As filed with the Securities and Exchange Commission on AUGUST 26, 1999
REGISTRATION STATEMENT NO. 333-77275
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
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>
<CAPTION>
CALCULATION OF REGISTRATION FEE
===========================================================================================================================
PROPOSED PROPOSED
MAXIMUM MAXIMUM
AMOUNT AGGREGATE AGGREGATE AMOUNT OF
TITLE OF TO BE PRICE OFFERING PRICE* REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER UNIT* FEE
===========================================================================================================================
<S> <C> <C> <C> <C>
Asset Backed Securities..................... $1,656,379,452(2) 100% $1,656,379,452(2) $331,278.89(3)
================= ==== ================= ==============
===========================================================================================================================
* Estimated for the purpose of calculating the registration fee.
</TABLE>
(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 J.P. MORGAN SECURITIES INC., AN AFFILIATE OF THE REGISTRANT, 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>
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, AUGUST 26, 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
Transferor and Master Servicer
The notes represent non-recourse obligations of the issuer only and do not
represent an interest in or obligation of the depositor, the trustee or any of
their affiliates.
This prospectus supplement may be used to offer and sell the certificates only
if accompanied by the prospectus.
THE TRUST
o is a Delaware business trust formed pursuant to a trust agreement between
J.P. Morgan Acceptance Corporation I and --------
o will issue [___] class of senior notes, which are offered hereby
o will issue a single transferor interest, which is not offered hereby
THE NOTES
o are principally secured by the assets of the trust which consist of a
pool of [adjustable rate home equity revolving credit line loan
agreements and fixed rate closed-end home equity loans]
o currently have no trading market
CREDIT ENHANCEMENT
o A spread account will fund shortfalls in payments due on the notes.
o The transferor interest will absorb up to a specified of all losses on
the mortgage loans.
o An irrevocable and unconditional guaranty insurance policy issued by
[________] will guarantee payments on the notes.
o If _____ defaults, certain payments to the holder of the transferor
interest will only be paid after payments due on the notes are made.
REVIEW THE INFORMATION IN "RISK FACTORS" ON PAGE S-10 IN THIS PROSPECTUS
SUPPLEMENT AND ON PAGE 5 IN THE PROSPECTUS.
J.P. Morgan Securities Inc., the underwriter, will buy the notes from the
depositor at the price specified below.
<TABLE>
<CAPTION>
PER $1,000 OF
NOTES TOTAL
------------------- ------------
<S> <C> <C>
Price to Public........................................... $ $
Underwriting Discount..................................... $ $
Proceeds, before expenses, to the depositor............... $ $
</TABLE>
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>
Certain persons participating in this offering may engage in transactions
that stabilize, maintain, or otherwise affect the price of the securities.
Specifically, the underwriters may overallot in connection with the offering,
and may bid for, and purchase, the securities in the open market. see
"Underwriting".
This prospectus supplement does not contain complete information about
the offering of the notes. Additional information is contained in the
prospectus, dated _______, 199_ and attached hereto. Purchasers are urged to
read both this prospectus supplement and the prospectus in full. Sales of the
notes offered hereby may not be consummated unless the purchaser has received
both this prospectus supplement and the prospectus.
No dealer, salesman, or any other person has been authorized to give any
information or to make any representations other than those contained in this
prospectus supplement and the accompanying prospectus and if given or made,
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 hereby in any
jurisdiction in which, or to any person to whom, it is unlawful to make that
offer or solicitation in that jurisdiction. The delivery of this prospectus
supplement and the accompanying prospectus at any time does not imply that the
information herein or therein is correct as of any time subsequent to the date
hereof.
Until 90 days after the date of this prospectus supplement, all dealers
effecting transactions in the notes, whether or not participating in this
distribution, may be required to deliver a prospectus supplement and the
prospectus to which it relates. This delivery requirement is in addition to
the obligation of dealers to deliver a prospectus supplement and prospectus
when acting as underwriter and with respect to their unsold allotments or
subscriptions.
<PAGE>
TABLE OF CONTENTS
Page
PROSPECTUS SUPPLEMENT
Summary.............................................................S-5
Risk Factors.......................................................S-11
The Insurer........................................................S-14
The Trust..........................................................S-15
The Transferor.....................................................S-16
Description of the Mortgage Loans..................................S-18
Description of the Notes...........................................S-26
Pool Factor........................................................S-47
Maturity and Prepayment Considerations.............................S-47
Description of the Agreements......................................S-49
Use of Proceeds....................................................S-59
Federal Income Tax Consequences....................................S-59
State Taxes........................................................S-63
ERISA Considerations...............................................S-63
Legal Investment Considerations....................................S-65
Underwriting.......................................................S-66
Legal Matters......................................................S-66
Experts............................................................S-66
Ratings............................................................S-67
PROSPECTUS
Risk Factors..........................................................5
The Trust Fund........................................................7
Use of Proceeds......................................................25
The Depositor........................................................25
Credit Enhancement...................................................43
Yield and Prepayment Considerations..................................50
The Agreements.......................................................52
Material Legal Aspects of the Loans..................................68
Federal Income Tax Consequences......................................84
State Tax Considerations............................................111
ERISA Considerations................................................111
Legal Investment....................................................118
Method of Distribution..............................................119
Legal Matters.......................................................120
Financial Information...............................................120
Rating..............................................................120
Index of Defined Terms..............................................122
<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 (+1-5%) 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.
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 subject to revision or withdrawal by either rating agency.
WE REFER YOU TO "RATINGS" AND "RISK FACTORS--NOTE RATING BASED PRIMARILY
ON CLAIMS-PAYING ABILITY OF THE INSURER" IN THIS PROSPECTUS SUPPLEMENT
FOR ADDITIONAL INFORMATION.
FEDERAL TAX CONSIDERATIONS
For Federal income tax purposes:
o Tax counsel is of the opinion that the notes will be treated as debt
instruments.
o You must agree to treat your note as indebtedness for federal, state
and local income and franchise tax purposes.
WE REFER YOU TO "FEDERAL INCOME TAX CONSIDERATIONS" 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.
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", "DESCRIPTION OF THE
NOTES--BOOK-ENTRY NOTES" AND "ANNEX I" IN THIS PROSPECTUS SUPPLEMENT FOR
ADDITIONAL INFORMATION.
ASSETS OF THE TRUST
The trust's assets include:
o a pool of [adjustable rate home equity revolving credit line loan
agreements and fixed rate closed-end home equity loans,] secured by
either first or junior deeds of trust or mortgages on one- to
four-family residential properties;
o payments of interest due on the mortgage loans on and after the
cut-off date and principal payments received on the mortgage loans
on and after the cut-off date;
o property that secured a mortgage loan which has been acquired by
foreclosure or deed in lieu of foreclosure; and
o rights under 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 number of mortgage loans: _____
o mortgaged property location: ___ states
o average credit limit of revolving credit-line loans: $_____
o credit limits on the revolving credit-line loans range: $____ to
$____
o interest rates as of ___________ 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--OVERCOLLATERALIZATION" IN THIS
PROSPECTUS SUPPLEMENT FOR ADDITIONAL INFORMATION.
OPTIONAL TERMINATION
The mortgage loans will be subject to an optional transfer to the owner
of the transferor interest on any payment date after:
o the principal balance of the notes is reduced to any amount less
than or equal to _% of the original principal balance of the notes;
and
o all amounts due and owing to the insurer and unreimbursed draws on
the insurance policy, with interest thereon have been paid.
WE REFER YOU TO "DESCRIPTION OF THE NOTES--TERMINATION; RETIREMENT OF THE
NOTES" IN THIS PROSPECTUS SUPPLEMENT FOR ADDITIONAL INFORMATION.
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 certain banks, your ability to
transfer or pledge a book-entry note to persons or entities that do not
participate in the DTC system or otherwise to take actions in respect of
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 thereafter credit them to your account either
directly or indirectly through indirect participants, as applicable.
WE REFER YOU TO "DESCRIPTION OF NOTES--BOOK-ENTRY NOTES" IN THIS
PROSPECTUS SUPPLEMENT.
BALLOON 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 such
as legal fees, real estate taxes and maintenance and preservation expenses
will reduce the portion of liquidation proceeds payable to you. If a mortgaged
property fails to provide adequate security for the mortgage loan, you will
incur a loss on your investment if the insurer fails to perform its
obligations under the insurance policy.
WE REFER YOU TO "LEGAL ASPECTS OF LOANS--FORECLOSURE" IN THE
PROSPECTUS.
PREPAYMENTS AFFECT TIMING AND RATE OF RETURN ON YOUR INVESTMENT
The yield to maturity on your notes will be directly related to the
rate of principal payments on the mortgage loans. Please consider the
following:
o Mortgagors may fully or partially prepay their mortgage loan at any time.
However, some mortgage loans require that the mortgagor pay a fee with
any prepayments in full within five years of origination, except that
generally no fee is required for any prepayment in full made within
twelve months of a loan's maturity date. This may result in the rate of
prepayments being slower than would otherwise be the case.
o During the period that a borrower may borrow money under a revolving
credit-line loan, the borrower may make monthly payments only for the
accrued interest or may also repay some or all of the amounts previously
borrowed. In addition, borrowers may borrow additional amounts up to the
maximum amounts of their lines of credit. As a result, the amount the
trust receives in any month (and in turn the amount of principal paid to
you) may change significantly.
o All of the mortgage loans compute interest due on a simple interest
method. This means that the amount of each monthly payment will vary each
month if the monthly payment is not received on its scheduled due date.
o All the mortgage loans contain due-on-sale provisions. Due-on-sale
provisions require the mortgagor to fully pay the mortgage loan when the
mortgaged property is sold. Generally, the master servicer will enforce
the due-on-sale provision unless prohibited by applicable law.
o The rate of principal payments on pools of mortgage loans is influenced
by a variety of factors, including general economic conditions, interest
rates, the availability of alternative financing and homeowner mobility.
o Home equity loans generally are not viewed by borrowers as permanent
financing. Accordingly, the mortgage loans may experience a higher rate
of prepayment than purchase money first lien mortgage loans.
o We cannot predict the rate at which borrowers will repay their mortgage
loans, nor are we aware of any publicly available studies or statistics
on the rate of prepayment of mortgage loans similar to the mortgage loans
in the pool.
o If you purchased your note at a premium and you receive your principal
faster than expected, your yield to maturity will be lower than you
anticipated. If you purchased your note at a discount and you receive
your principal slower than expected, your yield to maturity will be lower
than you anticipated.
WE REFER YOU TO "PREPAYMENT AND YIELD CONSIDERATIONS" IN THE
PROSPECTUS.
NOTE RATING BASED PRIMARILY ON CLAIMS-PAYING ABILITY OF THE INSURER
The rating on the notes depends primarily on an assessment by the
rating agencies of the mortgage loans and upon the claims-paying ability of
the 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 "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 CERTAIN 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.
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 and proceeds therefrom,
(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 thereto or in
connection therewith.
The notes and the transferor interest will be delivered by the trust
to the transferor as consideration for the mortgage loans pursuant to the sale
and servicing agreement.
On the closing date, the trust will purchase mortgage loans having an
aggregate principal balance of approximately $___________ as of the cut-off
date 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 thereafter, (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 "--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 OF DOLLAR NUMBER DOLLAR NUMBER DOLLAR NUMBER DOLLAR NUMBER DOLLAR
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........ % % % % % %
</TABLE>
- -----------------
(1) Dollar amounts rounded to the nearest $1,000.
CHARGE-OFF EXPERIENCE OF THE MASTER SERVICER'S PORTFOLIO OF HOME EQUITY LINES
OF CREDIT
The following table sets forth information relating to the loan
charge-off experience of mortgage loans similar to and including the mortgage
loans for the ____ months ended ____________, 199_, and the years ended
December 31, 199_, December 31, 199_, December 31, 199_ and December 31, 199_.
"Average Portfolio Balance" during the period is the arithmetic
average of the principal balances of the mortgage loans outstanding on the
first and last days of each period. The Average Portfolio Balance has been
rounded to the nearest $1,000.
"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.
<TABLE>
<CAPTION>
YEAR ENDED ____
MONTHS ENDED
_____________
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, _____________,
199_ 199_ 199_ 199_ 199_
-------------- -------------- -------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
Average Portfolio $ $ $ $
Balance............
Charge-Offs............. $ $ $ $
Charge-Offs as a % % % % %(1)
of Average Portfolio
Balance...............
</TABLE>
- --------------------
(1) Annualized.
DESCRIPTION OF THE MORTGAGE LOANS
GENERAL
All statistical information concerning the mortgage loans is based
upon all of the mortgage loans included in the trust. All weighted averages
described below are weighted on the basis of the cut-off date pool balance
included in the trust unless otherwise indicated.
Approximately ____% of the mortgage loans 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.
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, as described
below.
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 are subject to a maximum loan rate of at least __% per
annum. The revolving credit-line loans have a minimum loan rate equal to the
greater of zero and the gross margin. No revolving credit-line loan is subject
to a periodic rate cap.
Payments made by or on behalf of the borrower for each revolving
credit-line loan are generally required to be applied, first, to any unpaid
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 are subject to a maximum loan rate of at
least ___% per annum. The adjustable rate closed-end loans have a minimum loan
rate equal to the gross margin. No adjustable rate closed-end loan is subject
to a periodic rate cap.
MORTGAGE LOAN POOL STATISTICS
The master servicer has computed the following additional information
as of the cut-off date with respect to the mortgage loans to be included in
the trust. 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 following tables are based
on the cut-off date principal balances of all mortgage loans.
COMBINED LOAN-TO-VALUE RATIOS
<TABLE>
<CAPTION>
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%
=== =========== ======
</TABLE>
LIEN PRIORITY
<TABLE>
<CAPTION>
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%
=== ====== ======
</TABLE>
PROPERTY TYPE
<TABLE>
<CAPTION>
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%
=== ======= ======
</TABLE>
OWNER OCCUPANCY STATUS
<TABLE>
<CAPTION>
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%
=== ========== ======
</TABLE>
GEOGRAPHIC DISTRIBUTION(1)
<TABLE>
<CAPTION>
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%
=== ====== ======
</TABLE>
(1) Geographic location is determined by the address of mortgaged property
securing each mortgage loan.
