicer will receive from the interest payments on the
mortgage loans equal to __% per annum on the principal balance of
each mortgage loan as a servicing fee.
WE REFER YOU TO "THE SELLER AND THE MASTER SERVICER" 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 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.
CERTIFICATE RATING
The trust fund will not issue the class A certificates unless they receive
at least the following ratings:
___ by _________________
___ by _________________
A rating is not a recommendation to buy, sell or hold securities and may
be lowered or withdrawn by either rating agency at any time.
WE REFER YOU TO "RATINGS" AND "RISK FACTORS--RATING of THE SECURITIES" IN
THE PROSPECTUS FOR ADDITIONAL INFORMATION.
FEDERAL TAX CONSIDERATIONS
For federal income tax purposes:
o The trust fund will be treated as a 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 "MATERIAL FEDERAL INCOME TAX CONSEQUENCES" IN THIS
PROSPECTUS SUPPLEMENT AND IN THIS PROSPECTUS FOR ADDITIONAL INFORMATION.
ERISA CONSIDERATIONS
The fiduciary responsibility provisions of ERISA can limit investments by
pension and other employee benefit plans. For example, the acquisition of
particular certificates may be considered a "prohibited transaction" under
ERISA. Some 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 governed by
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
SMMEA 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" IN THIS PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS FOR ADDITIONAL INFORMATION.
CUT-OFF DATE
o ____________, 199_.
CLOSING DATE
o ________________, 199_.
DISTRIBUTION DATE
o The 25th day of each month, or if that 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
Book-entry through DTC, Euroclear or Cedelbank.
WE REFER YOU TO "RISK FACTORS--EFFECT ON LIQUIDITY AND PAYMENT DELAY
BECAUSE OF OWING BOOK-ENTRY CERTIFICATES" AND "DESCRIPTION OF THE
CERTIFICATES--BOOK-ENTRY CERTIFICATES" 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 the hazard insurance policies covering the mortgaged
properties; and
o amounts on deposit in the 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:
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 a 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. The
group 1 certificates will be paid sequentially--i.e., no class of
group 1 certificates will receive a principal distribution until all
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 to that class.
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 holder of the class A certificates
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. A portion of the excess interest 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 application will result in a limited acceleration of principal
payments on the certificates relative to the amortization of the related
mortgage loans, thus creating overcollateralization for the class A
certificates. Once the required level of overcollateralization is reached,
the application of excess interest payments will stop, until it is again
needed to restore or 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 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 relating to 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 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 1 capitalized 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
related group of certificates expected to occur prior to the trust fund's
purchase of the additional mortgage loans.
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 current total pool principal balance declines to or 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.
<PAGE>
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.
EFFECT 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 their liquidity 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 particular 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 those certificates, may be limited due to the 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 then credit them to your account either directly
or indirectly through indirect participants, as applicable.
WE REFER YOU TO "DESCRIPTION OF THE CERTIFICATES--BOOK-ENTRY
CERTIFICATES" 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 that amount and the certificate insurer fails to
perform its obligations under the policy, you will suffer a loss. Approximately
___% of the mortgage loans are balloon loans.
DELAY IN RECEIPT OF LIQUIDATION PROCEEDS; LIQUIDATION PROCEEDS MAY BE LESS THAN
MORTGAGE LOAN BALANCE
o Substantial delays could be encountered in connection with the
liquidation of delinquent mortgage loans.
o Liquidation expenses, which include 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 related mortgage loan, you will incur a loss on your
investment if the certificate insurer fails to perform its obligations under
the policy.
WE REFER YOU TO "MATERIAL LEGAL ASPECTS OF THE 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 loans at any
time. However, some mortgage loans require that the mortgagor pay a fee with
any prepayment. This fee may result in the rate of prepayments being slower
than would be the case if there were no fee.
o All the mortgage loans contain due-on-sale provisions. Generally, the
master servicer will enforce the due-on-sale provision unless prohibited by
applicable law. Enforcement of due-on-sale clauses will result in a prepayment
of principal on the related mortgage loan.
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. Generally,
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 limited 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 is
intended as a "true sale" of the mortgage loans for bankruptcy purposes. The
sale of the mortgage loans from the depositor to the trust fund will be treated
by the depositor and the trust fund 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. The attempt to recharacterize the transfer, 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 interest shortfalls
attributed to prepayments, they will be covered by the policy.
o SOME INTEREST SHORTFALLS ARE NOT COVERED BY THE MASTER SERVICER OR THE
CERTIFICATE INSURANCE POLICY. The Soldiers' and Sailors' Civil Relief Act of
1940 permits modifications to the payment terms for mortgage loans, including a
reduction in the amount of interest paid by the borrower. 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. The holders of
the certificates will not be entitled to receive any shortfalls in interest
resulting from the application of the Soldiers' and Sailors' Civil Relief Act
of 1940.
[POSSIBILITY 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. The higher rates of
delinquencies and foreclosures may result in delays in payment or losses to
you.]
[POSSIBILITY 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 [_____] 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.]
<PAGE>
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 that information.
[DESCRIPTION OF THE CERTIFICATE INSURER]
SELLER AND THE MASTER SERVICER
______________ ("__________"), as 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 to be dated as of _____, 199_,
among J.P. Morgan Acceptance Corporation I, as depositor, _____________, as
seller and master servicer, and ________, as 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_, December 31, 199_, December 31, 199_ and December 31, 199_.
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 those loans are delinquent pursuant to their repayment terms.
Dollar amounts are rounded to the nearest $1,000.
<PAGE>
<TABLE>
<CAPTION>
Year Ended Months Ended
December 31, 199_ December 31, 199_ December 31, 199_ December 31, 199_ December 31, 199_ _________ 30, 199_
Number of Dollar Number of Dollar Number of Dollar Number of Dollar Number of Dollar Number of Dollar
Loans Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans Amount
<S> <C> <C> <C> <C> <C> <C>
Portfolio $ $ $ $ $ $
Delinquency
Percentage % % % % % % %
30-59 days
60-89 % % % % % % %
90 days or % % % % % % %
more(1)
TOTAL % % % % % % % %
</TABLE>
The table above includes the principal balance of loans currently in
process of foreclosure and loans acquired through foreclosure or deed in lieu
of foreclosure.
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_, December 31, 199_, December 31, 199_, and
December 31, 199_. Amounts charged-off during a period are expressed as a
percentage of the average portfolio balance during that period. 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 the re-appraisals, a
decision is then made concerning the amounts determined to be uncollectible.
The average portfolio balance during the period is calculated by averaging 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.
<TABLE>
<CAPTION>
Year Ended Months Ended
December 31, December 31, December 31, December 31, December 31, _________, 199_
199_ 199_ 199_ 199_ 199_
<S> <C> <C> <C> <C> <C> <C>
Average Portfolio $ $ $ $ $ $
Balance...
Charge-Offs ......... $ .. $ $ $ $ $
Charge-Offs as a % % % % % % %
of Average
Portfolio
Balance............
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF DELINQUENCY AND CHARGE-OFF EXPERIENCE
DESCRIPTION OF THE MORTGAGE LOANS
GENERAL
The statistical information presented in this prospectus supplement is
only with respect to the mortgage loans and describes the mortgage loans in
loan group 1 and the mortgage loans in loan group 2 and is based on the
characteristics of the loan groups as of _______, 199_.
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 that date. The loan group 1
principal balance and the loan group 2 principal balance are each sometimes
referred to in this prospectus supplement 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 consists of mortgage loans with an aggregate
principal balance as of the __________ of $__________. 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 that 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 that 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 of that mortgage loan at a rate per annum -- the
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 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, which means they are mortgage loans in
which borrowers are not required to make monthly payments of principal that
will fully amortize the related 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 in this prospectus supplement.
The mortgage loans provide that interest is charged to the borrowers,
and payments are due from the 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 of those mortgage loans will not affect the amortization schedule or
the relative application of the 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 in this prospectus
supplement, all percentages set forth in this prospectus supplement 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 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 maximum principal balance of
any of the mortgage loans in loan group 1 was $__________, the minimum
principal balance of the mortgage loans in loan group 1 was $________, and the
principal balance of the 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 of the 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 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 the mortgage loans by their respective
maturity dates, and % of the mortgage loans in loan group 1 are balloon loans.
<PAGE>
Cut-Off Date Loan Group 1 Principal Balances
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Cut-Off Date % of Cut-Off Date
Range of Cut-Off Number of Loan Group 1 Loan Group 1
Date Principal Balances mortgage loans Principal Balance Principal Balance
- ----------------------- -------------- ----------------- -----------------
</TABLE>
<PAGE>
Geographic Distribution by State
Loan Group 1
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Cut-Off Date % of Cut-Off Date
Number of Loan Group 1 Loan Group 1
State mortgage loans Principal Balance Principal Balance
- ----- -------------- ----------------- -------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Loan-to-Value Ratios(1)
Loan Group 1
<S> <C> <C> <C>
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
- ------------------- -------------- ----------------- -----------------
</TABLE>
(1) The loan-to-value ratios shown above are equal, with respect to each
mortgage loan, to (1) the original principal balance of the mortgage
loan at the date of origination divided by (2) the lesser of (a) the
value of the related mortgaged property, based upon the appraisal made
at the time of origination of the mortgage loan or (b) the purchase
price of the mortgaged property if the mortgage loan proceeds from the
mortgage loan are used to purchase the mortgaged property.
<PAGE>
Loan Rates
Loan Group 1
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Cut-Off Date % of Cut-Off Date
Number of Loan Group 1 Loan Group 1
Loan Rates mortgage loans Principal Balance Principal Balance
</TABLE>
<TABLE>
<CAPTION>
Original Term to Stated Maturity
Loan Group 1
<S> <C> <C> <C>
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
- --------------- -------------- ----------------- -----------------
</TABLE>
Remaining Months to Stated Maturity
Loan Group 1
<TABLE>
<CAPTION>
<S> <C> <C> <C>
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
- --------------- -------------- ----------------- -----------------
</TABLE>
<PAGE>
Months Since Origination
Loan Group 1
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Cut-Off Date % of Cut-Off Date
Number of Loan Group 1 Loan Group 1
Months Since Origination mortgage loans Principal Balance Principal Balance
- ------------------------ -------------- ----------------- -----------------
</TABLE>
Property Type
Loan Group 1
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Cut-Off Date % of Cut-Off Date
Number of Loan Group 1 Loan Group 1
Property Type mortgage loans Principal Balance Principal Balance
- ------------- -------------- ----------------- -----------------
</TABLE>
<PAGE>
Occupancy Type
Loan Group 1
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Cut-Off Date % of Cut-Off Date
Number of Loan Group 1 Loan Group 1
Occupancy Type mortgage loans Principal Balance Principal Balance
- -------------- -------------- ----------------- -----------------
</TABLE>
[CONVEYANCE OF SUBSEQUENT MORTGAGE LOANS
The pooling and servicing agreement permits the trust fund to purchase
from the seller, subsequent to the date of this prospectus supplement 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 in this
prospectus supplement. The date on which the seller transfers a subsequent
mortgage loan to the trust fund shall be referred to in this prospectus
supplement as the subsequent transfer date.
In any event, each conveyance of subsequent mortgage loans will be
required to satisfy the following conditions:
(1) the subsequent mortgage loans must (a) satisfy the
eligibility criteria set forth in the prospectus under "The Trust
Fund--Representations by Sellers or Originators; Repurchases" and (b)
comply with each representation and warranty as to the mortgage loans
set forth in the pooling and servicing agreement;
(2) the 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,
(3) no subsequent mortgage loan may be ___ or more days
contractually delinquent as of the applicable cut-off date;
(4) no subsequent mortgage loan may have a remaining term to
maturity in excess of ___ years;
(5) no subsequent mortgage loan may have a loan rate less
than ____%;
(6) following the purchase of the subsequent mortgage loans by
the trust fund, the mortgage loans (a) will have a weighted average
loan 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;
(7) the seller [, the depositor and the trustee shall not have
been notified by either rating agency that the conveyance of the
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 the conveyance as required
by the pooling and servicing agreement]; and
(8) the trustee shall have received opinions of counsel as to,
among other things, the enforceability and validity of the transfer
agreements relating to the conveyance of the 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 in this prospectus
supplement, all percentages set forth in this prospectus supplement 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 ___ 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 maximum principal balance
of any of the mortgage loans in loan group 2 was $__________, the minimum
principal balance of the mortgage loans in loan group 2 was $________ and the
principal balance of the 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 ranged from % to % with a weighted average 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 the 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 .
<PAGE>
Cut-Off Date Loan Group 2 Principal Balances
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Cut-Off Date % of Cut-Off Date
Range of Cut-Off Number of Loan Group 2 Loan Group 2
Date Principal Balances mortgage loans Principal Balance Principal Balance
- ----------------------- -------------- ----------------- -----------------
</TABLE>
<PAGE>
Geographic Distribution by State(1)
Loan Group 2
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Cut-Off Date % of Cut-Off Date
Number of Loan Group 2 Loan Group 2
State mortgage loans Principal Balance Principal Balance
- ----------------------- -------------- ----------------- -----------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Determined by the property address designated in the related mortgage.
<PAGE>
Loan-to-Value Ratios(1)
Loan Group 2
<TABLE>
<CAPTION>
<S> <C> <C> <C>
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
- ------------------- -------------- ----------------- -----------------
</TABLE>
(1) The loan-to-value ratios shown above are equal, with respect to each
mortgage loan, to (1) the original principal balance of the mortgage
loan at the date of origination divided by (2) the lesser of (a) the
value of the related mortgaged property, based upon the appraisal made
at the time of origination of the mortgage loan or (b) the purchase
price of the mortgaged property if the mortgage loan proceeds from the
mortgage loan are used to purchase the mortgaged property.
<PAGE>
Loan Rates
Loan Group 2
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Cut-Off Date % of Cut-Off Date
Number of Loan Group 2 Loan Group 2
Loan Rates mortgage loans Principal Balance Principal Balance
- ------------------- -------------- ----------------- -----------------
</TABLE>
Original Term to Stated Maturity
Loan Group 2
<TABLE>
<CAPTION>
<S> <C> <C> <C>
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
- --------------- -------------- ----------------- -----------------
</TABLE>
<PAGE>
Remaining Months to Stated Maturity
Loan Group 2
<TABLE>
<CAPTION>
<S> <C> <C> <C>
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
- --------------- -------------- ----------------- -----------------
</TABLE>
<PAGE>
Months Since Origination
Loan Group 2
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Cut-Off Date % of Cut-Off Date
Number of Loan Group 2 Loan Group 2
Months Since Origination mortgage loans Principal Balance Principal Balance
- ------------------------- -------------- ----------------- -----------------
</TABLE>
Property Type
Loan Group 2
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Cut-Off Date % of Cut-Off Date
Number of Loan Group 2 Loan Group 2
Property Type mortgage loans Principal Balance Principal Balance
- ------------- -------------- ----------------- -----------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Occupancy Type
Loan Group 2
<S> <C> <C> <C>
Cut-Off Date % of Cut-Off Date
Number of Loan Group 2 Loan Group 2
Occupancy Type mortgage loans Principal Balance Principal Balance
- -------------- -------------- ----------------- -----------------
</TABLE>
Margin
Loan Group 2
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Cut-Off Date % of Cut-Off Date
Number of Loan Group 2 Loan Group 2
Margin mortgage loans Principal Balance Principal Balance
- -------------- -------------- ----------------- -----------------
</TABLE>
Lifetime Cap
Loan Group 2
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Cut-Off Date % of Cut-Off Date
Number of Loan Group 2 Loan Group 2
Lifetime Cap mortgage loans Principal Balance Principal Balance
- ------------ -------------- ----------------- -----------------
</TABLE>
Floor
Loan Group 2
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Cut-Off Date % of Cut-Off Date
Number of Loan Group 2 Loan Group 2
Floor mortgage loans Principal Balance Principal Balance
- ------------ -------------- ----------------- -----------------
</TABLE>
<PAGE>
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 have
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 the
mortgage loans. Since the rate of payment of principal of the mortgage loans
will depend on future events and a variety of factors, no assurance can be
given as to the rate 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 certificate payments
is sensitive to prepayments, liquidations and purchases of the 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 pooling and servicing agreement to enforce the
provisions, unless the 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 "Material Legal Aspects of the
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 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 experience 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 experience 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 interest to pay principal
of the class A certificates of the related certificate group to the extent
required by the pooling and servicing 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 that certificate group will cease, unless
necessary to maintain the required level of overcollateralization for that
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 that 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, 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 those mortgage loans. A 100% prepayment
assumption assumes a conditional prepayment rate of 4% per annum of the
outstanding principal balance of those 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 subsequent month until the twelfth month;
beginning in the twelfth month and in each subsequent month 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 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:
(1) the mortgage loans consist of pools of loans with the level-pay
and balloon amortization characteristics set forth below,
(2) the closing date for the class A certificates is ________________,
(3) 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 in this prospectus supplement under the heading
"Description of the Certificates--Priority of Distributions",
(4) 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 _______________,
(5) the mortgage loans' prepayment rates are a multiple of the
prepayment assumption,
(6) all prepayments are prepayments in full received on the last day
of each month commencing ______________ and include 30 days' interest,
(7) no optional termination is exercised,
(8) the class A certificates of each class have the respective
certificate rates and initial class A principal balances as set forth in this
prospectus supplement,
(9) the overcollateralization levels are set initially as specified in
the pooling and servicing agreement, and then decrease in accordance with the
provisions of the pooling and servicing agreement,
[(10) 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],
(11) six-month LIBOR for each interest period will be % and
(12) one-month LIBOR for each interest period will be %.
<TABLE>
<CAPTION>
Original Original Remaining
Amortization Term to Term to
Amortization Principal Term Maturity Maturity
Methodology Balance Loan Rate (months) (months) (months)
- ------------ -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
GROUP 1
Balloon....... $
Level Pay..... $
Level Pay..... $
</TABLE>
Utilizing the foregoing 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 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 Remaining
Months Maximum Minimum Amortization Term to Term to
Amortization Principal Loan to Rate Gross Interest Interest Term Maturity Maturity
Methodology Balance Rate Change Margin Rate Rate (months) (months) (months)
----------- ------- ---- ------ ------ ---- ---- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GROUP 2
Balloon.... $
Level Pay.. $
Level Pay.. $
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Percent of Initial Class A Principal Balance Outstanding
at the Following Percentages of the Prepayment Assumption
CLASS A-1 CLASS A-2
--------- ---------
DISTRIBUTION DATE % % % % % % % %
- ----------------- - - - - - - - -
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Initial
Percentage....... 100 100 100 100 100 100 100 100
Weighted Average
Life (years)*....
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
* The weighted average life of a certificate of any class is determined
by (1) 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, (2)
adding the results, and (3) dividing the sum by the highest related
principal balance of the certificate.
<TABLE>
<CAPTION>
CLASS A-3 CLASS A-4
--------- ---------
DISTRIBUTION DATE % % % % % % % %
- ----------------- - - - - - - - -
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Initial
Percentage....... 100 100 100 100 100 100 100 100
Weighted Average
Life (years)*....
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
* The weighted average life of a certificate of any class is determined
by (1i) 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,
(2) adding the results, and (3) dividing the sum by the highest
related principal balance of the certificate.
<TABLE>
<CAPTION>
CLASS A-5 CLASS A-6
--------- ---------
DISTRIBUTION DATE % % % % % % % %
- ----------------- - - - - - - - -
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Initial
Percentage....... 100 100 100 100 100 100 100 100
Weighted Average
Life (years)*....
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
* The weighted average life of a certificate of any class is determined
by (1) 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, (2)
adding the results, and (3) 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 of the mortgage loans, and should be read in conjunction with those
tables.
<PAGE>
DESCRIPTION OF THE CERTIFICATES
The series 199_-certificates will be issued pursuant to the pooling
and servicing agreement. The form of the pooling servicing 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
material provisions of the pooling and servicing 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 pooling and servicing
agreement. Wherever particular sections or defined terms of the pooling and
servicing agreement are referred to, those sections or defined terms are
incorporated into this prospectus supplement by reference.
GENERAL
The offered certificates will be issued in denominations of $1,000 and
multiples of $1 in excess of $1,000 and will evidence specified undivided
interests in the trust fund. The property of the trust fund will consist of, to
the extent provided in the pooling and servicing agreement:
(1) the mortgage loans;
(2) payments on the mortgage loans due and received on and
after the cut-off date;
(3) mortgaged properties relating to the mortgage loans that
are acquired by foreclosure or deed in lieu of foreclosure;
(4) the collection account and the distribution account and
funds on deposit in those accounts, excluding net earnings on
those amounts; and
(5) rights under 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 for the benefit of the
holders of the class A certificates, pursuant to which the
certificate insurer will guarantee payments to those
certificateholders as in this prospectus supplement. Definitive
certificates 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. The class A-1, class A-2, class A-3, class A-4 and class
A-5 certificates, or group 1 certificates, will represent undivided ownership
interests in the mortgage loans assigned to loan group 1, all collections on
those mortgage loans, exclusive of payments in respect of interest on the
mortgage loan due prior to the cut-off date and received after the cut-off
date, and the proceeds of those mortgage loans. The class A-6 certificates, or
group 2 certificates, will represent undivided ownership interests in the
mortgage loans assigned to loan group 2, all collections on those mortgage
loans, exclusive of payments in respect of interest on the mortgage loans due
prior to the cut-off date and received after the cut-off date, and the proceeds
of those mortgage loans. The class principal balance of a class of class A
certificates 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 that class of 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 of class A certificates and one
class of subordinated certificates, the class R certificates. Only the class A
certificates are being offered by this prospectus supplement. Each class of
offered certificates represents the right to receive payments of interest at
that certificate rate for that class and payments of principal as described
under the heading "--Priority of Distributions."
A certificateholder is the person in whose name a certificate is
registered in the certificate register.
The relative rights and interests of a certificateholder in relation
to the other certificateholders of the related class is evidenced by the
percentage interest of its certificate. The percentage interest of a class A
certificate as of any date of determination represents the percentage obtained
by dividing the denomination of that 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. Persons
acquiring beneficial ownership interests in the offered certificates, or
certificate owners, will hold their offered certificates through the DTC in the
United States, or Cedelbank or Euroclear in Europe if they are participants of
those systems, or indirectly through organizations which are participants in
those 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 those positions in customers' securities accounts in the
depositaries' names on the books of DTC. Citibank will act as depositary for
Cedelbank and The Chase Manhattan Bank will act as depositary for Euroclear.
Investors may hold their beneficial interests in the book-entry certificates in
minimum denominations representing class principal balances of $1,000 and in
multiples of $1 in excess of $1,000. Except as described in this prospectus
supplement, no person acquiring a book-entry certificate will be entitled to
receive a physical, 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 pooling and
servicing 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 that maintains the beneficial owner's account for
that purpose. In turn, the financial intermediary's ownership of that
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 in this prospectus supplement, under the rules,
regulations and procedures creating and affecting DTC and its operations, DTC
is required to make book-entry transfers among DTC 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 the
distributions on behalf of their respective certificate owners. Accordingly,
although certificate owners will not possess certificates, the DTC 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 DTC
participants and indirect participants by instructing the DTC participants and
indirect participants to transfer offered certificates, by book-entry transfer,
through DTC for the account of the purchasers of those offered certificates,
which account is maintained with their respective DTC participants. Under the
DTC 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 DTC participants at DTC will be debited and credited.
Similarly, the DTC 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 DTC participant will
be made during subsequent securities settlement processing and dated the
business day following the DTC settlement date. Credits or any transactions in
those securities settled during the processing will be reported to the relevant
Euroclear or Cedelbank participants on the business day. Cash received in
Cedelbank or Euroclear as a result of sales of securities by or through a
Cedelbank participant or Euroclear participant to a DTC participant will be
received with value on the DTC settlement date but will be available in the
relevant 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 "Material Federal Income Tax
Consequences--Foreign Investors" and "--Backup Withholding" in this prospectus
supplement.
Transfers between DTC 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, 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, 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
governed by 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 and facilitates the clearance and settlement of securities
transactions between Cedelbank participants through electronic book-entry
changes in accounts of Cedelbank participants, thus 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
regulated 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
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
and to clear and settle transactions between Euroclear participants through
simultaneous electronic book-entry delivery against payment, thus 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, 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. 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 the payments to the accounts of the applicable DTC participants
in accordance with DTC's normal procedures. Each DTC participant will be
responsible for disbursing 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 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 the
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. Those distributions will be subject to tax reporting in
accordance with relevant United States tax laws and regulations. See "Material
Federal Income Tax Consequences--Foreign Investors" and "--Backup Withholding"
in this prospectus supplement. 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 the book-entry certificates,
may be limited due to the lack of physical certificates for the book-entry
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 the 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 pooling and servicing
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
actions are taken on behalf of financial intermediaries whose holdings include
those 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 pooling and servicing agreement on behalf of a Cedelbank participant
or Euroclear participant only in accordance with its relevant rules and
procedures. 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, 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 to DTC
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 that 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 then will
recognize the holders of those definitive certificates as certificateholders
under the pooling and servicing 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 those procedures and those 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 those 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, including all payments
received on or with respect to each 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 after the cut-off date. The
trustee, concurrently with the transfer, will deliver the certificates to the
depositor. Each mortgage loan transferred to the trust fund will be identified
on a mortgage loan schedule delivered to the trustee pursuant to the pooling
and servicing agreement. 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 pooling and servicing
agreement and if any mortgage loan or related document is found to be defective
in any material respect and the defect is not cured within 90 days following
notification of the defect to the seller, the seller will be obligated to
either (1) substitute for the mortgage loan an eligible substitute mortgage
loan; however, 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 substitution will not disqualify the trust fund as a REMIC or result in a
prohibited transaction tax under the Internal Revenue Code or (2) purchase the
mortgage loan at a purchase price equal to the outstanding principal balance of
the mortgage loan as of the date of purchase, plus all accrued and unpaid
interest on the mortgage loan, 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 the 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 the obligation arises the
substitution amount which is equal to the excess of the principal balance of
the related defective mortgage loan over the principal balance of the 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
substitution:
(1) 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;
(2) have a loan rate not less than the loan rate of the
defective mortgage loan and not more than 1% in excess of the loan
rate of the defective mortgage loan;
(3) if the defective mortgage loan is in loan group 2, have a
loan rate based on the same index with adjustments to the 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
(4) have a mortgage of the same or higher level of priority
as the mortgage relating to the defective mortgage loan at the time
the mortgage was transferred to the trust fund;
(5) 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;
(6) comply with each representation and warranty set forth in
the pooling and servicing agreement made as of the date of
substitution;
(7) have an original loan-to-value ratio not greater than
that of the defective mortgage loan;
(8) if the 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 the
defective mortgage loan; and
(9) 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 the eligible substitute mortgage loans meet
the foregoing attributes in the aggregate and the substitution is
approved in writing in advance by the certificate insurer.
The seller will make representations and warranties as to the accuracy
in all material respects of 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:
(1) 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
(2) 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 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 (1) substitute for the defective mortgage loan an
eligible substitute mortgage loan or (2) purchase the 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 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 pooling and
servicing 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 pooling and servicing 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. Upon receipt by the master servicer of amounts in respect of the
mortgage loans, net of amounts representing the master servicing fee, the
master servicer will deposit those amounts in the collection account. Amounts
so deposited may be invested in eligible investments described in the pooling
and servicing agreement maturing no later than two business days prior to the
next succeeding date on which amounts on deposit in the collection account are
required to be deposited in the distribution account.
The trustee will establish 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 in the distribution account 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 (1) maintained with a
depository institution whose debt obligations at the time of any deposit in
that account have the highest short-term debt rating by the rating agencies,
and whose accounts are fully insured by either the Savings Association
Insurance Fund or the Bank Insurance Fund of the FDIC established by the 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 and are limited to investments that 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:
(1) direct obligations of, or obligations fully guaranteed as
to timely payment of principal and interest by, the United States or
any agency or instrumentality of the United States, provided that
those obligations are backed by the full faith and credit of the
United States;
(2) repurchase agreements on obligations specified in clause
(1) maturing not more than three months from the date of acquisition
of that obligation, provided that the short-term unsecured debt
obligations of the party agreeing to repurchase those obligations are
at the time rated by each rating agency in its highest short-term
rating category;
(3) 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 of the
United States and regulated by federal and/or state banking
authorities, provided that the unsecured short-term debt obligations
of that depository institution or trust company at the date of
acquisition of the obligations have been rated by each of the rating
agencies in its highest unsecured short-term debt rating category;
(4) 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 of the United States which on the date of
acquisition has been rated by the Rating Agencies in their highest
short-term rating categories;
(5) short term investment funds sponsored by any trust
company or bank incorporated under the laws of the United States or
any state of the United States which on the date of acquisition has
been rated by the rating agencies in their respective highest rating
category of long term unsecured debt;
(6) interests in any money market fund which at the date of
acquisition of the interests in that fund and throughout the time as
the interest is held in that fund has the rating specified by each
Rating Agency; and
(7) other obligations or securities that are acceptable to
each rating agency as an eligible investment and will not result in a
reduction in the then current rating of the certificates, as evidenced
by a letter to that effect from the 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 shall be an eligible
investment if it evidences either the right to receive (a) only
interest with respect to the obligations underlying that instrument or
(b) both principal and interest payments derived from obligations
underlying that instrument and the interest and principal payments
with respect to that 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 shall be an
eligible investment if it is purchased at a price greater than par and
if it 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 the monthly advance, which is 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 obligation of the
master servicer to remit the monthly advance continues with respect to each
mortgage loan until that 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 (1) the preservation, restoration and
protection of the mortgaged properties, (2) any enforcement or judicial
proceedings, including foreclosures, and (3) the management and liquidation of
mortgaged properties acquired in satisfaction of the related mortgage. These
expenditures 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 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 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
reimbursement 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 the
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 the mortgage loan. However, if any servicing advance or monthly
advance is determined by the master servicer to be nonrecoverable from those
sources, the amount of that 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 that day is not a business day,
then the next succeeding business day, commencing in ______________________,
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 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 (1) 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 that
certificateholder at a domestic bank or other entity having appropriate
facilities, if that certificateholder has so notified the trustee in accordance
with the pooling and servicing agreement, or (2) by check mailed to the address
of the entitled person as it appears on the certificate register maintained by
the trustee as that registrar.