PRINCIPAL BALANCES
<TABLE>
<CAPTION>
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%
=== =========== ======
</TABLE>
REVOLVING CREDIT-LINE LOANS
Credit Limits
<TABLE>
<CAPTION>
NUMBER PERCENT
OF 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%
==== =========== ======
</TABLE>
REVOLVING CREDIT-LINE LOANS
CREDIT LIMIT UTILIZATION RATES
<TABLE>
<CAPTION>
NUMBER
OF REVOLVING CUT-OFF DATE PERCENT 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%
</TABLE>
LOAN AGE
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE PERCENT 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%
==== ========== ======
</TABLE>
LOAN RATES AS OF THE CUT-OFF DATE
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE PERCENT BY CUT-OFF DATE
LOAN RATES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------- -------------- ----------------- --------------------
<S> <C> <C> <C>
______ - ______ %.....................
- ------ - ------ ......................
- ------ - ------ ......................
- ------ - ------ ......................
- ------ - ------ ......................
- ------ - ------ ......................
- ------ - ------ .....................
- ------ - ------ ......................
- ------ - ------ ......................
- ------ - ------ ......................
- ------ - ------ ......................
- ------ - ------.......................
- ------ - ------.......................
- ------ - ------ ......................
- ------ - ------.......................
- ------ - ------.......................
- ------ - ------ ......................
Total........................... ____ $__________ 100.00%
==== =========== ======
</TABLE>
GROSS MARGIN FOR ADJUSTABLE RATE MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
NUMBER
OF REVOLVING CUT-OFF DATE PERCENT BY CUT-OFF DATE
GROSS MARGIN CREDIT-LINE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------ ----------------- ----------------- -----------------
<S> <C> <C> <C>
- ------ - ------%.....................
- ------ - ------......................
- ------ - ------......................
- ------ - ------......................
----- - ------......................
----- - ------......................
----- - ------......................
----- - ------......................
----- - ------......................
----- - ------......................
----- - ------......................
----- - ------......................
----- - ------......................
----- - ------......................
----- - ------......................
----- - ------......................
Total........................... ____ $________ 100.00%
==== ========= ======
</TABLE>
- -----------------
(1) Each adjustable rate mortgage loan is subject to a minimum loan rate
equal to the greater of zero and the gross margin.
MAXIMUM RATES FOR ADJUSTABLE RATE MORTGAGE LOANS
<TABLE>
<CAPTION>
NUMBER
OF REVOLVING CUT-OFF DATE PERCENT BY CUT-OFF DATE
MAXIMUM RATES CREDIT-LINE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
_____%.......................
- ----- .......................
Total ................... _____ $_________ 100.00%
===== ======
</TABLE>
<PAGE>
ORIGINATION YEAR
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE PERCENT 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%
==== ========== ======
</TABLE>
DELINQUENCY STATUS
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE PERCENT 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
multiples of $1 in excess thereof and 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 subject to
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
thereafter;
(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 aggregate undivided interest in the trust represented by the
notes as of the closing date will equal $____________ (the "Original Invested
Amount") which represents ___% of the cut-off date pool balance. The original
note principal balance will equal $__________ with a permitted variance in the
aggregate of plus or minus 5%. Following the closing date, the "Invested
Amount" with respect to any payment date will be an amount equal to the
Original Invested Amount minus (1) the amount of Investor Principal
Collections previously 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. 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
below.
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 thereof. Except as described below, 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
below, 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 below. Unless and until definitive notes are
issued, note owners who are not participants may transfer ownership of notes
only through participants and indirect participants by instructing 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. Such 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 "Federal Income Tax Consequences -
Foreign Investors" and "-- Backup Withholding" herein and "Global Clearance,
Settlement And Tax Documentation Procedures - Certain U.S. Federal Income Tax
Documentation Requirements" in Annex I hereto.
Transfers between participants will occur in accordance with DTC
rules. Transfers between Cedelbank participants and Euroclear participants
will occur in accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly through
DTC, on the one hand, and directly or indirectly through Cedelbank
participants or Euroclear participants, on the other, will be effected in DTC
in accordance with DTC rules on behalf of the relevant European international
clearing system by the relevant depositary. However, 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 subject
to the rules, regulations and procedures governing DTC and DTC participants as
in effect from time to time.
Cedelbank is incorporated under the laws of Luxembourg as a
professional depository. Cedelbank holds securities for its participating
organizations and facilitates the clearance and settlement of securities
transactions between Cedelbank participants through electronic book-entry
changes in accounts of Cedelbank participants, thereby eliminating the need
for physical movement of notes. Transactions may be settled in Cedelbank in
any of 28 currencies, including United States dollars. Cedelbank provides to
its Cedelbank participants, among other things, services for safekeeping,
administration, clearance and settlement of internationally traded securities
and securities lending and borrowing. Cedelbank interfaces with domestic
markets in several countries. As a professional depository, Cedelbank is
subject to regulation by the Luxembourg Monetary Institute. Cedelbank
participants are recognized financial institutions around the world, including
underwriters, securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations. Indirect access to Cedelbank is
also available to others, such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a Cedelbank
participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for participants of
Euroclear and to clear and settle transactions between Euroclear participants
through simultaneous electronic book-entry delivery against payment, thereby
eliminating the need for physical movement of notes and any risk from lack of
simultaneous transfers of securities and cash. Transactions may now be settled
in any of 32 currencies, including United States dollars. Euroclear includes
various other services, including securities lending and borrowing and
interfaces with domestic markets in several countries generally similar to the
arrangements for cross-market transfers with DTC described above. Euroclear is
operated by the Brussels, Belgium office of Morgan Guaranty Trust Company of
New York, under contract with Euroclear Clearance Systems S.C., a Belgian
cooperative corporation (the "Cooperative"). All operations are conducted by
the Euroclear operator, and all Euroclear securities clearance accounts and
Euroclear cash accounts are accounts with the Euroclear operator, not the
Cooperative. The Cooperative establishes policy for Euroclear on behalf of
Euroclear participants. Euroclear participants include banks, including
central banks, securities brokers and dealers and other professional financial
intermediaries. Indirect access to Euroclear is also available to other firms
that clear through or maintain a custodial relationship with a Euroclear
participant, either directly or indirectly.
The Euroclear operator is the Belgian branch of a New York banking
corporation which is member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear
operator are governed by the Terms and Conditions Governing Use of Euroclear
and the related Operating Procedures of the Euroclear System and applicable
Belgian law. 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 subject to tax reporting in accordance with
relevant United States tax laws and regulations. See "Federal Income Tax
Consequences - Foreign Investors" and "- Backup Withholding" herein. Because
DTC can only act on behalf of financial intermediaries, the ability of a
beneficial owner to pledge book-entry 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
certain potential investors may be unwilling to purchase notes for which they
cannot obtain physical notes.
Monthly and annual reports on the trust provided by the master
servicer to Cede, as nominee of DTC, may be made available to beneficial
owners upon request, in accordance with the rules, regulations and procedures
creating and affecting 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
subject to the ability of the relevant depositary 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 thereto is no longer in the best interests of beneficial owners.
Upon the occurrence of any of the events described in the immediately
preceding sentence, the indenture trustee will be required to notify all
beneficial owners of the occurrence of 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 thereafter the indenture
trustee 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 thereafter. 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
Subject to 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
therein, 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
Subject to the conditions specified in the sale and servicing
agreement, on any payment date the transferor may, but shall not be obligated
to, remove on the related payment date from the trust, certain mortgage loans
without notice to the noteholders. The transferor is permitted to randomly
designate the mortgage loans to be removed. Mortgage loans so designated will
only be removed upon satisfaction of 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.
Subject to the investment provisions described in the following paragraphs,
upon receipt by the master servicer of amounts in respect of the mortgage
loans, excluding amounts representing the servicing fee, the master servicer
will deposit 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 therein 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 therein may be invested in eligible
investments maturing on or before the business day prior to the related
payment date. Net investment earnings on the funds in the distribution account
will be paid to ____________.
An eligible account is a segregated account that is (1) maintained
with a depository institution whose debt obligations at the time of any
deposit therein have the highest short-term debt rating by the Rating Agencies
and whose accounts are fully insured by either the Savings Association
Insurance Fund 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 generally be allocated in
accordance with the credit line agreements or the mortgage notes, as
applicable, between amounts collected in respect of interest and amounts
collected in respect of principal. As to any payment date, "Interest
Collections" will be equal to the amounts collected during the related
collection period, including 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 above under "--Simple Interest Excess Sub-Account."
As to any payment date, "Principal Collections" will be equal to 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. Liquidation proceeds are 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. Net liquidation proceeds with
respect to a mortgage loan are equal to the liquidation proceeds, reduced by
related expenses, but not including the portion, if any, of that amount that
exceeds the sum of (1) the principal balance of the mortgage loan plus (2)
accrued and unpaid interest thereon to the end of the collection period during
which that mortgage loan became a liquidated mortgage loan.
With respect to any payment date, the portion of Interest Collections
allocable to the notes ("Investor Interest Collections") will equal the
product of (a) Interest Collections for that payment date and (b) the Investor
Floating Allocation Percentage. With respect to any payment date, the
"Investor Floating Allocation Percentage" is the percentage equivalent of a
fraction determined by dividing (a) the Invested Amount at the close of
business on the preceding payment date or the closing date in the case of the
first payment date by (b) the pool balance at the beginning of the related
collection period. The remaining amount of Interest Collections will be
allocated to the transferor interest.
Principal Collections will be allocated between the noteholders and
the transferor as described herein.
The indenture trustee will deposit any amounts withdrawn from the
spread account or drawn under the insurance policy into the distribution
account.
With respect to any date, the pool balance will be equal to the
aggregate of the principal balances of all mortgage loans as of that date. The
principal balance of a mortgage loan, other than a liquidated mortgage loan,
on any day is equal to the cut-off date principal balance thereof, plus (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.
"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. The "Investor Loss Amount" shall be the
product of the Investor Floating Allocation Percentage and the aggregate of
the Liquidation Loss Amounts for that payment date. A liquidated mortgage loan
means, as to any payment date, any mortgage loan in respect of which the
master servicer has determined, based on the servicing procedures specified in
the sale and servicing agreement, as of the end of the preceding collection
period that all liquidation proceeds which it expects to recover with respect
to the disposition of the related mortgaged property have been recovered.
As to any payment date, the collection period is the calendar month
preceding each payment date.
PAYMENTS ON THE NOTES
Beginning with the first payment date (which will occur on _________
__, 199__), payments on the notes will be made by the indenture trustee or the
paying agent based upon aggregate information provided by the master servicer
on each payment date to the persons in whose names 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 herein on the determination date. However, the
final payment in respect of the notes will be made only upon presentation and
surrender thereof at the office or the agency of the indenture trustee
specified in the notice to noteholders of 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 thereon to the extent permitted by law, on
the note principal balance of the notes; and
(b) to the holder of the transferor interest, the amount
to which it is entitled in accordance with the
provisions of the sale and servicing agreement, which
will generally be equal to the amount accrued on a
notional balance equal to the note principal balance
at a rate equal to the excess of the Net WAC over the
note rate;
PROVIDED, HOWEVER, if Investor Interest Collections prior to giving effect to
withdrawals from the spread account or draws on the 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 payment date thereafter will be paid to the holder of the
transferor interest after payment of principal and interest due on the notes
are made on 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 herein, as of the second LIBOR business day prior to the immediately
preceding payment date or as of two LIBOR business days prior to the closing
date, in the case of the first payment date plus (b) ___% per annum.
Notwithstanding the foregoing, in no event will the amount of interest
required to be distributed in respect of the notes on any payment date exceed
the amount calculated at the Net WAC which is equal to the weighted average of
the loan rates, net of the servicing fee rate, the fee payable to the
indenture trustee and the owner trustee expressed as a rate and the rate at
which the premium payable to the insurer is calculated, weighted on the basis
of the daily balance of each mortgage loan during the calendar month preceding
the collection period relating to that payment date or in the case of the
first payment date, the weighted average loan rate as of the cut-off date.
Interest on the notes in respect of any payment date will accrue on
the note principal balance from the preceding payment date or in the case of
the first payment date, from the 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
LIBOR 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 LIBOR business days prior to the immediately preceding payment date to
prime banks in the London interbank market for a period of one month in
amounts approximately equal to the principal amount of the notes then
outstanding. The indenture trustee will request the principal London office of
each of the reference banks to provide a quotation of its rate. If at least
two 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. "LIBOR business day" means any day other
than (1) a Saturday or a Sunday or (2) a day on which banking institutions in
the State of New York or in the city of London, England are required or
authorized by law to be closed.
TRANSFEROR COLLECTIONS. Interest Collections allocable to the
transferor interest will be paid to the transferor on each payment date.
Principal Collections allocable to the transferor interest will be distributed
to the transferor only to the extent that 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 equal, to the extent funds are
available therefor, the Scheduled Principal Collections Payment Amount for
that payment date. On any payment date during the managed amortization period,
the "Scheduled Principal Collections Payment Amount" shall equal the lesser of
(1) the Maximum Principal Payment and (2) the Alternative Principal Payment.
With respect to any payment date, the "Maximum Principal Payment" will equal
the product of the Investor Fixed Allocation Percentage and Principal
Collections for the payment date. With respect to any payment date, the
"Alternative Principal Payment" will equal the amount, but not less than zero,
of Principal Collections for the payment date less the aggregate of additional
balances created during the related collection period. The rapid amortization
period is the period beginning at the earlier of (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 "-- Termination;
Retirement of the Notes."
Beginning with the first payment date following the end of the
managed amortization period, the amount of Principal Collections payable to
noteholders on each payment date will be equal to the Maximum Principal
Payment.
Payments of principal collections based upon the Investor Fixed
Allocation Percentage may result in payments of principal to noteholders in
amounts that are greater relative to the declining pool balance than would be
the case if the Investor Floating Allocation Percentage were used to determine
the percentage of Principal Collections distributed in respect of the Invested
Amount. Principal Collections not allocated to the noteholders will be
allocated to the transferor interest. The aggregate payments of principal to
the noteholders will not exceed the original note principal balance.
In addition, to the extent of funds available therefor, including
funds available under the insurance policy, on the payment date in __________,
noteholders will be entitled to receive as a payment of principal an amount
equal to the outstanding note principal balance.
THE PAYING AGENT. The paying agent shall initially be the indenture
trustee, together with any successor thereto in 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 Policy
(with interest thereon); and
(4) to pay any other amounts owed to the Insurer pursuant to the
Insurance Agreement.
The sale and servicing agreement permits reduction of the amount on
deposit in the spread account as specified in the sale and servicing
agreement. Any 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 such as the mortgage loans or a guarantee of the transferor or
a letter of credit issued on behalf of the transferor, may be substituted for
some or all of the assets held therein, if any, provided that the insurer and
the rating agencies consent to that action and the then current ratings of the
notes assigned by the rating agencies are not lowered as a result thereof.]
RAPID AMORTIZATION EVENTS
As described above, the managed amortization period will continue
through the payment date in __________, unless a rapid amortization event
occurs prior to 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 subject to regulation by the SEC 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 above.
THE POLICY
The following information has been supplied by the insurer for
inclusion in this prospectus supplement. Accordingly, the depositor does not
make any representation as to the accuracy and completeness of this
information.
The insurer, in consideration of the payment of the premium and
subject to the terms of the insurance policy, thereby 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 subject to appeal,
(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 therein will be disbursed by the fiscal agent to the indenture trustee
on behalf of the owners by wire transfer of immediately available funds in the
amount of the insured payment less, in respect of insured payments related to
preference amounts, any amount held by the indenture trustee for the payment
of the insured payment and legally available therefor.
The fiscal agent is the agent of the insurer only and the fiscal
agent shall in no event be liable to the owners for any acts of the fiscal
agent or any failure of the insurer to deposit or cause to be deposited,
sufficient funds to make payments due under the insurance policy.
As used in the insurance policy, the following terms shall have the
following meanings:
"AGREEMENTS" means any of the indenture, the trust agreement or the
sale and servicing agreement without regard to any amendment or supplement
thereto unless the amendment or modification has been approved in writing by
the insurer.
"BUSINESS DAY" means any day other than (1) a Saturday or a Sunday or
(2) a day on which the insurer or banking institutions in the States of New
York or _________ are required or authorized by law or executive order to be
closed.
"CIVIL RELIEF ACT INTEREST SHORTFALLS" means for any payment date any
shortfall in interest collections on the mortgage loans during the prior
collection period that are attributable to the Soldiers' and Sailors' Civil
Relief Act of 1940, as amended.
"DEFICIENCY AMOUNT" means for any payment date (A) the excess, if
any, of (1) Investor Interest for that payment date plus any Unpaid Investor
Interest Shortfall, if any, due on the notes over (2) Investor Interest
Collections on deposit in the distribution account available to be distributed
therefor on that payment date and (B) the Guaranteed Principal Amount.
"FINAL PAYMENT DATE" means the payment date in __________.
"GUARANTEED PRINCIPAL AMOUNT" means (a) for any payment date (other
than the final payment date) the amount, if any, by which the note principal
balance exceeds the Invested Amount 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.
"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.
"NOTICE" means the telephonic or telegraphic notice, promptly
confirmed in writing by telecopy, substantially in the form of Exhibit A
attached to the insurance policy, the original of which is subsequently
delivered by registered or certified mail, from the indenture trustee
specifying the insured payment which shall be due and owing on the applicable
payment date.
"OWNER" means each holder who, on the applicable payment date, is
entitled under the terms of the applicable notes to payment thereunder.
"PREFERENCE AMOUNT" means any amount previously distributed to an
owner on the notes that is recoverable and sought to be recovered as avoidable
preference by a trustee in bankruptcy pursuant to the United States Bankruptcy
Code (11 U.S.C.), as amended from time to time in accordance with a final
nonappealable order of a court having competent jurisdiction.
"UNPAID INVESTOR SHORTFALL" means, with respect to any payment date,
the aggregate amount, if any, of Investor Interest that was accrued in respect
of prior payment dates and has not been distributed to noteholders.
Capitalized terms used in the insurance policy and not otherwise
defined in the insurance policy shall have the respective meanings set forth
in the sale and servicing agreement as of the date of execution of the
insurance policy, without giving effect to any subsequent amendment or
modification to the sale and servicing agreement unless the amendment or
modification has been approved in writing by the insurer.
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 notice address of the fiscal agent is ________________________,
Attention: Municipal Registrar and Paying Agency, or such other address as the
fiscal agent shall specify to the indenture trustee in writing.
The insurance policy is being issued under and pursuant to, and shall
be construed under, the laws of the State of New York, without giving effect
to the conflict of laws principles thereof.
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." Thereafter, the pool factor will decline to
reflect reductions in the related note principal balance resulting from
payments of principal to the notes.
Pursuant to the sale and servicing agreement, monthly reports
concerning the Invested Amount, the pool factor and various other items of
information will be made available to the noteholders. In addition, within 60
days after the end of each calendar year, beginning with the 199__ calendar
year, information for tax reporting purposes will be made available to each
person who has been a Noteholder of record at any time during the preceding
calendar year. See "Description of the Notes--Book-Entry Notes" and "--Reports
to Noteholders" herein.
MATURITY AND PREPAYMENT CONSIDERATIONS
The agreements, except as otherwise described herein, provides that
the noteholders will be entitled to receive on each payment date payments of
principal, in the amounts described herein, until the note principal balance
is reduced to zero. During the managed amortization period, noteholders will
receive amounts from Principal Collections based upon the Investor Fixed
Allocation Percentage subject to reduction as described below. During the
rapid amortization period, noteholders will receive amounts from Principal
Collections based solely upon the Investor Fixed Allocation Percentage.
Because prior payments of Investor Principal Collections to noteholders reduce
the Investor Floating Allocation Percentage but do not change the Fixed
Allocation Percentage, allocations of Principal Collections based on the Fixed
Allocation Percentage may result in payments of principal to the noteholders
in amounts that are, in most cases, greater relative to the declining balance
of the mortgage loans than would be the case if the Investor Floating
Allocation Percentage were used to determine the percentage of Principal
Collections distributed to noteholders. This is especially true during the
rapid amortization period when the noteholders are entitled to receive
Investor Principal Collections and not a lesser amount. In addition, to the
extent of losses allocable to the noteholders, noteholders may also receive as
payment of principal the Investor Floating Allocation Percentage of the amount
of 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, but subject to the
satisfaction of certain conditions specified in the sale and servicing
agreement, including the conditions described below, to remove certain
mortgage loans from the trust at any time during the life of the trust, so
long as the transferor interest after giving effect to 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 mortgage loans such
as the mortgage loans. Generally, home equity loans are not viewed by
borrowers as permanent financing. Accordingly, the mortgage loans may
experience a higher rate of prepayment than traditional first mortgage loans.
Because the revolving credit-line loans generally do not amortize during the
Draw Period, rates of principal payment on the mortgage loans will generally
be slower than those of traditional fully-amortizing first mortgages in the
absence of prepayments on 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 "Legal Aspects
of Loans--Due-on-Sale Clauses" in the prospectus.
As with fixed rate obligations generally, the rate of prepayment on a
pool of mortgage loans with fixed rates such as the closed-end loans with
fixed loan rates is affected by prevailing market rates for mortgage loans of
a comparable term and risk level. When the market interest rate is below the
interest rate on a mortgage loan, mortgagors may have an increased incentive
to refinance their mortgage loans. Depending on prevailing mortgage rates, the
future outlook for market rates and economic conditions generally, some
mortgagors may sell or refinance mortgaged properties in order to realize
their equity in the mortgaged properties, to meet cash flow needs or to make
other investments.
The yield to an investor who purchases the notes in the secondary
market at a price other than par will vary from the anticipated yield if the
rate of prepayment on the mortgage loans is actually different than the rate
anticipated by 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 thereon. It is possible that
borrowers may fail to make scheduled payments. Collections on the mortgage
loans may vary due to seasonal purchasing and payment habits of borrowers.
No assurance can be given as to the level of prepayments that will be
experienced by the trust but it can be expected that a portion of borrowers
will not prepay their mortgage loans to any significant degree. See
"Description of the Securities--Weighted Average Life of the Certificates" in
the prospectus.
DESCRIPTION OF THE AGREEMENTS
The following summary describes 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 thereby incorporated
herein by reference. See "The Agreements" in the prospectus.
REPORTS TO NOTEHOLDERS
Concurrently with each payment to the noteholders, the master
servicer will forward to the indenture trustee for mailing to 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, subject to retention by the master
servicer to the extent those amounts constitute servicing compensation or to
withdrawal pursuant to the sale and servicing agreement.
In the event that the master servicer obtains and maintains a blanket
policy as provided in the sale and servicing agreement insuring against fire
and hazards of extended coverage on all of the mortgage loans then, to the
extent 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 from its obligations and duties thereunder, 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 to the indenture trustee and the insurer
in writing and such proposed successor master servicer is reasonably
acceptable to the indenture trustee; (b) the rating agencies have confirmed to
the indenture trustee and the insurer that the appointment of 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 such duties and obligations and
as if the master servicer itself were performing such duties and obligations.
Any person into which, in accordance with the sale and servicing
agreement, the transferor or the master servicer may be merged or consolidated
or any person resulting from any merger or consolidation to which the
transferor or the master servicer is a party, or any person succeeding to the
business of the transferor or the master servicer, will be the successor to
the master servicer under the sale and servicing agreement.
The sale and servicing agreement provides that the master servicer
will indemnify the trust, the indenture trustee and the owner trustee from and
against any loss, liability, expense, damage or injury suffered or sustained
as a result of the master servicer's actions or omissions in connection with
the servicing and administration of the mortgage loans which are not in
accordance with the provisions of the sale and servicing agreement. In the
event of an event of servicing termination resulting in the assumption of
servicing obligations by a successor master servicer, the successor master
servicer will indemnify the transferor for any losses, claims, damages and
liabilities of the transferor as described in this paragraph arising from the
successor master servicer's actions or omissions. The sale and servicing
agreement provides that neither the transferor nor the master servicer nor
their directors, officers, employees or agents will be under any other
liability to the trust, the indenture trustee, the owner trustee, the
noteholders or any other person for any action taken or for refraining from
taking any action pursuant to the sale and servicing agreement. However,
neither the transferor nor the master servicer will be protected against any
liability which would otherwise be imposed by reason of willful misconduct,
bad faith or gross negligence of the transferor or the master servicer in the
performance of its duties under the sale and servicing agreement or by reason
of reckless disregard of its obligations thereunder. In addition, the sale and
servicing agreement provides that the master servicer will not be under any
obligation to appear in, prosecute or defend any legal action which is not
incidental to its servicing responsibilities under the sale and servicing
agreement and which in its opinion may expose it to any expense or liability.
The master servicer may, in its sole discretion, undertake any such legal
action which it may deem necessary or desirable with respect to the sale and
servicing agreement and the rights and duties of the parties thereto and the
interest of the noteholders and the insurer thereunder.
EVENTS OF SERVICING TERMINATION
Events of servicing termination will consist of:
(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
such delay or failure could not be prevented by the exercise of reasonable
diligence by the master servicer and such delay or failure was caused by an
act of God, or other similar occurrence. Upon the occurrence of any such event
the master servicer shall not be relieved from using its best efforts to
perform its obligations in a timely manner in accordance with the terms of the
sale and servicing agreement and the master servicer shall provide the
indenture trustee and the noteholders prompt notice of such failure or delay
by it, together with a description of its efforts to so perform its
obligations.
RIGHTS UPON AN EVENT OF SERVICING TERMINATION
So long as an event of servicing termination remains unremedied,
either the indenture trustee shall at the direction of the Insurer or may,
with the consent of the insurer, or noteholders evidencing an aggregate,
undivided interest in the trust of at least 51% of the Note principal balance
with the consent of the Insurer, may terminate all of the rights and
obligations of the master servicer under the sale and servicing agreement and
in and to the mortgage loans, whereupon the indenture trustee will succeed to
all the responsibilities, duties and liabilities of the master servicer under
the sale and servicing agreement and will be entitled to similar compensation
arrangements. In the event that the indenture trustee would be obligated to
succeed the master servicer but is unwilling or unable so to act, it may
appoint, or petition a court of competent jurisdiction for the appointment of,
a housing and home finance institution or other mortgage loan or home equity
loan master servicer with all licenses and permits required to perform its
obligations under the sale and servicing agreement and having a net worth of
at least $15,000,000 and acceptable to the insurer to act as successor to the
master servicer under the sale and servicing agreement. Pending 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 covenant or agreement under the indenture, other
than a covenant covered in clause (i) hereof, which continues for a
period of thirty days after notice thereof is given; and
(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 director, officer or
employee thereof will be protected against any liability that would otherwise
be imposed on it by reason of willful malfeasance, bad faith or negligence in
the performance of its duties or by reason of its reckless disregard of its
obligations and duties under the indenture. Subject to the limitations set
forth in the indenture, the indenture trustee and any director, officer,
employee or agent thereof will be indemnified by the trust and held harmless
against any loss, liability or expense incurred in connection with
investigating, preparing to defend or defending any legal action, commenced or
threatened, relating to the indenture, other than any loss, liability or
expense incurred by reason of its own willful malfeasance, bad faith or
negligence in the performance of its duties under the indenture, or by reason
of its reckless disregard of its obligations and duties under the indenture.
All persons into which the indenture trustee may be merged or with which it
may be consolidated, or any person resulting from such merger or
consolidation, will be the successor to the indenture trustee under the
indenture.
The owner trustee, the indenture trustee and any of their respective
affiliates may hold notes in their own names or as pledgees. For the purpose
of meeting the legal requirements of certain jurisdictions, the master
servicer, the owner trustee and the indenture trustee acting jointly, or in
some instances, the owner trustee or the indenture trustee acting alone, will
have the power to appoint co-trustees or separate trustees of all or any part
of the trust. In the event of 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 certain 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 thereto 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 the execution and
authentication thereof, or of any mortgage loans or related documents, and
will not be accountable for the use or application by the transferor or the
master servicer of any funds paid to the transferor or the master servicer in
respect of the notes, or the mortgage loans, or the investment of any monies
by the master servicer before such monies are deposited into the collection
account or the distribution account. So long as no event of default 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 which failure constitutes an event
of default under the Indenture unless the owner trustee obtains actual
knowledge of such failure as will be specified in the trust agreement.