DEPOSITS TO THE DISTRIBUTION ACCOUNT
No later than one business day prior to each distribution date, the
Available Funds for each loan group for the previous due period shall be
deposited into the distribution account.
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, together, the amount available, and make distributions of those
amounts as described below and to the extent of the amount available:
A. With respect to the group 1 certificates, the related
Available Funds within the following order of priority:
(1) to the trustee, the related trustee fee for that
distribution date;
(2) to holders of each class of group 1
certificates, an amount equal to the related Class Interest
Distribution for that distribution date;
(3) 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 class is reduced to zero, the related Class A Principal
Distribution, other than the portion constituting the
Distributable Excess Spread, for that distribution date;
provided, however, that after the occurrence and continuance
of an insurer default, the Class A Principal Distribution
for the group 1 certificates will be distributed pro rata to
the holders of the class A certificates based on the
respective class A principal balances;
(4) 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
(5) 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 class is reduced to zero, the related Distributable
Excess Spread for that distribution date; provided, however,
that after the occurrence and continuance of an insurer
default, the Distributable Excess Spread for the group 1
certificates will be distributed pro rata to the holders of
the class A certificates based on the respective class A
principal balances.
B. With respect to the group 2 certificates, the related
Available Funds in the following order of priority:
(1) to the trustee, the related trustee fee for that
distribution date;
(2) to the holders of the class A-6 certificates, an
amount equal to the Class Interest Distribution for the
class A-6 certificates for that distribution date;
(3) 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
related Distributable Excess Spread;
(4) 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
(5) 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 that
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 the other certificate
group shall be distributed to the extent of that insufficiency in
accordance with the priorities for distribution set forth in the
subclause above with respect to the certificate group
experiencing the insufficiency.
D. After making the distributions referred to in 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:
(1) to the master servicer, the amount of any
accrued and unpaid master servicing fee;
(2) to the certificate insurer, amounts owing to the
certificate insurer for reimbursement for prior draws made
on the policy;
(3) to the master servicer, the amount of
nonrecoverable advances not previously reimbursed;
(4) to the certificate insurer, any other amounts
owing to the certificate insurer under the insurance
agreement;
(5) to the class A-6 certificateholders, the Class
A-6 Interest Carryover; and
(6) to the class R certificateholders, the balance.
THE CERTIFICATE RATE
The certificate rate for any interest period with respect to the Group
1 Certificates will be:
Class A-1 __%
Class A-2 __%
Class A-3 __%
Class A-4 __%
Class A-5 __%
The interest period with respect to each distribution date and group 1
certificates, is the period from the first day of the calendar month preceding
the month of that distribution date through the last day of that calendar
month. The interest period with respect to each distribution date and group 2
certificates is the period from the distribution date in the month preceding
the month of that distribution date or, in the case of the first distribution
date, from the closing date through the day before that 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
____%, (B) the Net Funds Cap for that distribution date and (C) ____% per
annum. 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. On the second LIBOR
business day immediately preceding each distribution date, the trustee shall
determine the LIBOR Rate for the interest period commencing on that
distribution date and inform the master servicer of the rate.
INTEREST
On each distribution date, to the extent of funds available to be
distributed as interest on the certificates, the Class Interest Distribution
will be distributed with respect to each class of class A certificates. Class
Interest Distributions will be reduced by the class' pro rata share of Civil
Relief Act Interest Shortfalls, if any, for that 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 certificate group will be distributed on an
equal priority and any shortfall in the amount required to be distributed as
interest to each class will be allocated between those classes pro rata based
on the amount each class would have been distributed in the absence of that
shortfall.
PRINCIPAL
On each distribution date, to the extent of funds available, 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 that
distribution date.
If the required level of overcollateralization for a certificate group
is reduced below the then existing amount of overcollateralization or if the
required level of overcollateralization for that certificate group is
satisfied, the amount of the related Class A Monthly Principal Distributable
Amount on the following distribution date will be reduced by the amount of that
reduction or by the amount necessary to assure 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 that certificate group to be made on that 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 a
loan group exceeds the amount of the related Excess Spread for the related
distribution date, the amount distributed in respect of principal will be
reduced, unless additional amounts are available as described below under
"--Crosscollateralization". 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" in this prospectus supplement. 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, so 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 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 class outstanding on a pro rata basis in accordance with the
class A principal balance of each 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
that amount is not covered by available funds from the related loan group or
the crosscollateralization mechanics described in this prospectus supplement,
will reduce the amount of overcollateralization, if any, with respect to the
related certificate group. An insurer default will occur in the event the
certificate insurer fails to make a payment required under the policy or if
events of bankruptcy or insolvency occur with respect to the certificate
insurer.
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 pooling and servicing agreement,
as of the end of the preceding due period, that all liquidation proceeds which
it expects to recover with respect to that mortgage loan, including disposition
of the related REO property, have been recovered.
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 the following information.
The certificate insurer, in consideration of the payment of the
premium and subject to the terms of the policy, unconditionally and irrevocably
guarantees to any owner that an amount equal to each full and complete insured
payment will be received by 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 those 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 that 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 liability of that type.
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 of:
(1) a certified copy of the order requiring the return of a
preference payment,
(2) an opinion of counsel satisfactory to the certificate
insurer that the order is final and not appealable,
(3) an assignment in 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 that preference
payment or otherwise with respect to that preference amount, and
(4) appropriate instruments to effect the appointment of the
certificate insurer as agent for that owner in any legal proceeding
related to the preference amount, those instruments being in a form
satisfactory to the certificate insurer, provided that if the
documents are received after 12:00 noon New York City time on that
business day, they will be deemed to be received on the following
business day. Those 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
that owner has returned principal or interest paid on the class A
certificates to the receiver or trustee in bankruptcy, in which case
that payment shall be disbursed to that owner.
A preference amount is 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.
The certificate insurer will pay any other amount payable under that
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 of a notice;
provided that if that notice is received after 12:00 noon New York City time on
that business day, it will be deemed to be received on the following business
day. If any 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 in the
policy 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 that Insured Payment
and legally available to be paid to certificateholders.
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.
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 another address
as the certificate insurer shall specify to the trustee in writing.
The notice address of the fiscal agent is
_____________________________ Attention: ________________, or another 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 of the laws of the State of New York.
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, the acceleration
feature for the certificate group will cease, until necessary to maintain the
required level of overcollateralization for that certificate group.
The pooling and servicing agreement provides that 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 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
limited 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, $___________ will be deposited in 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 pre-funded amount will be reduced by the amount
used to purchase subsequent mortgage loans in accordance with the pooling and
servicing 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 principal balances, which results in a partial
principal prepayment of the related certificates on that 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 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 in the capitalized interest account 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:
(1) the aggregate amount of the distribution to each class of
certificateholders on that distribution date;
(2) the amount of distribution set forth in paragraph (1)
above in respect of interest and the amount of that distribution in
respect of any Class Interest Carryover Shortfall, and the amount of
any Class Interest Carryover Shortfall remaining;
(3) the amount of distribution set forth in paragraph (1)
above in respect of principal and the amount of that distribution in
respect of the Class A Principal Carryover Shortfall, and any
remaining Class A Principal Carryover Shortfall;
(4) the amount of Excess Spread for each loan group and the
amount applied as to a distribution on the certificates;
(5) the Guaranteed Principal Amount with respect to each
certificate group, if any, for that distribution date;
(6) the amount paid under the policy for that distribution
date in respect of the Class Interest Distribution to each class of
certificates;
(7) the master servicing fee;
(8) 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;
(9) the aggregate class A principal balance of each
certificate group after giving effect to payments allocated to
principal above;
(10) 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 that distribution date;
(11) 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;
(12) the book value of any real estate which is acquired by
the trust fund through foreclosure or grant of deed in lieu of
foreclosure;
(13) the aggregate amount of prepayments received on the
mortgage loans during the previous due period and specifying the
amount for each loan group; and
(14) the weighted average loan rate on the mortgage loans and
specifying the 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 (2) and (3)
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 that person, who was a
certificateholder during the prior calendar year a statement containing the
information set forth in clauses (2) and (3) above aggregated for that calendar
year.
LAST SCHEDULED DISTRIBUTION DATE
The last scheduled distribution date for each class of offered
certificates is as follows:
Class Date
----- ----
Class A-1 Certificates
Class A-2 Certificates
Class A-3 Certificates
Class A-4 Certificates
Class A-5 Certificates
Class A-6 Certificates.....
It is expected that the actual last distribution date for each class
of offered certificates will occur significantly earlier than these scheduled
distribution dates. See "Prepayment and Yield Considerations".
The 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 pooling and
servicing 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
pooling and servicing agreement, follow the 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 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 (1)
the maximum insurable value of the improvements securing that mortgage loan
from time to time and (2) the combined principal balance owing on that mortgage
loan and any mortgage loan senior to that 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 (1) the maximum
insurable value from time to time of the improvements which are a part of the
property and (2) the combined principal balance owing on that mortgage loan and
any mortgage loan senior to that mortgage loan. In cases in which any mortgaged
property is located in a federally designated flood area as designated by FEMA,
the hazard insurance to be maintained for the related mortgage loan shall
include flood insurance to the extent it is available and the master servicer
has determined that insurance is necessary in accordance with accepted first
and second mortgage loan servicing standards, as applicable. All flood
insurance shall be in amounts equal to the lesser of (A) the amount in clause
(2) 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 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 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 of those
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, except to the extent those amounts constitute servicing compensation
or are reimbursable to the master servicer under the pooling and servicing
agreement.
In the event that the master servicer obtains and maintains a blanket
policy as provided in the pooling and servicing agreement insuring against fire
and hazards of extended coverage on all of the mortgage loans, then, to the
extent that 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 those mortgage loans that
come into default when, in accordance with applicable servicing procedures
under the pooling and servicing agreement, no satisfactory arrangements can be
made for the collection of delinquent payments. In connection with the
foreclosure or other conversion, the master servicer will follow those
practices 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, the foreclosure,
correction or restoration will increase net liquidation proceeds in excess of
liquidation expenses. The master servicer will be reimbursed out of liquidation
proceeds for advances of its own funds as liquidation expenses before any net
liquidation proceeds in excess of liquidation expenses 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 the interest payments as a master servicing fee in the amount equal
to ____% per annum on the principal balance of each mortgage loan as of the
first day of each 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.
EVIDENCE AS TO COMPLIANCE
The pooling and servicing 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 pooling and servicing agreement throughout the
preceding fiscal year, except as specified in that 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 they have examined documents and the
records relating to servicing of the mortgage loans under the Uniform Single
Attestation Program for Mortgage Bankers and the firm's conclusion with respect
to those documents and records.
The master servicer's fiscal year is the calendar year.
MATTERS REGARDING THE MASTER SERVICER
The pooling and servicing agreement provides that the master servicer
may not resign except in connection with a permitted transfer of servicing,
unless (1) the duties and obligations are no longer permissible under
applicable law as evidenced by an opinion of counsel delivered to the
certificate insurer or (2) upon the satisfaction of the following conditions:
(a) the master servicer has proposed a successor master servicer to the trustee
in writing and the proposed successor master servicer is reasonably acceptable
to the trustee; (b) the rating agencies have confirmed to the trustee that the
appointment of the 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) the proposed successor master servicer is reasonably
acceptable to the certificate insurer. No resignation will become effective
until the trustee or a successor master servicer has assumed the master
servicer's obligations and duties under the pooling and servicing agreement.
The master servicer may perform any of its duties and obligations
under the pooling and servicing agreement through one or more subservicers or
delegates, which may be affiliates of the master servicer. Notwithstanding any
arrangement, the master servicer will remain liable and obligated to the
trustee and the certificateholders for the master servicer's duties and
obligations under the pooling and servicing agreement, without any diminution
of those duties and obligations and as if the master servicer itself were
performing those duties and obligations.
The master servicer may agree to changes in the terms of a mortgage
loan, provided, however, that those changes:
(1) 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,
(2) are consistent with prudent business practices and
(3) do not change the loan rate of that mortgage loan or extend the
maturity date of that mortgage loan in excess of one year unless the related
mortgager is in default, or a 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 those
changes are necessary to avoid a prepayment of that mortgage loan, those
changes are in accordance with prudent business practices and the master
servicer purchases that mortgage loan in accordance with the terms of the
pooling and servicing agreement.
The pooling and servicing agreement provides that the master servicer
will indemnify the trust fund and the trustee from and against any loss,
liability, expense, damage or injury suffered or sustained as a result of the
master servicer's actions or omissions in connection with the servicing and
administration of the mortgage loans which are not in accordance with the
provisions of the pooling and servicing agreement. The pooling and servicing
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 pooling
and servicing 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 pooling and servicing agreement or by reason of reckless disregard of its
obligations under the pooling and servicing agreement. In addition, the pooling
and servicing agreement provides that the master servicer will not be under any
obligation to appear in, prosecute or defend any legal action which is not
incidental to its servicing responsibilities under the pooling and servicing
agreement. The master servicer may, in its sole discretion, undertake any legal
action which it may deem necessary or desirable with respect to the pooling and
servicing agreement and the rights and duties of the parties to the agreement
and the interests of the certificateholders.
Any corporation into which the master servicer may be merged or
consolidated, or any corporation resulting from any merger, conversion or
consolidation to which the master servicer shall be a party, or any corporation
succeeding to the business of the master servicer shall be the successor of the
master servicer under the pooling and servicing agreement, without the
execution or filing of any paper or any further act on the part of any of the
parties to the pooling and servicing agreement, anything in the pooling and
servicing agreement to the contrary notwithstanding.
EVENTS OF DEFAULT
Events of Default will consist of:
(1) (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 pooling and servicing
agreement, which failure continues unremedied for two business days
after the giving of written notice of the failure to the master
servicer by the trustee, or to the master servicer and the trustee by
the certificate insurer or any certificateholder;
(2) any failure by the master servicer duly to observe or
perform in any material respect any other of its covenants or
agreements in the pooling and servicing 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 the failure to the
master servicer by the trustee, or to the master servicer and the
trustee by the certificate insurer or any certificateholder;
(3) 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 the failure to the
master servicer by the trustee, or to the master servicer and the
trustee by the certificate insurer or any certificateholder; or
(4) events of insolvency, readjustment of debt, marshalling
of assets and liabilities or similar proceedings relating to the
master servicer and actions by the master servicer indicating
insolvency, reorganization or inability to pay its obligations.
Upon the occurrence and continuation beyond the applicable grace
period of the event described in clause (1) (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 that event, the trustee will
make the 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 trustee, as successor master servicer,
will be obligated to make monthly advances and servicing advances and other
advances unless it determines reasonably and in good faith that the advances
would not be recoverable.
Notwithstanding the foregoing, a delay in or failure of performance
referred to under clause (1) above for a period of ten (10) business days or
referred to under clause (2) above for a period of thirty (30) business days,
shall not constitute an Event of Default if the delay or failure could not be
prevented by the exercise of reasonable diligence by the master servicer and
the delay or failure was caused by an act of God or other similar occurrence.
Upon the occurrence of any event the master servicer shall not be relieved from
using its best efforts to perform its obligations in a timely manner in
accordance with the terms of the pooling and servicing agreement and the master
servicer shall provide the trustee, the certificate insurer and the
certificateholders prompt notice of the 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 pooling and servicing 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 pooling and servicing
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 pooling and servicing 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
pooling and servicing agreement. Pending that appointment, the trustee will be
obligated to act as successor master servicer unless prohibited by law. The
successor will be entitled to receive the same compensation that the master
servicer would otherwise have received, or any lesser compensation as the
trustee and the 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 pooling and servicing 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 in the pooling and
servicing agreement which may be inconsistent with any other provisions of the
pooling and servicing 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 to add or amend any provisions of the pooling and servicing agreement
as required by the rating agencies in order to maintain or improve any rating
of the 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 rating of the offered certificates - or to add any other
provisions with respect to matters or questions arising under the pooling and
servicing agreement which shall not be inconsistent with the provisions of the
agreement; provided that that 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 amendment will not be
deemed to materially and adversely affect the certificateholders and no opinion
will be required to be delivered if the person requesting the amendment obtains
a letter from the rating agencies stating that the amendment would not result
in a downgrading of the then current rating of the offered certificates. The
pooling and servicing 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 by that amendment and the certificate insurer for the purpose of
adding any provisions to or changing in any manner or eliminating any of the
provisions of the pooling and servicing agreement or of modifying in any manner
the rights of the certificateholders, provided that no amendment will (1)
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 (2) reduce the aforesaid percentage required to consent to
any 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:
(1) the distribution date on which the aggregate class A
principal balance has been reduced to zero,
(2) the final payment or other liquidation of the last
mortgage loan in the trust fund,
(3) the optional purchase by the master servicer of the
mortgage loans, as described below and
(4) 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.
So long as the provisions in the pooling and servicing agreement
concerning adopting a plan of complete liquidation have been complied with, the
master servicer may, at its option, terminate the pooling and servicing
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, reduced, if the
purchase price is based in part on the appraised value of any REO property
included in the trust fund, by the amount, if any, by which the appraised value
of that property is less than the principal balance of the related mortgage
loan, and accrued and unpaid interest on the mortgage loan 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 purchase of the remaining mortgage loans shall be accomplished by
deposit into the distribution account of the purchase price specified above.
VOTING RIGHTS
Under the pooling and servicing agreement, the voting rights will be
allocated to the class A certificates among the 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 that 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 pooling and servicing 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 trustee under the pooling and servicing agreement or if
the trustee becomes insolvent. Upon becoming aware of those circumstances, the
depositor will be obligated to appoint a successor trustee, as approved by the
certificate insurer. Any resignation or removal of the trustee and appointment
of a successor trustee will not become effective until acceptance of the
appointment by the successor trustee.
No holder of a certificate will have any right under the pooling and
servicing agreement to institute any proceeding with respect to the pooling and
servicing agreement unless the 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 the proceeding in its own name
as trustee and have offered to the trustee reasonable indemnity and the trustee
for 60 days has neglected or refused to institute any proceeding. The trustee
will be under no obligation to exercise any of the trusts or powers vested in
it by the pooling and servicing agreement or to make any investigation of
matters arising under the agreement or to institute, conduct or defend any
litigation at the request, order or direction of any of the certificateholders,
unless the trustee has been offered reasonable security or indemnity against
the cost, expenses and liabilities which may be incurred by the trustee in
connection with the exercise of those trusts or powers.
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.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
An election will be made to treat the trust fund as a REMIC for
federal income tax purposes under the Internal Revenue Code. In the opinion of
Brown & Wood LLP, 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 "Material 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 the certificates
must be reported under an accrual method of accounting.
The offered certificates may, depending on their issue price, be
issued with OID for federal income tax purposes. Holders of 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 that
income. The OID regulations do not contain provisions specifically interpreting
Section 1272(a)(6) of the tax code which applies to prepayable securities like
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 Section 1272(a)(6) of the tax code,
there can be no assurance that described 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 the
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 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 Brown & Wood LLP, the offered certificates will be
treated as regular interests in a REMIC under section 860G of the tax code.
Accordingly, the offered certificates will be treated as (1) assets described
in section 7701(a)(19)(C) of the tax code, and (2) "real estate assets" within
the meaning of section 856(c)(4)(A) of the tax 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 tax code to the same extent that the
offered certificates are treated as real estate assets. See "Material Federal
Income Tax Consequences" in the prospectus.
BACKUP WITHHOLDING
Some 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 tax code, properly, or, under limited
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, some 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 those
certificates owned from DTC participants and indirect DTC participants rather
than from the trustee. The trustee, however, will respond to requests for
necessary information to enable DTC participants, indirect DTC participants and
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 DTC participants or indirect DTC 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.
Those amounts will be deemed distributed to the affected certificate
owner for all purposes of the certificates, the pooling and servicing agreement
and the policy.
The new withholding regulations, which are final regulations dealing
with withholding tax on income paid to foreign persons, backup withholding and
related matters 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 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 foreign investors. A foreign investor for
federal income tax purposes is any person other than:
(1) a citizen or resident of the United States,
(2) a corporation, partnership or other entity organized in
or under the laws of the United States, any state of the United States
or the District of Columbia, other than a partnership that is not
treated as a United States person under any applicable Treasury
regulations,
(3) an estate the income of which is includible in gross
income for United States federal income tax purposes, regardless of
its source,
(4) 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
(5) some 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 tax code and Treasury regulations generally subject interest paid
to a foreign investor to a withholding tax at a rate of 30% unless that rate
were changed by an applicable treaty. The withholding tax, however, is
eliminated with respect to particular "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 tax code is furnished 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 the 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 the offered certificate, PROVIDED that:
(1) the gain is not effectively connected with a trade or
business carried on by the certificate owner in the United States,
(2) in the case of a certificate owner that is an individual,
the certificate owner is not present in the United States for 183 days
or more during the taxable year in which the sale, exchange or
redemption occurs and
(3) 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 "Material 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 those tax consequences.
All investors should consult their own tax advisors regarding the
Federal, state, local or foreign income tax consequences of the purchase,
ownership and disposition of the 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 ERISA, and the tax code, of the Plan's acquisition
and ownership of those certificates. See "ERISA Considerations" in the
prospectus.
DOL has granted an exemption to J.P. Morgan Securities Inc., as an
underwriter, Prohibited Transaction Exemption 90-23, Application No. D-7989, 55
Fed. Reg. 20545 (1990) which exempts from the application of the prohibited
transaction rules transactions relating to (1) the acquisition, sale and
holding by Plans of particular certificates representing an undivided interest
in particular 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 asset-backed pass-through trusts, PROVIDED that the
general conditions and 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 specified conditions 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 those 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 acquisition that is in one of the
three highest generic rating categories from S&P, Moody's, Duff &
Phelps or Fitch;
(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 the 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 the
mortgage loans; the sum of all payments made to and retained by the
master servicer represents not more than reasonable compensation for
any of the master servicer's services under the pooling and servicing
agreement and reimbursement of the master servicer's reasonable
expenses in connection with providing those services;
(5) The trustee is not an affiliate of any underwriter, the
seller, any servicer, the master 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 SEC under the Securities Act of 1933, as amended.
On July 21, 1997, DOL published in the Federal Register an amendment
to the exemption, which extends exemptive relief to particular 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 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, instead of requiring that all obligations supporting the
certificates 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 must not exceed twenty-five percent (25%).
(2) All obligations transferred after the closing date 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 the 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 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 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
that 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 funding period must end no later than three months or
90 days after the closing date or earlier in particular circumstances
if the pre-funding account falls below the minimum level specified in
the pooling and servicing agreement or an event of default occurs
under that agreement.
(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 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 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 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 tax code to that 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 tax 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
The offered certificates will constitute "mortgage related securities"
for purposes of 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 therefore are legal investments for specified 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
Under the terms and conditions set forth in the underwriting
agreement, dated ____________________, between the depositor and J.P. Morgan
Securities Inc., 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 offers and sales related to the prospectus supplement and the
attached prospectus may be used by [_______] in connection with market making
transactions in the offered certificates. [_________] may act as principal or
agent in those transactions. Those transactions will be at prices related to
prevailing market prices at the time of sale. [________] is an affiliate of [
], and therefore may also be viewed as an affiliate of the trust.]
The underwriting agreement provides that the depositor will indemnify
the underwriter against specified civil liabilities, including liabilities
under the Securities Act.
EXPERTS
[----------]
LEGAL MATTERS
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 ______.
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 lowered or withdrawn at any time by the assigning rating
organization. Each securities rating should be evaluated independently of
similar ratings on different securities.
<PAGE>
GLOSSARY
Whenever used in this prospectus supplement, the following terms have
the following meanings:
"Available Funds" means, for each distribution date, the following
amounts in respect of a loan group for the previous due period:
(1) payments of principal and interest on the mortgage loans
in that 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);
(2) net liquidation proceeds and insurance proceeds with
respect to the mortgage loans in that loan group net of amounts
applied to the restoration or repair of a mortgaged property;
(3) the purchase price for repurchased defective mortgage
loans with respect to the mortgage loans in that loan group and any
related substitution adjustment;
(4) 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
that loan group as provided in the pooling and servicing agreement;
and
(5) any amounts paid under the policy in respect of the related
certificate group.
"Civil Relief Act Interest Shortfalls" means, for any distribution
date, any shortfall in a Class Interest Distribution attributable to the
Soldiers' and Sailors' Civil Relief Act of 1940, as amended.
"Class A Monthly Principal Distributable Amount" means, with respect
to any distribution date and certificate group, to the extent of funds
available to be distributed as principal on the certificates, the amount equal
to the sum of the following amounts (without duplication) with respect to the
immediately preceding due period:
(1) each payment of principal on a mortgage loan in the
related loan group received by the master servicer during that due
period, including all full and partial principal prepayments,
(2) 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,
(3) the portion of the purchase price allocable to principal
of all repurchased defective mortgage loans in the related loan group
with respect to that due period,
(4) any substitution adjustments received on or prior to the
previous determination date and not yet distributed with respect to
the related loan group, and
(5) that portion, not greater than 100%, of Excess Spread, if
any, required to be distributed on that distribution date to satisfy
the required level of overcollateralization for the related loan group
for that distribution date, which amount is 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
that certificate group on the preceding distribution date over the amount in
respect of principal that is actually distributed to the class A
certificateholders of that certificate group on the preceding 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 that distribution date and any outstanding
Class A Principal Carryover Shortfall as of the close of business on the
preceding distribution date.
"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 (1) the amount of interest the class A-6
certificates would be entitled to receive on that distribution date had that
rate been calculated without reference to the Net Funds Cap over (2) the amount
of interest the class A-6 certificates actually receives on the distribution
date, plus accrued interest on the amount of that excess at the rate determined
pursuant to clause (1) above for that distribution date.
"Class Interest Carryover Shortfall" means, as to any distribution
date and class of class A certificates, the sum of (1) 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 that class on the preceding distribution date, over the amount in
respect of interest that is actually distributed to that class on the preceding
distribution date plus (2) one month's interest on that excess, to the extent
permitted by law, at the related certificate rate.
"Class Interest Distribution" means an amount equal to the sum of (a)
that one month's interest at the related certificate rate on the related class
A principal balance immediately prior to that distribution date, or the Class
Monthly Interest Distributable Amount, and (b) any class Interest Carryover
Shortfall for that class of class A certificates for that distribution date.
"Deficiency Amount" means for any distribution date (A) the excess, if
any, of (1) class Monthly Interest Distributable Amount net of any Civil Relief
Act Interest Shortfalls plus any Class Interest Carryover Shortfall over (2)
funds on deposit in the distribution account net of the trustee's fee and the
insurance premium for that distribution date and (B) the Guaranteed Principal
Amount.
"Distributable Excess Spread" means, for any distribution date and
each loan group, the portion, if any, of Excess Spread required to be
distributed to satisfy the required level of overcollateralization for that
loan group.
"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 that distribution date over (y) the amount required to be
distributed on that distribution date as described in paragraph A items (1)
through (4), with respect to the group 1 certificates and paragraph B items (1)
through (4), with respect to the group 2 certificates, in each case set forth
under "Description of the Certificates--Priority of Distributions" in this
prospectus supplement.
"Exemption" means Prohibited Transaction Exemption 90-23, Application
No. D-7989, 55 Fed Reg. 20545 (1990) granted by the DOL to J.P. Morgan
Securities, Inc.
"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 that 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), an
amount equal to the then outstanding class A principal balance.
"Insured Payment" means (1) as of any distribution date, any
Deficiency Amount and (2) any preference amount.
"LIBOR Rate" means 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 business day prior to the first day of any interest
period relating to the class A-6 certificates, or the second business day prior
to the closing date, in the case of the first distribution date; provided,
that, if that rate does not appear on that page or the other page as may
replace that page on that service, or if that service is no longer offered, the
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]; provided further, that if no 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.
"Net Funds Cap" means, for any distribution date, 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 that distribution date,
weighted on the basis of the related principal balances as of that date and (B)
the sum of (1) the master servicing fee rate and the rate at which the trustee
fee and the premium payable to the certificate insurer are calculated and (2)
commencing with the thirteenth distribution date, ___%.
"Plan" means employee benefit plans and other retirement plans and
arrangements, including, but not limited to, individual retirement accounts and
annuities, as well as collective investment funds and separate general accounts
in which the plans or arrangements are invested, which have requirements
imposed upon them under ERISA and the tax code.
"Plan Asset Regulation" means the final regulations issued by DOL that
define the "assets" of a Plan for purposes of ERISA and the prohibited
transaction provisions of the tax code (under 29 C.F.R. Sections 2510.3-101).
["Reference Bank Rate" means [ ]. ]
"SMMEA" means the Secondary Mortgage Market Enhancement Act of 1984,
as amended.
<PAGE>
The information in this prospectus supplement is not complete and may be
changed. We may not sell these securities until the registration statement filed
with the SEC 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 December 27, 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
----------------------
| The notes represent | transferor and master servicer
| non-recourse |
| obligations of the | THE TRUST
| issuer only and do |
| not represent an | o will issue [___] class of senior notes, which
| interest in or | are offered by this prospectus supplement
| obligation of the |
| depositor, the | THE NOTES
| trustee or any of |
| their affiliates. | o are secured by the assets of the trust which
includes a pool of [adjustable rate home equity
| This prospectus | revolving credit line loan agreements and fixed
| supplement may be | rate closed-end home equity loans]
| used to offer and |
| sell the notes only | o currently have no trading market
| if accompanied by |
| the prospectus. | CREDIT ENHANCEMENT
----------------------
o A spread account will fund shortfalls in
payments due on the notes.
o The transferor interest will absorb up to a
specified amount of all losses on the mortgage
loans.
o An irrevocable and unconditional guaranty
insurance policy issued by [________] will
guarantee payments on the notes.
REVIEW THE INFORMATION IN "RISK FACTORS" ON PAGE S-10 IN THIS PROSPECTUS
SUPPLEMENT AND ON PAGE 5 IN THE PROSPECTUS.
J.P. Morgan Securities Inc., the underwriter, will buy the notes from the
depositor at the price specified below. This prospectus supplement and the
attached prospectus may be used by [______], which is an affiliate of
[__________] and therefore may also be viewed as an affiliate of the trust, in
connection with offers and sales related to market making transactions in the
notes. These transactions will be at prevailing market prices at the time of
sale. [ ] may act as principal or agent in these transactions.