The indenture trustee will make no representations as to the validity
or sufficiency of the indenture, the notes, other than the execution and
authentication thereof, or of any mortgage loans or related documents, and
will not be accountable for the use or application by the transferor or the
master servicer of any funds paid to the transferor or the master servicer in
respect of the notes or the mortgage loans, or the use or investment of any
monies by the master servicer before such monies are deposited into the
collection account or the distribution account. So long as no event of default
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 which failure constitutes an event
of default under the Indenture unless the indenture trustee obtains actual
knowledge of such failure as will be specified in the indenture.
The indenture trustee will be under no obligation to exercise any of
the rights or powers vested in it by the indenture or to make any
investigation of matters arising thereunder or to institute, conduct or defend
any litigation thereunder or in relation thereto at the request, order or
direction of any of the noteholders, unless such noteholders have offered to
the indenture trustee reasonable security or indemnity against the costs,
expenses and liabilities that may be incurred therein or thereby.
AMENDMENT
Each of the agreements may be amended from time to time by the master
servicer and the indenture trustee and with the consent of the insurer, but
without the consent of the noteholders, to cure any ambiguity, to correct or
supplement any provisions therein which may be inconsistent with any other
provisions of 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, it being understood that, after obtaining the ratings in effect on
the closing date, neither the indenture trustee nor the master servicer is
obligated to obtain, maintain, or improve any such rating, or to add any other
provisions with respect to matters or questions arising under that agreement
which shall not be inconsistent with the provisions of that agreement,
provided that such action will not, as evidenced by an opinion of counsel,
materially and adversely affect the interests of any noteholder or the
insurer; provided, that any 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 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,
as described below and
(4) the payment date in ___________.
The mortgage loans will be subject to optional transfer to the
transferor on any payment date after the note principal balance is reduced to
an amount less than __% of the original note principal balance and all amounts
due and owing to the insurer, including unreimbursed draws on the insurance
policy, together with interest thereon, as provided under the insurance
agreement, have been paid. The transfer price will be equal to the sum of the
outstanding note principal balance and accrued and unpaid interest thereon at
the note rate through the day preceding the final payment date. In no event,
however, will the trust created by the trust agreement continue for more than
21 years after the death of the individuals named in the sale and servicing
agreement. Written notice of termination of the sale and servicing agreement
will be given to each noteholder, and the final payment will be made only upon
surrender and cancellation of the notes at an office or agency appointed by
the indenture trustee which will be specified in the notice of termination.
THE INDENTURE TRUSTEE
____________, a ___________________ with its principal place of
business in ____________, has been named indenture trustee pursuant to the
sale and servicing agreement.
The commercial bank or trust company serving as indenture trustee may
own notes and have normal banking relationships with the depositor, the master
servicer and the insurer and/or their affiliates.
The indenture trustee may resign at any time, in which event the
depositor will be obligated to appoint a successor indenture trustee, as
approved by the insurer. The depositor or the Insurer may also remove the
indenture trustee if the indenture trustee ceases to be eligible to continue
as such under the sale and servicing agreement or if the indenture trustee
becomes insolvent. Upon becoming aware of 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 thereunder and have offered to
the indenture trustee reasonable indemnity and the indenture trustee for 60
days has neglected or refused to institute that proceeding. The indenture
trustee will be under no obligation to exercise any of the trusts or powers
vested in it by the sale and servicing agreement or to make any investigation
of matters arising thereunder or to institute, conduct or defend any
litigation thereunder or in relation thereto at the request, order or
direction of any of the noteholders, unless those noteholders have offered to
the indenture trustee reasonable security or indemnity against the cost
expenses and liabilities which may be incurred therein or thereby.
CERTAIN ACTIVITIES
The trust will not:
(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.
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 hereof, all of which are subject to change, possibly
retroactively. This discussion does not address every aspect of the U.S.
federal income tax laws which may be relevant to note owners in light of their
personal investment circumstances or to certain types of note owners subject
to special treatment under the U.S. federal income tax laws - for example,
banks and life insurance companies. Accordingly, investors should consult
their tax advisors regarding U.S. federal, state, local, foreign and any other
tax consequences to them of investing in the notes.
CHARACTERIZATION OF THE NOTES AS INDEBTEDNESS
Based on the application of existing law to the 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). Accordingly, upon issuance, the notes will be treated as
debt securities as described in the prospectus. See "Federal Income Tax
Considerations" in the prospectus.
The transferor and the noteholders express in the sale and servicing
agreement their intent that, for applicable tax purposes, the notes will be
indebtedness secured by the mortgage loans. The transferor and the
noteholders, by accepting the notes, and each note owner by its acquisition of
a beneficial interest in a note, have agreed to treat the notes as
indebtedness for U.S. federal income tax purposes. However, because different
criteria are used to determine the non-tax accounting characterization of the
transaction, the transferor intends to treat this transaction as a sale of an
interest in the principal balances of the mortgage loans for financial
accounting and certain regulatory purposes.
In general, whether for U.S. federal income tax purposes a
transaction constitutes a sale of property or loan, the repayment of which is
secured by property, is a question of fact, the resolution of which is based
upon the economic substance of the transaction rather than its form or the
manner in which it is labeled. While the IRS and the courts have set forth
several factors to be taken into account in determining whether the substance
of a transaction is a sale of property or a secured loan, the primary factor
in making this determination is whether the transferee has assumed the risk of
loss or other economic burdens relating to the property and has obtained the
benefits of ownership thereof. Tax counsel has analyzed and relied on several
factors in reaching its opinion that the weight of the benefits and burdens of
ownership of the mortgage loans has been retained by the transferor and has
not been transferred to the note owners.
In some instances, courts have held that a taxpayer is bound by the
particular form it has chosen for a transaction, even if the substance of the
transaction does not accord with its form. Tax counsel has advised that the
rationale of those cases will not apply to this transaction, because the form
of the transaction as reflected in the operative provisions, of the documents
either accords with the characterization of the notes as debt or otherwise
makes the rationale of those cases inapplicable to this situation.
TAXATION OF INTEREST INCOME OF NOTE OWNERS
Assuming that the note owners are holders of debt obligations for
U.S. federal income tax purposes, the notes generally will be taxable as debt
securities. See "Federal Income Tax Considerations" in the prospectus.
While it is not anticipated that the notes will be issued at a
greater than de minimis discount, under Treasury regulations 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 such regulations were to apply, all of the taxable
income to be recognized with respect to the notes would be includible in
income of note owners as OID, but would not be includible again when the
interest is actually received. See "Federal Income Tax
Considerations--Taxation of Debt Securities; Interest and Acquisition
Discount" in the prospectus for a discussion of the application of the OID
rules if the notes are in fact issued at a greater than de minimis discount or
are treated as having been issued with OID under the OID Regulations. For
purposes of calculating OID, it is likely that the notes will be treated as
Pay-Through Securities.
POSSIBLE CLASSIFICATION OF THE NOTES AS A PARTNERSHIP OR ASSOCIATION TAXABLE
AS A CORPORATION
The opinion of tax counsel is not binding on the courts or the IRS,
It is possible that the IRS could assert that for purposes of the Code, the
transaction contemplated by this prospectus with respect to the notes
constitutes a sale of the mortgage loans (or an interest therein) to the note
owners and that the proper classification of the legal relationship between
the transferor and the note owners resulting from this transaction is that of
a partnership, including a publicly traded partnership, a publicly traded
partnership treated as a corporation, or an association taxable as a
corporation. Since tax counsel has advised that the notes will be treated as
indebtedness in the hands of the noteholders for U.S. federal income tax
purposes, the transferor will not attempt to comply with U.S. federal income
tax reporting requirements applicable to partnerships or corporations as such
requirements would apply if the notes were treated as indebtedness.
If it were determined that this transaction created an entity
classified as a corporation, including a publicly traded partnership taxable
as a corporation, the trust would be subject to U.S. federal income tax at
corporate income tax rates on the income it derives from the mortgage loans,
which would reduce the amounts available for payment to the note owners. Cash
payments to the note owners generally would be treated as dividends for tax
purposes to the extent of such corporation's earnings and profits. If the
transaction were treated as creating a partnership between the note owners and
the transferor, the partnership itself would not be subject to U.S. federal
income tax, unless it were to be characterized as a publicly traded
partnership taxable as a corporation; rather, the transferor and each note
owner would be taxed individually on their respective distributive shares of
the partnership's income, gain, loss, deductions and credits. The amount and
timing of items of income and deductions of the note owner could differ if the
notes were held to constitute partnership interests rather than indebtedness.
POSSIBLE CLASSIFICATION AS A TAXABLE MORTGAGE POOL
In relevant part, Section 7701 (i) of the Code provides that any
entity or a portion of an entity that is a "taxable mortgage pool" will be
classified as a taxable corporation and will not be permitted to file a
consolidated U.S. federal income tax return with another corporation. Subject
to a grandfather provision for existing entities, any entity (or a portion of
any entity) will be a taxable mortgage pool if (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 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 such interest is not effectively connected with a trade or business of
the recipient in the United States and the note owner provides the required
foreign person information certification. See "Federal Income Tax
Considerations--Tax Treatment of Foreign Investors" in the prospectus.
If the interests of the note owners were deemed to be partnership
interests, the partnership, if it were considered to be engaged in a U.S.
trade or business, would be required, on a quarterly basis, to pay withholding
tax equal to the product, for each foreign partner, of such foreign partner's
distributive share of "effectively connected" income of the partnership
multiplied by the highest rate of tax applicable to that foreign partner. In
addition, 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 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, certain
tax-exempt organizations or nonresident aliens who provide certification as to
their status as nonresidents. As long as the only noteholder of record is
Cede, as nominee for DTC, note owners and the IRS will receive tax and other
information including the amount of interest paid on the notes from
participants and indirect participants rather than from the indenture trustee.
The indenture trustee, however, will respond to requests for necessary
information to enable participants, indirect participants and 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 thereby subject the note owner to the "unrelated
business, taxable income" provisions of the Code.
STATE TAXES
The depositor makes no representations regarding the tax consequences
of purchase, ownership or disposition of the notes under the tax laws of any
state. Investors considering an investment in the notes should consult their
own tax advisors regarding such tax consequences.
All investors should consult their own tax advisors regarding the
Federal, state, local, foreign or any other income tax consequences of the
purchase, ownership and disposition of the notes.
ERISA CONSIDERATIONS
GENERAL
ERISA ("ERISA") and Section 4975 of the Code impose certain
restrictions on employee benefit plans subject to ERISA or plans or
arrangements subject to Section 4975 of the Code 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 Code, are not subject to
the restrictions of ERISA, and assets of such plans may be invested in the
notes without regard to the ERISA considerations described below, subject to
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. Any plan fiduciary
which proposes to cause a plan to acquire any of the notes should consult with
its counsel with respect to the potential consequences under ERISA and the
Code, of the plan's acquisition and ownership of the notes. See "ERISA
Considerations" in the prospectus. Investments by plans are also subject to
ERISA's general fiduciary requirements, including the requirement of
investment prudence and diversification and the requirement that a plan's
investments be made in accordance with the documents governing the plan.
PROHIBITED TRANSACTIONS
GENERAL
Section 406 of ERISA prohibits parties in interest with respect to a
Plan from engaging in certain transactions including loans involving a plan
and its assets unless a statutory regulatory, or administrative exemption
applies to the transaction. Section 4975 of the Code imposes certain excise
taxes, or, in some cases, a civil penalty may be assessed pursuant to section
502(i) of ERISA, on parties in interest which engage in non-exempt prohibited
transactions.
Depending on the relevant facts and circumstances, certain prohibited
transaction exemptions may apply to the purchase or holding of the notes--for
example, Prohibited Transaction Class Exemption ("PTE") 96-23, which exempts
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 that such an exemption, if it did apply, would apply to all
prohibited transactions that may occur in connection with such investment.
PLAN ASSET REGULATION
The 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 Code. The plan asset regulation describes the
circumstances under which the assets of an entity in which a plan invests will
be considered to be "plan assets" such that any person who exercises control
over such assets would be subject to ERISA's fiduciary standards. Under the
plan asset regulation, generally, when a plan invests in another entity, the
plan's assets do not include, solely by reason of such investment, any of the
underlying assets of the entity. However, the plan asset regulation provides
that, if a plan acquires an "equity interest" in an entity that is neither a
"publicly-offered security" 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 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 Labor has stated that these determinations should be made under the state
law governing interpretation of the instrument in question. In the preamble to
the plan asset regulation, the DOL declined to provide a precise definition of
what features are equity features or the circumstances under which such
features would be considered "substantial," noting that the question of
whether a plan's interest has substantial equity features is an inherently
factual one, but that in making a determination it would be appropriate to
take into account whether the equity features are such that a plan's
investment would be a practical vehicle for the indirect provision of
investment management services. Based upon the terms of the notes, the opinion
of tax counsel that the notes will be classified as debt instruments for
Federal income tax purposes and the ratings which have been assigned to the
notes, the issuer expects that the notes will not constitute "equity
interests" for purposes of the plan asset regulation. However, if the notes
are deemed nevertheless to be equity interests in the trust and no statutory,
regulatory or administrative exception applies, the trust could be considered
to hold plan assets by reason of a plan's investment in the notes.
REVIEW BY PLAN FIDUCIARIES
Any plan fiduciary considering whether to purchase any notes on
behalf of a plan should consult with its counsel regarding the applicability
of the fiduciary responsibility and prohibited transaction provisions of ERISA
and the Code to 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
Subject to 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
hereby.
In the underwriting agreement, the underwriter has agreed, subject to
the terms and conditions set forth therein, to purchase all the notes offered
hereby if any of the notes are purchased.
The depositor has been advised by the underwriter that they propose
initially to offer the notes to the public in Europe and the United States at
the underwriting price set forth herein and to dealers at that price, less a
discount not in excess of ____% of the note denominations. The underwriter may
allow and such dealers may reallow a discount not in excess of ___% of the
note denominations to 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 hereby; however, the underwriter
is not obligated to do so, any market-making may be discontinued at any time,
and there can be no assurance that an active public market for the notes will
develop.
In connection with the offering, the underwriter may engage in
transactions that stabilize, maintain or otherwise affect the price of the
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,
such activities may be discontinued at any time.
The underwriting agreement provides that the depositor will indemnify
the underwriter against certain civil liabilities, including liabilities under
the Securities Act of 1933, as amended.
LEGAL MATTERS
Certain legal matters with respect to the notes will be passed upon
for the depositor by Brown & Wood LLP, New York, New York and for the
underwriters by Brown & Wood LLP, New York, New York. Certain legal matters
will be passed upon for the insurer by _____________.
EXPERTS
The consolidated balance sheets of [Insurer] and its subsidiaries as
of December 31, 199__ and 199__ and the related consolidated statements of
income, changes in shareholder's equity, and cash flows for each of the three
years in the period ended December 31, 199__, incorporated by reference in
this prospectus supplement, have been incorporated herein in reliance on the
report of _________________, independent accountants, given on the authority
of that firm as experts in accounting and auditing.
RATINGS
It is a condition to issuance that the notes be rated "____" by
__________ and _____ and "_____" by __________.
A securities rating addresses the likelihood of the receipt by
noteholders of payments on the mortgage loans. The rating takes into
consideration the characteristics of the mortgage loans and the structural,
legal and tax aspects associated with the notes. The ratings on the notes do
not, however, constitute statements regarding the likelihood or frequency of
prepayments on the mortgage loans or the possibility that noteholders might
realize a lower than anticipated yield.
The ratings assigned to the notes will depend primarily upon the
creditworthiness of the insurer. Any reduction in a rating assigned to the
claims-paying ability of the insurer below the ratings initially assigned to
the notes may result in a reduction of one or more of the ratings assigned to
the notes.
A securities rating is not a recommendation to buy, sell or hold
securities and may be revised or withdrawn at any time by the assigning rating
organization. Each securities rating should be evaluated independently of
similar ratings on different securities.
<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 Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities and it is not soliciting
an offer to buy these securities in any state where the offer or sale is not
permitted.
SUBJECT TO COMPLETION, DATED AUGUST 26, 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 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 hereby
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.
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 hereto.
Purchasers are urged to read both this prospectus supplement and the
prospectus in full. Sales of the offered certificates hereby may not be
consummated unless the purchaser has received both this prospectus supplement
and the prospectus.
No dealer, salesman, or any other person has been authorized to give
any information or to make any representations other than those contained in
this prospectus supplement and the accompanying prospectus and if given or
made, such information or representations must not be relied upon as having
been authorized by the depositor or the underwriter. This prospectus
supplement and the accompanying prospectus shall not constitute an offer to
sell or a solicitation of an offer to buy any of the securities offered hereby
in any jurisdiction in which, or to any person to whom, it is unlawful to make
such offer or solicitation in such jurisdiction. The delivery of this
prospectus supplement and the accompanying prospectus at any time does not
imply that the information herein or therein is correct as of any time
subsequent to the date hereof.
Until 90 days after the date of this prospectus supplement, all
dealers effecting transactions in the offered certificates, whether or not
participating in this distribution, may be required to deliver a prospectus
supplement and the prospectus to which it relates. This delivery requirement
is in addition to the obligation of dealers to deliver a prospectus supplement
and prospectus when acting as underwriter and with respect to their unsold
allotments or subscriptions.
<PAGE>
TABLE OF CONTENTS
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-16
Prepayment and Yield Considerations................................ S-35
Description of the Certificates.................................... S-41
Use of Proceeds.................................................... S-71
Federal Income Tax Consequences.................................... S-74
State Taxes........................................................ S-74
ERISA Considerations............................................... S-74
Legal Investment Considerations.................................... S-77
Underwriting....................................................... S-78
Experts............................................................ S-78
Legal Matters...................................................... S-78
Ratings............................................................ S-78
Annex I............................................................ S-80
PROSPECTUS
Risk Factors............................................................5
The Trust Fund..........................................................7
Use of Proceeds.........................................................25
The Depositor...........................................................25
Description of the Securities...........................................25
Credit Enhancement......................................................43
Yield and Prepayment Considerations.....................................50
The Agreements..........................................................52
Material Legal Aspects of the Loans.....................................68
Federal Income Tax Consequences.........................................84
State Tax Considerations................................................111
ERISA Considerations....................................................111
Legal Investment........................................................118
Method of Distribution..................................................119
Legal Matters...........................................................120
Financial Information...................................................120
Rating..................................................................120
Index of Defined Terms..................................................122
<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.
HOME EQUITY LOAN ASSET-BACKED CERTIFICATES, SERIES 199_-_
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(3) $ -
Class R N/A $0 -
- -------------------------
(1)...... [Describe variable rate]
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 THIS PROSPECTUS SUPPLEMENT FOR
ADDITIONAL INFORMATION.
TRUST FUND
o Home Equity Loan Trust 199_-_.
TRUSTEE
o [----------------------------]
CERTIFICATE INSURER
o [------------------].
WE REFER YOU TO "THE CERTIFICATE INSURER" IN THIS PROSPECTUS SUPPLEMENT
FOR ADDITIONAL INFORMATION.
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 subject to revision or withdrawal by either rating agency.
WE REFER YOU TO "RATINGS" AND "RISK FACTORS--RATING oF THE SECURITIES" IN
THE PROSPECTUS FOR ADDITIONAl INFORMATION.
FEDERAL TAX CONSIDERATIONS
For federal income tax purposes:
o An election will be made to treat the trust fund 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 "FEDERAL INCOME TAX CONSIDERATIONS" IN THIS PROSPECTUS
SUPPLEMENT AND IN THIS PROSPECTUS FOR ADDITIONAL INFORMATION.
ERISA CONSIDERATIONS
The fiduciary responsibility provisions of ERISA can limit investments by
certain 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 subject to ERISA, you should consult with your counsel regarding the
applicability of the provisions of ERISA and the tax code before
purchasing a class A certificate.
WE REFER YOU TO "ERISA CONSIDERATIONS" IN THIS PROSPECTUS SUPPLEMENT AND
THE PROSPECTUS FOR ADDITIONAL INFORMATION.
LEGAL INVESTMENT CONSIDERATIONS
The 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 such day is not a business day, the
next business day. The first distribution date is ___________ 199_.
DUE PERIOD
o The calendar month immediately preceding a determination date or a
distribution date, as applicable.
DESIGNATIONS
o OFFERED CERTIFICATES - The class A certificates.
o NON-OFFERED CERTIFICATES - The class R certificates.
o REGULAR CERTIFICATES - All classes of certificates other than the
class R certificates.
o RESIDUAL CERTIFICATES - The class R certificates.
o CLASS A CERTIFICATES - class A-1, class A-2, class A-3, class A-4,
class A-5 and class A-6 certificates.
o FIXED RATE OR GROUP 1 CERTIFICATES - class A-1, class A-2, class A-3,
class A-4 and class A-5 certificates. These certificates will receive
their payments from loan group 1.
o VARIABLE RATE OR GROUP 2 CERTIFICATES - The class A-6 certificates.
These certificates will receive their payments from loan group 2.
o LOAN GROUP 1 - Mortgage loans which bear interest at a fixed rate.
o LOAN GROUP 2 - Mortgage loans which bear interest at an adjustable
rate.
REGISTRATION OF CLASS A CERTIFICATES
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", "DESCRIPTION OF THE
CERTIFICATES--BOOK-ENTRY CERTIFICATES" AND "ANNEX I" IN THIS PROSPECTUs
SUPPLEMENT FOR ADDITIONAL INFORMATION.
TRUST FUND PROPERTY
The trust fund property is held by the trustee for the benefit of the
certificateholders. The trust fund property includes:
o a pool of closed-end fixed and adjustable rate mortgage loans,
secured by first and second deeds of trust or mortgages on one- to
four-family residential properties;
o payments on the mortgage loans received on and after the cut-off
date;
o property that secured a mortgage loan which has been acquired by
foreclosure or deed in lieu of foreclosure;
o rights under 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 that distribution date through the day
before that distribution date.
On each distribution date, you will be entitled to the following:
o interest at the related certificate rate that accrued during the
related interest period; and
o any interest that was due on a prior distribution date and not paid.
In addition, interest will have accrued on the amount of interest
which was previously due and not paid.
WE REFER YOU TO "DESCRIPTION OF THE CERTIFICATES--INTEREST" IN THIS
PROSPECTUS SUPPLEMENT FOR ADDITIONAl INFORMATION.
3. Principal Distributions
o Principal distributions are payable on each distribution date. 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.
WE REFER YOU TO "DESCRIPTION OF THE CERTIFICATES--PRINCIPAL" IN THIS
PROSPECTUS SUPPLEMENT FOR ADDITIONAl INFORMATION.
CREDIT ENHANCEMENTS
1. THE CERTIFICATE INSURANCE POLICY: The certificate insurance policy
guarantees the payment of:
o accrued and unpaid interest on the class A certificates;
o principal losses on the mortgage loans; and
o any principal amounts owed to the certificateholders on the last
scheduled distribution date.
WE REFER YOU TO "THE CERTIFICATE INSURER" IN THIS PROSPECTUS SUPPLEMENT
FOR ADDITIONAL INFORMATION.
2. OVERCOLLATERALIZATION: On the closing date the aggregate principal balance
of the mortgage loans in each group will equal the aggregate principal
balance of the certificates in the related certificate group. The interest
payments on the mortgage loans in each loan group are expected to exceed
the amount of interest due and payable on the certificates in the related
certificate group. This excess 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 will result in a
limited acceleration of principal payments on the certificates relative to
the amortization of the related mortgage loans, thereby creating
overcollateralization for the class A certificates. Once the required
level of overcollateralization is reached, the application of the excess
interest payments will stop, until it is again needed to 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 in the other loan group.
WE REFER YOU TO "DESCRIPTION OF THE CERTIFICATES--CROSSCOLLATERALIZATION"
IN THIS PROSPECTUS SUPPLEMENT FOr ADDITIONAL INFORMATION.
PRE-FUNDING ACCOUNT
On the closing date, the trustee shall deposit $_______________ in the
group 1 pre-funding account and $_____________ in the group 2 pre-funding
account. The trust will use the amounts on deposit in the pre-funding
accounts to acquire additional mortgage loans for the related loan group
from the seller. The trustee may only acquire additional mortgage loans
until _________________.
If any amounts are left in the pre-funding accounts on
___________________, holders of the group 1 certificates will receive
amounts left in the group 1 pre-funding account and holders of the group
2 certificates will receive amounts left in the group 2 pre-funding
account on the next distribution date as payment of principal.
WE REFER YOU TO "DESCRIPTION OF THE CERTIFICATES--PRE-FUNDING ACCOUNT" IN
THIS PROSPECTUS SUPPLEMENT FOr ADDITIONAL INFORMATION.
CAPITALIZED INTEREST ACCOUNT
On the closing date, the trustee shall deposit $_______________ in the
group 1capitalized interest account and $____________ in the group 2
capitalized interest account. The trust will use the amounts on deposit
in the capitalized interest accounts to cover interest shortfalls on the
certificates expected to occur prior to the trust's purchase of the
additional mortgage loans.
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>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS PRIOR TO ANY
PURCHASE OF CERTIFICATES. YOU SHOULD ALSO CAREFULLY CONSIDER THE INFORMATION
SET FORTH UNDER "RISK FACTORS" IN THE PROSPECTUS.
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 certain banks, your ability to
transfer or pledge a book-entry certificate to persons or entities that
do not participate in the DTC system or otherwise to take actions in
respect of 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 thereafter credit them to your account either
directly or indirectly through indirect participants, as applicable.
WE REFER YOU TO "DESCRIPTION OF THE CERTIFICATES--BOOK-ENTRY
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 such 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 such as legal fees, real estate taxes and
maintenance and preservation expenses will reduce the portion of
liquidation proceeds payable to you. If a mortgaged property fails to
provide adequate security for the 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 "LEGAL ASPECTS OF LOANS--FORECLOSURE" IN THE
PROSPECTUS.
PREPAYMENTS AFFECT TIMING AND RATE OF RETURN ON YOUR INVESTMENT
The yield to maturity on your certificates will be directly related
to the rate of principal payments on the mortgage loans. Please consider the
following:
o Mortgagors may fully or partially prepay their mortgage loan at any time.
However, some mortgage loans require that the mortgagor pay a fee with
any prepayment. This 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 will be treated by
the depositor and the trust as a sale of the mortgage loans. If the seller
were to become insolvent, a receiver or conservator for, or a creditor of, the
seller, may argue that the transaction between the seller and the depositor is
a pledge of mortgage loans as security for a borrowing rather than a sale. 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.
[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 any such 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 such loans are delinquent pursuant to their
repayment terms. Dollar amounts are rounded to the nearest $1,000.
<PAGE>
<TABLE>
<CAPTION>
Year Ended
December 31, 199_ December 31, 199_ December 31, 199_
Number of Dollar Number of Dollar Number of Dollar
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>
TABLE CONT.
<TABLE>
<CAPTION>
Months Ended
December 31, 199_ December 31, 199_ 30, 199_
Number of Dollar Number of Dollar Number of Dollar
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>
- ----------------------
(1)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_. In the following table, "Average Portfolio Balance"
during the period is the arithmetic average of the principal balances of the
mortgage loans outstanding on the first and last days of each period. The
Average Portfolio Balance has been rounded to the nearest $1,000.
"Charge-Offs" are amounts which have been determined by the master servicer to
be uncollectible relating to the mortgage loans for each respective period and
do not include any amount of collections or recoveries received by the master
servicer subsequent to charge-off dates. The master servicer's policy
regarding charge-offs provides that mortgaged properties are reappraised when
a mortgage loan has been delinquent for 180 days and based upon such
appraisals, a decision is then made concerning the amounts determined to be
uncollectible.
<TABLE>
<CAPTION>
Year Ended Months Ended
----------------------------------------------------------------------------------------------- --------------
December 31, 199_ December 31, 199_ December 31, 199_ December 31, 199_ December 31, 199_ ________, 199_
----------------- ----------------- ----------------- ----------------- ----------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Average Portfolio $ $ $ $ $ $
Balance...........
Charge-Offs ...... $ $ $ $ $ $
Charge-Offs as a % % % % % % %
of Average
Portfolio
Balance.........
</TABLE>
- ------------------
(1)Annualized.
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 herein as a loan group principal balance.
The mortgage loans to be purchased by the trust fund will be
originated or purchased by the seller and sold by the seller to the depositor
and transferred by the depositor to the trust fund.
The mortgage pool 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 thereof 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 such mortgage loan by their maturity. Each
mortgage loan was originated on or after . The remaining terms to stated
maturity as of the cut-off date of the mortgage loans range from months to
months; the weighted average remaining term to stated maturity of the mortgage
loans as of the cut-off date is months. In no event will more than 5% of the
cut-off date pool principal balance of the mortgage pool deviate from the
characteristics of the mortgage loans described in this prospectus supplement.