PER $1,000 OF
NOTES TOTAL
------------- -----------
Price to Public................................. $ $
Underwriting Discount........................... $ $
Proceeds, before expenses, to the depositor..... $ $
NEITHER THE SEC 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_
<PAGE>
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 to this prospectus supplement.
Purchasers are urged to read both this prospectus supplement and the
prospectus in full. Sales of the notes offered by this prospectus supplement
may not be consummated unless the purchaser has received both this prospectus
supplement and the prospectus. There is a Glossary on page S-64 where you will
find definitions of the capitalized terms used in this prospectus supplement.
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, that 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 by
this prospectus supplement in any jurisdiction in which, or to any person to
whom, it is unlawful to make that offer or solicitation in that jurisdiction.
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.
<PAGE>
Table Of Contents
Page
----
PROSPECTUS SUPPLEMENT
Summary................................................................S-4
Risk Factors..........................................................S-10
The Insurer...........................................................S-14
The Trust.............................................................S-14
The Transferor........................................................S-15
Description of the Mortgage Loans.....................................S-17
Description of the Notes..............................................S-26
Pool Factor...........................................................S-44
Maturity and Prepayment Considerations................................S-44
Description of the Agreements.........................................S-46
Use of Proceeds.......................................................S-56
Material Federal Income Tax Consequences..............................S-56
State Taxes...........................................................S-60
ERISA Considerations..................................................S-60
Legal Investment Considerations.......................................S-62
Underwriting..........................................................S-62
Legal Matters.........................................................S-63
Experts...............................................................S-63
Ratings...............................................................S-64
Glossary..............................................................S-64
PROSPECTUS
Risk Factors.............................................................5
The Trust Fund...........................................................7
Use of Proceeds.........................................................27
The Depositor...........................................................27
Description of the Securities...........................................28
Credit Enhancement......................................................46
Yield and Prepayment Considerations.....................................54
The Agreements..........................................................57
Material Legal Aspects of the Loans.....................................76
Material Federal Income Tax Consequences................................94
State Tax Considerations...............................................126
ERISA Considerations...................................................126
Legal Investment.......................................................134
Method of Distribution.................................................135
Legal Matters..........................................................137
Financial Information..................................................137
Rating.................................................................137
Where You Can Find More Information....................................138
Incorporation of Certain Documents by Reference........................138
Glossary...............................................................140
<PAGE>
SUMMARY
This summary highlights selected information from this document and
does not contain all of the information that you need to consider in making
your investment decision. Please read this entire prospectus supplement and
the accompanying prospectus for additional information about the Notes.
-----------------------------------------------------------------------------
HOME EQUITY LOAN ASSET-BACKED NOTES, SERIES 199_-_
-----------------------------------------------------------------------------
INITIAL CLASS
PRINCIPAL BALANCE
CLASS/INTEREST NOTE RATE (+/-5%) MATURITY DATE
----------------- --------------- ----------------------- ------------------
Notes LIBOR + ___% $________________ ____________
----------------- --------------- ----------------------- ------------------
Transferor N.A. N.A. N.A.
----------------- --------------- ----------------------- ------------------
We expect the actual maturity date for the notes will be
significantly earlier than its maturity date stated in the table
above.
If the note 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.
The transferor interest is not being offered pursuant to this
prospectus supplement and the prospectus.
<PAGE>
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.
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 revised or withdrawn 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.
FEDERAL TAX CONSEQUENCES
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 "MATERIAL FEDERAL
INCOME TAX CONSEQUENCES" IN THIS
PROSPECTUS SUPPLEMENT AND IN THE
PROSPECTUS FOR ADDITIONAL
INFORMATION.
ERISA CONSIDERATIONS
The fiduciary responsibility
provisions of ERISA can limit
investments by some 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.
CUT-OFF DATE
o ______________, 199_.
CLOSING DATE
o ______________, 199_.
PAYMENT DATE
o The __th day of each month, or if
that 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.
<PAGE>
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.
WE REFER YOU TO "RISK FACTORS--
CONSEQUENCES ON LIQUIDITY AND PAYMENT
DELAY BECAUSE OF OWNING BOOK-ENTRY
NOTES" AND "DESCRIPTION OF THE
NOTES--BOOK-ENTRY NOTES" 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 the 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
these 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 and fixed rate closed-end
home equity loans]. These 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 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 ___________
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 be
borrowed again.
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 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 that loan and
the borrower is not entitled
to future advances of cash
under that 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 the simple interest
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 a
payment date, you will be
entitled to receive payments
on that payment date.
2. INTEREST PAYMENTS: Interest on the
notes for a payment date 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
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
events causing an acceleration of
payment of principal do not occur,
you will be entitled to the lesser
of (a) and (b):
(a) ___% of the principal
collected during the prior due
period; or
(b) 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 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
specified levels. In addition, if
the insurer defaults, some payments
to the holder of the transferor
interest will be made after
payments to the notes.
WE REFER YOU TO "DESCRIPTION OF THE
NOTES" IN THIS PROSPECTUS
SUPPLEMENT FOR ADDITIONAL
INFORMATION.
OPTIONAL TERMINATION
The mortgage loans may be purchased
by the owner of the transferor
interest at its option 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 on those draws
have been paid.
WE REFER YOU TO "DESCRIPTION OF THE
AGREEMENTS--TERMINATION; RETIREMENT
OF THE NOTES" IN THIS PROSPECTUS
SUPPLEMENT FOR ADDITIONAL
INFORMATION.
LEGAL INVESTMENT CONSIDERATIONS
SMMEA 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.
<PAGE>
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 the 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 particular 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
the 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 then credit them to your account either directly or
indirectly through indirect participants, as applicable.
WE REFER YOU TO "DESCRIPTION OF THE NOTES--BOOK-ENTRY NOTES" IN THIS
PROSPECTUS SUPPLEMENT.
BALLOON LOANS MAY BE MORE LIKELY TO EXPERIENCE DEFAULTS
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 that amount, you will suffer a loss if
the insurer fails to perform its obligations under the insurance 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, which
include 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 "MATERIAL LEGAL ASPECTS OF THE LOANS--FORECLOSURE/
REPOSSESSIONS" 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 "YIELD AND PREPAYMENT 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 note 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 some 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 insurance 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 "MATERIAL 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 "true sale" of the
mortgage loans for bankruptcy purposes. 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. This
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 FDIC could be appointed as a receiver or conservator and prevent the
indenture trustee from taking any action with respect to the trust. The FDIC
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 master 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 the prepayment so
that one month's interest is paid with that prepayment in full. If the
servicing fee is insufficient to pay 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 insurance policy, you may incur a loss.
o SOME INTEREST SHORTFALLS ARE NOT COVERED BY THE MASTER SERVICER OR THE
INSURANCE POLICY. The Soldiers' and Sailors' Civil Relief Act of 1940
permits modifications to the payment terms for mortgage loans, including a
reduction in the amount of interest paid by the borrower. Neither the
master servicer nor the insurer will pay for any interest shortfalls
created by the Soldiers' and Sailors' Civil Relief Act of 1940. The holders
of the notes will not be entitled to receive any shortfalls in interest
resulting from the application of 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 the holders of the
notes.]
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 Freddie Mac with respect to credit history and
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. No representation is made by the underwriters, the
transferor, the master servicer or any of their affiliates as to the accuracy
of completeness of that information.
[DESCRIPTION OF INSURER]
THE TRUST
GENERAL
The Home Equity Loan Trust 199_-_ 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:
(1) acquiring, holding and managing the mortgage loans and the other
assets of the trust,
(2) issuing the notes and the transferor interest,
(3) making payments on the notes and the transferor interest and
(4) engaging in other activities that are necessary, suitable or
convenient to accomplish the foregoing or are incidental to those activities
or in connection with those activities.
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 from the transferor pursuant to a sale and servicing agreement dated as
of __________, 199_, among the trust, the depositor, the transferor, the
master servicer, the owner trustee and the indenture trustee. With respect to
any date, the pool principal balance will equal to the aggregate principal
balances of all mortgage loans as of that date.
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" in this prospectus
supplement. The assets of the trust will also include (1) payments in respect
on the mortgage loans received on or after the cut-off date exclusive of
payments in respect of interest accrued on the mortgage loans during ______
and (2) payments in respect of interest on the delinquent mortgage loans due
prior to the cut-off date and received after the cut-off date, (3) amounts on
deposit in the collection account, distribution account [and the spread
account] and (4) additional ancillary or incidental funds, rights and
properties related to the foregoing.
The assets of the trust will be pledged to the indenture trustee as
security for the notes pursuant to the indenture dated as of _________,
between the trust and the indenture trustee.
The master servicer is obligated to service the mortgage loans
pursuant to the sale and servicing agreement and will be compensated for its
services as described under "Description of the Agreements--Servicing
Compensation and Payment of Expenses" in this prospectus supplement.
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 as 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_, December 31, 199_ and December 31, 199_.
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 those loans are delinquent pursuant to their
repayment terms.
The 90 days or more category in the table below includes the
principal balance of loans currently in process of foreclosure and loans
acquired through foreclosure or deed in lieu of foreclosure.
<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(1) OF LOANS AMOUNT(1) OF LOANS AMOUNT(1) OF LOANS AMOUNT(1) OF LOANS AMOUNT(1)
-------- --------- -------- --------- -------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Portfolio...... $ $ $ $
Delinquency
Percentage(1)
30-59 days.... % % % %
60-89......... % % % %
90 days or
more(2)...... % % % %
TOTAL.... % % % % % %
______________________
(1) Dollar amounts rounded to the nearest $1,000.
</TABLE>
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_, December 31, 199_ and December 31, 199_.
Amounts charged-off during a period are expressed as a percentage of the
average portfolio balance during that period. 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 the re-appraisals, a decision is then
made concerning the amounts determined to be uncollectible. The average
portfolio balance during the period is calculated by averaging 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.
<TABLE>
<CAPTION>
____
MONTHS
YEAR ENDED ENDED
----------------------------------------------------- ------------
DECEMBER DECEMBER DECEMBER DECEMBER ___________,
31, 199_ 31, 199_ 31, 199_ 31, 199_ 199_
-------- -------- --------- --------- ------------
Average Portfolio
<S> <C> <C> <C> <C> <C>
Balance......... $ $ $ $
Charge-Offs....... $ $ $ $
Charge-Offs as a %
of Average Portfolio
Balance......... % % % %(1)
___________________
(1) Annualized.
</TABLE>
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 in this prospectus supplement are weighted on the basis of the
cut-off date pool balance included in the trust unless otherwise indicated.
Approximately ____% of the mortgage loans are fixed rate closed-end
home equity loans evidenced by promissory notes. Approximately ____% of the
mortgage loans are adjustable rate revolving home equity lines of credit.
All mortgage loans were originated between _________ and
____________. The aggregate cut-off date principal balance of all mortgage
loans was $___________, which is equal to the aggregate principal balances of
the mortgage loans as of the close of business on the cut-off date
(_____________, 199__). Approximately ____% of the mortgage loans were secured
by a first mortgage on the related mortgaged property, ____% of the mortgage
loans were secured by second mortgages and ___% of the mortgage loans 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 were secured by mortgaged
properties that are owner-occupied, and ___% of the mortgage loans were
secured by non-owner occupied mortgaged properties. Approximately ____%, ____%
and ____% of the mortgage loans were secured by mortgaged properties in
________, _______ and ________, respectively. 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 loan rates on the revolving
credit-line loans ranged from ______% per annum to _____% per annum and the
weighted average loan rate was ____% per annum. The average credit limit
utilization rate 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 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 that the revolving
credit-line loan was in a junior lien position, by the sum of the credit limit
or cut-off date principal balance as applicable and the outstanding balances
at the time the revolving credit-line loan was originated of all senior
mortgage loans affecting the mortgaged property was approximately ____%.
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
(1) the greater of the credit limit and the current balance as of the cut-off
date and (2) the principal balance of any senior mortgage loan as of the
origination of that 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 that mortgage loan. The CLTV of each
closed-end loan is the ratio, expressed as a percentage, of (1) the sum of (a)
the original principal balance of the 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 the closed-end loan divided by (2) the
value of the related mortgaged property, based upon the appraisal made at the
time of origination of that 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.
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 in this prospectus supplement.
MORTGAGE LOAN TERMS
REVOLVING CREDIT-LINE LOANS. The revolving credit-line loans were
originated pursuant to credit line agreements. Under the credit line
agreements, the borrowers may receive an additional balance or a draw at any
time during a 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 the related credit line agreement at the
time of the draw.
Approximately ___% (by cut-off date pool balance) of the mortgage
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 of these loans adjusts
monthly. Minimal monthly principal payments may be required to be made by the
borrowers during the draw period, but those 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, a 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 the 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.
Interest 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 loans which have a ten year draw period 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 loans which have a
ten year draw period, the twentieth day of the prior month plus a 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 interest on each revolving credit line loan accrued each month is
calculated based on in 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 have 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 has 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
interest and second, to the principal balance outstanding with respect to the
mortgage loan.
CLOSED-END LOANS. All of the closed-end loans have loan rates that
are fixed and are evidenced by mortgage or promissory 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, and payments are due,
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 through receipt of the borrower's most current monthly payment. The
portions of each monthly payment that are allocated to interest and principal
are adjusted based on the actual amount of interest charged on that 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 the closed-end
loan is an adjustable loan or a 360 day year of twelve 30-day months, if the
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 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 have 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 has 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.
<TABLE>
<CAPTION>
COMBINED LOAN-TO-VALUE RATIOS
PERCENT OF
COMBINED NUMBER OF CUT-OFF DATE POOL BY CUT-OFF DATE
LOAN -TO-VALUE RATIOS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
______ to ______..................
______ to ______..................
______ to ______..................
______ to ______..................
______ to ______..................
______ to ______..................
______ to ______..................
______ to ______..................
______ to ______..................
______ to ______..................
______ to ______..................
______ to ______..................
Total............................. $ 100.00%
=== ========= ======
LIEN PRIORITY
PERCENT OF
NUMBER OF CUT-OFF DATE POOL BY CUT-OFF DATE
LIEN PRIORITY MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
1.................................
2.................................
3.................................
Unknown...........................
Total........................ $ 100.00%
=== ========= ======
PROPERTY TYPE
PERCENT OF
NUMBER OF CUT-OFF DATE POOL BY CUT-OFF DATE
PROPERTY TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
1- to 4-Family.................... ___ $_________ %
Total........................ $ 100.00%
=== ========= ======
OWNER OCCUPANCY STATUS
PERCENT OF
NUMBER OF CUT-OFF DATE POOL BY CUT-OFF DATE
OWNER OCCUPANCY STATUS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
Owner Occupied...................
Non-Owner Occupied...............
Unknown.......................... ___ _________ ______
Total....................... $ 100.00%
=== ========= ======
GEOGRAPHIC DISTRIBUTION(1)
PERCENT OF
NUMBER OF CUT-OFF DATE POOL BY CUT-OFF DATE
OWNER OCCUPANCY STATUS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
.................................
.................................
.................................
Total....................... ___ $ 100.00%
========= ======
(1) Geographic location is determined by the address of mortgaged property
securing each mortgage loan.
PRINCIPAL BALANCES
PERCENT
NUMBER OF CUT-OFF DATE BY CUT-OFF DATE
PRINCIPAL BALANCES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
$ 0.01 - _________ ......
__________- _________ .........
__________- _________ .........
__________- _________ .........
__________- _________ .........
__________- _________ .........
__________- _________ .........
__________- _________ .........
__________- _________ .........
__________- _________ .........
__________- _________..........
__________- _________..........
__________- _________ .........
__________- _________ .........
__________ and greater .......
Total..................... ___ $ 100.00%
========= ======
REVOLVING CREDIT-LINE LOANS
CREDIT LIMITS
NUMBER OF PERCENT
REVOLVING CUT-OFF DATE BY CUT-OFF DATE
CREDIT LIMITS CREDIT-LINE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
$ 0.01- __________ ...........
_________- __________ ...........
_________- __________ ...........
_________- __________ ...........
_________- __________ ...........
_________- __________ ...........
_________- __________ ...........
_________- __________ ...........
_________- __________ ...........
_________- __________ ...........
_________- __________ ...........
_________- __________ ...........
_________- __________ ...........
_________- __________ ...........
_________- __________ ...........
_________ and greater ...........
Total....................... ___ $ 100.00%
========= ======
REVOLVING CREDIT-LINE LOANS
CREDIT LIMIT UTILIZATION RATES
NUMBER OF PERCENT
REVOLVING CUT-OFF DATE BY CUT-OFF DATE
CREDIT LIMIT UTILIZATION RATES CREDIT-LINE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------ ----------------- ----------------- -----------------
<S> <C> <C> <C>
Less than or equal to ______%....
---- - ---- ...................
---- - ---- ...................
---- - ---- ...................
---- - ---- ...................
---- - ---- ...................
---- - ---- ...................
---- - ---- ...................
---- - ---- ...................
---- - ---- ...................
---- - ---- ...................
---- - ---- ...................
---- - ---- ...................
Total...................... ____ $___________ 100.00%
LOAN AGE
PERCENT
NUMBER OF CUT-OFF DATE BY CUT-OFF DATE
LOAN AGE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------- -------------- ----------------- -----------------
<S> <C> <C> <C>
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
PERCENT
NUMBER OF CUT-OFF DATE BY CUT-OFF DATE
LOAN RATES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------- -------------- ----------------- -----------------
<S> <C> <C> <C>
- ------ - ------ %.........
- ------ - ------ ..........
- ------ - ------ ..........
- ------ - ------ ..........
- ------ - ------ ..........
- ------ - ------ ..........
- ------ - ------ .........
- ------ - ------ ..........
- ------ - ------ ..........
- ------ - ------ ..........
- ------ - ------ ..........
- ------ - ------...........
- ------ - ------...........
- ------ - ------ ..........
- ------ - ------...........
- ------ - ------...........
- ------ - ------ ..........
Total............... ____ $__________ 100.00%
==== =========== ======
GROSS MARGIN FOR ADJUSTABLE RATE MORTGAGE LOANS(1)
NUMBER OF PERCENT
REVOLVING CUT-OFF DATE BY CUT-OFF DATE
GROSS MARGIN CREDIT-LINE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
- ------ - -------%............
- ------ - -------..............
- ------ - - ------..............
- ------ - ------..............
----- - ------..............
------ ------...............
------ ------...............
------ ------...............
------ ------...............
------ ------...............
------ ------...............
------ ------...............
------ ------...............
------ ------...............
------ ------...............
------ ------...............
Total.................... ____ $________ 100.00%
==== ========= ======
- ------------------
(1) Each adjustable rate mortgage loan has a minimum loan rate equal to the
greater of zero and the gross margin.
MAXIMUM RATES FOR ADJUSTABLE RATE MORTGAGE LOANS
NUMBER OF PERCENT
REVOLVING CUT-OFF DATE BY CUT-OFF DATE
MAXIMUM RATES CREDIT-LINE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
_____%.......................
_____ .......................
Total................... $ 100.00%
=== ========= ======
ORIGINATION YEAR
PERCENT
NUMBER OF CUT-OFF DATE BY CUT-OFF DATE
ORIGINATION YEAR 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%
==== ========= ======
DELINQUENCY STATUS
PERCENT
NUMBER OF CUT-OFF DATE BY CUT-OFF DATE
NUMBER OF DAYS DELINQUENT MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
Current.......................
30 to 59......................
Total.................... $ 100.00%
==== ========= ======
</TABLE>
DESCRIPTION OF THE NOTES
The trust will issue one class of notes pursuant to the indenture to
be dated as of _________ __, 199__, between the trust and ________, as
indenture trustee. The trust will also issue the transferor interest pursuant
to the terms of a trust agreement to be dated as of _________ __, 199__, among
the trust and __________, as owner trustee. The notes will be secured by the
assets of the trust pursuant to the indenture. In addition, the depositor will
enter into a sale and servicing agreement to be dated as of _________ __,
199__ 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 in this
prospectus supplement. 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 material 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, the sections or defined terms are incorporated in
this prospectus supplement by reference.
GENERAL
The notes will be issued in minimum denominations of $1,000 and in
multiples of $1 in excess of that amount. The notes will evidence specified
undivided interests in the trust. The property of the trust will consist of:
(1) each of the mortgage loans that from time to time are held under
the sale and servicing agreement (including any Additional Balances arising
after the cut-off date) and the mortgage files;
(2) collections on the mortgage loans received on and after the
cut-off date, exclusive of payments in respect of interest accrued on the
mortgage loans during ______ and payments in respect to interest on the
delinquent mortgage loans due prior to the cut-off date and received after the
cut-off date;
(3) mortgaged properties relating to the mortgage loans that are
acquired by foreclosure or deed in lieu of foreclosure;
(4) the collection account, the distribution account and the spread
account; and
(5) the insurance policy.
Definitive notes, 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 Original Invested Amount which represents ___% of the cut-off
date pool balance will equal $________. The original note principal balance
will equal $__________ with a permitted variance in the aggregate of plus or
minus 5%. The principal amount of the outstanding notes, or 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 in this prospectus supplement.
The transferor will own the remaining undivided interest in the
mortgage loans, 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:
(1) the rating agencies have notified the transferor, the insurer and
the indenture trustee in writing that the action will not result in the
reduction or withdrawal of the ratings assigned to the notes,
(2) the insurer has consented in writing to the transfer and
(3) other conditions specified in the sale and servicing agreement
are satisfied.
BOOK-ENTRY NOTES
The notes will be book-entry notes. Persons acquiring beneficial
ownership interests in the notes, or note owners, may elect to hold their
notes through DTC in the United States, or Cedelbank or Euroclear in Europe if
they are participants of those systems, or indirectly through organizations
which are participants in those 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 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 Chase will act as depositary for Euroclear. Investors may
hold beneficial interests in the book-entry notes in minimum denominations
representing note principal balances of $1,000 and in multiples of $1 in
excess of that amount. Except as described in this prospectus supplement, no
beneficial owner of a book-entry note will be entitled to receive a physical
or definitive note representing that 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 that maintains the beneficial owner's account for
that purpose. In turn, the financial intermediary's ownership of the
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 in
this prospectus supplement, under the rules, regulations and procedures
creating and affecting DTC and its operations, 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 those payments on behalf of
their respective note owners. Accordingly, although note owners will not
possess notes, the DTC 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 in this prospectus supplement. 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 those participants and indirect participants to
transfer notes, by book-entry transfer, through DTC for the account of the
purchasers of the notes, which account is maintained with their respective
participants. Under the DTC 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. Credits or any transactions in
securities settled during that 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 or Euroclear participant 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 "Material Federal Income Tax
Consequences - Foreign Investors" and "-- Backup Withholding" in this
prospectus supplement.
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, 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 New York-chartered limited purpose trust company and
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 governed
by 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 and facilitates the clearance and settlement of securities
transactions between Cedelbank participants through electronic book-entry
changes in accounts of Cedelbank participants, thus 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
regulated 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
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 and to clear and settle transactions between Euroclear participants
through simultaneous electronic book-entry delivery against payment, thus
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 in this prospectus
supplement. Euroclear is operated by the Brussels, Belgium office of Morgan
Guaranty Trust Company of New York, under contract with Euroclear Clearance
Systems S.C., a Belgian cooperative corporation. 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. 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. 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 those payments to, the accounts of the applicable DTC participants in
accordance with DTC's normal procedures. Each DTC participant will be
responsible for disbursing those 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 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 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. Those payments will be covered by the tax reporting requirements
of the relevant United States tax laws and regulations. See "Material Federal
Income Tax Consequences - Foreign Investors" and "- Backup Withholding" in
this prospectus supplement. 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 DTC system, or otherwise
take actions in respect of the book-entry notes, may be limited due to the
lack of physical notes for those book-entry notes. In addition, issuance of
the book-entry notes in book-entry form may reduce the liquidity of those
notes in the secondary market since some 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 DTC, and to the financial intermediaries to whose DTC
accounts the book-entry notes of those 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 those
actions are taken on behalf of financial intermediaries whose holdings include
those 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 only
if the relevant depositary is able to effect 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,
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 to DTC 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 that 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 then will recognize the
holders of the 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 those procedures and those procedures may be discontinued
at any time.
DTC management is aware that some computer applications, systems, and
the like for processing data 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
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 interest payments, to securityholders, book-entry deliveries, and
settlement of trades within DTC, 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: (1) impress upon them the importance of those services
being year 2000 compliant; and (2) 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 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, including all collections received on or with respect to
each mortgage loan on or after the cut-off date, exclusive of payments in
respect of (1) interest accrued on the mortgage loans in _____ and (2)
payments in respect of interest on the delinquent mortgage loans due prior to
the cut-off date and received after the cut-off date. The trust, concurrently
with that 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 mortgage loan schedule which
will be attached as an exhibit to the indenture. The mortgage loan schedule
will include information as to the cut-off date principal balance of each
mortgage loan, as well as information with respect to the loan rate.
The 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 the defect is not cured within 90
days following notification to the transferor by the owner trustee, the trust
or the insurer, the transferor will be obligated to accept the transfer of
that mortgage loan from the trust. Upon the transfer, the principal balance of
the 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 that time, the
transferor will be obligated to either substitute an eligible substitute
mortgage loan or make a deposit into the collection account in the amount
equal to the transfer deficiency. Any deduction, substitution or deposit will
be considered for the purposes of the sale and servicing agreement a payment
in full of that mortgage loan. Any transfer deposit amount will be treated as
a principal collection. No 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
substitution:
(1) 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
that defective mortgage loan;
(2) 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 that defective mortgage loan;
(3) have a loan rate based on the same index with adjustments to
the loan rate made on the same adjustment date as that of
the defective mortgage loan;
(4) 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;
(5) have a mortgage of the same or higher level of priority as
the mortgage relating to the defective mortgage loan;
(6) 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;
(7) have an original combined loan-to-value ratio not greater
than that of the defective mortgage loan; and
(8) satisfy 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 the
difference. Any amounts will be treated as principal collections.
The transferor will make representations and warranties as to the
accuracy in all material respects of 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:
(1) 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 and
(2) 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 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
the 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
So long as it is permitted to do so under applicable law, the master
servicer may change the terms of the credit line agreements at any time
provided that those changes (1) do not adversely affect the interest of the
noteholders or the insurer, and (2) are consistent with prudent business
practice. In addition, the sale and servicing agreement permits the master
servicer, within limitations described in the sale and servicing agreement, to
increase or reduce the credit limit of the related mortgage loan and reduce
the gross margin for that mortgage loan.
OPTIONAL TRANSFERS OF MORTGAGE LOANS TO THE TRANSFEROR
On any payment date the transferor may, but shall not be obligated
to, remove mortgage loans from the trust 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 the conditions specified in the sale and servicing agreement, including:
(1) the transferor interest as of the transfer date, after
giving effect to removal, exceeds the minimum transferor
interest;
(2) 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 that
removal;
(3) 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 those mortgage
loans;
(4) in connection with each 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 the transfer will not result
in a reduction or withdrawal of the ratings assigned to the
notes without regard to the insurance policy; and
(5) 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 (1)
through (3) 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 that 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 the collection account which is a separate trust 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. 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 those amounts in the collection account. Not later than the
determinate date which is the eighteenth day of the calendar month of each
payment date, the master servicer will notify the indenture trustee of the
amount of the deposit to be included in funds available for the related
payment date. Amounts so deposited may be invested in eligible investments
maturing no later than one business day prior to the date on which amounts on
deposit in the collection account are required to be deposited in the
distribution account.
The indenture trustee will establish a 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 in an eligible account 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 (1) maintained
with a depository institution whose debt obligations at the time of any
deposit in an eligible account have the highest short-term debt rating by the
Rating Agencies and whose accounts are fully insured by either the Savings
Association Insurance Fund or the Bank Insurance Fund of the FDIC 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, (2) 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 (3) 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 insurance 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 the simple
interest excess sub-account which is a sub-account of the collection 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
(1) 30 days' interest on the principal balance of all those mortgage loans at
the loan rate, over (2) the portion of the monthly payment received from the
mortgagor for that 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 (1) the
portion of the monthly payment received from the mortgagor for that mortgage
loan allocable to interest with respect to the related collection period, over
(2) 30 days' interest on the principal balance of the 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 that 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 the investments, shall promptly remit the amount of
the loss from its own funds to the simple interest excess sub-account.
ALLOCATIONS AND COLLECTIONS
All collections on the mortgage loans will be allocated in accordance
with the credit line agreements or the mortgage notes, as applicable, between
Interest Collections and Principal Collections. Principal Collections and
Interest Collections will in turn be allocated between the noteholders and the
transferor as described in this prospectus supplement.
The indenture trustee will deposit any amounts withdrawn from the
spread account or drawn under the insurance policy into the distribution
account.
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 of
the mortgage loan, plus (1) any additional balances in respect of that
mortgage loan minus (2) all collections credited against the principal balance
of that mortgage loan in accordance with the related credit line agreement or
mortgage note prior to that day. The principal balance of a liquidated
mortgage loan after final recovery of related Liquidation Proceeds shall be
zero. A liquidated mortgage loan, as to any payment date, is 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.
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 those 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 that payment date. The term payment date means the
twenty-fifth day of each month or, if that 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 to those payments as it appears on the note register in
amounts calculated as described in this prospectus supplement on the
determination date. However, the final payment in respect of each note will be
made only upon presentation and surrender of the note at the office or the
agency of the indenture trustee specified in the notice to noteholders of the
final payment. For purposes of the agreements, a business day is any day other
than (1) a Saturday or Sunday or (2) a day on which the insurer or banking
institutions in the States of [____________] 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:
(1) 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;
(2) as payment for the premium for the insurance policy; and
(3) concurrently, as follows:
(a) to the noteholders, as payment for the
accrued interest due and any overdue
accrued interest, with interest on that
overdue interest 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 insurance policy on that
payment date are insufficient to make the payments required to be made
pursuant to this clause (3), 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 subclause without giving effect to any
shortfall in the 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 insurance policy, the amount payable pursuant to clause
(b) above on any subsequent payment date will be paid to the holder of the
transferor interest after payment of principal and interest due on the notes
are made on that 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 the interest period reduced by any
Civil Relief Act Interest Shortfalls for that payment date. The note rate for
a payment date will generally equal the sum of (a) LIBOR, determined as
specified in this prospectus supplement, as of the second business day prior
to the immediately preceding payment date or as of two 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 the Net WAC.
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 closing date through the day preceding that
payment date 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 insurance policy
pursuant to its terms. Interest for any payment date due but not paid on that
payment date will be due on the next succeeding payment date together with
additional interest on that 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. 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
business day prior to the first day of the interest period. Telerate Screen
Page 3750 means the display designated as page 3750 on the Telerate Service,
or any other page as may replace page 3750 on that service for the purpose of
displaying London interbank offered rates of major banks. If that rate does
not appear on that page or alternative page, 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
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 quotations
are provided, the rate will be the arithmetic mean of the quotations. If on
that 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 that 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 quotations can be obtained, the rate will be LIBOR for the prior payment
date.
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 the 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 the limitations will be retained in the collection account until the
transferor interest exceeds the minimum transferor interest, at which time the
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 _____________, the
amount of Principal Collections payable to noteholders as of each payment date
during the managed amortization period will be equal, to the extent funds are
available to be distributed as principal, to the Scheduled Principal
Collections Payment Amount for that payment date. The rapid amortization
period is the period beginning at the earlier of (1) the occurrence of a rapid
amortization event and (2) immediately following the payment date in
__________ and continuing until the later of when (1) the note principal
balance has been reduced to zero and all amounts then due and owing to the
insurer have been paid and (2) the trust is terminated. See "Description of
the Agreements--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, 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 to the indenture trustee in that
capacity. 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 the spread account which is a reserve 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
insurance policy, amounts, if any, on deposit in the spread account will be
available to make any of the following payments on the insurance policy in the
following order of priority:
(1) to the noteholders, any Insured Payment required
to be made on that payment date;
(2) to noteholders, the Investor Loss Amount for that
payment date or unreimbursed Investor Loss Amounts
from a previous payment date;
(3) to reimburse the insurer for prior draws made under
the insurance policy (with interest on those
draws); and
(4) to pay any other amounts owed to the insurer under
the insurance policy or the related 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 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 the payment date.
Funds credited to the spread account may be invested in eligible investments
or 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 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 in the spread account, if any, provided that the insurer and the rating
agencies consent to that action and the then current ratings of the notes
assigned by the rating agencies are not lowered as a result.]
RAPID AMORTIZATION EVENTS
As described in this prospectus supplement, the managed amortization
period will continue through the payment date in __________, unless a rapid
amortization event occurs prior to that date in which case the rapid
amortization period will commence prior to that 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 (1) termination of the trust and
(2) 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 (1) to make a
payment or deposit required under the agreements or (2) 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 that 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 events of bankruptcy, insolvency or
receivership relating to the transferor;
(d) the trust becomes required to register 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 insurance 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 those clauses, either the
indenture trustee or noteholders holding notes evidencing more than 51% of the
percentage interests 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 insurance 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 that 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 that 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 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 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 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 in this prospectus supplement.
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 this
information.
Under the insurance policy, the insurer, in consideration of the
payment of the premium, unconditionally and irrevocably guarantees to any
owner 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 insurance 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 those funds are properly applied by the indenture
trustee. Insured Payments shall be made only at the time set forth in the
insurance policy and no accelerated Insured Payments shall be made regardless
of any acceleration of the notes, unless that acceleration is at the sole
option of the insurer.
Notwithstanding the foregoing paragraph, the insurance 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 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 of
(1) a certified copy of the order requiring the return of a
preference payment,
(2) an opinion of counsel satisfactory to the insurer that the
order is final and not appealable,
(3) an assignment in the form 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 the preference payment or
otherwise with respect to the preference payment, and
(4) appropriate instruments to effect the appointment of the
insurer as agent for the owner in any legal proceeding,
related to the preference payment, those instruments being
in a form satisfactory to the insurer, provided that if
those documents are received after 12:00 noon, New York City
time, on a business day, they will be deemed to be received
on the following business day. Payments in respect of
preference amounts 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 the owner has returned principal
or interest paid on the notes to the receiver or trustee in
bankruptcy, in which case the payment shall be disbursed to
the owner.
The insurer will pay any other amount payable under the insurance
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 of a notice; provided that if notice is
received after 12:00 noon, New York City time, on a business day, it will be
deemed to be received on the following business day. If any notice received by
the fiscal agent is not in proper form or is otherwise insufficient for the
purpose of making claim under the insurance 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 insurance policy unless otherwise
stated in the insurance policy 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 the Insured Payment and legally available
to be paid to noteholders.
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 insurance policy.
Any notice under the insurance 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 any other address as the insurer shall specify
in writing to the indenture trustee.
The current notice address of the fiscal agent is
________________________, Attention: Municipal Registrar and Paying Agency.
The fiscal agent may change its notice address at any time by specifying its
new address to the indenture trustee in writing.
The insurance policy is being issued under and pursuant to, and shall
be construed under, the laws of the State of New York, without giving effect
to the conflict of laws principles of New York law.
The insurance provided by the insurance policy is not covered by the
Property/Casualty Insurance Security Fund specified in Article 76 of the New
York Insurance Law.
The insurance policy is not cancelable for any reason. The premium on
the insurance 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 that
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." After the closing date, 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" in this prospectus supplement.
MATURITY AND PREPAYMENT CONSIDERATIONS
The agreements, except as otherwise described in this prospectus
supplement, provides that the noteholders will be entitled to receive on each
payment date payments of principal, in the amounts described in this
prospectus supplement under the heading "Description of the Notes," 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. During the rapid amortization
period, noteholders will receive amounts from Principal Collections based
solely upon the Investor Fixed Allocation Percentage. Because prior payments
of 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 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 those losses either from the spread
account or draws under the insurance policy. The level of losses may therefore
affect the rate of payment of principal on 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, upon satisfaction of the
conditions specified in the sale and servicing agreement to remove mortgage
loans from the trust at any time during the life of the trust, so long as the
transferor interest after giving effect to that removal is not less than the
minimum transferor interest. The 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 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
those 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 those provisions,
unless that 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 "Material 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 fixed rate closed-end
loans, 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 that investor at the time the notes were purchased.
Collections on the mortgage loans may vary because, among other
things, borrowers may make payments during any month as low as the minimum
monthly payment for that 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 on the revolving credit-line loans.
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 the material terms of the sale and
servicing agreement, the trust agreement and the indenture. This 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, the defined terms are incorporated into this
prospectus supplement 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 the noteholder
and the insurer a statement setting forth among other items:
(1) the Investor Floating Allocation Percentage for the preceding
collection period;
(2) the amount being distributed to noteholders;
(3) the amount of interest included in the payment and the related
note rate;
(4) the amount, if any, of overdue accrued interest included in the
payment;
(5) the amount, if any, of the remaining overdue accrued interest
after giving effect to the payment;
(6) the amount, if any, of principal included in the payment;
(7) the amount, if any, of the reimbursement of previous Liquidation
Loss Amounts included in the payment;
(8) the amount, if any, of the aggregate unreimbursed Liquidation
Loss Amounts after giving effect to the payment;
(9) the servicing fee for the payment date;
(10) the Invested Amount and the note principal balance, each after
giving effect to the payment;
(11) the pool balance as of the end of the preceding collection
period;
(12) 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;
(13) the book value of any real estate which is acquired by the trust
through foreclosure or grant of deed in lieu of foreclosure; and
(14) the amount of any draws on the insurance policy.
In the case of information furnished pursuant to clauses (2), (3) in
respect of the amount of interest included in the payment, (4) and (8) above,
the amounts shall be expressed as a dollar amount per note with a $1,000
denomination.
Each year commencing in , the master servicer will be required to
forward to the indenture trustee a statement containing the information set
forth in clauses (3) and (6) above aggregated for that 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 those collection procedures 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 the 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 limited 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 (1) the outstanding principal balance on the mortgage loan
and any related senior lien(s); and (2) 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 FEMA as FLOOD ZONE "A",
flood insurance has been made available and the master servicer determines
that the 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 those 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 except to the extent the master servicer
is permitted to retain those amounts as servicing compensation or is permitted
to withdraw those amounts under 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 that 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 those mortgage loans that
come into default when, in accordance with applicable servicing procedures
under the sale and servicing agreement, no satisfactory arrangements can be
made for the collection of delinquent payments. In connection with foreclosure
or other conversion, the master servicer will follow those practices it deems
necessary or advisable and that are in keeping with its general subordinate
mortgage servicing activities. 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, that 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 that interest collections as a monthly servicing fee in the amount equal to
% per annum on the aggregate principal balances of the mortgage loans as of
the first day of the related collection period 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 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 expenses incurred by it in connection with
defaulted mortgage loans and in connection with the restoration of mortgaged
properties, the 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, , 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 that statement.
MATTERS REGARDING THE MASTER SERVICER AND THE TRANSFEROR
The sale and servicing agreement provides that the master servicer
may not resign as master servicer, except in connection with a permitted
transfer of servicing, unless (1) those 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 (2) upon the
satisfaction of the following conditions: (a) the master servicer has proposed
a successor master servicer that is reasonably acceptable to the indenture
trustee and the insurer in writing; (b) the rating agencies have confirmed to
the indenture trustee and the insurer that the appointment of the 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) the
proposed successor master servicer is acceptable to the insurer. No
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
arrangement with subservicers, 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 those duties and obligations
and as if the master servicer itself were performing them.
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 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 under the agreement. 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
legal action which it considers necessary or desirable with respect to the
sale and servicing agreement, the rights and duties of the parties to the sale
and servicing agreement and the interests of the noteholders and the insurer
under the sale and servicing agreement.
EVENTS OF SERVICING TERMINATION
Events of servicing termination will consist of:
(1) any failure by the master servicer to deposit in the
collection account any deposit required to be made under the
sale and servicing agreement;
(2) 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 the 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%;
(3) events of insolvency, readjustment of debt, marshalling of
assets and liabilities or similar proceedings relating to
the master servicer and actions by the master servicer
indicating insolvency, reorganization or inability to pay
its obligations; or
(4) loss or delinquency tests set forth in the sale and
servicing agreement are not met. Under 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 insurance 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 (1) or (2) above for a period of ten or 30 business
days, respectively, shall not constitute an event of servicing termination if
the delay or failure could not be prevented by the exercise of reasonable
diligence by the master servicer and was caused by an act of God, or other
similar occurrence.
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 that
appointment, the indenture trustee will be obligated to act in that capacity
unless prohibited by law. The successor will be entitled to receive the same
compensation that the master servicer would otherwise have received. 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:
(1) default in the payment of any interest or principal
payment when the same becomes due and payable and continuance of that
default for a period of five days;
(2) failure on the part of the trust to perform in any
material respect any other covenant or agreement under the indenture,
which continues for a period of thirty days after notice is given;
and
(3) 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. That 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 (1) above, unless (a) the holders of 100% of the notes and
the insurer consents to the sale, or (b) the proceeds of the sale or
liquidation are sufficient to pay all amounts due and owing to the noteholders
and the insurer, or (c) the indenture 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 indenture trustee obtains the
consent of the holders of 66-2/3% of the percentage interests of the notes.
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 of its directors, officer
or employees 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. The indenture trustee and any of
its directors, officers, employees or agents 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 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 some 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 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 those cases the separate trustee or
co-trustee jointly, or, in any jurisdiction in which the owner trustee or
indenture trustee will be incompetent or unqualified to perform particular
acts, singly upon the separate trustee or co-trustee who will exercise and
perform the 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. The owner trustee may
resign at any time, in which event the co-owner trustee will be obligated to
appoint a successor. The master servicer may also remove the owner trustee or
the indenture trustee if either ceases to be eligible 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 to the owner trustee or the
indenture trustee will not become effective until acceptance of the
appointment by a 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 regarding its
execution of them, 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 the monies are deposited into the collection account or
the distribution account. So long as no event of default under the Indenture
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 unless the owner trustee has
obtained actual knowledge of the failure.
The indenture trustee will make no representations as to the validity
or sufficiency of the indenture, the notes, other than regarding its execution
and authentication of them, 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 the monies are deposited into the
collection account or the distribution account. So long as no event of default
under the Indenture has occurred and is continuing, the indenture trustee will
be required to perform only those duties specifically required of it under the
indenture. Generally, those duties will be limited to the receipt of the
various certificates, reports or other instruments required to be furnished to
the indenture trustee under the indenture, in which case it will only be
required to examine them to determine whether they conform to the requirements
of the indenture. The indenture trustee will not be charged with knowledge of
a failure by the master servicer to perform its duties under the trust
agreement or sale and servicing agreement unless the indenture trustee has
obtained actual knowledge of the failure.
The indenture trustee will be under no obligation to exercise any of
the rights or powers vested in it by the indenture or to make any
investigation of matters arising under the indenture or to institute, conduct
or defend any litigation at the request, order or direction of any of the
noteholders, unless the indenture trustee has been offered reasonable security
or indemnity against the costs, expenses and liabilities that may be incurred
by it in the exercise of its rights or powers.
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 in an agreement which may be inconsistent with any
other provisions of that agreement, to add to the duties of the transferor or
the master servicer or to add or amend any provisions of that agreement as
required by the rating agencies in order to maintain or improve any rating of
the notes, or to add any other provisions with respect to matters or questions
arising under that agreement which shall not be inconsistent with the
provisions of that agreement, provided that the amendment does not, as
evidenced by an opinion of counsel, materially and adversely affect the
interests of any noteholder or the insurer. Any amendment will not be deemed
to materially and adversely affect the noteholders and no opinion will be
required to be delivered if the person requesting the amendment obtains a
letter from the rating agencies and the insurer stating that the 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 amendment will (1) reduce in any manner the
amount of, or delay the timing of, collections of payments on the notes or
payments under the insurance policy which are required to be made on any note
without the consent of the holder of that note and the insurer or (2) reduce
the aforesaid percentage required to consent to any 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
(1) the payment date on which the note principal balance has been
reduced to zero,
(2) 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,
(3) the optional transfer to the transferor of the mortgage loans,
and
(4) the payment date in ___________.
The mortgage loans may be purchased by the transferor at its option
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 insurance policy,
together with interest on those draws, as provided under the insurance
agreement, have been paid. The transfer price will be equal to the sum of the
outstanding note principal balance and accrued and unpaid interest on that
note principal balance at the note rate through the day preceding the final
payment date. 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
in its trust capacity or becomes insolvent. Upon becoming aware of
circumstances affecting the indenture trustee's eligibility, 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
that proceeding and the 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 that
proceeding in its own name as indenture trustee and have offered to the
indenture trustee reasonable indemnity and the indenture trustee for 60 days
has neglected or refused to institute that proceeding.
ACTIVITIES OF THE TRUST
The trust will not:
(1) borrow money;
(2) make loans;
(3) invest in securities for the purpose of exercising control;
(4) underwrite securities;
(5) except as provided in the sale and servicing agreement, engage in
the purchase and sale or turnover of investments;
(6) offer securities in exchange for property (except notes for the
mortgage loans); or
(7) 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.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following discussion, which summarizes the material U.S. federal
income tax aspects of the purchase, ownership and disposition of the notes, is
based on the provisions of the Internal Revenue Code of 1986, as amended, the
Treasury regulations thereunder, and published rulings and court decisions in,
effect as of the date of this prospectus supplement, 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 some types of
note owners that are the subject of 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 terms of the
transaction as set forth in the agreements 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 and counsel to the
underwriters, is of the opinion that (1) the notes will be treated as debt
instruments for federal income tax purposes as of that date and (2) 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) of the tax code. Accordingly, upon issuance, the notes will
be treated as debt securities as described in the prospectus. See "Material
Federal Income Tax Consequences" in the prospectus.
The transferor and the noteholders express in the sale and servicing
agreement their intent that, for applicable tax purposes, the notes will be
indebtedness secured by the mortgage loans. The transferor 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 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 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 of the property. 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 "Material Federal Income Tax Consequences" in the prospectus.
While it is not anticipated that the notes will be issued at a
greater than DE MINIMIS discount, under Treasury regulations it is possible
that the notes could nevertheless be deemed to have been issued with OID if
the interest were not treated as an unconditionally payable under the OID
regulations. If the OID regulations were to apply, all of the taxable income
to be recognized with respect to the notes would be includible in income of
note owners as OID, but would not be includible again when the interest is
actually received. See "Material Federal Income Tax Consequences--Taxation of
Debt Securities--Interest and Acquisition Discount" in the prospectus for a
discussion of the application of the OID rules if the 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 tax code,
the transaction contemplated by this prospectus with respect to the notes
constitutes a sale of the mortgage loans (or an interest in a mortgage loan)
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 those 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 the 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 tax 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. Unless
covered by a grandfather provision for existing entities, any entity (or a
portion of any entity) will be a taxable mortgage pool if (1) substantially
all of its assets consist of debt instruments, more than 50% of which are real
estate mortgages (2) the entity is the obligor under debt obligations with two
or more maturities, and (3) under the terms of the entity's debt obligations,
or an underlying arrangement, payments on the debt obligations bear a
relationship to the debt instruments held by the entity.
Assuming that all of the provisions of the 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 tax 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,
that arrangement would be subject to U.S. federal corporate income tax on its
taxable income generated by ownership of the mortgage loans. That tax might
reduce amounts available for payments to note owners. The amount of tax would
depend upon whether payments to note owners would be deductible as interest
expense in computing the taxable income of that arrangement as a taxable
mortgage pool.
FOREIGN INVESTORS
In general, subject to exceptions, interest including OID, paid on a
note to a nonresident alien individual, foreign corporation or other
non-United States person is not subject to U.S. federal income tax, provided
that the interest is not effectively connected with a trade or business of the
recipient in the United States and the note owner provides the required
foreign person information certification. See "Material Federal Income Tax
Consequences--Tax Treatment of Foreign Investors" in the prospectus.
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 the foreign partner's
distributive share of "effectively connected" income of the partnership
multiplied by the highest rate of tax applicable to that foreign partner. In
addition, the foreign partner would be subject to branch profits tax. Each
non-foreign partner would be required to certify to the partnership that it is
not a foreign person. The tax withheld from each foreign partner would be
credited against the foreign partner's U.S. income tax liability.
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 that 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 insurance
policy as having been paid to the related noteholder.
BACKUP WITHHOLDING
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 tax code, property, or, under some 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. Exempt holders are generally, holders that are corporations, some
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 other persons to
complete their reports. Each nonexempt 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 thus subject the note owner to the "unrelated
business, taxable income" provisions of the tax 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 state 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
ERISA and Section 4975 of the tax code impose restrictions on
employee benefit plans that are governed by ERISA or plans or arrangements
that are governed by Section 4975 of the tax code and on persons who are
parties in interest or disqualified persons with respect to those plans. Some
employee benefit plans, such as governmental plans and church plans, if no
election has been made under section 410(d) of the tax code, are not subject
to the restrictions of ERISA, and assets of those plans may be invested in the
notes without regard to the ERISA considerations described under this heading,
subject to other applicable Federal and state law. However, any governmental
or church plan which is qualified under section 401(a) of the tax code and
exempt from taxation under section 501(a) of the tax code is subject to the
prohibited transaction rules set forth in section 503 of the tax 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 tax 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 some transactions including loans involving a plan and
its assets unless a statutory regulatory, or administrative exemption applies
to the transaction. Section 4975 of the tax code imposes 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, prohibited
transaction exemptions may apply to the purchase or holding of the notes--for
example, Prohibited Transaction Class Exemption 96-23, which exempts
transactions effected on behalf of a plan by an "in-house asset manager"; PTE
95-60, which exempts transactions between insurance company general accounts
and parties in interest; PTE 91-38, which exempts transactions between bank
collective investment funds and parties in interest; PTE 90-1, which exempts
transactions between insurance company pooled separate accounts and parties in
interest; or PTE 84-14, which exempts 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 if it did apply, that it would apply to all prohibited
transactions that may occur in connection with an investment in the notes.
PLAN ASSET REGULATION
The DOL 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 tax code. The plan asset regulation describes
the circumstances under which the assets of an entity in which a plan invests
will be considered to be "plan assets" with the effect that any person who
exercises control over those assets would be subject to ERISA's fiduciary
standards. Under the plan asset regulations, generally, when a plan invests in
another entity, the plan's assets do not include, solely by reason of that
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" 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
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.
Those plan assets would include an undivided interest in any assets held by
the trust. In that 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 those 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 tax 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, 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 asset regulation, the DOL declined to
provide a precise definition of what features are equity features or the
circumstances under which equity 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 tax code to that 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 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
Under the terms and conditions set forth in the underwriting
agreement, dated _________ __, 199__, between the depositor and J.P. Morgan
Securities Inc., the depositor has agreed to sell to the underwriter, and the
underwriter has agreed to purchase from the depositor the notes offered by
this prospectus supplement.
In the underwriting agreement, the underwriter has agreed, provided
the terms and conditions set forth in the underwriting agreement are
satisfied, to purchase all the notes offered by this prospectus supplement 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 in this prospectus supplement and to dealers
at that price, less a discount not in excess of ____% of the note
denominations. The underwriter may allow and the dealers may reallow a
discount not in excess of ___% of the note denominations to other dealers.
After the initial public offering, the public offering price, the concessions
and the discounts may be changed.
The depositor has been advised by the underwriter that they presently
intend to make a market in the notes offered by this prospectus supplement;
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
notes. Specifically, the underwriter may overallot the offering, creating a
syndicate short position. In addition, the underwriter may bid for, and
purchase, the notes in the open market to cover syndicate shorts or to
stabilize the price of the notes. Any of these activities may stabilize or
maintain the market price of the notes above independent market levels. The
underwriter is not required to engage in these activities, and if commenced,
these activities may be discontinued at any time.
[The prospectus supplement and the attached prospectus may be used by
[_______] in connection with offers and sales related to market making
transactions in the notes. [_________] may act as principal or agent in those
transactions. Those transactions will be at prices related to prevailing
market prices at the time of sale. [________] is an affiliate of [________],
and therefore may also be viewed as an affiliate of the trust.]
The underwriting agreement provides that the depositor will indemnify
the underwriter against particular civil liabilities, including liabilities
under the Securities Act of 1933, as amended.
LEGAL MATTERS
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. 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 into this prospectus
supplement 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 revised or withdrawn at any time by the assigning rating
organization. Each securities rating should be evaluated independently of
similar ratings on different securities.
GLOSSARY
Whenever used in this prospectus supplement, the following terms have
the following meanings:
"Alternative Principal Payment" means, with respect to any payment
date, the amount, but not less than zero, of Principal Collections for the
payment date less the aggregate of additional balances created during the
related collection period.
"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 (1) Investor Interest for that payment date plus any Unpaid Investor
Shortfall, if any, due on the notes over (2) the Investor Interest Collections
on deposit in the distribution account that are available to be distributed as
interest on that payment date and (B) the Guaranteed Principal Amount.
"Fixed Allocation Percentage" means ___%.
"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 on that payment date, after giving effect
to all payments of principal on the notes on that 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 that payment date pursuant to the agreements.
"Insured Payment" means (1) as of any payment date, any Deficiency
Amount and (2) any preference amount.
"Interest Collections" means, for any payment date, the amounts
collected during the related collection period, including the 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 in this prospectus supplement under
"Description of the Notes--Simple Interest Excess Sub-Account."
"Invested Amount" means, with respect to any payment date, an amount
equal to the Original Invested Amount minus (1) the amount of Principal
Collections previously allocated and distributed to noteholders, and minus (2)
an amount equal to the product of the Investor Floating Allocation Percentage
and the Liquidation Loss Amounts not allocated to the transferor interest.
"Investor Fixed Allocation Percentage" means ____%.
"Investor Floating Allocation Percentage" means, with respect to any
payment date, 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.
"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 that interest period, after giving
effect to the payments made on the first day of the interest period, net of
any Civil Relief Act Interest Shortfalls for that payment date.
"Investor Interest Collections" means, with respect to any payment
date, the portion of Interest Collections allocable to the notes and will be
equal to the product of (a) Interest Collections for that payment date and (b)
the Investor Floating Allocation Percentage.
"Investor Loss Amount" means, for any payment date, the product of
the Investor Floating Allocation Percentage and the aggregate of the
Liquidation Loss Amounts for that payment date.
"Liquidation Loss Amount" means, with respect to any liquidated
mortgage loan, the unrecovered principal balance of that mortgage loan during
the collection period in which that mortgage loan became a liquidated mortgage
loan, after giving effect to the Net Liquidation Proceeds received in
connection with the liquidation.
"Liquidation Proceeds" means the proceeds, excluding any amounts
drawn on the insurance policy, received in connection with the liquidation of
any mortgage loan, whether through trustee's sale, foreclosure sale or
otherwise.
"Maximum Principal Payment" means, with respect to any payment date,
the product of the Investor Fixed Allocation Percentage and Principal
Collections for the payment date.
"Net Liquidation Proceeds" means, with respect to a mortgage loan,
the Liquidation Proceeds, reduced by related expenses, but not including the
portion, if any, of that amount that exceeds the sum of (1) the principal
balance of the mortgage loan plus (2) accrued and unpaid interest on that
principal balance to the end of the collection period during which that
mortgage loan became a liquidated mortgage loan.
"Net WAC" means, for any payment date, the weighted average of the
mortgage 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 that payment date or in the case of the
first payment date, the weighted average loan rate as of the cut-off date.
"OID" means "original issue discount" under the tax code.
"Original Invested Amount" means the aggregate undivided interest in
the trust represented by the notes as of the closing date, which will equal
$____________.
"Principal Collections" means, for any payment date, the sum of (1)
the amounts collected during the related collection period, including the
portion of Net Liquidation Proceeds allocated to principal pursuant to the
terms of the credit line agreements or mortgage notes, as applicable, and (2)
any transfer deposit amounts.
"PTE" means a Prohibited Transaction Class Exemption under ERISA.
"Scheduled Principal Collections Payment Amount" means, on any
payment date during the managed amortization period, the lesser of (1) the
Maximum Principal Payment and (2) the Alternative Principal Payment.
"SMMEA" means the Secondary Mortgage Market Enhancement Act of 1984, as
amended.
"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.
<PAGE>
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the SEC 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 December 27, 1999
Prospectus
J.P. Morgan Acceptance Corporation I
Asset Backed Securities
(Issuable in Series)
----------------
---------------------------
| CONSIDER CAREFULLY THE | J.P. Morgan Acceptance Corporation I may
| RISK FACTORS BEGINNING ON | periodically establish trusts which will issue
| PAGE 5 OF THIS | securities. The securities may be in the form of
| PROSPECTUS. | asset-backed certificates or asset-backed notes.
| | Each issue of securities will have its own
| The securities represent | series designation.
| obligations of the trust |
| only and do not represent | Each trust will consist of one or more of the
| an interest in or | following:
| obligation of J.P. Morgan |
| Acceptance Corporation I, | o mortgage loans secured by senior or junior
| the master servicer or | liens on one- to four-family residential
| any of their affiliates. | properties;
| |
| This prospectus may be | o closed-end and/or revolving home equity
| used to offer and sell | loans secured by senior or junior liens on
| the securities only if | one- to four-family residential properties;
| accompanied by a |
| prospectus supplement. | 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 home improvements;
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 Ginnie Mae, Freddie Mac or
Fannie Mae; and
o privately issued mortgage backed securities
representing interests in any of the above
asset types.
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 all, some or none 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 the securities 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 SEC 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
<PAGE>
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. There is a Glossary on page 140 where you will find definitions of
the capitalized terms used in this prospectus. 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.
<PAGE>
Table of Contents
Page
----
RISK FACTORS.......................................5
Limited Resale Market for
Securities Could Adversely Affect
Your Ability to Liquidate Your
Investment..................................5
Protection Against Losses is Limited
Since Securities Will Receive
Payments Only From Specified
Sources.....................................5
Nature of Mortgages Securing the Loans
May Delay Receipt of, or Result in
Shortfalls in Proceeds
Payable on a Loan...........................6
You Could Be Adversely Affected By
Violations of Environmental Laws ...........7
Value of Trust Assets May Be Less Than
Outstanding Principal Balance of the
Related Securities .........................7
THE TRUST FUND.....................................8
General.......................................8
The Loans....................................10
Modification of Loans........................15
Agency Securities............................15
Private Mortgage-Backed Securities...........22
Representations by Sellers or
Originators; Repurchases ..................25
Substitution of Trust Fund Assets............27
USE OF PROCEEDS...................................27
THE DEPOSITOR.....................................27
DESCRIPTION OF THE SECURITIES.....................28
General......................................28
Distributions on Securities..................31
Advances.....................................32
Reports to Securityholders...................33
Categories of Classes of Securities..........35
Indices Applicable to Floating Rate and
Inverse Floating Rate Classes .............38
LIBOR........................................39
COFI.........................................40
Treasury Index...............................42
Prime Rate...................................42
Book-Entry Registration of Securities........43
CREDIT ENHANCEMENT................................46
General......................................46
Subordination................................47
Letter of Credit.............................48
Insurance Policies, Surety Bonds and
Guaranties ................................49
Over-Collateralization.......................49
Spread Account...............................49
Reserve Accounts.............................49
Pool Insurance Policies......................52
Cross-Collateralization......................53
Other Insurance, Surety Bonds, Guaranties,
and Letters of Credit .....................54
Derivative Products..........................54
YIELD AND PREPAYMENT CONSIDERATIONS...............54
THE AGREEMENTS....................................57
Assignment of the Trust Fund Assets..........57
No Recourse to Sellers, Originators,
Depositor or Master Servicer ..............60
Payments on Loans; Deposits to Security
Account ...................................60
Pre-Funding Account..........................63
Sub-Servicing by Sellers.....................64
Hazard Insurance.............................65
Realization Upon Defaulted Loans.............67
Servicing and Other Compensation and
Payment of Expenses .......................69
Evidence as to Compliance....................69
Matters Regarding the Master Servicer
and the Depositor .........................70
Events of Default; Rights Upon Event
of Default ................................71
Amendment....................................74
Termination; Optional Termination............74
The Trustee..................................76
MATERIAL LEGAL ASPECTS OF THE LOANS...............76
General......................................76
Foreclosure/Repossession.....................77
Environmental Risks..........................80
Rights of Redemption.........................81
Anti-deficiency Legislation and Other
Limitations on Lenders ....................82
Due-on-Sale Clauses..........................83
Enforceability of Prepayment and Late
Payment Fees ..............................83
Applicability of Usury Laws..................84
The Contracts................................84
Installment Contracts........................87
Soldiers' and Sailors' Civil Relief Act......88
Junior Mortgages; Rights of Senior
Mortgagees ................................88
The Title I Program..........................90
Consumer Protection Laws.....................94
MATERIAL FEDERAL INCOME TAX CONSEQUENCES..........94
General......................................94
Taxation of Debt Securities..................95
Taxation of the REMIC and Its Holders.......102
REMIC Expenses; Single Class REMICS.........103
Taxation of the REMIC.......................103
Taxation of Holders of Residual
Interest Securities ......................105
Administrative Matters......................108
Tax Status as a Grantor Trust...............108
Sale or Exchange............................111
Miscellaneous Tax Aspects...................112
Tax Treatment of Foreign Investors..........112
Tax Characterization of the Trust
Fund as a Partnership ....................114
Tax Consequences to Holders of the Notes....114
Tax Consequences to Holders of the
Certificates .............................116
Taxation of Trust as FASIT..................122
Treatment of FASIT Regular Securities.......124
Treatment of High-Yield Interests...........125
Tax Treatment of FASIT Ownership
Securities ...............................125
STATE TAX CONSIDERATIONS.........................126
ERISA CONSIDERATIONS.............................126
General.....................................126
Prohibited Transactions.....................127
General.....................................127
Plan Asset Regulation.......................127
Exemption 83-1..............................128
The Underwriter's Exemption.................129
Insurance Company Purchasers................133
Consultation with Counsel...................134
LEGAL INVESTMENT.................................134
METHOD OF DISTRIBUTION...........................135
LEGAL MATTERS....................................136
FINANCIAL INFORMATION ...........................137
RATING...........................................137
WHERE YOU CAN FIND MORE INFORMATION .............138
INCORPORATION OF CERTAIN DOCUMENTS
BY REFERENCE ...................................138
GLOSSARY.........................................139
<PAGE>
Risk Factors
You should consider the following risk factors in deciding whether to
purchase any of the securities.