The mortgage loans provide that interest is charged to the borrowers
thereunder, 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 thereof 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 herein, all percentages set
forth herein with respect to the mortgage loans in loan group 1 are
percentages of the cut-off date loan group 1 principal balance.
The mortgage loans in loan group 1 consist of ___ loans, and the
related mortgaged properties 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 thereof 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
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
<PAGE>
Geographic Distribution by State
Loan Group 1
Cut-Off Date % of Cut-Off Date
Number of Loan Group 1 Loan Group 1
State mortgage loans Principal Balance Principal Balance
<PAGE>
Loan-to-Value Ratios(1)
Loan Group 1
Cut-Off Date % of Cut-Off Date
Number of Loan Group 1 Loan Group 1
Loan-to-Value Ratio mortgage loans Principal Balance Principal Balance
- -------------------------------------------------------------------------------
(1) The loan-to-value ratios 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
Cut-Off Date % of Cut-Off Date
Number of Loan Group 1 Loan Group 1
Loan Rates mortgage loans Principal Balance Principal Balance
Original Term to Stated Maturity
Loan Group 1
Cut-Off Date % of Cut-Off Date
Original Term to Number of Loan Group 1 Loan Group 1
Stated Maturity mortgage loans Principal Balance Principal Balance
<TABLE>
<CAPTION>
Remaining Months to Stated Maturity
Loan Group 1
<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
Cut-Off Date % of Cut-Off Date
Number of Loan Group 1 Loan Group 1
Months Since Origination mortgage loans Principal Balance Principal Balance
Property Type
Loan Group 1
Cut-Off Date % of Cut-Off Date
Number of Loan Group 1 Loan Group 1
Property Type mortgage loans Principal Balance Principal Balance
<PAGE>
Occupancy Type
Loan Group 1
Cut-Off Date % of Cut-Off Date
Number of Loan Group 1 Loan Group 1
Occupancy Type mortgage loans Principal Balance Principal Balance
[CONVEYANCE OF SUBSEQUENT MORTGAGE LOANS
The pooling and servicing agreement permits the trust fund to
purchase from the seller, subsequent to the date hereof and prior to _______,
19__, subsequent mortgage loans in an amount not to exceed approximately
$________ in aggregate principal balance for inclusion in the trust fund. Each
subsequent mortgage loan will have been originated or purchased by the seller
in accordance with the underwriting guidelines set forth above under
"--Underwriting and Credit Guidelines." Accordingly, the statistical
characteristics of the mortgage pool set forth above are based exclusively on
the initial mortgage loans and the statistical characteristics of the mortgage
pool after giving effect to the acquisition of any subsequent mortgage loans
will likely differ from the information specified herein. The date on which
the seller transfers a subsequent mortgage loan to the trust fund shall be
referred to herein as the subsequent transfer date.
In any event, each conveyance of subsequent mortgage loans will be
subject to, among other things, the following conditions:
(1) The subsequent mortgage loans must (a) satisfy the
eligibility criteria set forth in the prospectus under "The Loan
Program--Representations by sellers; Repurchases" and (b) comply
with each representation and warranty as to the mortgage loans
set forth in the 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 such 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 herein, all percentages set
forth herein with respect to the mortgage loans in loan group 2 are
percentages of the cut-off date loan group 2 principal balance.
The mortgage loans in loan group 2 bear interest rates that adjust
based on the London interbank offered rate for six-month United States dollar
deposits.
The mortgage loans in loan group 2 consist of _____ loans, and the
related mortgaged properties are located in ___ 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 thereof 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
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
<PAGE>
Geographic Distribution by State(1)
Loan Group 2
Cut-Off Date % of Cut-Off Date
Number of Loan Group 2 Loan Group 2
State mortgage loans Principal Balance Principal Balance
- -------------------------------------------------------------------------------
(1) Determined by property address designated as such in the related mortgage.
<PAGE>
Loan-to-Value Ratios(1)
Loan Group 2
Cut-Off Date % of Cut-Off Date
Number of Loan Group 2 Loan Group 2
Loan-to-Value Ratio mortgage loans Principal Balance Principal Balance
- ------------------------------------------------------------------------------
(1) The loan-to-value ratios 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
Cut-Off Date % of Cut-Off Date
Number of Loan Group 2 Loan Group 2
Loan Rates mortgage loans Principal Balance Principal Balance
Original Term to Stated Maturity
Loan Group 2
Cut-Off Date % of Cut-Off Date
Original Term to Number of Loan Group 2 Loan Group 2
Stated Maturity mortgage loans Principal Balance Principal Balance
<PAGE>
Remaining Months to Stated Maturity
Loan Group 2
Cut-Off Date % of Cut-Off Date
Remaining Term to Number of Loan Group 2 Loan Group 2
Stated Maturity mortgage loans Principal Balance Principal Balance
<PAGE>
Months Since Origination
Loan Group 2
Cut-Off Date % of Cut-Off Date
Months Number of Loan Group 2 Loan Group 2
Since Origination mortgage loans Principal Balance Principal Balance
Property Type
Loan Group 2
Cut-Off Date % of Cut-Off Date
Number of Loan Group 2 Loan Group 2
Property Type mortgage loans Principal Balance Principal Balance
<PAGE>
Occupancy Type
Loan Group 2
Cut-Off Date % of Cut-Off Date
Number of Loan Group 2 Loan Group 2
Occupancy Type mortgage loans Principal Balance Principal Balance
Margin
Loan Group 2
Cut-Off Date % of Cut-Off Date
Number of Loan Group 2 Loan Group 2
Margin mortgage loans Principal Balance Principal Balance
Lifetime Cap
Loan Group 2
Cut-Off Date % of Cut-Off Date
Number of Loan Group 2 Loan Group 2
Lifetime Cap mortgage loans Principal Balance Principal Balance
Floor
Loan Group 2
Cut-Off Date % of Cut-Off Date
Number of Loan Group 2 Loan Group 2
Floor mortgage loans Principal Balance Principal Balance
<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 are subject to prepayment penalties which vary from jurisdiction to
jurisdiction.
Prepayments, liquidations and purchases of the mortgage loans in a
loan group, including any optional purchase by the master servicer of the
remaining mortgage loans in connection with the termination of the trust fund,
will result in distributions on the related class A certificates of principal
amounts which would otherwise be distributed over the remaining terms of 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 payments thereon 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 "Legal Aspects of
Loans--Due-on-Sale Clauses in Mortgage Loans" in the prospectus.
As with fixed rate obligations generally, the rate of prepayment on a
pool of mortgage loans with fixed rates such as the mortgage loans in the loan
group 1 is affected by prevailing market rates for mortgage loans of a
comparable term and risk level. When the market interest rate is below the
interest rate on a mortgage, mortgagors may have an increased incentive to
refinance their mortgage loans. Depending on prevailing market rates, the
future outlook for market rates and economic conditions generally, some
mortgagors may sell or refinance mortgaged properties in order to realize
their equity in the mortgaged properties, to meet cash flow needs or to make
other investments.
All of the mortgage loans in the loan group 2 are adjustable-rate
mortgage loans. As is the case with conventional fixed-rate mortgage loans,
adjustable-rate mortgage loans may be subject to a greater rate of principal
prepayments in a declining interest rate environment. For example, if
prevailing interest rates fall significantly, adjustable-rate mortgage loans
could be subject to higher prepayment rates than if prevailing interest rates
remain constant because the availability of fixed-rate mortgage loans at
competitive interest rates may encourage mortgagors to refinance their
adjustable-rate mortgage loans at competitive interest rates may encourage
mortgagors to refinance their adjustable-rate mortgage loans to "lock in" a
lower fixed interest rate. However, no assurance can be given as to the level
of prepayments that the mortgage loans will experience.
In addition to the foregoing factors affecting the weighted average
life of the class A certificates, the use of excess 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 such
certificate group will cease, unless necessary to maintain the required level
of ____ overcollateralization ____ for such certificate group. See
"Description of the Certificates--Overcollateralization Provisions."
WEIGHTED AVERAGE LIVES
Generally, greater than anticipated prepayments of principal will
increase the yield on the class A certificates purchased at a price less than
par and will decrease the yield on the class A certificates purchased at a
price greater than par. The effect on an investor's yield due to principal
prepayments on the mortgage loans occurring at a rate that is faster, or
slower, than the rate anticipated by the investor in the period immediately
following the issuance of the certificates will not be entirely offset by a
subsequent like reduction, or increase, in the rate of principal payments. The
weighted average life of the class A certificates will also be affected by the
amount and timing of delinquencies and defaults on the mortgage loans and the
recoveries, if any, on defaulted mortgage loans and foreclosed properties.
The "weighted average life" of a certificate refers to the average
amount of time that will elapse from the date of issuance to the date each
dollar in respect of principal of 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 such mortgage loans. A 100% prepayment
assumption assumes a conditional prepayment rate of 4% per annum of the
outstanding principal balance of such mortgage loans in the first month of the
life of the mortgage loans and an additional 1.45%, precisely 16/11, expressed
as a percentage per annum, in each month thereafter until the twelfth month;
beginning in the twelfth month and in each month thereafter during the life of
the mortgage loans, a conditional prepayment rate of 20% per annum each month
is assumed. As used in the table below, 0% prepayment assumption assumes a
conditional prepayment rate equal to 0% of the prepayment assumption, i.e., no
prepayments. Correspondingly, 200% prepayment assumption assumes prepayment
rates equal to 200% of the prepayment assumption, and so forth. The prepayment
assumption does not purport to be a historical description of prepayment
experience or a prediction of the anticipated rate of prepayment of any pool
of mortgage loans, including the mortgage loans. The depositor believes that
no existing statistics of which it is aware provide a reliable basis for
holders of the class A certificates to predict the amount or the timing of
receipt of prepayments on the mortgage loans.
Since the tables were prepared on the basis of the assumptions in the
following paragraph, there are discrepancies between characteristics of the
actual mortgage loans and the characteristics of the mortgage loans assumed in
preparing the tables. Any 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 herein,
(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 thereon,
(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 herein,
(9) the overcollateralization levels are set initially as specified
in the pooling and servicing agreement, and thereafter 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 Term
Principal Amortization Term Term to Maturity to Maturity
Amortization Methodology Balance Loan Rate (months) (months) (months)
<S> <C> <C> <C> <C> <C>
GROUP 1
Balloon........... $
Level Pay.......... $
Level Pay.......... $
</TABLE>
Subject to the foregoing discussion and assumptions, the following
table indicates the weighted average life of each class of class A
certificates, and sets forth the percentages of the initial class A principal
balance of each 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
Months Maximum Minimum Amortization Term to Remaining
Amortization Principal Loan to Rate Gross Interest Interest Term Maturity Term to
Methodology Balance Rate Change Margin Rate Rate (months) (months) Maturity(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 thereof, and should be read in conjunction therewith.
<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, such sections or defined terms are hereby
incorporated herein by reference.
GENERAL
The offered certificates will be issued in denominations of $1,000
and multiples of $1 in excess thereof and will evidence specified undivided
interests in the trust fund. The property of the trust fund will consist of,
to the extent provided in the pooling and servicing agreement:
(1) the mortgage loans;
(2) payments on the mortgage loans received on and after the
cut-off date, exclusive of payments in respect of interest on the
mortgage loans due prior to the cut-off date and received thereafter;
(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 therein, excluding net earnings thereon; 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 such certificateholders as
described herein. 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
thereon, exclusive of payments in respect of interest on the mortgage loan due
prior to the cut-off date and received thereafter, and the proceeds thereof.
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 thereon, exclusive of payments in respect of interest on the
mortgage loans due prior to the cut-off date and received thereafter, and the
proceeds thereof. 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 hereby. 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 below.
A certificateholder is the Person in whose name a Certificate is
registered as such in the Certificate Register.
The "percentage interest" of a class A certificate as of any date of
determination will be equal to the percentage obtained by dividing the
denomination of 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 such 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 such beneficial interests in the book-entry certificates in
minimum denominations representing class principal balances of $1,000 and in
multiples of $1 in excess thereof. Except as described below, 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
such 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 below, 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 such 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. Such credits or any
transactions in such 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 "Federal Income Tax
Consequences--Foreign Investors" and "--Backup Withholding" herein and "Global
Clearance, Settlement anD Tax Documentation Procedures--Certain U.S. Federal
Income Tax Documentation Requirements" in Annex I hereto.
Transfers between 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 subject to the rules, regulations and procedures governing DTC and DTC
participants as in effect from time to time.
Cedelbank is incorporated under the laws of Luxembourg as a
professional depository. Cedelbank holds securities for its participating
organizations and facilitates the clearance and settlement of securities
transactions between Cedelbank participants through electronic book-entry
changes in accounts of Cedelbank participants, thereby eliminating the need
for physical movement of certificates. Transactions may be settled in
Cedelbank in any of 28 currencies, including United States dollars. Cedelbank
provides to its Cedelbank participants, among other things, services for
safekeeping, administration, clearance and settlement of internationally
traded securities and securities lending and borrowing. Cedelbank interfaces
with domestic markets in several countries. As a professional depository,
Cedelbank is subject to regulation by the Luxembourg Monetary Institute.
Cedelbank participants are recognized financial institutions around the world,
including underwriters, securities brokers and dealers, banks, trust
companies, clearing corporations and certain other organizations. Indirect
access to Cedelbank is also available to others, such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a Cedelbank participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for its participants
and to clear and settle transactions between Euroclear participants through
simultaneous electronic book-entry delivery against payment, thereby
eliminating the need for physical movement of certificates and any risk from
lack of simultaneous transfers of securities and cash. Transactions may be
settled in any of 32 currencies, including United States dollars. Euroclear
includes various other services, including securities lending and borrowing
and interfaces with domestic markets in several countries generally similar to
the arrangements for cross-market transfers with DTC described above.
Euroclear is operated by the Brussels, Belgium office of Morgan Guaranty Trust
Company of New York, under contract with Euroclear Clearance Systems S.C., a
Belgian cooperative corporation, the cooperative. All operations are conducted
by the Euroclear operator, and all Euroclear securities clearance accounts and
Euroclear cash accounts are accounts with the Euroclear operator, not the
cooperative. The cooperative establishes policy for Euroclear on behalf of
Euroclear participants. Euroclear participants include banks, including
central banks, securities brokers and dealers and other professional financial
intermediaries. Indirect access to Euroclear is also available to other firms
that clear through or maintain a custodial relationship with a Euroclear
participant, either directly or indirectly.