LIMITED RESALE MARKET FOR SECURITIES COULD ADVERSELY AFFECT YOUR ABILITY TO
LIQUIDATE YOUR INVESTMENT
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. There have been
times in the past when the absence of a liquid resale market for similar asset
and mortgage backed securities has rendered investors unable to sell their
securities at all or at other than a significant loss. Consequently, at a time
when you desire to sell your securities, you may not be able to do so.
Alternatively, you may be able to do so only at a price significantly below that
which would be obtainable were there a liquid resale market for your securities.
PROTECTION AGAINST LOSSES IS LIMITED SINCE SECURITIES WILL RECEIVE PAYMENTS ONLY
FROM SPECIFIED SOURCES
The securities of each series will be payable solely from the assets of
the related trust, including any applicable credit enhancement. In addition, 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 seller of loans or
mortgage backed securities to the depositor for inclusion in a trust will make
particular representations and warranties as to those assets. Those
representations and warranties will be described in the related prospectus
supplement. The only obligation of the seller with respect to a trust will be 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, you will be reliant
entirely on the trust assets and any available credit enhancement for payments
on the securities. If payments on the trust assets are insufficient to make all
payments required on the securities you may incur a loss of your investment.
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. Third party
providers of credit enhancement like insurance policies could default. 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. Credit enhancement may therefore be limited in
coverage and in amount. It may also include the credit risk of a third party
like an insurer. The terms of any credit enhancement and the limitations will be
described in the related prospectus supplement.
You must carefully assess the specific assets of the trust issuing your
securities and any credit enhancement because they will be your only protection
against losses on your investment.
NATURE OF MORTGAGES SECURING THE LOANS MAY DELAY RECEIPT OF, OR RESULT IN
SHORTFALLS IN PROCEEDS PAYABLE ON A LOAN
o DECLINE IN PROPERTY VALUES MAY INCREASE LOAN LOSSES. Your
investment may be adversely affected by declines 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
and, thus, reduce proceeds payable to the securityholders.
o DELAYS DUE TO LIQUIDATION PROCEDURES. 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, like many lawsuits, are characterized by significant delays and
expenses 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. As a result, you may
experience delays in receipt of moneys payable to you.
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. The trust may contain
loans that are in a junior lien position. 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 in a manner that is consistent with the rights of the senior
mortgage lender. 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 on that mortgage, the trust's ability as a practical matter to
foreclose on any junior mortgage will be limited. In addition, since foreclosure
proceeds first retire any senior liens, the foreclosure proceeds may not be
sufficient to pay all amounts owed to you.
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. Any limit on the master
servicer's ability to collect interest or principal on a loan may result in a
loss to you.
The loans may also be governed by 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 exposed to damages and administrative
enforcement. In either event, losses on your investment could result.
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.
YOU COULD BE ADVERSELY AFFECTED BY VIOLATIONS OF ENVIRONMENTAL LAWS
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 trust issuing your securities, because it is a
mortgage holder, 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 MAY BE LESS THAN OUTSTANDING PRINCIPAL BALANCE OF THE
RELATED SECURITIES
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 securityholders.
As a result, you may not receive the full amount of interest and principal due
on your security.
THE TRUST FUND
GENERAL
The certificates of each series will represent interests in the assets
of a trust fund established by the depositor, 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. The assets of each trust fund will consist primarily of a pool
comprised of, as specified in the related prospectus supplement, any one or more
of the following:
(a) single family mortgage loans, including:
(1) mortgage loans secured by first, second and/or more
subordinate liens on one- to four-family residential properties,
(2) closed-end and/or revolving home equity loans secured by
first, second and/or more subordinate liens on one-to four-family
residential properties,
(3) home improvement installment sale contracts and installment
loan agreements 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 financed home improvements, including loans insured under
the FHA Title I Credit Insurance program administered pursuant to
the National Housing Act of 1934, and
(4) manufactured housing installment sales contracts and
installment loan agreements 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 Ginnie Mae,
Fannie Mae or Freddie Mac;
(c) privately issued mortgaged-backed securities representing
interests in any of the above asset types; and
(d) all monies due under each of the loans or securities held in the
trust fund, 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, which date is 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 may be affiliates of
the depositor. Loans acquired by the depositor will have been originated in
accordance with the underwriting criteria described in this prospectus 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 as subservicers, 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 between the trustee and the master servicer with respect to
a series consisting of notes or 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 subservicer, the master servicer will remain
liable for its servicing obligations under the related agreement as if the
master servicer alone were servicing those loans.
Any mortgage backed securities issued or guaranteed by Ginnie Mae,
Fannie Mae or Freddie Mac will be securities that are exempt from registration
under the Securities Act of 1933.
As used in this prospectus, agreement means, with respect to a series
consisting of certificates, the pooling and servicing agreement, and with
respect to a series consisting of notes or of certificates and notes, the trust
agreement, the indenture and the master servicing agreement, as the context
requires.
If so specified in the related prospectus supplement, a trust fund
relating to a series of securities may be a business trust formed under the laws
of the state specified in the related prospectus supplement pursuant to a trust
agreement 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 the related trust fund assets and other assets contemplated
in this prospectus and in the related prospectus supplement, issuing securities
and making payments and distributions on the securities and related activities.
No trust fund is expected to have any source of capital other than its assets
and any related credit enhancement.
In general, 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 regarding the assets to the depositor for inclusion
in the related trust fund. The deposit will also assign to the trustee for the
related series the assets to be included in the related trust fund and the
depositor's rights with respect to those representations and warranties. See
"The Agreements -- Assignment of the Trust Fund Assets." A prospectus
supplement, however, may describe additional obligations of the depositor for
the related trust fund. The obligations of the master servicer with respect to
the loans included in a trust fund will consist principally of its contractual
servicing obligations under the related agreement, including its obligation to
enforce the obligations of the subservicers or sellers, or both, as more fully
described in this prospectus 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 recoverable delinquencies in payments on or
with respect to the loans. Any obligation of the master servicer to make
advances will be limited in the manner described in this prospectus under
"Description of the Securities -- Advances."
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 in this prospectus
will be provided in the related prospectus supplement, and specific information
will be set forth in a Current Report on Form 8-K to be filed with the SEC
within fifteen days after the initial issuance of those securities. 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. If so specified in the related prospectus supplement, the
actual statistical characteristics of a pool as of the closing date may differ
from those set forth in the prospectus supplement. However, in no event will
more than five percent of the assets as a percentage of the cut-off date pool
principal balance vary from the characteristics described in the related
prospectus supplement.
THE LOANS
GENERAL. Loans may 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.
If so specified, the loans may include cooperative apartment loans secured by
security interests in shares issued by private, non-profit, cooperative housing
corporations 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 like the FHA or VA. The loans will have been originated in
accordance with the underwriting criteria specified in the related prospectus
supplement.
In general, the loans in a pool will have monthly payments due on the
first day of each month. However, as described in the related prospectus
supplement, the loans in a pool may have payments due more or less frequently
than monthly. In addition, payments may be due on any day during a 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,
all as described in this prospectus 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 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 may provide for payments in level monthly installments, for balloon
payments, 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 -- a 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 conditioned on payment of 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
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 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 buydown loans that include provisions for a
third party to subsidize partially the monthly payments of the borrowers on
those loans during the early years of those loans, the difference to be made up
from 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. If assumption of 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 financed home improvements and the financed manufactured homes. The
mortgaged properties, the home improvements and the manufactured homes are
collectively referred to in this prospectus 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-use properties. Any mixed-use property
will not exceed three stories and will be predominantly one- to four-family
residential in that its primary use will be for dwelling, with the remainder of
its space 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 a time period 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.
The existence, extent and duration of any coverage provided by primary mortgage
guaranty insurance policies will be described in the related prospectus
supplement.
The aggregate principal balance of loans secured by properties that are
owner-occupied will be disclosed in the related prospectus supplement.
Typically, the basis for a representation that a given percentage of the loans
is secured by single family properties that are owner-occupied will be either
(1) 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 (2) 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 generally will not
exceed 360 months. If specified in the related prospectus supplement, the terms
to stated maturity of closed-end loans may 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
financed home improvements. The home improvement contracts may be fully
amortizing or provide for balloon payments and may have fixed interest rates or
adjustable interest rates and may provide for other payment characteristics as
in this prospectus and in the related prospectus supplement. The initial
loan-to-value ratio of a home improvement contract will be 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, 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, 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.
The manufactured homes securing the manufactured housing contracts will
consist of manufactured homes within the meaning of 42 United States Code,
Section 5402(6), or manufactured homes meeting those other standards as shall be
described in the related prospectus supplement. Section 5402(6) 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, and home improvements, unlike mortgaged properties,
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 or the related cut-off
date and to the extent then specifically known to the depositor, with respect to
the loans contained in the related pool, including:
(1) the aggregate outstanding principal balance and the average
outstanding principal balance of the loans as of the applicable cut-off
date,
(2) 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,
(3) the original terms to maturity of the loans,
(4) the largest principal balance and the smallest principal balance
of any of the loans,
(5) the earliest origination date and latest maturity date of any of
the loans,
(6) the loan-to-value ratios or combined loan-to-value ratios, as
applicable, of the loans,
(7) the loan interest rates or range of loan interest rates borne by
the loans,
(8) the maximum and minimum per annum loan interest rates, and
(9) the geographical location of the loans.
If specific information about 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 Current Report on
Form 8-K filed within 15 days of the closing date.
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 causing 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 to 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
the loans to be included in a trust fund. The underwriting standards for loans
of a particular series will be described in the related prospectus supplement.
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 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 for the loans of a particular series will be
authorized to modify, waive or amend any term of a loan in a manner that is
consistent with the servicing standard and the specific limitations set forth in
the servicing agreement and described in the related prospectus supplement.
However, those agreements will require that the modification, waiver or
amendment 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
GINNIE MAE. Ginnie Mae is a wholly-owned corporate instrumentality of
HUD. Section 306(g) of Title II of the National Housing Act of 1934, as amended,
authorizes Ginnie Mae to, among other things, guarantee the timely payment of
principal of and interest on certificates which represent an interest in a pool
of mortgage loans insured by the FHA under the National Housing Act or Title V
of the National Housing Act of 1949, 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.
Section 306 (g) of the National 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
National Housing Act, Ginnie Mae may, under Section 306(d) of the National
Housing Act, borrow from the United States Treasury in an amount which is at any
time sufficient to enable Ginnie Mae, with no limitations as to amount, to
perform its obligations under its guarantee.
GINNIE MAE CERTIFICATES. Each Ginnie Mae certificate held in a trust
fund for a series of securities will be a "fully modified pass-through"
mortgaged-backed certificate issued and serviced by a mortgage banking company
or other financial concern approved by Ginnie Mae or approved by Fannie Mae as a
seller-servicer of FHA Loans and/or VA Loans. Each Ginnie Mae certificate may be
a GNMA I certificate or a GNMA II certificate. The mortgage loans underlying the
Ginnie Mae certificates 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. Ginnie Mae will approve the issuance of each Ginnie Mae
certificate in accordance with a guaranty agreement between Ginnie Mae and the
issuer and servicer of the Ginnie Mae certificate. Pursuant to its guaranty
agreement, a Ginnie Mae servicer will be required to advance its own funds in
order to make timely payments of all amounts due on each of the related Ginnie
Mae certificates, even if the payments received by the Ginnie Mae servicer on
the FHA Loans or VA Loans underlying each of those Ginnie Mae certificates are
less than the amounts due on those Ginnie Mae certificates.
The full and timely payment of principal of and interest on each Ginnie
Mae certificate will be guaranteed by Ginnie Mae, which obligation is backed by
the full faith and credit of the United States. Each Ginnie Mae certificate will
have an original maturity of not more than 40 years (but may have original
maturities of substantially less than 40 years). Each Ginnie Mae certificate
will provide for the payment by or on behalf of the Ginnie Mae servicer to the
registered holder of the Ginnie Mae 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 Ginnie Mae 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 Ginnie
Mae 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 Ginnie Mae certificate and liquidation proceeds in the
event of a foreclosure or other disposition of any the related FHA Loans or VA
Loans.
If a Ginnie Mae servicer is unable to make the payments on a Ginnie Mae
certificate as it becomes due, it must promptly notify Ginnie Mae and request
Ginnie Mae to make the payment. Upon notification and request, Ginnie Mae will
make payments directly to the registered holder of a Ginnie Mae certificate. In
the event no payment is made by a Ginnie Mae servicer and the Ginnie Mae
servicer fails to notify and request Ginnie Mae to make the payment, the holder
of the related Ginnie Mae certificate will have recourse only against Ginnie Mae
to obtain the payment. The trustee or its nominee, as registered holder of the
Ginnie Mae certificates held in a trust fund, will have the right to proceed
directly against Ginnie Mae under the terms of the guaranty agreements relating
to the Ginnie Mae certificates for any amounts that are not paid when due.
All mortgage loans underlying a particular Ginnie Mae 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 Ginnie Mae certificate
will be comprised of interest due as specified on a Ginnie Mae certificate plus
the scheduled principal payments on the FHA Loans or VA Loans underlying a
Ginnie Mae certificate due on the first day of the month in which the scheduled
monthly installments on a Ginnie Mae certificate is due. Regular monthly
installments on each Ginnie Mae certificate are required to be paid to the
trustee identified in the related prospectus supplement 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 Ginnie Mae certificate held in a trust fund or any other early
recovery of principal on a loan will be passed through to the trustee identified
in the related prospectus supplement as the registered holder of a Ginnie Mae
certificate.
Ginnie Mae 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 Ginnie Mae certificates backed by pools
containing "buydown" mortgage loans will be computed in the same manner as
payments derived from other Ginnie Mae 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 on that interest, will be paid in subsequent years. The obligations of
Ginnie Mae and of a Ginnie Mae issuer/servicer will be the same irrespective of
whether the Ginnie Mae 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. Ginnie Mae certificates
related to a series of certificates may be held in book-entry form.
FANNIE MAE. Fannie Mae is a federally chartered and privately owned
corporation organized and existing under the Federal National Mortgage
Association Charter Act. Fannie Mae was originally established in 1938 as a
United States government agency to provide supplemental liquidity to the
mortgage market and was transformed into a stockholder-owned and privately
managed corporation by legislation enacted in 1968.
Fannie Mae provides funds to the mortgage market primarily by
purchasing mortgage loans from lenders. Fannie Mae acquires funds to purchase
mortgage loans from many capital market investors that may not ordinarily invest
in mortgages. In so doing, it expands the total amount of funds available for
housing. Operating nationwide, Fannie Mae helps to redistribute mortgage funds
from capital-surplus to capital-short areas.
FANNIE MAE CERTIFICATES. Fannie Mae certificates are either guaranteed
mortgage pass-through certificates or stripped mortgage-backed securities. The
following discussion of Fannie Mae certificates applies equally to both types of
Fannie Mae certificates, except as otherwise indicated. Each Fannie Mae
certificate included in the trust fund for a series will represent a fractional
undivided interest in a pool of mortgage loans formed by Fannie Mae. Each pool
formed by Fannie Mae will consist of mortgage loans of one of the following
types:
(1) fixed-rate level installment conventional mortgage loans;
(2) fixed-rate level installment mortgage loans that are insured
by FHA or partially guaranteed by the VA;
(3) adjustable rate conventional mortgage loans; or
(4) 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 Fannie
Mae purchase program. Each of those mortgage loans will be secured by a first
lien on a one- to four-family residential property.
Each Fannie Mae certificate will be issued pursuant to a trust
indenture. Original maturities of substantially all of the conventional, level
payment mortgage loans underlying a Fannie Mae 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 Fannie Mae 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 Fannie Mae guaranteed mortgage-backed
certificate and the series pass-through rate payable with respect to a Fannie
Mae stripped mortgage-backed securities 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 Fannie Mae'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 Fannie Mae certificate will be between
50 basis points and 250 basis points greater than the annual pass-through rate,
in the case of a Fannie Mae guaranteed mortgage-backed certificate, or the
series pass-through rate in the case of a Fannie Mae stripped mortgage-backed
security. Under a special servicing option (pursuant to which Fannie Mae assumes
the entire risk for foreclosure losses), the annual interest rates on the
mortgage loans underlying a Fannie Mae certificate will generally be between 55
basis points and 255 basis points greater than the annual pass-through rate, in
the case of a Fannie Mae guaranteed mortgage-backed certificate, or the series
pass-through rate in the case of a Fannie Mae stripped mortgage-backed security.
Fannie Mae guarantees to each registered holder of a Fannie Mae
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 Fannie Mae 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 Fannie Mae under its guarantees are
obligations solely of Fannie Mae and are not backed by, nor entitled to, the
full faith and credit of the United States. If Fannie Mae were unable to satisfy
its obligations, distributions to holders of Fannie Mae certificates would
consist solely of payments and other recoveries on the underlying mortgage loans
and, accordingly, monthly distributions to holders of Fannie Mae certificates
would be affected by delinquent payments and defaults on those mortgage loans.
Fannie Mae stripped mortgage-backed securities 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 Fannie Mae stripped
mortgage-backed securities 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 Fannie Mae, Fannie Mae 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 Fannie Mae certificate will be made by Fannie Mae on the 25th day of each
month to the persons in whose name the Fannie Mae certificate is entered in the
books of the Federal Reserve Banks, or registered on the Fannie Mae certificate
register in the case of fully registered Fannie Mae certificates as of the close
of business on the last day of the preceding month. With respect to Fannie Mae
certificates issued in book-entry form, distributions on the Fannie Mae
certificates will be made by wire, and with respect to fully registered Fannie
Mae certificates, distributions on the Fannie Mae certificates will be made by
check.
FREDDIE MAC. Freddie Mac 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 common stock of Freddie Mac is owned by the Federal Home Loan
Banks. Freddie Mac 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 Freddie Mac 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
Freddie Mac certificates. Freddie Mac 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.
FREDDIE MAC CERTIFICATES. Each Freddie Mac certificate included in a
trust fund for a series will represent an undivided interest in a pool of
mortgage loans that may consist of first lien conventional loans, FHA Loans or
VA Loans. Freddie Mac certificates are sold under the terms of a mortgage
participation certificate agreement. A Freddie Mac certificate may be issued
under either Freddie Mac's Cash Program or Guarantor Program. Typically,
mortgage loans underlying the Freddie Mac 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 law governing Freddie Mac. A Freddie Mac certificate group may include
whole loans, participation interests in whole loans and undivided interests in
whole loans and/or participations comprising another Freddie Mac certificate
group. Under the guarantor program, any Freddie Mac certificate group may
include only whole loans or participation interests in whole loans.
Freddie Mac guarantees to each registered holder of a Freddie Mac
certificate the timely payment of interest on the underlying mortgage loans to
the extent of the applicable certificate rate on the registered holder's pro
rata share of the unpaid principal balance outstanding on the underlying
mortgage loans in the Freddie Mac certificate group represented by a Freddie Mac
certificate, whether or not received. Freddie Mac also guarantees to each
registered holder of a Freddie Mac 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, but does not, except if and to
the extent specified in the prospectus supplement for a series, guarantee the
timely payment of scheduled principal. Under Freddie Mac's Gold PC Program,
Freddie Mac 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, Freddie Mac indemnifies holders of Freddie Mac
certificates against any diminution in principal by reason of charges for
property repairs, maintenance and foreclosure. Freddie Mac may remit the amount
due on account of its guarantee of collection of principal at any time after
default on an underlying mortgage loan, but not later than (1) 30 days following
foreclosure sale, (2) 30 days following payment of the claim by any mortgage
insurer, or (3) 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 Freddie Mac certificates, including the timing of demand for
acceleration, Freddie Mac 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 Freddie Mac to
determine that a mortgage loan should be accelerated varies with the particular
circumstances of each mortgagor, and Freddie Mac has not adopted standards which
require that the demand be made within any specified period.
Freddie Mac certificates are not guaranteed by the United States or by
any Federal Home Loan Bank and do not constitute debts or obligations of the
United States or any Federal Home Loan Bank. The obligations of Freddie Mac
under its guarantee are obligations solely of Freddie Mac and are not backed by,
nor entitled to, the full faith and credit of the United States. If Freddie Mac
were unable to satisfy its obligations, distributions to holders of Freddie Mac
certificates would consist solely of payments and other recoveries on the
underlying mortgage loans and, accordingly, monthly distributions to holders of
Freddie Mac certificates would be affected by delinquent payments and defaults
on those mortgage loans.
Registered holders of Freddie Mac certificates are entitled to receive
their monthly pro rata share of all principal payments on the underlying
mortgage loans received by Freddie Mac, including any scheduled principal
payments, full and partial prepayments of principal and principal received by
Freddie Mac by virtue of condemnation, insurance, liquidation or foreclosure,
and repurchases of the mortgage loans by Freddie Mac or by the party that sold
the related mortgage loans to Freddie Mac. Freddie Mac is required to remit each
registered Freddie Mac certificateholder's pro rata share of principal payments
on the underlying mortgage loans, interest at the Freddie Mac 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 Freddie Mac.
Under Freddie Mac'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 Freddie Mac certificate may exceed the pass-through
rate on the Freddie Mac certificate. With respect to Freddie Mac certificates
issued on or after June 1, 1987, the maximum interest rate on the mortgage loans
underlying those Freddie Mac certificates may exceed the pass-through rate of
the Freddie Mac certificates by 50 to 100 basis points. Under that program,
Freddie Mac 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 Freddie Mac. 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 Freddie Mac certificate group under the Cash Program will vary since mortgage
loans and participations are purchased and assigned to a Freddie Mac certificate
group based upon their yield to Freddie Mac rather than on the interest rate on
the underlying mortgage loans.
Under Freddie Mac's Guarantor Program, the pass-through rate on a
Freddie Mac certificate is established based upon the lowest interest rate on
the underlying mortgage loans, minus a minimum servicing fee and the amount of
Freddie Mac's management and guaranty income as agreed upon between the seller
and Freddie Mac. For Freddie Mac 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 Freddie
Mac certificate group may not exceed two percentage points.
Freddie Mac 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 Freddie
Mac 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 Freddie Mac certificates. Subsequent remittances 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 Freddie Mac certificates sold by Freddie Mac
on or after January 2, 1985, and makes payments of principal and interest each
month to the registered holders of Freddie Mac certificates in accordance with
the holders' instructions.
STRIPPED MORTGAGE-BACKED SECURITIES. Agency securities may consist of
one or more stripped mortgage-backed securities, each as described in this
prospectus 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 or the
interest distributions, or in some specified portion of the principal and
interest distributions, on particular Freddie Mac, Fannie Mae, Ginnie Mae or
other government agency or government-sponsored agency certificates. The
underlying securities will be held under a trust agreement by Freddie Mac,
Fannie Mae, Ginnie Mae or another government agency or government-sponsored
agency, each as trustee, or by another trustee named in the related prospectus
supplement. Freddie Mac, Fannie Mae, Ginnie Mae 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 Ginnie Mae, Fannie Mae, Freddie Mac or other government
agencies or government-sponsored agencies. The characteristics of any other
mortgage pass-through certificates issued or guaranteed by Ginnie Mae, Fannie
Mae, Freddie Mac 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 an asset pool, or
(b) collateralized mortgage obligations secured by an asset pool. Each asset
pool will consist either of loans or mortgage-backed securities that would
otherwise qualify for inclusion as trust assets under this prospectus. Private
mortgage-backed securities will have been issued pursuant to an agreement that
will be described in the related prospectus supplement. That agreement will have
appointed a trustee to act for the benefit of the PMBS holders. The PMBS trustee
or its agent, or a custodian, will possess the loans underlying the private
mortgage-backed security. Loans underlying a private mortgage-backed security
will be serviced by the PMBS servicer directly or by one or more sub-servicers
under the supervision of the PMBS servicer.
The issuer of the private mortgage-backed security 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 private mortgage-backed
security:
(1) will be acquired in the secondary market and not pursuant to an
initial offering of the securities,
(2) 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
(3) will have previously been registered under the Securities Act of
1933 or will be freely transferable pursuant to Rule 144(k) promulgated
under the Securities Act of 1933.
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 PMBS. 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 right 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. As described in the prospectus supplement,
(1) 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,
(2) the underlying mortgage loan may have had an original term to
stated maturity of not less than 5 years and not more than 40 years or any
other term specified in the related prospectus supplement,
(3) the underlying mortgage loan, other than cooperative loans, may be
required to be covered by a standard hazard insurance policy, which may be
a blanket policy, and
(4) the underlying mortgage loan other than cooperative loans or
contracts secured by a manufactured home, may 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 same issuance 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 PMBS or with respect to the PMBS themselves.
ADDITIONAL INFORMATION. The prospectus supplement for a series for
which the related trust fund includes private mortgage-backed securities will
specify:
(1) the aggregate approximate principal amount and type of the private
mortgage-backed securities to be included in the trust fund;
(2) 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;
(3) the maximum original term-to-stated maturity of the private
mortgage-backed securities;
(4) the weighted average term-to-stated maturity of the private
mortgage-backed securities;
(5) the pass-through or certificate rate of the private mortgage-
backed securities;
(6) the weighted average pass-through or certificate rate of the
private mortgage-backed securities;
(7) the PMBS issuer, the PMBS servicer, and the PMBS trustee for the
private mortgage-backed securities;
(8) 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;
(9) 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
(10) 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 of loans that are included in a trust fund
for a series of securities will have made representations and warranties in
respect of the loans sold by that seller or originated by that originator. The
representations and warranties may include, among other things:
(1) 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;
(2) 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;
(3) that each loan constituted a valid lien on, or a perfected
security interest with respect to, the related property, subject only
to permissible liens disclosed, if applicable, title insurance exceptions,
if applicable, and other exceptions described in the related agreement, and
that the property was free from damage and was in acceptable condition;
(4) that there were no delinquent tax or assessment liens against the
property;
(5) that no required payment on a loan was delinquent more than the
number of days specified in the related prospectus supplement; and
(6) 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.
However, the prospectus supplement relating to a series of securities may
contain additional or different representations and warranties for the loans in
the related trust fund.
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 in
this prospectus 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 or seller. 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 also 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. If the applicable seller or originator cannot cure a breach within the
time period specified in the related prospectus supplement following notice from
the master servicer or the trustee, as the case may be, then that seller or
originator will be obligated either (1) to repurchase the loan from the trust
fund at a price equal to 100% of its unpaid principal balance as of the date of
the repurchase plus accrued interest on the unpaid principal balance to the
first day of the month following the month of repurchase at the loan interest
rate, less any advances or amount payable as related servicing compensation if
the seller or originator is the master servicer, or (2) substitute for the loan
a replacement loan that satisfies the criteria specified in the related
prospectus supplement. If a REMIC election is to be made with respect to a trust
fund, the 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 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 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 substantially equivalent to 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:
(1) to purchase the related trust fund assets;
(2) to establish any pre-funding account, capitalized interest
account or reserve account as described in the related prospectus
supplement; and
(3) 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 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. J.P. Morgan
Acceptance Corporation I will act as the depositor for the trust with respect to
each series of securities. As depositor it will establish the trust and will be
the party that deposits, sells or otherwise conveys the trust fund assets to the
trust. The depositor 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 pooling
and servicing agreements or trust agreements among the depositor and the
entities named in the related prospectus supplement as master servicer and
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 between the related trust fund and the entity named in the related
prospectus supplement as indenture trustee, and the related loans will be
serviced by the master servicer pursuant to a master servicing agreement or a
sale and 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. The provisions of each of the above agreements will vary
depending upon the nature of the securities to be issued and the nature of the
related trust fund. The following are descriptions of the material provisions
which may appear in any of the above agreements. The prospectus supplement for a
series of securities will describe more fully the provisions of the agreements
for the related series. The descriptions are subject to, and are qualified in
their entirety by reference to, all of the provisions of the agreements for each
series of securities and the applicable prospectus supplement.