The Euroclear operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it
is regulated and examined by the Board of Governors of the Federal Reserve
System and the New York State Banking Department, as well as the Belgian
Banking Commission.
Securities clearance accounts and cash accounts with the Euroclear
operator are governed by the Terms and Conditions Governing Use of Euroclear
and the related Operating Procedures of the Euroclear system and applicable
Belgian law, collectively, the terms and conditions. The terms and conditions
govern transfers of securities and cash within Euroclear, withdrawals of
securities and cash from Euroclear, and receipts of payments with respect to
securities in Euroclear. All securities in Euroclear are held on a fungible
basis without attribution of specific certificates to specific securities
clearance accounts. The Euroclear operator acts under the terms and conditions
only on behalf of Euroclear participants, and has no record of or relationship
with persons holding through Euroclear participants.
Distributions on the book-entry certificates will be made on each
distribution date by the trustee to DTC. DTC will be responsible for crediting
the amount of such payments to the accounts of the applicable DTC participants
in accordance with DTC's normal procedures. Each DTC participant will be
responsible for disbursing 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
such payments will be forwarded by the trustee to Cede. Distributions with
respect to certificates held through Cedelbank or Euroclear will be credited
to the cash accounts of Cedelbank participants or Euroclear participants in
accordance with the relevant system's rules and procedures, to the extent
received by the relevant depositary. Those distributions will be subject to
tax reporting in accordance with relevant United States tax laws and
regulations. See "Federal Income Tax Consequences--Foreign Investors" and
"--Backup Withholding" herein. Because DTC can only act on behalf of financial
intermediaries, the ability of a beneficial owner to pledge book-entry
certificates to persons or entities that do not participate in the depository
system, or otherwise take actions in respect of such book-entry certificates,
may be limited due to the lack of physical certificates for such book-entry
certificates.
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 and subject to the ability of the relevant
depositary to effect actions on its behalf through DTC. DTC may take actions,
at the direction of the related participants, with respect to some class A
certificates which conflict with actions taken with respect to other class A
certificates.
Definitive certificates will be issued to beneficial owners of the
book-entry certificates, or their nominees, rather than to DTC, only if:
(a) DTC or the depositor advises the trustee in writing that
DTC is no longer willing, qualified or able to discharge properly its
responsibilities as nominee and depository with respect to the
book-entry certificates and the depositor or the trustee is unable to
locate a qualified successor,
(b) the depositor, at its sole option, with the consent of
the trustee, elects to terminate a book-entry system through DTC or
(c) after the occurrence of an event of servicing
termination, beneficial owners having percentage interests
aggregating not less than 51% of the aggregate class A principal
balance of the book-entry certificates advise the trustee and DTC
through the financial intermediaries and the DTC participants in
writing that the continuation of a book-entry system through DTC or a
successor thereto is no longer in the best interests of beneficial
owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the trustee will be required to notify all beneficial
owners of the occurrence of such event and the availability through DTC of
definitive certificates. Upon surrender by DTC of the global certificate or
certificates representing the book-entry certificates and instructions for
re-registration, the trustee will issue definitive certificates, and
thereafter the trustee will recognize the holders of such definitive
certificates as certificateholders under the 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 such procedures and such procedures may be
discontinued at any time.
Neither the depositor, the seller, the master servicer nor the
trustee will have any responsibility for any aspect of the records relating to
or payments made on account of beneficial ownership interests of the
book-entry certificates held by Cede, as nominee for DTC, or for maintaining,
supervising or reviewing any records relating to such beneficial ownership
interests.
ASSIGNMENT OF MORTGAGE LOANS
On the closing date, the depositor will transfer to the trust fund
all of its right, title and interest in and to each mortgage loan, the related
mortgage notes, mortgages and other related documents, 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 thereafter. 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 thereof 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 such 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 thereon, computed at the loan rate, net of the
master servicing fee if the seller is the master servicer, plus the amount of
any unreimbursed servicing advances made by the master servicer. The purchase
price will be deposited in the collection account on or prior to the next
succeeding determination date after 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
relating thereto will apply to the substitution or purchase of a
defective mortgage loan as a result of a breach of a representation
or warranty in the 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. Subject to the investment provision described in the following
paragraphs, 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 therein 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 therein may be invested in eligible
investments maturing on or before the business day prior to the related
distribution date.
An eligible account is an account that is (1) maintained with a
depository institution whose debt obligations at the time of any deposit
therein have the highest short-term debt rating by the rating agencies, and
whose accounts are fully insured by either the Savings Association Insurance
Fund 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 thereof, 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
thereof, provided that the short-term unsecured debt obligations of
the party agreeing to repurchase such obligations are at the time
rated by each rating agency in its highest short-term rating
category;
(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
thereof and subject to supervision and examination by federal and/or
state banking authorities, provided that the unsecured short-term
debt obligations of such depository institution or trust company at
the date of acquisition thereof have been rated by each of the rating
agencies in its highest unsecured short-term debt rating category;
(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 thereof 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 thereof which on the date of acquisition has been rated by
the rating agencies in their respective highest rating category of
long term unsecured debt;
(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 such 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 hereunder 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 described hereunder
shall evidence 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 described hereunder may be
purchased at a price greater than par if such instrument may be
prepaid or called at a price less than its purchase price prior to
its stated maturity.
ADVANCES
Not later than two business days prior to each distribution date, the
master servicer will remit to the trustee for deposit in the distribution
account 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 therefor in accordance with the priorities and in the amounts
described below under "--Priority of Distributions," an aggregate amount equal
to the sum of (a) the class Interest Distribution for each class of offered
certificates and (b) the class A Principal Distribution for each certificate
group. Distributions will be made (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 therefor, 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 person entitled thereto 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
following amounts in respect of a loan group and the previous due period shall
be deposited into the distribution account and shall constitute the Available
Funds for the related certificate group for that distribution date:
(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.
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 thereof
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 thereof 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 thereof 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 such insufficiency.
D. After making the distributions referred to in subclauses A, B
and C above, the trustee shall make distributions in the following
order of priority, to the extent of the balance of the amount
available:
(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.
"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 such rate been calculated pursuant to the lesser of clause (A) and clause
(C) of the definition of Certificate Rate over (2) the amount of interest the
class A-6 certificates actually receives on such distribution date, plus
accrued interest thereon at the rate determined pursuant to clause (1) above
for that distribution date.
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.
The Net Funds Cap for any distribution date shall equal the
difference between (A) the average of the loan rates of the mortgage loans in
loan group 2 as of the first day of the month preceding the month of 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, ___%.
With respect to the class A-6 certificates, interest in respect of any
distribution date will accrue during each interest period on the basis of a
360-day year and the actual number of days elapsed.
The "LIBOR Rate" is the rate for United States dollar deposits for
one month which appear on the Telerate Screen LIBO Page 3750 as of 11:00 A.M.,
London time, on the second LIBOR business day prior to the first day of any
interest period relating to the class A-6 certificates, or the second LIBOR
business day prior to the closing date, in the case of the first distribution
date). If 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. If no such quotations can be obtained
and no Reference Bank Rate is available, the LIBOR Rate will be the LIBOR Rate
applicable to the preceding distribution date. On the second LIBOR business
day immediately preceding each distribution date, the trustee shall determine
the LIBOR Rate for the interest period commencing on that distribution date
and inform the master servicer of the rate.
INTEREST
On each distribution date, to the extent of funds available therefor
as described herein, the Class Interest Distribution will be distributed with
respect to each class of class A certificates in 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. As to any distribution date and class of class A
certificates, the class Interest Carryover Shortfall is 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 such
excess, to the extent permitted by law, at the related certificate rate. The
interest entitlement described in (a) above 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 thereon 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 thereof,
in accordance with the priorities described above under "--Priorities of
Distributions," principal will be distributed to the holders of class A
certificates of each certificate group then entitled to distributions of
principal in an amount equal to the lesser of (A) the related aggregate class
A principal balance and (B) the related class A Principal Distribution for
that 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 Monthly Principal Distributable Amount" means, with respect
to any distribution date and certificate group, to the extent of funds
available therefor as described herein the amount equal to the sum of the
following amounts (without duplication) with respect to the immediately
preceding due period:
(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.
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, subject to the provisions described below under
"--Crosscollateralization," the amount distributed in respect of principal
will be reduced. A draw on the policy in respect of principal will not be made
until the class A principal balance of a certificates group exceeds the
aggregate principal balance of the mortgage loans in the related loan group.
See "--The Policy" herein. Accordingly, there may be distribution dates on
which class A certificateholders receive little or no distributions in respect
of principal.
So long as an insurer default has not occurred and is continuing,
distributions of the class A Principal Distribution with respect to the group
1 certificates will be applied, sequentially, to the distribution of principal
to the class A-1, class A-2, class A-3, class A-4 and class A-5 certificates,
in that order, 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 such 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 such amount is not covered by available funds from the related loan
group or the crosscollateralization mechanics described herein, will reduce
the amount of overcollateralization, if any, with respect to the related
certificate group.
Due period means, with respect to any determination date or
distribution date, the calendar month immediately preceding that determination
date or distribution date, as the case may be.
A liquidated mortgage loan, as to any distribution date, is a
mortgage loan with respect to which the master servicer has determined, in
accordance with the servicing procedures specified in the 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.
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 pursuant to subclause A items (1) through (4), with respect to
the group 1 certificates and subclause B items (1) through (4), with respect
to the group 2 certificates, in each case set forth under the heading
"Description of Certificates--Priority of Distributions" on that distribution
date.
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.
THE POLICY
The following information has been supplied by the certificate
insurer for inclusion in this prospectus supplement. Accordingly, neither the
depositor nor the master servicer makes any representation as to the accuracy
and completeness of such information.
The certificate insurer, in consideration of the payment of the
premium and subject to the terms of the policy, thereby unconditionally and
irrevocably guarantees to any owner that an amount equal to each full and
complete insured payment will be received by 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 such order is final and not subject to appeal,
(3) an assignment in such form as is reasonably required by
the certificate insurer, irrevocably assigning to the certificate
insurer all rights and claims of the owner relating to or arising
under the class A certificates against the debtor that made 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 such preference amount, those instruments being in a form
satisfactory to the certificate insurer, provided that if such
documents are received after 12:00 noon New York City time on 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.
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 therein
will be disbursed by the fiscal agent to the trustee on behalf of the owners
by wire transfer of immediately available funds in the amount of the insured
payment less, in respect of insured payments related to Preference Amounts,
any amount held by the trustee for the payment of that insured payment and
legally available therefor.
The fiscal agent is the agent of the certificate insurer only and the
fiscal agent shall in no event be liable to the owners for any acts of the
fiscal agent or any failure of the certificate insurer to deposit or cause to
be deposited, sufficient funds to make payments due under the policy.
As used in the policy, the following terms shall have the following
meanings:
Agreement means the pooling and servicing agreement, dated as
of _________________, between J.P. Morgan Acceptance Corporation I, as
depositor, ____________, as seller and master servicer, and the
trustee, as trustee, without regard to any amendment or supplement
thereto unless such amendment or modification has been approved in
writing by the certificate insurer.
Business day means any day other than a Saturday, a Sunday or
a day on which banking institutions in New York City or the city in
which the corporate trust office of the trustee under the Agreement is
located are authorized or obligated by law or executive order to
close.
Deficiency amount means for any distribution date (A) the
excess, if any, of (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.
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) of this definition of "Guaranteed
Principal Amount," 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.
Notice means the telephonic or telegraphic notice, promptly
confirmed in writing, in the case of a telephonic notice, by telecopy,
substantially in the form of exhibit A attached to the policy, the
original of which is subsequently delivered by registered or certified
mail, from the trustee specifying the insured payment which shall be
due and owing on the applicable distribution date.
Owner means each holder who, on the applicable distribution
date, is entitled under the terms of the applicable class A
certificates to payment under the policy.
Preference Amount means any amount previously distributed to
an owner on the class A certificates that is recoverable and sought to
be recovered as a voidable preference by a trustee in bankruptcy
pursuant to the United States Bankruptcy Code (11 U.S.C.), as amended
from time to time in accordance with a final nonappealable order of a
court having competent jurisdiction.
Any notice under the policy or service of process on the fiscal agent
may be made at the address listed below for the fiscal agent or such other
address as the certificate insurer shall specify to the trustee in writing.
The notice address of the fiscal agent is
_____________________________ Attention: ________________, or such other
address as the fiscal agent shall specify to the trustee in writing.
The policy is being issued under and pursuant to, and shall be
construed under, the laws of the State of New York, without giving effect to
the conflict of laws principles thereof.
The insurance provided by the policy is not covered by the
Property/Casualty Insurance Security Fund specified in Article 76 of the New
York Insurance Law.
The policy is not cancelable for any reason. The premium on the
policy is not refundable for any reason including payment, or provision being
made for payment, prior to the maturity of the class A certificates.
OVERCOLLATERALIZATION
The credit enhancement provisions of the trust fund result in a
limited acceleration of the class A certificates of a certificate group
relative to the amortization of the mortgage loans in the related loan group
in the early months of the transaction. The accelerated amortization is
achieved by the application of Distributable Excess Spread relating to a loan
group to principal distributions on the class A certificates of the related
certificate group. This acceleration feature creates, with respect to each
certificate group, overcollateralization, i.e., the excess of the aggregate
outstanding principal balance of the mortgage loans in the related loan group
over the related aggregate class A principal balance. Once the required level
of overcollateralization is reached for a certificate group, and subject to
the provisions described in the next paragraph, the acceleration feature for
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, subject to floors,
caps and triggers, the required level of overcollateralization with respect to
a certificate group may increase or decrease over time. Any decrease in the
required level of overcollateralization for a loan group will occur only at
the sole discretion of the certificate insurer. Any such decrease will have
the effect of reducing the amortization of the class A certificates of the
related certificate group below what it otherwise would have been.
CROSSCOLLATERALIZATION
Excess Spread with respect to a loan group will be available to cover
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 thereof 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 such
date.