GENERAL
The securities of each series will be issued in book-entry or fully
registered form, in the authorized denominations specified in the related
prospectus supplement. If the securities are certificates, they will evidence
specified beneficial ownership interests in the assets of the related trust
fund. If the securities are notes, they will be debt obligations secured by the
assets of the related trust fund. The securities generally will not be entitled
to payments in respect of the assets included in any other trust fund
established by the depositor. However, if so specified in the related prospectus
supplement, the securities may be entitled to payments in respect of the assets
of other trust funds established by the depositor. In general, the securities
will not represent obligations of the depositor or any affiliate of the
depositor. A trust fund may include loans that are 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:
(1) the trust fund assets that are included from time to time in the
related trust fund, exclusive of any retained interest described in the
related prospectus supplement, including all payments of interest and
principal received after the cut-off date with respect to the loans
included in the trust fund assets to the extent not applied in computing
the principal balance of the loans as of the cut-off date;
(2) the assets that from time to time have been deposited in the
related security account, as described in this prospectus under "The
Agreements -- Payments on Loans; Deposits to Security Account";
(3) property which secured a loan and which is acquired on behalf of
the securityholders by foreclosure or deed in lieu of foreclosure; and
(4) 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 or portion of future interest and principal payments on the
related trust fund assets. A class of certificates may represent different
specified percentages or portions of interest and principal payments on the
related trust fund assets. In each case, that percentage or portion may be zero
or may represent any other specified interest to and including 100%, as
specified in the related prospectus supplement. 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. A 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" 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
of principal or interest. 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, which may be monthly, quarterly,
semi-annually or at other intervals and on the dates as are specified in the
related prospectus supplement. Distributions of principal and interest or of
principal only or interest only, as applicable, will be made 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 related record date specified in the related prospectus
supplement. Distributions will be made in the manner specified in the related
prospectus supplement to the persons entitled to distributions at the address
appearing in 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 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 Internal Revenue Code, could
result in prohibited transactions, within the meaning of ERISA and the Internal
Revenue Code. See "ERISA Considerations." Each prospectus supplement may
identify one or more classes of securities that are restricted from purchases by
plans. 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. If the restricted class of securities is held in
book-entry form, the conditions in the preceding sentence may be deemed
satisfied by the transferee's acceptance of the security.
As to each series, an election may be made to treat the related trust
fund or designated portions of the trust fund as a REMIC as defined in the
Internal Revenue 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 Internal Revenue Code. All other classes of securities
in that series will constitute "regular interests" in the related REMIC, as
defined in the Internal Revenue 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 may 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 if so specified 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. As between securities of different classes and as between distributions
of principal, and, if applicable, between distributions of principal prepayments
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, 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 allocable to the securities of
that series on that distribution date, net of related fees and expenses payable
by the related trust fund, other than amounts to be held in that security
account for distribution on future distribution dates.
DISTRIBUTIONS OF INTEREST. Interest will accrue on each class of
securities entitled to interest at the pass-through rate or interest rate, as
applicable, specified in the related prospectus supplement. In any case, the
rate will be a fixed rate per annum or a variable rate calculated in the method
and for the periods described in the related prospectus supplement. To the
extent funds are available, 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 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.
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 the related prospectus supplement, reduced by all distributions reported to
the holders of that securities as allocable to principal and, (1) 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 (2) in the case of adjustable rate securities, reduced by
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 principal prepayments, which are received in advance of their
scheduled due dates and are not accompanied by amounts representing scheduled
interest due after the month of those payments 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 may receive distributions before the next scheduled
distribution date under the circumstances and in the manner described in this
prospectus 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. Typically, 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; however, if so specified in the
related prospectus supplement, it may. The unscheduled distributions may or may
not 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
If so specified 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 date specified in the related prospectus
supplement and were not advanced by any sub-servicer, net of the servicing fee.
The master servicer will make advances if the master servicer determines 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.
If so 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:
(1) the amount of the distribution allocable to principal, separately
identifying the aggregate amount of any principal prepayments and if so
specified in the related prospectus supplement, any applicable prepayment
penalties included in that distribution;
(2) the amount of the distribution allocable to interest;
(3) the amount of any advance;
(4) 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;
(5) 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;
(6) 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;
(7) the percentage of principal prepayments on the loans, if any,
which each class will be entitled to receive on the following distribution
date;
(8) 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;
(9) 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;
(10) the book value of any real estate acquired through foreclosure
or grant of a deed in lieu of foreclosure;
(11) 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;
(12) if applicable, the amount remaining in any reserve account at
the close of business on the distribution date;
(13) the pass-through rate or interest rate, as applicable, as of the
day prior to the immediately preceding distribution date; and
(14) 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 (1) and (2) 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 describes 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.
Categories of Classes
- ---------------------
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 a notional amount. The
notional amount is used for purposes of the
determination of interest distributions.
Planned Principal Class
or PACs ...................... A class that is designed to receive principal
payments using a predetermined principal
balance schedule derived by assuming two
constant prepayment rates for the underlying
trust fund assets. These two rates are the
endpoints for the "structuring range" for the
planned principal class. The planned
principal classes in any series of 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 or Companion
Class ........................ 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
or TACs ...................... A class that is designed to receive principal
payments using a predetermined principal
balance schedule derived by assuming a single
constant prepayment rate for the underlying
trust fund assets.
Interest Types
- --------------
Fixed Rate ..................... A class with an interest rate that is fixed
throughout the life of that 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.
Categories of Classes
- ---------------------
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 distributions in respect
of principal only.
Partial Accrual ................ A class that accretes a portion of the amount
of accrued interest with respect to that
class. The accreted interest will not be
distributed but will instead be added to the
principal balance of that class on each
applicable distribution date, with the
remainder of the accrued interest to be
distributed currently as interest on that
class. This partial accrual without
distribution may continue until a specified
event has occurred or until the partial
accrual class is retired.
Accrual ........................ A class that accretes the full amount of
accrued interest with respect to that class.
The accreted interest will not be distributed
but will instead be added as principal to the
principal balance of that class on each
applicable distribution date. This accrual
without distribution may continue until some
specified event has occurred or until the
accrual class is retired.
INDICES APPLICABLE TO FLOATING RATE AND INVERSE FLOATING RATE CLASSES
The indices applicable to floating rate and inverse floating rate
classes will be LIBOR, COFI, the Treasury Index, the Prime Rate, in each case
calculated as described in this prospectus or any other index described in the
related prospectus supplement.
LIBOR
On the date specified in the related prospectus supplement for any
class of securities the interest rate of which is determined by reference to an
index designated as LIBOR, the calculation agent designated in the prospectus
supplement will determine LIBOR for the related interest accrual period. On that
determination date, the calculation agent will determine the quotations, as of
11:00 a.m., London time, offered by the principal London office of each of the
designated reference banks meeting the criteria set forth below, for making
one-month United States dollar deposits in the London Interbank market. The
calculation agent will determine those quotations by reference to 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, or
to the Telerate Screen Page 3750. In lieu of relying on the quotations for those
reference banks that appear at that time on the Reuters Screen LIBO Page or on
the Telerate Screen Page 3750, the calculation agent may request each of the
reference banks to provide offered quotations at that time.
LIBOR will be established as follows:
(a) If on any LIBOR determination date two or more reference
banks provide offered quotations, LIBOR for the next interest accrual
period shall be the arithmetic mean of the offered quotations (rounded
upwards if necessary to the nearest whole multiple of 1/32%).
(b) If on any LIBOR determination date only one or none of the
reference banks provides offered quotations, LIBOR for the next
interest accrual period shall be whichever is the higher of (1) LIBOR
as determined on the previous LIBOR determination date or (2) the
reserve interest rate, which is the rate per annum which the
calculation agent determines to be either (a) 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 (b) 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 (1) shall be a leading bank engaged in transactions
in Eurodollar deposits in the international Eurocurrency market; (2) shall not
control, be controlled by, or be under common control with the calculation
agent; and (3) shall have an established place of business in London. If any
reference bank should be unwilling or unable to act 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
On the date specified in the related prospectus supplement for any
class of securities the interest rate of which is determined by reference to an
index designated as COFI, the calculation agent designated in the prospectus
supplement will ascertain the Eleventh District Cost of Funds Index for the
related interest accrual period. 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 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, or FHLBSF, to
neutralize the effect of events such as member institutions leaving the Eleventh
District or acquiring institutions outside the Eleventh District. The Eleventh
District Cost of Funds Index is weighted to reflect the relative amount of each
type of funds held at the end of the relevant month. The major components of
funds of Eleventh District member institutions are:
(1) savings deposits,
(2) time deposits,
(3) FHLBSF advances,
(4) repurchase agreements, and
(5) 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 with
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. In addition, 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. On the tenth day, or
any other day of the month specified in the related prospectus supplement, COFI
for each class of COFI securities for the interest accrual period commencing in
that month shall be the most recently published Eleventh District Cost of Funds
Index, unless the most recently published index relates to a month prior to the
third preceding month. If the most recently published Eleventh District Cost of
Funds Index relates to a month prior to the third preceding month, COFI 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 Cost of Funds Index published by the OTS. 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 COFI
is based on the National Cost of Funds Index it will be based on the most
recently published index, unless the most recently published index, as of the
tenth or other designated day of the month in which an interest accrual period
commences, relates to a month prior to the fourth preceding month. In that case,
the index applicable to each class of COFI securities, 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 related 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
On the date specified in the related prospectus supplement for any
class of securities the interest rate of which is determined by reference to an
index denominated as a Treasury Index, the calculation agent designated in the
prospectus supplement will ascertain the Treasury Index for Treasury securities
of the maturity and for the period, or, if applicable, date, specified in the
prospectus supplement. As described 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 in the related prospectus supplement, and for
any date means the yield for that date, expressed as a per annum percentage
rate, on (1) U.S. Treasury securities adjusted to the "constant maturity"
specified in that prospectus supplement or (2) 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
On the date specified in the related prospectus supplement for any
class of securities the interest rate of which is determined by reference to an
index denominated as the Prime Rate, the calculation agent designated in the
prospectus supplement will ascertain the Prime Rate for the related interest
accrual period. As described 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 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
securities. Persons acquiring beneficial ownership interests in the
securities--the security owners--will hold their securities through The
Depository Trust Company in the United States, or Cedelbank or Euroclear in
Europe if they are 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.
Except as described in this prospectus, no person acquiring a book-entry
security will be entitled to receive a physical certificate representing that
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 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
in this prospectus, under the rules, regulations and procedures creating and
affecting DTC and its operations, 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 DTC 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 in this prospectus. 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 DTC 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 or Euroclear participant 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 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, 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. 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 participants, or participating organizations and facilitates the clearance
and settlement of securities transactions between Cedelbank participants through
electronic book-entry changes in accounts of Cedelbank participants, 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
regulated 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
and to clear and settle transactions between Euroclear participants through
simultaneous electronic book-entry delivery against payment, eliminating the
need for physical movement of certificates. 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, as
Euroclear operator, under contract with Euroclear Clearance Systems S.C., a
Belgian cooperative corporation. 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, 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 a New York banking corporation and 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. Its Belgian branch, which is the
Euroclear operator, is also regulated by the Belgian Banking Commission.
Securities clearance accounts and cash accounts for Euroclear
participants 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. 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 "Material 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.
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 depositor 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 and DTC's relevant rules and procedures. 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 then 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 in this prospectus and
described in the related prospectus supplement, or any combination of the
foregoing. 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 on those securities. 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 to distributions of
scheduled principal, principal prepayments, interest or any combination thereof
that otherwise would have been payable to holders of one or more classes of
subordinated securities under the circumstances and to the extent specified in
the related prospectus supplement. Protection may also be afforded to the
holders of senior securities of a series by:
(1) reducing the ownership interest, if applicable, of the related
subordinated securities;
(2) a combination of the immediately preceding sentence and clause (1)
above; or
(3) another method described in the related prospectus supplement.
If so specified in the related prospectus supplement, delays in receipt of
scheduled payments on the loans held in a trust fund and losses on defaulted
loans may be borne first by the various classes of subordinated securities and
subsequently by the various classes of senior securities, in each case under the
circumstances and in accordance with 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, in each case as specified in the
related prospectus supplement. Deposits may also be made following payments from
the reserve account to holders of securities or otherwise to the extent
necessary to restore the balance in the reserve account to required levels, in
each case as also 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:
(1) in the order of their scheduled final distribution dates;
(2) in accordance with a schedule or formula;
(3) in relation to the occurrence of events; or
(4) by another method 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. Under the letter of credit, the entity providing the L/C
will be obligated to honor drawings under the L/C in an aggregate fixed dollar
amount, net of unreimbursed payments, 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. 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 under the letter of credit. The obligations of the entity providing the
L/C 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 SEC 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 the securities or on specified
classes 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:
(1) maintaining timely payments or providing additional protection
against losses on the trust fund assets;
(2) paying administrative expenses; or
(3) 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 SEC as an exhibit to a Current
Report on Form 8-K to be filed with the SEC 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 included in the trust fund 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 a 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:
(1) by the deposit in the reserve account of cash, United States
Treasury securities, instruments evidencing ownership of
principal or interest payments on those amounts or instruments,
letters of credit, demand notes, certificates of deposit or a
combination thereof in the aggregate amount specified in the
related prospectus supplement;
(2) by the deposit in the reserve account 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
(3) 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:
(1) obligations of the United States or any of its agencies, provided
those obligations are backed by the full faith and credit of the
United States;
(2) 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;
(3) 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;
(4) 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
and regulated 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 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;
(5) 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;
(6) 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;
(7) repurchase obligations with respect to any security described in
clauses (1) and (2) above, in either case entered into with a
depository institution or trust company acting as principal
described in clause (4) above;
(8) securities, other than stripped bonds, stripped coupons or
instruments sold at a purchase price in excess of 115% of face
amount, bearing interest or sold at a discount and issued by any
corporation incorporated under the laws of the United States or
any state 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;
(9) 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
(10) short term investment funds sponsored by any trust company or
national banking association incorporated under the laws of the
United States or any state 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. In general, any
instrument deposited in the spread account 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. If approved by each rating agency rating a
series of securities, the instruments deposited in the spread account may be in
the name of another entity. 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 will be obtained for the loans included in the trust fund. The
insurer issuing the pool insurance policy will be named in that prospectus
supplement.
Each pool insurance policy will provide limited coverage of losses
caused by payment defaults on loans in the related pool. Coverage will be 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 in this prospectus, the master
servicer will present claims 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
under the policies may only be made respecting particular defaulted loans and
only upon satisfaction of the conditions precedent contained in each policy.
Typically, 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; however, if
so specified in the related prospectus supplement, the pool insurance policies
may cover those claims.
The pool insurance policy may provide that no claims may be validly
presented unless:
(1) any required primary mortgage insurance policy is in effect for
the defaulted loan and a claim under that policy has been
submitted and settled;
(2) hazard insurance on the related property has been kept in force
and real estate taxes and other protection and preservation
expenses have been paid;
(3) 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
(4) 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 its principal balance plus accrued and unpaid interest at the loan interest
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 interest 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 (1) the restoration will increase the
proceeds to securityholders on liquidation of the loan after reimbursement of
the master servicer for its expenses and (2) the expenses will be recoverable by
it through proceeds of the sale of the property or proceeds of the related pool
insurance policy or any related primary mortgage insurance policy.
The pool insurance policy generally 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, (1) fraud or negligence in the
origination or servicing of a loan, including misrepresentation by the borrower,
the originator or persons involved in the origination of the loan, or (2)
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 was not approved by the
applicable insurer.
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,
in most cases, accrued interest on delinquent loans to the date of payment of
the claim. Accordingly, if aggregate net claims paid under any pool insurance
policy reach the original policy limit, coverage under that pool insurance
policy will be exhausted and any further losses will be borne by the related
securityholders.
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 (1) 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 (2) 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 coverage the credit
support provides 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:
(1) maintaining timely payments or providing additional protection
against losses on the assets included in that trust fund;
(2) paying administrative expenses; or
(3) 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 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 in that pool. Each prospectus supplement will contain
information with respect to the type and maturities of the loans in the related
pool. The related prospectus supplement will specify the circumstances, if any,
under which the related loans will have 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 right of borrowers to deduct interest payments on home equity loans for
federal income tax purposes may further increase the rate of prepayments of the
loans. The enforcement of a "due-on-sale" provision 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 from 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 (1) 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 (2) make
payments as high as the entire outstanding principal balance plus accrued
interest and the fees and charges on the revolving credit line loans. 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.
If specified in the related prospectus supplement, 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. On the other hand, if specified in the related prospectus supplement,
conventional loans will not contain due-on-sale provisions. FHA Loans and VA
Loans 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. As described 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 borne by the loans, those loans are more
likely to experience 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 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. In most cases, 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. If so specified in the
related prospectus supplement there may be a provision for the servicer or some
other specific entity to cover the shortfall resulting from prepayment in full.
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. In most cases,
neither full nor partial prepayments will be passed through or paid until the
month following receipt.
Even assuming that the properties provide adequate security for the
loans, substantial delays could be encountered in connection with the
liquidation of defaulted loans and corresponding delays in the receipt of
related proceeds by securityholders could occur. An action to foreclose on a
property securing a loan is regulated by state statutes and rules and, like many
lawsuits, can be characterized by significant delays and expenses if defenses or
counterclaims are interposed. Foreclosure actions may require 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, 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, and, in
so doing, cause 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 the
indentures, pooling and servicing agreements and trust agreements which, as
applicable, will govern the terms of each series of securities and which are not
described elsewhere in this prospectus. The description of these agreements 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 interest rate, the maturity of
the loan, the loan-to-value ratios or combined loan-to-value ratios, as
applicable, at origination and other information.
If specified in the related prospectus supplement, within the time
period specified in that prospectus supplement, the depositor, or the seller of
the related loans to the depositor, will be required to deliver or cause to be
delivered to the trustee or to the trustee's custodian as to each mortgage loan
or home equity loan, among other things:
(1) the mortgage note or contract endorsed without recourse in blank
or to the order of the trustee;
(2) the mortgage, deed of trust or similar instrument with evidence
of recording indicated on the mortgage, deed of trust or similar
instrument, except for any mortgage not returned from the public
recording office, in which case the depositor or seller 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;
(3) an assignment of the mortgage to the trustee, which assignment
will be in recordable form in the case of a mortgage assignment;
and
(4) 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.
Notwithstanding the foregoing, if specified in the prospectus supplement, the
depositor or the seller may maintain possession of the documents in clauses (1)
through (4) above for the life of the transaction or until the occurrence of
events described in that prospectus supplement.
If specified in the related prospectus supplement, the depositor or the
seller 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. Alternatively, if specified in the related prospectus
supplement, the depositor or the seller will not cause the assignments of the
loans to be recorded or will cause the recordation only upon the occurrence of
events specified in that prospective supplement.
With respect to any loans that are cooperative loans, the depositor or
the seller 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. If so specified in the related
prospectus supplement, the depositor or the seller 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.
If specified in the related prospectus supplement, the depositor or the
seller will as to each manufactured housing contract or home improvement
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, if specified in the related prospectus
supplement, the depositor or the seller 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. If so 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 its custodian will review the loan documents delivered
to it within the time period specified in the related prospectus supplement, and
the trustee will hold those documents in trust for the benefit of the related
securityholders. If any document is found to be missing or defective in any
material respect, the trustee or its 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
(1) purchase the related loan from the trust fund at the purchase price or (2)
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 in the prospectus supplement. 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. 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. 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 Internal Revenue 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 of the loans to the
depositor or the originator of the loans 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 which, unless otherwise specified in the related
prospectus supplement, must be either:
(1) 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;
(2) an account or accounts the deposits in which are fully insured by
either the Bank Insurance Fund of the FDIC or the Savings
Association Insurance Fund (as successor to the Federal Savings
and Loan Insurance Corporation);
(3) 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 so 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
(4) an account or accounts otherwise acceptable to each rating
agency.
The collateral eligible to secure amounts in the security account is limited to
permitted investments. A security account may be maintained as an interest
bearing account or the funds held in the security account may be invested
pending each succeeding distribution date in permitted investments. The related
prospectus supplement will specify whether 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 the entity that 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 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:
(1) all payments on account of principal, including principal
prepayments and, if specified in the related prospectus supplement,
any applicable prepayment penalties, on the loans;
(2) all payments on account of interest on the loans, net of
applicable servicing compensation;
(3) all proceeds, net of unreimbursed payments of property taxes,
insurance premiums and similar items 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 and all other cash amounts, net of
unreimbursed expenses incurred in connection with liquidation or
foreclosure 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, 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;
(4) all proceeds of any loan or property 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;
(5) 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;
(6) 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
(7) 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 may include the
following:
(1) to pay to the master servicer the servicing fees described in
the related prospectus supplement, the master servicing fees and, as
additional servicing compensation, earnings on or investment income
with respect to funds in the amounts in the security account credited
to the security account;
(2) 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 to that loan) with respect to which the advance
was made;
(3) to reimburse the master servicer for any advances previously
made which the master servicer has determined to be nonrecoverable;
(4) to reimburse the master servicer from insurance proceeds for
expenses incurred by the master servicer and covered by the related
insurance policies;
(5) to 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;
(6) to pay to the master servicer, with respect to each loan or
property that has been purchased by the master servicer under the
related agreement, all amounts received on the loan or property and
not taken into account in determining the principal balance of the
repurchased loan;
(7) to reimburse the master servicer or the depositor for
expenses incurred and reimbursable pursuant to the agreement;
(8) to withdraw any amount deposited in the security account and
not required to be deposited in the security account; and
(9) to clear and terminate the security account upon termination
of the agreement.
In addition, on or prior to the business day immediately preceding each
distribution date or any other day specified in the related prospectus
supplement, 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, a funding period
will be established for the related series of securities and the master servicer
will establish and maintain a pre-funding account. Any pre-funding account for a
trust fund will be maintained in the name of the related trustee, and will be
the account into which the depositor or the seller 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. Any funding period for a trust fund will begin on
the related closing date and will end on the date specified in the related
prospectus supplement, which in no event will be later than the date that is one
year after the related closing date.
The pre-funding account will be designed solely to hold funds to be
applied by the related trustee during the funding period to pay to the depositor
or the seller the purchase price for loans deposited into the trust fund
subsequent to the related closing date. The purchase of these subsequent loans
will be the sole use for which amounts on deposit in the pre-funding account may
be used during the funding period. Monies on deposit in the pre-funding account
will not be available to cover losses on or in respect of the related loans.
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 or the
seller 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, the seller 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.
Monies on deposit in the pre-funding account may be invested in permitted
investments under the circumstances and in the manner described in the related
agreement. Earnings on investment of funds in the pre-funding account will be
deposited into the related security account or any other trust account as is
specified in the related prospectus supplement or released to the depositor, the
seller 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, a capitalized 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 or the seller as specified in the related prospectus supplement.
SUB-SERVICING BY SELLERS
Each seller of a loan to the depositor in connection with a series or
any other servicing entity may act as the sub-servicer for a loan in connection
with that series pursuant to a sub-servicer 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 (1) the maximum insurable value
of the improvements securing the loan or (2) the greater of (y) the outstanding
principal balance of the loan and (z) an amount 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 in the security
account but for that clause.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements securing a loan by
fire, lightning, explosion, smoke, windstorm and hail, riot, strike and civil
commotion, subject to the conditions and exclusions 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 of the
policies 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 (1) 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 (2) 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 on the loans
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."
In general, 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 (1) that the restoration will
increase the proceeds to securityholders on liquidation of the loan after
reimbursement of the master servicer for its expenses and (2) 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 on the
loan 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
on the loan 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 amounts
representing the balance of the excess, exclusive of any amount required by law
to be forwarded to the related borrower, as additional servicing compensation.
If 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 on the loan 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 on the loan. See "Credit Enhancement."
In general, 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.
The related prospectus supplement may specify an alternative priority
of allocation of proceeds from the liquidation of a 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: (1) the restoration
or foreclosure will increase the liquidation proceeds in respect of the related
loan available to the securityholders after reimbursement to itself for the
expenses and (2) the expenses will be recoverable by it either through
liquidation proceeds or the proceeds of insurance. Notwithstanding anything to
the contrary in this prospectus, 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 three 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 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 on
that loan 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. 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 master servicing fee is 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. In
addition, the master servicer or Sub-Servicer may be entitled to 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 to the extent 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 as described in the related prospectus supplement or
the applicable agreement.
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
Freddie Mac 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 Freddie Mac, 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 Freddie Mac
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 servicing agreement will provide that the master
servicer may not resign from its obligations and duties under that agreement
except upon a determination that the performance by it of its duties is 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 servicing 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 negligence in the
performance of its duties or by reason of reckless disregard of its obligations
and duties. Each servicing 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 negligence in the
performance of its duties or by reason of reckless disregard of its obligations
and duties. 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 to the
agreement and the interests of the securityholders. In that event, the legal
expenses and costs of the action and any resulting liability 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 for those
amounts 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
Events of default under each pooling and servicing agreement and master
servicing agreement generally will consist of:
(1) 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
voting interests constituting that class;
(2) any failure by the master servicer to make an advance as required
under the agreement, unless cured as specified in that agreement;
(3) 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 voting interests constituting that class; or
(4) 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.
The prospectus supplement for a series of securities may describe
additional or alternative events of default for the pooling and servicing
agreement or the master servicing agreement.
If specified in the related prospectus supplement, the agreement will
permit the trustee to sell the trust fund assets and the other assets of the
trust fund described under "Credit Enhancement" in this prospectus in the event
that payments in respect to the trust fund assets 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.
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 voting 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. Upon termination, the trustee or another entity
in the related prospectus supplement 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.
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 voting interests constituting that class have made written request
upon the trustee to institute a proceeding in its own name as trustee 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:
(1) 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;
(2) 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 of the failure is
given in accordance with the procedures described in the related
prospectus supplement;
(3) events of bankruptcy, insolvency, receivership or liquidation of
the depositor or the trust fund; or
(4) 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, 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 voting 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 voting 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 voting 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 its unpaid principal amount less the amount of the discount which is
unamortized.
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. So long as they are acting in accordance with the provisions for
indemnification and the 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. 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 to a series,
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 affected noteholders.
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, and any other party
specified in the related prospectus supplement:
(1) to cure any ambiguity;
(2) to correct or supplement any provision in that agreement which
may be defective or inconsistent with any other provision in that
agreement; or
(3) to make any other revisions with respect to matters or questions
arising under the Agreement, 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 voting interests of each affected class 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 (1) 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 (2) 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. In addition, to the
circumstances 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 (1) the final
payment of or other liquidation of the last of the trust fund assets or the
disposition of all property acquired upon foreclosure of any trust fund assets
remaining in the trust fund and (2) 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 from the
related trust fund of all of the remaining trust fund assets and all property
acquired in respect of those trust fund assets.
Any purchase of trust fund assets and property acquired in respect of
trust fund assets evidenced by a series of securities will be made at the option
of the master servicer, 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 conditioned on 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, causing the 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. However, if a REMIC election has been made with
respect to a trust fund, the purchase will be made only in connection with a
"qualified liquidation" of the REMIC within the meaning of Section 860F(g)(4) of
the Internal Revenue 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 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 applicable 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 the 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.
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 securing 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 under "-- Foreclosure/Repossession" 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 related 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. If it does
purchase the property, except as limited by 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.
These equitable principles 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 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 transfer restrictions under 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 under
the lease or agreement. 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 on
that loan.
Recognition agreements also provide that in the event of a foreclosure
on a cooperative loan, the lender must obtain the approval or consent of the
cooperative as required by the proprietary lease before transferring the
cooperative shares or assigning the proprietary lease. Generally, the lender is
not limited in any rights it may have to dispossess the tenant-stockholders.
In some states, foreclosure on the cooperative shares is accomplished
by a sale in accordance with the provisions of Article 9 of the UCC and the
security agreement relating to those shares. Article 9 of the UCC requires that
a sale be conducted in a "commercially reasonable" manner. Whether a foreclosure
sale has been conducted in a "commercially reasonable" manner will depend on the
facts in each case. In determining commercial reasonableness, a court will look
to the notice given the debtor and the method, manner, time, place and terms of
the foreclosure. Generally, a sale conducted according to the usual practice of
banks selling similar collateral will be considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be
applied first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is limited by 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, or CERCLA, the EPA may impose a lien on
property where EPA has incurred clean-up costs. However, a CERCLA lien is
subordinate to pre-existing, perfected security interests.
Under the laws of some states, and under CERCLA, 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
securityholders.
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, or 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.
It is anticipated that, at the time the loans to be included in the
trust fund are originated, no environmental assessment or a very limited
environmental assessment of the mortgaged properties will be 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
prior 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 prior 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 some tax liens over the lien
of a mortgage or secured party.
DUE-ON-SALE CLAUSES
The loans to be included in a trust fund may or may not 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 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 (1)
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 (2) originated by
lenders other than national banks, federal savings institutions and federal
credit unions. Freddie Mac 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 mortgaged 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.
Further, 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, for each series, many of the mortgaged 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 interest 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 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 OTS, 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 manufactured housing contracts and home improvement
contracts, other than those that are unsecured or are secured by mortgages on
real estate 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 or the
seller 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. The contracts will not be
stamped or otherwise marked to reflect their assignment from the depositor to
the trustee unless the related prospectus supplement states that they will be so
stamped. 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 home improvements 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 is not governed by 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 of 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.
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. 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 unless the related prospectus
supplement so states. 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 particular circumstances, may become governed by 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,
after expiration of the four months, 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 FTC is intended to defeat the ability of the transferor of a consumer credit
contract who 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 contract debtor. The effect of this rule is to subject
the assignee of a contract of this type to all claims and defenses that the
debtor under the contract 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 provides that state usury
limitations shall not apply to any contract which is secured by a first lien on
particular kinds of consumer goods, unless it is covered by any of the following
conditions. The contracts would be covered if they satisfy 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 rejected, any state is authorized by the law to adopt a
provision limiting discount points or other charges on loans covered by Title V.
INSTALLMENT CONTRACTS
The loans may also consist of installment contracts. Under an
installment contract the property seller, as lender under the contract, retains
legal title to the property and enters into an agreement with the purchaser, as
borrower under the contract, 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 that is encumbered by 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, or 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. 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. This action
would in turn cause the junior mortgagee's lien to be extinguished 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 priority 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 and not commit or permit any waste upon the
property, 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 these obligations, 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. 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 FHA insurance under the Title
I Program include property improvement loans. A property improvement 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. This
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 then 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 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 on the property 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 that 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 (1) the amount of the
FHA insurance claims approved for payment relating to the insured loans and (2)
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 in that reserve account may be earmarked with respect to
each or any eligiable insured loans 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 to
provide recourse, 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, although that time
limit does not apply in the event it is contesting on the grounds 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. The claimable
amount is 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 to the unpaid loan obligation 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 the loans that will be included in a trust fund. 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 with them. In
addition, violations of those laws may limit the ability of the originators to
collect all or part of the principal of or interest on the loans and could
subject the originators and in some case their assignees to damages and
administrative enforcement.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following is a summary of the material 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. The
summary is based upon the provisions of the Internal Revenue 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 that type of 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 particular types of investors who are the subject of
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:
(1) the securities of a series are classified as indebtedness;
(2) an election is made to treat the trust fund relating to a
particular series of securities as a REMIC under the Internal
Revenue Code;
(3) the securities represent an ownership interest in some or all of
the assets included in the trust fund for a series; or
(4) the trust fund relating to a particular series of certificates is
treated as a partnership.
Brown & Wood LLP, special counsel to the depositor, is of the opinion
that, for federal income tax purposes:
o securities issued as notes will be treated as indebtedness;
o securities issued as certificates will be treated as one of the
following:
- indebtedness;
- ownership interests in the related trust fund or in its assets;
- "REMIC regular interests" or "REMIC residual interests"; or
- "FASIT regular securities" or "FASIT ownership securities".
The latter two treatments would occur in the event that REMIC or FASIT
elections, respectively, are made with respect to the trust fund, as described
under "--Taxation of the REMIC and Its Holders" and "--Taxation of Trust as
FASIT". Each prospectus supplement will specify which of these treatments
applies to the securities being issued. Brown & Wood LLP is of the opinion that
REMIC "regular interests" and "FASIT regular securities" will generally be
treated as indebtedness issued by the REMIC or FASIT, as applicable.
In all cases, each trust fund will be structured to not be subject to
an entity level tax, and Brown & Wood LLP is of the opinion that each trust fund
will not be characterized as an association, or publicly traded partnership or
taxable mortgage pool, taxable as a corporation.
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 that
series. Prior to issuance of each series of securities, the depositor shall file
with the SEC a Current Report on 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 "Material Federal Income Tax Consequences" in
this prospectus 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, is of the opinion that
the securities will be treated as debt for United States federal income tax
purposes and the trust fund will not be characterized as an association,
publicly traded partnership or taxable mortgage pool, taxable as a corporation.
At the time those 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:
(1) 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);
(2) 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
(3) 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 are generally taxable to holders in the same manner as
evidences of indebtedness issued by the REMIC. Stated interest on 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 in
accordance with their usual methods of accounting.
Debt Securities that are Compound Interest Securities--generally,
securities all or a portion of the interest on which is not paid
currently--will, and some of the other Debt Securities may, be issued with
original issue discount. The following discussion is based in part on the
regulations governing OID which are set forth in Sections 1271-1275 of the Code
and the Treasury regulations issued thereunder on February 2, 1994. A holder of
Debt Securities should be aware, however, that the OID regulations do not
adequately address some 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 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 that class will be
treated as the fair market value of that class on that 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 those 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
in this prospectus, provided that those 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. Some Debt Securities may provide
for default remedies in the event of late payment or nonpayment of interest. The
interest on those 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
those Debt Securities includes all distributions of interest as well as
principal on those Debt Securities. 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 in
this prospectus. 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 the OID is less than 0.25% of the stated redemption price at maturity
of the Debt Security multiplied by the weighted average maturity of the Debt
Security. For this purpose, the weighted average maturity of the Debt Security
is computed as the sum of the amounts determined by multiplying the number of
full years -- i.e., rounding down partial years -- from the issue date until
each distribution in reduction of stated redemption price at maturity is
scheduled to be made by a fraction, the numerator of which is the amount of each
distribution included in the stated redemption price at maturity of the Debt
Security and the denominator of which is the stated redemption price at maturity
of the Debt Security. Holders generally must report de minimis OID pro rata as
principal payments are received, and that 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:
(1) the interest is unconditionally payable at least annually at a
"current value" of the index;
(2) the issue price of the debt instrument does not exceed the total
noncontingent principal payments;
(3) 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 that Debt Security; and
(4) the principal payments are not contingent.
In the case of Compound Interest Securities, some Interest Weighted Securities,
and 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 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 covered by 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 the methodology represents the
correct manner of calculating OID.
The holder of a Debt Security issued with OID must include in gross
income, for all days during its taxable year on which it holds the Debt
Security, the sum of the "daily portions" of that OID. 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 OID 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 assets, the amount of
OID for an accrual period, which is 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 that accrual period, reduced by any payments of qualified stated
interest allocable to that 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 that Debt Security on or before the first day of that accrual
period, other than qualified stated interest payments.
The amount of OID to be included in income by a holder of a Pay-Through
Security, like some classes of the Debt Securities, that is subject to
acceleration due to prepayments on other debt obligations securing those
instruments, is computed by taking into account the rate of prepayments assumed
in pricing the debt instrument. 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: (1) 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, (2) events which have occurred before the end of
the accrual period and (3) 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 those adjustments. If the IRS
were to require that OID be accrued without those adjustments, the rate of
accrual of OID for a class of Regular Interest Securities could increase.
Some classes of Regular Interest Securities may represent more than one
class of REMIC regular interests. The trustee intends, based on the OID
regulations, to calculate OID on those securities as if, solely for the purposes
of computing OID, the separate regular interests were a single debt instrument
unless the related prospectus supplement specifies that the trustee will treat
the separate regular interests separately.
A subsequent holder of a Debt Security will also be required to include
OID in gross income, but a subsequent holder who purchases that Debt Security
for an amount that exceeds its adjusted issue price will be entitled, as will an
initial holder who pays more than a Debt Security's issue price, to offset the
OID by comparable economic accruals of portions of that 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 the amounts are
uncollectible. As a result, the amount of income, including OID, reported by a
holder of a security in any period could significantly exceed the amount of cash
distributed to that 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
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 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. 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 that 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 the holder for that security over its stated
principal amount, if any. Under this approach, a holder would be entitled to
amortize the premium only if it has in effect an election under Section 171 of
the Code with respect to all taxable debt instruments held by that holder, as
described in this prospectus. Alternatively, the IRS could assert that an
Interest Weighted Security should be taxable under the rules governing bonds
issued with contingent payments. This treatment may be more likely in the case
of Interest Weighted Securities that are Stripped Securities as described in
this prospectus. 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 (1) the yield to maturity of those Debt
Securities and (2) in the case of Pay-Through Securities, the present value of
all payments remaining to be made on those Debt Securities, should be calculated
as if the interest index remained at its value as of the issue date of those
securities. Because the proper method of adjusting accruals of OID on a variable
rate Debt Security is uncertain, holders of variable rate Debt Securities should
consult their own tax advisers regarding the appropriate treatment of those
securities for federal income tax purposes.
MARKET DISCOUNT. A purchaser of a security may be subject to the market
discount rules of Sections 1276-1278 of the Code. A holder 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. The market
discount would accrue in a manner to be provided in Treasury regulations but,
until those regulations are issued, the market discount would in general accrue
either (1) on the basis of a constant yield, in the case of a Pay-Through
Security, taking into account a prepayment assumption, or (2) 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 that 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
in this prospectus, the loans underlying that 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 in this prospectus, the
underlying loans, with market discount over interest received on that security
is allowed as a current deduction only to the extent the excess is greater than
the market discount that accrued during the taxable year in which the interest
expense was incurred. In general, the deferred portion of any interest expense
will be deductible when the market discount is included in income, including
upon the sale, disposition, or repayment of the security, or in the case of a
Pass-Through Security, an underlying loan. A holder may elect to include market
discount in income currently as it accrues, on all market discount obligations
acquired by the holder during and after the taxable year the election is made,
in which case the interest deferral rule will not apply.
PREMIUM. A holder who purchases a Debt Security, other than an Interest
Weighted Security to the extent described above, at a cost greater than its
stated redemption price at maturity, generally will be considered to have
purchased the security at a premium, which it may elect to amortize as an offset
to interest income on the security, and not as a separate deduction item, on a
constant yield method. Although no regulations addressing the computation of
premium accrual on securities similar to the securities have been issued, the
legislative history of the Tax Reform Act of 1986, or 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
that class. If a holder of a Debt Security makes an election to amortize premium
on a Debt Security, that election will apply to all taxable debt instruments,
including all REMIC regular interests and all pass-through certificates
representing ownership interests in a trust holding debt obligations, held by
the holder at the beginning of the taxable year in which the election is made,
and to all taxable debt instruments subsequently acquired by the holder, and
will be irrevocable without the consent of the IRS. Purchasers who pay a premium
for the securities should consult their tax advisers regarding the election to
amortize premium and the method to be employed.
The IRS has issued 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) like 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 that election were to be made with
respect to a Debt Security with market discount, the holder of the Debt Security
would be deemed to have made an election to include in income currently market
discount with respect to all other debt instruments having market discount that
the holder of the Debt Security acquires during or after the year of the
election. Similarly, a holder of a Debt Security that makes this election for a
Debt Security that is acquired at a premium will be deemed to have made an
election to amortize bond premium with respect to all debt instruments having
amortizable bond premium that the holder owns or acquires. The election to
accrue interest, discount and premium on a constant yield method with respect to
a Debt Security is irrevocable.
TAXATION OF THE REMIC AND ITS HOLDERS
GENERAL. If a REMIC election is made with respect to a series of
securities, then upon the issuance of those securities, assuming the 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, is of the opinion that the arrangement by
which the securities of that series are issued will be treated as a REMIC. At
the time the securities are issued Brown & Wood LLP 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.
As a REMIC, the trust fund is not generally subject to an entity-level tax and
will not be characterized as an association, publicly traded partnership or
taxable mortgage pool, taxable as a corporation. 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, (1) 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 (2)
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 (3) effective September 1, 1997,
Regular Interest Securities held by 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 (1) or (2)
above, then a security will qualify for the tax treatment described in (1) or
(2) in the proportion that those REMIC assets are qualifying assets.
STATUS OF MANUFACTURED HOUSING CONTRACTS. 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, 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 some pass-through entities but not including real estate
investment trusts, the expenses will be deductible only to the extent that those
expenses, plus other "miscellaneous itemized deductions" of the holder of a
Regular Interest Security, exceed 2% of the holder's adjusted gross income. In
addition, the amount of itemized deductions otherwise allowable for the taxable
year for an individual whose adjusted gross income exceeds the applicable
amount, which amount will be adjusted for inflation for taxable years beginning
after 1990, will be reduced by the lesser of (1) 3% of the excess of adjusted
gross income over the applicable amount, or (2) 80% of the amount of itemized
deductions otherwise allowable for that taxable year. The reduction or
disallowance of this deduction may have a significant impact on the yield of the
Regular Interest Security to a holder. In general terms, a single class REMIC is
one that either (1) 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 (2) is similar to a grantor trust and which is structured with the
principal purpose of avoiding the single class REMIC rules. In general the
expenses of the REMIC will be allocated to holders of the related Residual
Interest Securities. The prospectus supplement, however, may specify another
entity to whom the expenses of the REMIC may be allocated.
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 in the REMIC. 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 adjustments. In general, the taxable income or
net loss will be the difference between (1) 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 (2) 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 some 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 those expenses, when
aggregated with that holder's other miscellaneous itemized deductions for that
year, do not exceed two percent of that holder's adjusted gross income.
For purposes of computing its taxable income or net loss, the REMIC
should have an initial aggregate tax basis in its assets equal to the aggregate
fair market value of the regular interests and the residual interests on the
startup day, generally, the day that the interests are issued. That aggregate
basis will be allocated among the assets of the REMIC in proportion to their
respective fair market values.
The OID provisions of the Code apply to loans of individuals originated
on or after March 2, 1984, and the market discount provisions apply to loans
originated after July 18, 1984. Subject to possible application of the de
minimis rules, the method of accrual by the REMIC of OID income on those 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 the discount in income, but without regard to the de minimis
rules. See "Material Federal Income Tax Consequences -- General" above. However,
a REMIC that acquires loans at a market discount must include the market
discount in income currently, as it accrues, on a constant interest basis.
To the extent that the REMIC's basis allocable to loans that it holds
exceeds their principal amounts, the resulting premium, if attributable to
mortgages originated after September 27, 1985, will be amortized over the life
of the loans, taking into account the Prepayment Assumption, on a constant yield
method. Although the law is somewhat unclear regarding recovery of premium
attributable to loans originated on or before that date, it is possible that the
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:
(1) subject to limited exceptions, the sale or other disposition of
any qualified mortgage transferred to the REMIC;
(2) subject to a limited exception, the sale or other disposition of
a cash flow investment;
(3) the receipt of any income from assets not permitted to be held by
the REMIC pursuant to the Code; or
(4) 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 taxes for prohibited transactions imposed on
the REMIC. To the extent not paid by those holders or otherwise, however, taxes
that will be paid out of the trust fund and will be allocated pro rata to all
outstanding classes of securities of that REMIC.
TAXATION OF HOLDERS OF RESIDUAL INTEREST SECURITIES
The holder of 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 that 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 that quarter, and by allocating that amount among the holders, on that
day, of the Residual Interest Securities in proportion to their respective
holdings on that day.
The holder of a Residual Interest Security must report its
proportionate share of the taxable income of the REMIC whether or not it
receives cash distributions from the REMIC attributable to the income or loss.
The reporting of taxable income without corresponding distributions could occur,
for example, in some 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 some 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, while 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 a corporate
bond or stripped instrument having similar cash flow characteristics and pretax
yield.
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 that loss arises. A holder's basis in a
Residual Interest Security will initially equal that 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 those 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 a payment exceeds a holder's adjusted basis
in the Residual Interest Security, however, the holder will recognize gain,
treated as gain from the sale of the Residual Interest Security, to the extent
of the excess.
SALE OR EXCHANGE. A holder of a Residual Interest Security will
recognize gain or loss on the sale or exchange of a Residual Interest Security
equal to the difference, if any, between the amount realized and that holder's
adjusted basis in the Residual Interest Security at the time of the sale or
exchange. Except to the extent provided in regulations which have not yet been
issued, any loss upon disposition of a Residual Interest Security will be
disallowed if the selling holder acquires any residual interest in a REMIC or
similar mortgage pool within six months before or after 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 that
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, that holder's excess inclusion income will
be treated as unrelated business taxable income of that 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 some 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 additional limitations. See "-- Tax Treatment of
Foreign Investors." The Small Business Job Protection Act of 1996 eliminated the
special rule permitting Section 593 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
Section 593 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 a 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 these 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 a quarterly period
of (1) 120% of the long term applicable Federal Rate on the startup day
multiplied by (2) the adjusted issue price of the Residual Interest Security at
the beginning of that 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 some 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 "Disqualified
Organization. Disqualified Organizations include the United States, any State or
other political subdivision, 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 that 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 that 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 in this prospectus, 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 (1) 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 (2) 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 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 the 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, is of the
opinion that, assuming compliance with the agreements and with applicable law,
that 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 and
at the time those 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
those circumstances, a holder of a Pass-Through Security will be considered to
have purchased a pro rata undivided interest in each of the loans. With Stripped
Securities, the 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, at the same time and in the same manner as those 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 fees. In the case of
Pass-Through Securities other than Stripped Securities, that income will consist
of a pro rata share of all of the income derived from all of the loans and, in
the case of Stripped Securities, the income will consist of a pro rata share of
the income derived from each stripped bond or stripped coupon in which the
holder owns an interest. The holder of a security will generally be entitled to
deduct fees under Section 162 or Section 212 of the Code to the extent that
those 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, fees
payable to the trustee and the servicer to the extent not otherwise disallowed,
e.g., because they exceed reasonable compensation will be deductible in
computing the holder's regular tax liability only to the extent that those fees,
when added to other miscellaneous itemized deductions, exceed 2% of adjusted
gross income and may not be deductible to any extent in computing that 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 (1) 3% of the excess of adjusted gross income over the applicable
amount or (2) 80% of the amount of itemized deductions otherwise allowable for
that 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 on that Pass-Through Security 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 that discount that is allocable to a loan
among the principal payments on the loan and to include the discount allocable
to each principal payment in ordinary income at the time the principal payment
is made. That 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 payments of both
interest and principal. 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 the 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 that 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 cash flow
bond method described above for Pay-Through Securities, 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 that 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 those 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 some 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 (1) in some 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; (2) the non-Interest Weighted
Securities are subject to the contingent payment provisions of the Contingent
Regulations; or (3) 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 those 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 a 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. The 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 (1) the amount that
would have been includible in the holder's income if the yield on a Regular
Interest Security had equaled 110% of the applicable Federal Rate as of the
beginning of the holder's holding period, over (2) the amount of ordinary income
actually recognized by the holder with respect to the 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 some 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
(1) fails to furnish the trustee with its taxpayer identification
number;
(2) furnishes the trustee an incorrect taxpayer identification
number;
(3) fails to report properly interest, dividends or other "reportable
payments" as defined in the Code; or
(4) under some circumstances, fails to provide the trustee or the
holder's securities broker with a certified statement, signed
under penalty of perjury, that the taxpayer identification number
provided is its correct number and that the holder is not subject
to backup withholding.
Backup withholding will not apply, however, with respect to some payments made
to holders of securities, including payments to particular exempt recipients,
like exempt organizations, and to some nonresident, alien individual, foreign
partnership or foreign corporation. 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
that 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,
the interest will normally qualify as portfolio interest, except where (1) the
recipient is a holder, directly or by attribution, of 10% or more of the capital
or profits interest in the issuer, or (2) 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 that 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 that 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 nonresident alien individuals, foreign partnerships or
foreign corporations. 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 that 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 those amounts to be taken into account at an
earlier time in order to prevent the avoidance of tax. Those 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 alien individual,
foreign partnership or foreign corporation 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 those 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."
The New Withholding Regulations, which are final regulations dealing
with withholding tax on income paid to foreign persons and related matters, 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 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 the 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 some 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, 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 those 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 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 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, to the extent provided in the related prospectus supplement,
opine 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, ETC. The discussion below assumes that all payments on the notes
are denominated in U.S. dollars, and that the notes are not 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 those 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 on a note will be taxable to a holder of a note as
ordinary interest income when received or accrued in accordance with that
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 the OID in income, on a pro
rata basis, as principal payments are made on the note. It is believed that any
prepayment premium paid as a result of a mandatory redemption will be taxable as
contingent interest when it becomes fixed and unconditionally payable. A
purchaser who buys a note for more or less than its principal amount will
generally be subject, respectively, to the premium amortization or market
discount rules of the Code.
A holder of a short-term note -- with a fixed maturity date of not more
than one year from the issue date of that note -- may be subject to special
rules. An accrual basis holder of a short-term note, and some 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. 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 that 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 that
holder with respect to the note. Any 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, or 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 (1) 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 (2) 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 other financial institutions, the organization or institution
may provide the relevant signed statement to the withholding agent; in that
case, however, the signed statement must be accompanied by a Form W-8 or
substitute form provided by the foreign person that owns the note. If the
interest is not portfolio interest, then it will be subject to United States
federal income and withholding tax at a rate of 30 percent, unless reduced or
eliminated pursuant to an applicable tax treaty.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a note by a foreign person will be exempt from United
States federal income and withholding tax, provided that (1) the gain is not
effectively connected with the conduct of a trade or business in the United
States by the foreign person and (2) 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 applicable
qualifying income tests. Nonetheless, treatment of the notes as equity interests
in that type of publicly traded partnership could have adverse tax consequences
to some holders. For example, income to some 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 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 in this
prospectus.
A variety of alternative characterizations are possible. For example,
because the certificates have some features characteristic of debt, the
certificates might be considered debt of the trust fund. This 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 in this prospectus. The following
discussion assumes that the certificates represent equity interests in a
partnership.
The following discussion assumes that all payments on the certificates
are denominated in U.S. dollars, none of the certificates are 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 those
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 that 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:
(1) the interest that accrues on the certificates in accordance with
their terms for that month, including interest accruing at the
pass-through rate for that month and interest on amounts
previously due on the certificates but not yet distributed;
(2) 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;
(3) prepayment premium payable to the holders of certificates for
that month; and
(4) any other amounts of income payable to the holders of
certificates for that month.
The 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 that 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
those 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 that 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. Those deductions might be disallowed to the individual in
whole or in part and might result in that holder being taxed on an amount of
income that exceeds the amount of cash actually distributed to that holder over
the life of the 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 those 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 the discount in income currently as it
accrues over the life of the loans or to offset the premium against interest
income on the loans. As indicated above, a portion of the market discount income
or premium deduction may be allocated to 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 a termination occurs, the trust fund will be considered to
contribute all of its assets and liabilities to a new partnership and, then to
liquidate immediately by distributing interests in the new partnership to the
certificateholders, with the trust fund, as the new partnership continuing the
business of the partnership deemed liquidated. The trust fund will not comply
with particular technical requirements that might apply when a constructive
termination occurs. As a result, the trust fund may be subject to 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 that 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
those certificates, and, upon sale or other disposition of some of the
certificates, allocate a portion of the aggregate tax basis to the certificates
sold, rather than maintaining a separate tax basis in each certificate for
purposes of computing gain or loss on a sale of that certificate.
Any gain on the sale of a certificate attributable to the holder's
share of unrecognized accrued market discount on the loans would generally be
treated as ordinary income to the holder and would give rise to special tax
reporting requirements. The trust fund does not expect to have any other assets
that would give rise to 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 to those certificates, that 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 that 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 that 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 the 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 trustee under a trust agreement is required
to keep or have kept complete and accurate books of the trust fund. The books
will be maintained for financial reporting and tax purposes on an accrual basis
and the fiscal year of the trust fund will be the calendar year. The trustee
under a trust agreement 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 in this prospectus and those nominees will be required to
forward that 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 those 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 information on the nominee, the beneficial owners
and the certificates so held. That information includes (1) the name, address
and taxpayer identification number of the nominee and (2) as to each beneficial
owner (x) the name, address and identification number of that person, (y)
whether that person is a United States person, a tax-exempt entity or a foreign
government, an international organization, or any wholly owned agency or
instrumentality of either of the foregoing, and (z) some information on
certificates that were held, bought or sold on behalf of that person throughout
the year. In addition, brokers and financial institutions that hold certificates
through a nominee are required to furnish directly to the trust fund information
as to themselves and their ownership of certificates. A clearing agency
registered under Section 17A of the Securities Exchange Act of 1934 is not
required to furnish the 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, in that capacity 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 some 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 in this prospectus.
Although it is not expected that the trust fund would be engaged in a trade or
business in the United States for those purposes, the trust fund will withhold
as if it were so engaged in order to protect the trust fund from possible
adverse consequences of a failure to withhold. The trust fund expects to
withhold on the portion of its taxable income that is allocable to foreign
holders of certificates pursuant to Section 1446 of the Code, as if that income
were effectively connected to a U.S. trade or business, at a rate of 35% for
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 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 that those payments are determined without regard to the
income of the trust fund. If these interest payments are properly characterized
as guaranteed payments, then the interest will not be considered "portfolio
interest." As a result, 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 that case, a foreign holder
would only be entitled to claim a refund for that portion of the taxes in excess
of the taxes that should be withheld with respect to the guaranteed payments.
BACKUP WITHHOLDING. Distributions made on the certificates and proceeds
from the sale of the certificates will be subject to a "backup" withholding tax
of 31% if, in general, the certificateholder fails to comply with the
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, which
provide for a new type of entity for federal income tax purposes known as 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 in this prospectus 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 those
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 that
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 and FASIT Ownership Securities will
constitute the "regular interests" and the "ownership interest," respectively,
if:
(1) a FASIT election is in effect,
(2) tests concerning (A) the composition of the FASIT's assets and
(B) the nature of the securityholders' interests in the FASIT are
met on a continuing basis, and
(3) the trust fund is not a regulated investment company as defined
in Section 851(a) of the Code.
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, and at all times after, the close of the third month
beginning after the closing date. Permitted assets include:
(1) cash or cash equivalents,
(2) debt instruments with fixed terms that would qualify as Regular
Interests if issued by a REMIC as defined in Section 860D of the
Code -- (generally, instruments that provide for interest at a
fixed rate, a qualifying variable rate, or a qualifying
interest-only ("IO") type rate,
(3) foreclosure property,
(4) hedging instruments -- generally, interest and currency rate
swaps and credit enhancement contracts -- that are reasonably
required to guarantee or hedge against the FASIT's risks
associated with being the obligor on FASIT interests,
(5) contract rights to acquire qualifying debt instruments or
qualifying hedging instruments,
(6) FASIT Regular Securities, and
(7) REMIC Regular Interests.
Permitted assets do not include any debt instruments issued by the holder of the
FASIT's ownership interest or by any person related to that holder.
INTEREST IN A FASIT. In addition to the foregoing asset qualification
requirements, the interests in a FASIT also must meet additional requirements.
All of the interests in a FASIT must belong to either of the following: (1) one
or more classes of regular interests or (2) a single class of ownership interest
that is held by a fully taxable domestic C Corporation.
A FASIT interest generally qualifies as a regular interest if:
(1) it is designated as a regular interest,
(2) it has a stated maturity no greater than thirty years,
(3) it entitles its holder to a specified principal amount,
(4) the issue price of the interest does not exceed 125% of its
stated principal amount,
(5) the yield to maturity of the interest is less than the applicable
Treasury rate published by the IRS plus 5%, and
(6) if it pays interest, that 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 that
principal amount. Permissible variable rates for FASIT regular
interests are the same as those for REMIC regular interests --
i.e., qualified floating rates and weighted average rates.
Interest will be considered to be based on a permissible variable rate if
generally:
(1) the interest is unconditionally payable at least annually,
(2) the issue price of the debt instrument does not exceed the total
noncontingent principal payments, and
(3) interest is based on a "qualified floating 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 that FASIT regular interest.
If an interest in a FASIT fails to meet one or more of the requirements
set out in clause (3), (4) or (5) in the immediately preceding paragraph, but
otherwise meets all requirements to be treated as a FASIT, it may still qualify
as a type of FASIT Regular Security known as a High-Yield Interest. In addition,
if an interest in a FASIT fails to meet the requirement of clause (6), but the
interest payable on the interest consists of a specified portion of the interest
payments on permitted assets and that portion does not vary over the life of the
security, the interest will also qualify as a High-Yield Interest. A High-Yield
Interest may be held only by Eligible Corporations, other FASITs, and dealers in
securities who acquire those interests as inventory, rather than for investment.
In addition, holders of High-Yield Interests are subject to limitations on
offset of income derived from that interest. See "Material 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 from that year
on. If FASIT status is lost, the treatment of the former FASIT and interests in
that FASIT 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, those 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 those 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 that 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 the securities in the same manner described
for senior securities. See "Taxation of Trust as Partnership--Treatment of
Senior Securities--OID, Etc." below. High-Yield Securities may be held only by
Eligible Corporations, other FASITs, and some 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 in this
prospectus 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, some holders of the 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 that interest, and the ability of the 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 those 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 the 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 "Material 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 the 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 that
holder, then Section 475 of the Code will continue to apply to those 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
(1) the receipt of income derived from assets that are not permitted
assets,
(2) some types of dispositions of permitted assets,
(3) the receipt of any income derived from any loan originated by a
FASIT, and
(4) in some 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
"Material 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
ERISA and the Code impose requirements on employee benefit plans and
other retirement plans and arrangements, including, but not limited to,
individual retirement accounts and annuities, as well as on collective
investment funds and separate and general accounts in which the plans or
arrangements are invested. Generally, ERISA applies to investments made by these
Plans. Among other things, ERISA requires that the assets of Plans be held in
trust and that the trustee, or other duly authorized fiduciary, have exclusive
authority and discretion to manage and control the assets of those Plans. ERISA
also imposes 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 that
Plan, subject to 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 that 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 in
this prospectus, of the acquisition and ownership of those securities.
Some 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 those plans may be invested
in the securities without regard to the ERISA considerations described in this
prospectus, within other applicable federal and state law. However, any
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
some 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, who have specified relationships to the Plan, unless an exemption
applies. Therefore, a Plan fiduciary or any other person using the assets of a
Plan considering an investment in the securities should also consider whether
that 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 DOL has issued Plan Asset Regulations, which are 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 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 those 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 that
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 -- 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 unless 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. Those plan assets would include an
undivided interest in any assets held by the trust fund. In that 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 those 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 Asset 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 Asset Regulation, the DOL declined to provide a precise definition of what
features are equity features or the circumstances under which those 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, the DOL exempted from
ERISA's prohibited transaction rules specified 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 those certificates. PTE 83-1 permits, subject to particular 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 mortgage pool pass-through certificates
representing an interest in those mortgage pools by Plans. If the general
conditions of PTE 83-1 are satisfied, investments by a Plan in 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, it is not anticipated that a 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 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:
(1) the maintenance of a system of insurance or other protection for
the pooled mortgage loans and property securing those 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;
(2) the existence of a pool trustee who is not an affiliate of the
pool sponsor; and
(3) 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" in this
prospectus with respect to those 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" in this prospectus. 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))
from some of the prohibited transaction rules of ERISA and the related excise
tax provisions of Section 4975 of the Code with respect to the initial purchase,
the holding and the subsequent resale by Plans of certificates in pass-through
trusts that consist of receivables, loans, and other obligations that meet the
conditions and requirements of the J.P. Morgan 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 an exemption
of that type.
Among the conditions that must be satisfied for the J.P. Morgan
Exemption to apply are the following:
(1) the acquisition of the certificates by a Plan is on terms,
including the price for those 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 acquisition that is one of the three highest generic
rating categories from one of S&P, Moody's, Duff & Phelps or Fitch;
(4) the trustee must not be an affiliate of any other member of
the Restricted Group;
(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
those 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 those
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 that person's services under the related
agreement and reimbursements of that person's reasonable expenses in
connection with providing those services; and
(6) the Plan investing in the certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the SEC
under the Securities Act of 1933.
The trust fund must also meet the following requirements:
(a) the corpus of the trust fund must consist solely of assets of
the type that have been included in other investment pools;
(b) certificates evidencing interests in 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 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 J.P. Morgan Exemption, which extends exemptive relief
to some 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
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
instead of requiring that all those obligations be either identified or
transferred on or before the closing date. The relief is available when
the following conditions are met:
(1) the ratio of the amount allocated to the pre-funding
account to the total principal amount of the certificates being
offered does not exceed twenty-five percent (25%).
(2) all obligations transferred after the closing date 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 those 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:
(a) the characteristics of the additional obligations
must be monitored by an insurer or other credit support
provider that is independent of the depositor; or
(b) 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 that 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 some
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 permitted investments;
(8) the related prospectus or prospectus supplement must
describe:
(a) any pre-funding account and/or capitalized interest
account used in connection with a pre-funding account;
(b) the duration of the pre-funding period;
(c) the percentage and/or dollar amount of the
pre-funding limit for the trust; and
(d) 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;
and
(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 some 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:
(1) that 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;
(2) the Plan is not a plan with respect to which any member of the
Restricted Group is the "plan sponsor" as defined in Section
3(16)(B) of ERISA;
(3) in the case of an acquisition in connection with the initial
issuance of certificates, at least fifty percent of each class of
certificates in which Plans have invested is acquired by persons
independent of the Restricted Group and at least fifty percent of
the aggregate interest in the trust fund is acquired by persons
independent of the Restricted Group;
(4) 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
(5) immediately after the acquisition, no more than twenty-five
percent of the assets of any Plan with respect to which that
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 J.P. Morgan Exemption does not apply to Plans sponsored by any
member of the Restricted Group with respect to the related series.
The J.P. Morgan Exemption may apply to the acquisition, holding and
transfer of the certificates by Plans if all of the conditions of the J.P.
Morgan Exemption are met, including those within the control of the investor. As
of the date of this prospectus, there is no single trust fund asset included in
a trust fund related to a series 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 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 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 have not been issued as of the date of this prospectus. 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 (1) as
otherwise provided by the Secretary of Labor in the 401(c) Regulations to
prevent avoidance of the regulations or (2) an action is brought by the
Secretary of Labor for 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 that 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 J.P. Morgan 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 in the exemption 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 J.P.
Morgan 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 offered securities constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984. 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
those entities. Under SMMEA, if a state enacts legislation prior to October 4,
1991 specifically limiting the legal investment authority of those entities with
respect to "mortgage related securities," securities will constitute legal
investments for entities subject to that legislation only to the extent provided
in that legislation. Approximately twenty-one states adopted that legislation
prior to the October 4, 1991 deadline. SMMEA provides, however, that in no event
will the enactment of that legislation affect the validity of any contractual
commitment to purchase, hold or invest in securities, or require the sale or
other disposition of securities, so long as the contractual commitment was made
or those securities were acquired prior to the enactment of that 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
mortgage related securities without limitations as to the percentage of their
assets represented by their investment, 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 those regulations as the applicable federal authority may prescribe. In this
connection, federal credit unions should review the 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 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
setting forth, in relevant part, some 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, "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 and at stated intervals after purchase, whether
a particular mortgage derivative product is a "high-risk mortgage security," and
whether the purchase, or retention, of that 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 some 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 those
investors.
METHOD OF DISTRIBUTION
The securities offered by this prospectus 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, under the terms and conditions of
the underwriting agreement, by J.P. Morgan Securities Inc., an affiliate of the
depositor, acting as underwriter with other underwriters, if any, named in the
underwriting agreement. In that event, the prospectus supplement may also
specify that the underwriters will not be obligated to pay for any securities
agreed to be purchased by purchasers pursuant to purchase agreements acceptable
to the depositor. In connection with the sale of 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 compensation paid by the depositor.
Alternatively, the prospectus supplement may specify that securities
will be distributed by J.P. Morgan Securities Inc. 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 Securities Inc. acts as agent in the sale
of securities, J.P. Morgan Securities Inc. will receive a selling commission
with respect to those securities, depending on market conditions, expressed as a
percentage of the aggregate principal balance or notional amount of those
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 Securities Inc. elects to purchase securities as principal,
J.P. Morgan Securities Inc. 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 that offering and any
agreements to be entered into between the depositor and purchasers of securities
of that series.
If an underwriter for a series of securities is or may be viewed as an
affiliate of the trust issuing the securities, that underwriter will be so
identified in the related prospectus supplement. In that event, that underwriter
may use the related prospectus supplement, as attached to this prospectus, in
connection with offers and sales related to market making transactions in the
related securities. That underwriter may act as principal or agent in those
transactions. Those transactions will be at prices related to prevailing market
prices at the time of sale.
The depositor will indemnify J.P. Morgan Securities Inc. and any other
underwriters against civil liabilities, including liabilities under the
Securities Act of 1933, or will contribute to payments J.P. Morgan Securities
Inc. and any other underwriters may be required to make in respect of those
civil liabilities.
The securities will be sold primarily to institutional investors.
Purchasers of securities, including dealers, may, depending on the facts and
circumstances of those purchases, be deemed to be "underwriters" within the
meaning of the Securities Act of 1933 in connection with reoffers and sales by
them of securities. Securityholders should consult with their legal advisors in
this regard prior to the 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 by this
prospectus and the related prospectus supplement. 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 federal income
tax consequences with respect to that series, will be passed upon for the
depositor by Brown & Wood LLP.
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, except in the case where the trust fund is formed as a statutory
business trust, no financial statements with respect to any trust fund will be
included in this prospectus or in the related prospectus supplement. In the
case where the trust fund is formed as a statutory business trust, the trust's
financial statements will be included in the related prospectus supplement in
reliance upon the report of the independent certified public accountants named
in the prospectus supplement.
RATING
It is a condition to the issuance of the securities of each series
offered by this prospectus that they shall have been rated in one of the four
highest rating categories by the nationally recognized statistical rating
agency or agencies specified in the related prospectus supplement.
Any 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 that
class and will reflect that rating agency's assessment solely of the
likelihood that holders of a class of securities of that class will receive
payments to which those securityholders are entitled under the related
agreement. The rating will not constitute an assessment of the likelihood that
principal prepayments on the related loans will be made, the degree to which
the rate of those prepayments might differ from that originally anticipated or
the likelihood of early optional termination of the series of securities. The
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. The rating will not address the possibility that
prepayment at higher or lower rates than anticipated by an investor may cause
that 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 particular prepayment scenarios.
There is also no assurance that any rating will remain in effect for
any given period of time or that it may not be lowered or withdrawn entirely
by the rating agency in the future if in its judgment circumstances in the
future so warrant. In addition to being lowered or withdrawn due to any
erosion in the adequacy of the value of the trust fund assets or any credit
enhancement with respect to a series, that rating might also be lowered or
withdrawn among other reasons, because of an adverse change in the financial
or other condition of a credit enhancement provider or a change in the rating
of the credit enhancement provider's long term debt.
The amount, type and nature of credit enhancement, if any,
established with respect to a series of securities will be determined on the
basis of criteria established by each rating agency rating classes of that
series. The criteria are sometimes based upon an actuarial analysis of the
behavior of mortgage loans in a larger group. The analysis is often the basis
upon which each rating agency determines the amount of credit enhancement
required with respect to each class. There can be no assurance that the
historical data supporting any 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 the
rates of delinquencies, foreclosures and losses could be higher than those now
generally experienced in the mortgage lending industry. This could be
particularly the case if loss levels were severe enough for the outstanding
principal balances of the loans in a particular trust fund and any secondary
financing on the related properties to become equal to or greater than the
value of the properties. 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 losses are not covered by credit
enhancement, those losses will be borne, at least in part, by the holders of
one or more classes of the securities of the related series.
WHERE YOU CAN FIND MORE INFORMATION
The depositor, as originator of each trust, has filed with the SEC a
registration statement, registration No. 333-77275, under the Securities Act
of 1933, with respect to the securities offered by this prospectus. You may
read and copy any reports or other information filed by or on behalf of the
depositor or any of the trusts and obtain copies, at prescribed rates, of the
registration statement at the SEC's public reference facility at 450 Fifth
Street, N.W., Washington, D.C. 20549; and at the SEC's regional offices at
Citicorp Center, 500 West Madison Street, Suite 1400,Chicago, Illinois 60661
and Seven World Trade Center, New York, New York 10048. In addition, the SEC
maintains a public access site on the internet through the world wide web at
which reports and other information, including all electronic filings, may be
viewed. The internet address of this site is http://www.sec.gov. You may
obtain more information on the operation of the SEC's public reference
facility by calling the SEC at 1-800-SEC-0330.
Each offering of securities by a trust under this prospectus will
create an obligation to file with the SEC periodic reports for that trust
under the Securities Exchange Act of 1934. The depositor intends that those
reports will be filed only for the duration of the required reporting period
prescribed by the SEC. The depositor expects that for each offering the
required reporting period will last only to the end of calendar year in which
the related series of securities were issued. All reports filed with the SEC
for each trust may be obtained through the SEC's public reference facilities,
through its web site, or by contacting the depositor at the address and
telephone number set forth under "The Depositor" in this prospectus.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The SEC allows information filed with it regarding the depositor or
each trust to be incorporated by reference into this prospectus. This means
that the depositor and each trust can disclose important information to you by
referring to those reports. Information filed with the SEC that is
incorporated by reference into this prospectus is considered part of this
prospectus and automatically updates and supercedes the information in this
prospectus and the related prospectus supplement. All documents filed with the
SEC by or an behalf of each trust prior to the termination of the offering of
the securities issued by that trust will be incorporated by reference into
this prospectus. All reports filed with the SEC for each trust may be obtained
through the SEC's public reference facilities or through its web site. See
"Where You Can Find More Information" for information on where you can obtain
these reports.
<PAGE>
Glossary
Whenever used in this prospectus, the following terms have the
following meanings:
"401(c) Regulations" means the published proposed regulations published
by DOL on December 22, 1997 pursuant to Section 401(c) of ERISA.
"Code" means the Internal Revenue Code of 1986, as amended.
"Compound Interest Securities" means securities all or a portion of the
interest on which is not paid currently, and includes any accrual classes or
partial accrual classes as described in this prospectus under "Description of
the Securities -- Categories of Classes of Securities".
"Contingent Regulations" means the regulations issued by the IRS
governing the calculation of OID on instruments having contingent interest
payments.
"Debt Securities" means, collectively, those securities of a series
that are characterized as debt for federal income tax purposes and those that
are Regular Interest Securities.
"Eligible Corporation" means a domestic C corporation that is fully
subject to corporate income tax.
"FASIT" means a "financial asset securitization investment trust" under
the Code.
"FASIT Ownership Securities" means interests in a FASIT that are
designated as "ownership interests" in the FASIT under the Code.
"FASIT Regular Securities" means interests in a FASIT that are
designated as "regular interests" in the FASIT under the Code.
"FHA Loan" means a mortgage loan insured by the FHA under the National
Housing Act or Title V of the National Housing Act of 1949.
"High-Yield Interest" means with respect to each of the following FASIT
eligibility requirements:
(1) that the FASIT interest entitles its holder to a specified
principal amount;
(2) that the issue price of the interest does not exceed 125% of its
stated principal amount;
(3) that the yield to maturity of the interest is less than the
applicable Treasury rate published by the IRS plus 5%,; and
(4) that if it pays interest, that 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 that
principal amount. Permissible variable rates for FASIT regular
interests are the same as those for REMIC
an interest in a FASIT that fails to meet one or more of those
requirements but otherwise meets all requirements to be treated as a
FASIT, and any additional requirements imposed by the IRS; provided,
that if the it fails to meet the requirement described in (4) above,
the interest payable consists of a specified portion of the interest
payments on permitted assets and that portion does not vary over the
life of the security.
"Interest Weighted Security" means, for federal income tax purposes
and any REMIC, securities 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 the Pass-Through Securities.
"J.P. Morgan Exemption" or "Exemption" means the administrative
exemption that the DOL has granted to J.P. Morgan Securities Inc., and known as
Prohibited Transaction Exemption 90-23, 55 Fed. Reg. 20545 (1990).
"OID" means with respect to any security, "original issue discount"
under the Code with respect to the issuance of that security.
"Parties in Interest" means, collectively, "disqualified persons"
within the meaning of the Code and "parties in interest" under ERISA who have
specified relationships with a Plan without an applicable exemption under ERISA
or the Code.
"Pass-Through Security" means securities of a series that are treated
for federal income tax purposes as representing ownership interests in the
related trust fund.
"Pay-Through Security" means, for federal income tax purposes, a debt
instrument, such as some classes of Debt Securities, that is subject to
acceleration due to prepayments on other debt obligations securing that
instrument.
"Plan" means employee benefit plans and other retirement plans and
arrangements, including, but not limited to, individual retirement accounts and
annuities, as well as collective investment funds and separate general accounts
in which the plans or arrangements are invested, which have requirements imposed
upon them under ERISA and the Code.
"Plan Asset Regulations" means the final regulations issued by DOL that
define the "assets" of a Plan for purposes of ERISA and the prohibited
transaction provisions of the Code (under 29 C.F.R. Sections 2510.3-101).
"Prepayment Assumption" means, for federal income tax purposes and any
security, the rate of prepayments assumed in pricing the security.
"Property Improvement Loans" means types of loans that are eligible for
FHA insurance under the Title I Program that are made to finance actions or
items that substantially protect or improve the basic livability or utility of a
property.
"Ratio Stripped Securities" means a Stripped Security that represents a
right to receive differing percentages of both the interest and principal on
each underlying loan.
"Regular Interests" or "Regular Interest Securities" means securities
that are designated as "regular interests" in a REMIC in accordance with
the Code.
"Relief Act" means the Soldiers' and Sailors' Civil Relief Act of 1940.
"REMIC" means a "real estate mortgage investment conduit" under the
Code.
"Residual Interests" or "Residual Interest Securities" means securities
that are designated as "residual interests" in a REMIC in accordance with the
Code.
"Restricted Group" means, for any series, the seller, the depositor,
J.P. Morgan Securities Inc. and the other underwriters set forth in the related
prospectus supplement, the trustee, the master servicer, any sub-servicer, any
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
those parties.
"Single Family Securities" are certificates that represent interests in
a pool consisting of loans of the type that may back the securities to be
offered under this prospectus.
"Stripped Security" means a security that represents a right to
receive only a portion of the interest payments on the underlying loans,
a right to receive only principal payments on the underlying loans, or a right
to receive payments of both interest and principal on the underlying loans.
"Title I Loans" means types of loans that are eligible for FHA
insurance under the Title I Program that are made to finance actions or items
that substantially protect or improve the basic livability or utility of a
property.
"Title I Programs" means the FHA Title I Credit Insurance program
created pursuant to Sections 1 and 2(a) of the National Housing Act of 1934.
"VA Loan" means a mortgage loan partially guaranteed by the VA under
the Servicemen's Readjustment Act of 1944, as amended, or Chapter 37 of Title
38, United States Code.
<PAGE>
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.................................. $331,275.89
Trustee's Fees and Expenses........................... 10,000.00
Printing and Engraving................................ 30,000.00
Legal Fees and Expenses............................... 100,000.00
Blue Sky Fees......................................... 12,500.00
Accounting Fees and Expenses.......................... 20,000.00
Rating Agency Fees.................................... 64,000.00
Miscellaneous......................................... 10,000.00
-----------
Total................................................. $577,775.89
===========
_______________
* 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 $250,000,000 of the Securities registered hereby.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under Section 7(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 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 Form 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.
Opinion of Richards, Layton & Finger, P.A. 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.*
10.2 Form of Master Servicing Agreement.*
23.1 Consent of Brown & Wood LLP (included in Exhibits 5.1 and 8.1 hereto).
Consent of Richards, Layton & Finger, P.A.
(included in Exhibit 5.1 hereto).
24.1 Powers of Attorney.*
_______________
* Previously Filed.
** Incorporated by reference from Registration Statement No. 33-23761.
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. Notwithstanding the foregoing, any increase
or decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high and of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Securities and Exchange Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than 20
percent change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective 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;
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if
the information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the
Securities and Exchange Commission by the registrant pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934, as amended, that are
incorporated by reference in this 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.
The undersigned registrant hereby undertakes to file an application for
the purpose of determining the eligibility of the trustee to act under
subsection (a) of Section 310 of the Trust Indenture Act of 1939, as amended,
in accordance with the rules and regulations prescribed by the Securities and
Exchange Commission under Section 305(b)(2) of the Trust Indenture Act of
1939, as amended.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant certifies that (1) it has reasonable grounds to believe that it
meets all of the requirements for filing on Form S-3 and (2) it reasonably
believes that the security rating requirement of Transaction Requirement B.5
of Form S-3 will be met by the time of sale of each series of securities to
which this Registration Statement relates and has duly caused this Amendment
No. 3 to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in New York, New York, on the 27th day
of December, 1999.
J.P. MORGAN ACCEPTANCE CORPORATION I
By: /s/ David M. Duzyk
----------------------------------
Name: David M. Duzyk
Title: President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 3 to the Registration Statement has been signed below by
the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
Signature Title Date
--------- ----- ----
/s/ David M. Duzyk President (Principal Executive Officer) December 27, 1999
- -------------------------------------
David M. Duzyk
* Controller (Principal Financial and Accounting December 27, 1999
- ------------------------------------- Officer)
Aashish R. Kamat
* Director , Chairman of the Board December 27, 1999
- -------------------------------------
William S. Demchak
* Director December 27, 1999
- -------------------------------------
Debra F. Stone
* Director December 27, 1999
- -------------------------------------
Edwin F. McMichael
</TABLE>
*By: /s/ David M. Duzyk
---------------------------------
Attorney-in-fact
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
Exhibits: Description
<S> <C>
1.1 Form of Underwriting Agreement.*
3.1 Restated Certificate of Incorporation of the Registrant.**
3.2 By-laws of the Registrant.**
4.1 Form 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.
Opinion of Richards, Layton & Finger, P.A. 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.*
10.2 Form of Master Servicing Agreement.*
23.1 Consent of Brown & Wood LLP (included in Exhibits 5.1 and 8.1 hereto).
Consent of Richards, Layton & Finger, P.A. (included in Exhibit 5.1 hereto).
24.1 Powers of Attorney.*
- --------------------
* Previously Filed.
** Incorporated by reference from Registration Statement No. 33-23761.
</TABLE>
<PAGE>
Exhibit 5.1
[Letterhead of Brown & Wood LLP]
December 27, 1999
J.P. Morgan Acceptance Corporation I
60 Wall Street
New York, New York 10260
Re: J.P. Morgan Acceptance Corporation I
Registration Statement on Form S-3
Ladies and Gentlemen:
We have acted as counsel for J.P. Morgan Acceptance Corporation I, a
Delaware corporation (the "Company"), in connection with the preparation of
the registration statement No. 333-77275 on Form S-3 (the "Registration
Statement") relating to the issuance from time to time in one or more series
(each, a "Series") of up to $1,656,379,452 aggregate principal amount of
asset-backed securities (the "Securities"). The Securities may be issued in
the form of Asset-Backed Notes (the "Notes") or Asset-Backed Certificates (the
"Certificates"). Pursuant to Rule 429 under the Securities Act of 1933, as
amended (the "1933 Act"), the Registration Statement also constitutes
Post-Effective Amendment No. 1 to registration statements No. 33-23597 and No.
33-23761. The Registration Statement has been filed with the Securities and
Exchange Commission (the "Commission") under the 1933 Act. As set forth in the
Registration Statement, each Series of Securities will be issued by a separate
trust to be formed by the Company (each, a "Trust") under and pursuant to the
conditions of a separate pooling and servicing agreement, trust agreement or
indenture (each, an "Agreement"), each to be identified in the prospectus
supplement for such Series of Securities.
We have examined copies of the Company's Restated Certificate of
Incorporation, the Company's By-laws, the form of each Agreement filed as an
exhibit to the Registration Statement, the forms of Securities included in the
Agreements so filed, and such other agreements, records and documents as we
have deemed necessary for purposes of this opinion. As to factual matters, we
have relied upon statements, certificates and other assurances of public
officials and of officers or other representatives of the Company and upon
such other certificates or representations as we deemed appropriate for
purposes of our opinion, which factual matters have not been independently
established or verified by us. We have assumed, without independent
verification, the genuineness of all signatures, the accuracy of the
representations contained in the reviewed documents, the authenticity of all
documents submitted to us as originals and the conformity to the originals of
all documents submitted to us as copies.
Based upon such examinations and our consideration of such questions of
law as we have deemed relevant in the circumstances, and subject to the
assumptions, qualifications and limitations set forth herein, we are of the
opinion that when the Securities of a Series have been duly executed,
authenticated and delivered in accordance with the terms of the related
Agreements and issued and delivered against payment therefor as described in
the Registration Statement, the Certificates of such Series will be legally
and validly issued, fully paid and nonassessable, and the holders thereof will
be entitled to the benefits of the related Agreement, and the Notes of such
Series will be valid and legally binding obligations of the related Trust,
subject to bankruptcy, insolvency, reorganization, moratorium or other laws
affecting creditors' rights generally and to general principles of equity
(regardless of whether enforceability is sought in a proceeding in equity or
at law).
In rendering the foregoing opinions, we express no opinion as to the laws
of any jurisdiction other than the laws of the State of New York (excluding
choice of law principles therein) and the federal laws of the United States of
America. We note that the Registration Statement provides that a Trust may be
organized as a business trust under Delaware law, and that the form of trust
agreement included as Exhibit 4.2 provides that it shall be governed by
Delaware law. Accordingly, we express no opinion herein regarding the
Certificates to the extent issued by a Delaware business trust pursuant to
such a trust agreement.
We hereby consent to the filing of this letter as an exhibit to the
Registration Statement and to the references to this firm under the heading
"Legal Matters" in the Prospectus forming a part of the Registration
Statement, without admitting that we are "experts" within the meaning of the
1933 Act or the Rules and Regulations of the Commission issued thereunder,
with respect to any part of the Registration Statement, including this
exhibit.
Very truly yours,
/s/ Brown & Wood LLP
<PAGE>
[Letterhead of Richards, Layton & Finger, PA]
December 27, 1999
J. P. Morgan Acceptance Corporation I
60 Wall Street
New York, New York 10260
Re: J. P. Morgan Acceptance Corporation I
Registration Statement on Form S-3 (File No. 333-77275)
Ladies and Gentlemen:
We have acted as special Delaware counsel for J. P. Morgan
Acceptance Corporation I (the "Registrant") in connection with the
Registration Statement on Form S-3 (File No. 333-77275) (the "Registration
Statement"), filed with the Securities and Exchange Commission under the
Securities Act of 1933, as amended (the "Act"), for the registration under the
Act of Asset Backed Notes ("Notes") and Asset Backed Certificates
("Certificates").
As described in the Registration Statement, the Notes and the
Certificates will be issued from time to time in series, and may be issued by
a Delaware business trust (each, a "Delaware Trust") to be formed by the
Registrant pursuant to a Trust Agreement (each, a "Trust Agreement") among the
Registrant and a trustee named in the related prospectus supplement, as owner
trustee. With respect to each series, the Certificates may be issued pursuant
to a Trust Agreement, the Notes, if any, will be issued pursuant to an
Indenture (each, an "Indenture") between the related Trust and an Indenture
Trustee and the Notes and Certificates will be sold from time to time pursuant
to certain underwriting agreements (the "Underwriting Agreements") between the
Registrant and the various underwriters named therein. At your request, this
opinion is being furnished to you.
For purposes of giving the opinions hereinafter set forth, we have
examined and relied upon the Registration Statement and, in each case as filed
with the Registration Statement, the form of Master Servicing Agreement among
a Trust, the trustee named therein and the master servicer named therein, the
form of Indenture (including forms of Notes included as exhibits thereto), the
form of Trust Agreement (including the form of Certificate of Trust to be
filed pursuant to the Delaware Business Trust Act and the form of Certificate
filed as an exhibit thereto) and the form of Underwriting Agreement for the
Notes and the Certificates (the "Operative Documents"). Terms used herein
without definition have the meanings given to such terms in the Registration
Statement.
For purposes of this opinion, we have not reviewed any documents
other than the documents listed above, which we believe are all the documents
reasonably necessary for us to have considered for purposes of rendering the
opinions stated herein. We have conducted no independent factual investigation
of our own but rather have relied solely upon the foregoing documents, the
statements and information set forth therein and the additional matters
recited or assumed herein, all of which we assume to be true, complete and
accurate in all material respects.
Based upon the foregoing, and upon our examination of such questions
of law and statutes of the State of Delaware as we have considered necessary
or appropriate, and subject to the assumptions, qualifications, limitations
and exceptions set forth herein, we are of the opinion that, with respect to
the Certificates of any series issued by a Delaware Trust, when (i) the final
terms of such Certificates have been duly established and approved by or
pursuant to authorization of the Board of Directors of the Registrant, (ii)
the Operative Documents relating to such series have each been duly completed,
executed and delivered by the parties thereto substantially in the form filed
as an exhibit to the Registration Statement reflecting the terms established
as described above, (iii) the Certificate of Trust for the related Delaware
Trust has been duly executed by the owner trustee and filed with the Secretary
of State of the State of Delaware, and (iv) such Certificates have been duly
authorized, executed and issued by the related Delaware Trust and
authenticated by the owner trustee, and delivered to and paid for by the
purchasers thereof, all in accordance with the terms and conditions of the
related Operative Documents and in the manner described in the Registration
Statement, such Certificates will be valid, fully paid and nonassessable
beneficial interests in the Trust.
The foregoing opinion is subject to the following exceptions,
qualifications, limitations and assumptions:
A. This opinion is limited to the laws of the State of Delaware
(excluding the securities laws of the State of Delaware), and we have not
considered and express no opinion on the laws of any other jurisdiction,
including federal laws and rules and regulations relating thereto. Our
opinions are rendered only with respect to Delaware laws and rules,
regulations and orders thereunder which are currently in effect.
B. We have not participated in the preparation of the Registration
Statement (other than this opinion) or any offering materials with respect to
the Certificates and assume no responsibility for their contents (other than
this opinion).
We hereby consent to the use of this opinion as an exhibit to the
Registration Statement. In giving the foregoing consent, we do not thereby
admit that we come within the category of Persons whose consent is required
under Section 7 of the Securities Act of 1933, as amended, or the rules and
regulations of the Securities and Exchange Commission thereunder. Except as
stated above, without our prior written consent, this opinion may not be
furnished or quoted to, or relied upon by, any other Person or for any other
purpose.
Very truly yours,
/s/ Richards, Layton & Finger, P.A.
EAM
<PAGE>
Exhibit 8.1
[Letterhead of Brown & Wood, LLP]
December 27, 1999
J.P. Morgan Acceptance Corporation I
60 Wall Street
New York, New York 10260
Re: J.P. Morgan Acceptance Corporation I
Registration Statement on Form S-3
----------------------------------
Ladies and Gentlemen:
We have acted as special tax counsel for J.P. Morgan Acceptance
Corporation I, a Delaware corporation (the "Company"), in connection with the
preparation of the registration statement No. 333-77275 on Form S-3 (the
"Registration Statement") relating to the issuance from time to time in one or
more series (each, a "Series") of up to $1,656,379,452 aggregate principal
amount of asset-backed securities (the "Securities"). Pursuant to Rule 429
under the Securities Act of 1933, as amended (the "1933 Act"), the
Registration Statement also constitutes Post-Effective Amendment No. 1 to
registration statements No. 33-23597 and No. 33-23761. The Registration
Statement has been filed with the Securities and Exchange Commission (the
"Commission") under the 1933 Act. As set forth in the Registration Statement,
each Series of Securities will be issued under and pursuant to the conditions
of a separate pooling and servicing agreement, trust agreement or indenture
(each an "Agreement") among the Company, a trustee (the "Trustee") and, where
appropriate, a servicer (the "Servicer"), each to be identified in the
prospectus supplement for such Series of Securities.
We have examined the prospectus contained in the Registration Statement
(the "Prospectus") and such other documents, records and instruments as we
have deemed necessary for the purposes of this opinion.
In arriving at the opinion expressed below, we have assumed that each
Agreement will be duly authorized by all necessary corporate action on the
part of the Company, the Trustee, the Servicer (where applicable) and any
other party thereto for such Series of Securities and will be duly executed
and delivered by the Company, the Trustee, the Servicer and any other party
thereto substantially in the applicable form filed as an exhibit to the
Registration Statement, that each Series of Securities will be duly executed
and delivered in substantially the forms set forth in the related Agreement
filed as an exhibit to the Registration Statement, and that the Securities
will be sold as described in the Registration Statement.
As special tax counsel to the Company, we have advised the Company with
respect to the material federal income tax aspects of the proposed issuance of
each Series of Securities pursuant to the related Agreement. Such advice has
formed the basis for the description of selected federal income tax
consequences for holders of such Securities that appears under the heading
"Material Federal Income Tax Consequences" in the Prospectus forming a part of
the Registration Statement. Such description does not purport to discuss all
possible federal income tax ramifications of the proposed issuance of the
Securities, but with respect to those federal income tax consequences which
are discussed, in our opinion, the description is accurate in all material
respects. We hereby confirm and adopt as our opinions, the opinions stated in
the Prospectus under the heading "Material Federal Income Tax Consequences".
This opinion is based on the facts and circumstances set forth in the
Registration Statement and in the other documents reviewed by us. Our opinion
as to the matters set forth herein could change with respect to a particular
Series of Securities as a result of changes in fact or circumstances, changes
in the terms of the documents reviewed by us, or changes in the law subsequent
to the date hereof. Because the Prospectus contemplates Series of Securities
with numerous different characteristics, you should be aware that the
particular characteristics of each Series of Securities must be considered in
determining the applicability of this opinion to a particular Series of
Securities.
We hereby consent to the filing of this letter as an exhibit to the
Registration Statement and to the references to this firm under the heading
"Material Federal Income Tax Consequences" in the Prospectus forming a part of
the Registration Statement, without admitting that we are "experts" within the
meaning of the 1933 Act or the Rules and Regulations of the Commission issued
thereunder, with respect to any part of the Registration Statement, including
this exhibit.
Very truly yours
/s/Brown & Wood LLP