Amounts on deposit in the pre-funding account will be invested in
permitted investments. All interest and any other investment earnings on
amounts on deposit in the pre-funding account will be deposited in the
capitalized interest account. The pre-funding account shall not be an asset of
the REMIC. All reinvestment earnings on the pre-funding account shall be owned
by, and be taxable to, the seller.
CAPITALIZED INTEREST ACCOUNT
On the closing date there will be deposited in the Capitalized
Interest Account maintained with and in the name of the trustee on behalf of
the trust fund a portion of the proceeds of the sale of the certificates. The
amount deposited therein will be used by the trustee on the distribution dates
in __________________ 19__, _____________ 19__ and ______________, 19__ to
cover shortfalls in interest on the certificates that may arise as a result of
the utilization of the pre-funding account for the purchase by the trust fund
of subsequent mortgage loans after the closing date. Any amounts remaining in
the capitalized interest account at the end of the funding period which are
not needed to cover shortfalls on the distribution date in ___________ 19__
are required to be paid directly to the seller.] The capitalized interest
account shall not be an asset of the REMIC. All reinvestment earnings on the
capitalized interest account shall be owned by, and be taxable to, the
seller.]
REPORTS TO CERTIFICATEHOLDERS
Concurrently with each distribution to the certificateholders, the
trustee will forward to each certificateholder a statement based solely on
information received from the master servicer setting forth among other items
with respect to each distribution date:
(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 thereof 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 thereof 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 such
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 such
amount for each loan group; and
(14) the weighted average loan rate on the mortgage loans
and specifying such weighted average loan rate for each loan group as
of the first day of the month prior to the distribution date.
In the case of information furnished pursuant to clauses (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 such 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 such
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 such scheduled
distribution dates. See "Prepayment and Yield Considerations".
Such last scheduled distribution dates are based on a 0% Prepayment
Assumption with no Distributable Excess Spread used to make accelerated
payments of principal to the holders of the related offered certificates and
the assumptions set forth above under "Prepayment and Yield
Considerations--Weighted Average Lives"; provided that the last scheduled
distribution dates for the class A-5 certificates and the class A-6
certificates have been calculated assuming that the mortgage loan in the
related loan group having the latest maturity date allowed by the 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 such collection procedures as it
follows from time to time with respect to the loans in its servicing portfolio
comparable to the mortgage loans. Consistent with the above, the master
servicer may in its discretion waive any late payment charge or any assumption
or other fee or charge that may be collected in the ordinary course of
servicing the mortgage loans.
With respect to the mortgage loans, the master servicer may arrange
with a borrower a schedule for the payment of interest due and unpaid for a
period, PROVIDED that any such arrangement is consistent with the master
servicer's policies with respect to the mortgage loans it owns or services.
HAZARD INSURANCE
The master servicer will cause to be maintained fire and hazard
insurance with extended coverage customary in the area where the mortgaged
property is located, in an amount which is at least equal to the lesser of (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 such
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 such
insurance is available, fire and hazard insurance in the applicable amounts
described above, liability insurance and, to the extent required and available
under the National Flood Insurance Act of 1968, as amended, and the master
servicer determines that insurance is necessary in accordance with accepted
mortgage servicing practices of prudent lending institutions, flood insurance
in an amount equal to that required above. Any amounts collected by the master
servicer under any such policies, other than amounts to be applied to the
restoration or repair of the mortgaged property, or to be released to the
mortgagor in accordance with customary mortgage servicing procedures, will be
deposited in the collection account, subject to retention by the master
servicer to the extent those amounts constitute servicing compensation or to
withdrawal pursuant to 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 such
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, such 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 such 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.
Interest shortfalls resulting from the application of the Civil
Relief Act will not be covered by the policy, although prepayment interest
shortfalls, after application of the master servicing fee, will be so covered.
The master servicer is not obligated to offset any of the master servicing fee
against, or to provide any other funds to cover, any shortfalls in interest
collections on the mortgage loans that are attributable to the application of
the Civil Relief Act. See "Risk Factors--Payments on the Mortgage Loans" in
this prospectus supplement.
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.
CERTAIN MATTERS REGARDING THE MASTER SERVICER
The pooling and servicing agreement provides that the master servicer
may not resign from its obligations and duties thereunder, except in
connection with a permitted transfer of servicing, unless (1) such 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 such 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 such 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 such default is, in the judgment of the master
servicer, imminent. Any changes to the terms of a mortgage loan that would
cause the trust fund to fail to qualify as a REMIC, however, may be agreed to
by the master servicer, provided that the master servicer has determined those
changes are necessary to avoid a prepayment of that mortgage loan, such
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 thereunder. In addition, the pooling and
servicing agreement provides that the master servicer will not be under any
obligation to appear in, prosecute or defend any legal action which is not
incidental to its servicing responsibilities under the pooling and servicing
agreement. 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
thereto and the interest of the certificateholders thereunder.
Any corporation into which the master servicer may be merged or
consolidated, or any corporation resulting from any merger, conversion or
consolidation to which the master servicer shall be a party, or any
corporation succeeding to the business of the master servicer shall be the
successor of the master servicer under the pooling and servicing agreement,
without the execution or filing of any paper or any further act on the part of
any of the parties 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 such
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 such failure to the
master servicer by the trustee, or to the master servicer and the
trustee by the certificate insurer or any certificateholder; or
(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 such delay or failure could not be
prevented by the exercise of reasonable diligence by the master servicer and
such delay or failure was caused by an act of God or other similar occurrence.
Upon the occurrence of any 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 in such capacity unless prohibited by
law. The successor will be entitled to receive the same compensation that the
master servicer would otherwise have received, or such lesser compensation as
the trustee and such successor may agree. A receiver or conservator for the
master servicer may be empowered to prevent the termination and replacement of
the master servicer if the only Event of Default that has occurred is an
insolvency event.
AMENDMENT
The 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 therein 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 any regulation
thereunder, 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 such rating - 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 such action will not, as evidenced by an opinion of
counsel, materially and adversely affect the interests of any
certificateholder or the certificate insurer; provided, further, that any
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 such 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 thereby and
the certificate insurer for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of the pooling and
servicing agreement or of modifying in any manner the rights of the
certificateholders, provided that no such 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.
Subject to provisions in the pooling and servicing agreement
concerning adopting a plan of complete liquidation, 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, subject to reduction as provided in the
pooling and servicing agreement if the purchase price is based in part on the
appraised value of any REO Property included in the trust fund and such
appraised value is less than the principal balance of the related mortgage
loan, and accrued and unpaid interest thereon at the weighted average of the
loan rates through the end of the due period preceding the final distribution
date together with all amounts due and owing to the certificate insurer.
Any such purchase shall be accomplished by deposit into the
distribution account of the purchase price specified above.
VOTING RIGHTS
Under the 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 such 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 such holder previously has given to the trustee
written notice of default and unless certificateholders holding certificates
evidencing at least 51% of the percentage interests in the trust fund have
made written requests upon the trustee to institute such proceeding in its own
name as trustee thereunder and have offered to the trustee reasonable
indemnity and the trustee for 60 days has neglected or refused to institute
any proceeding. The trustee will be under no obligation to exercise any of the
trusts or powers vested in it by the pooling and servicing agreement or to
make any investigation of matters arising thereunder or to institute, conduct
or defend any litigation thereunder or in relation thereto at the request,
order or direction of any of the certificateholders, unless those
certificateholders have offered to the trustee reasonable security or
indemnity against the cost, expenses and liabilities which may be incurred
therein or thereby.
USE OF PROCEEDS
The net proceeds to be received from the sale of the certificates
will be applied by the depositor towards the purchase of the mortgage loans.
FEDERAL INCOME TAX CONSEQUENCES
An election will be made to treat the trust fund as a 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 "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 Code Section 1272(a)(6) which applies to prepayable securities
such as the offered certificates. Until the Treasury issues guidance to the
contrary, the trustee intends to base its OID computation on Code Section
1272(a)(6) and the OID Regulations as described in the prospectus. However,
because no regulatory guidance currently exists under Code Section 1272(a)(6),
there can be no assurance that such methodology represents the correct manner
of calculating OID.
The yield used to calculate accruals of OID with respect to the
offered certificates with OID will be the original yield to maturity of 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 Code.
Accordingly, the offered certificates will be treated as (1) assets described
in section 7701(a)(19)(C) of the Code, and (2) "real estate assets" within the
meaning of section 856(c)(4)(A) of the Code, in each case to the extent
described in the prospectus. Interest on the offered certificates will be
treated as interest on obligations secured by mortgages on real property
within the meaning of section 856(c)(3)(B) of the Code to the same extent that
the offered certificates are treated as real estate assets. See "Federal
Income Tax Consequences" in the prospectus.
BACKUP WITHHOLDING
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 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, certain tax-exempt
organizations or nonresident aliens who provide certification as to their
status as nonresidents). As long as the only class A certificateholder of
record is Cede, as nominee for DTC, certificate owners and the IRS will
receive tax and other information including the amount of interest paid on
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.
Such 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. The term Foreign Investor
means 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 thereof 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) certain trusts treated as United States persons before
August 20, 1996 that elect to continue to be so treated to the extent
provided in regulations.
The Code and Treasury regulations generally subject interest paid to
a foreign investor to a withholding tax at a rate of 30% unless that rate were
changed by an applicable treaty. The withholding tax, however, is eliminated
with respect to certain "portfolio debt investments" issued to foreign
investors. Portfolio debt investments include debt instruments issued in
registered form for which the United States payor receives a statement that
the beneficial owner of the instrument is a foreign investor. The offered
certificates will be issued in registered form, therefore if the information
required by the Code is furnished 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 such 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 "Federal Income Tax Consequences - Backup Withholding".
STATE TAXES
The depositor makes no representations regarding the tax consequences
of purchase, ownership or disposition of the offered certificates under the
tax laws of any state. Investors considering an investment in the certificates
should consult their own tax advisors regarding such tax consequences.
All investors should consult their own tax advisors regarding the
Federal, state, local or foreign income tax consequences of the purchase,
ownership and disposition of the certificates.
ERISA CONSIDERATIONS
Any Plan fiduciary which proposes to cause a Plan to acquire any of
the offered certificates should consult with its counsel with respect to the
potential consequences under ERISA, and the 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. (the
"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 certain certificates representing an undivided interest in
certain asset-backed pass-through trusts, with respect to which J.P. Morgan
Securities Inc. or any of its affiliates is the sole underwriter or the
manager or co-manager of the underwriting syndicate; and (2) the servicing,
operation and management of asset-backed pass-through trusts, PROVIDED that
the general conditions and certain other conditions set forth in the exemption
are satisfied. The exemption will apply to the acquisition, holding and resale
of the class A certificates by a Plan, PROVIDED that 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 (each, a "Rating Agency");
(4) The sum of all payments made to and retained by the
underwriter in connection with the distribution of the class A
certificates represents not more than reasonable compensation for
underwriting 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 certain mortgage-backed
and asset-backed securities transactions using pre-funding accounts for trusts
issuing pass-through certificates. The amendment generally allows mortgage
loans or other secured receivables (the "Obligations") supporting payments to
certificateholders, and having a value equal to no more than twenty-five
percent (25%) of the total principal amount of the certificates being offered
by the trust, to be transferred to the trust within a 90-day or three-month
period following the closing date, instead of requiring that all 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 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 certain circumstances if
the pre-funding account falls below the minimum level specified in
the pooling and servicing agreement or an Event of Default occurs.
(7) Amounts transferred to any pre-funding account and/or
capitalized interest account used in connection with the pre-funding
may be invested only in 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 Code to such investment. Among other things,
before purchasing any class A certificates, a fiduciary of a Plan subject to
the fiduciary responsibility provisions of ERISA or an employee benefit plan
subject to the prohibited transaction provisions of the Code should make its
own determination as to the availability of the exemptive relief provided in
the Exemption, and also consider the availability of any other prohibited
transaction exemptions.
LEGAL INVESTMENT
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, as such, 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
Subject to 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 underwriting agreement provides that the depositor will indemnify
the underwriter against certain civil liabilities, including liabilities under
the Securities Act.
EXPERTS
[----------]
LEGAL MATTERS
Certain legal matters with respect to the class A certificates will
be passed upon for the depositor by Brown & Wood LLP, New York, New York, and
for the underwriter by ____________________.
RATINGS
It is a condition to the issuance of the class A certificates that
they receive ratings of "AAA" by _______ and "Aaa" by ______.
A securities rating addresses the likelihood of the receipt by class
A certificateholders of distributions on the mortgage loans. The rating takes
into consideration the characteristics of the mortgage loans and the
structural, legal and tax aspects associated with the class A certificates.
The ratings on the class A certificates do not, however, constitute statements
regarding the likelihood or frequency of prepayments on the mortgage loans or
the possibility that class A certificateholders might realize a lower than
anticipated yield.
The ratings assigned to the class A certificates will depend
primarily upon the creditworthiness of the certificate insurer. Any reduction
in a rating assigned to the claims-paying ability of the certificate insurer
below the ratings initially assigned to the class A certificates may result in
a reduction of one or more of the ratings assigned to the class A
certificates.
A securities rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each securities rating should be evaluated
independently of similar ratings on different securities.
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Home
Equity Loan Asset-Backed Certificates, Series 199___ (the "Global Securities")
will be available only in book-entry form. Investors in the Global Securities
may hold such Global Securities through any of DTC, Cedelbank or Euroclear.
The Global Securities will be tradeable as home market instruments in both the
European and U.S. domestic markets. Initial settlement and all secondary
trades will settle in same-day funds.
Secondary market trading between investors holding Global Securities
through Cedelbank and Euroclear will be conducted in the ordinary way in
accordance with their normal rules and operating procedures and in accordance
with conventional eurobond practice - i.e., seven calendar day settlement.
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations and prior home equity loan asset-backed
certificates issues.
Secondary cross-market trading between Cedelbank or Euroclear and DTC
participants holding certificates will be effected on a
delivery-against-payment basis through the respective depositaries of
Cedelbank and Euroclear (in that capacity) and as DTC participants.
Non-U.S. holders of Global Securities will be subject to U.S.
withholding taxes unless such holders meet certain requirements and deliver
appropriate U.S. tax documents to the securities clearing organizations or
their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the
name of Cede as nominee of DTC. Investors' interests in the Global Securities
will be represented through financial institutions acting on their behalf as
direct and indirect participants in DTC. As a result, Cedelbank and Euroclear
will hold positions on behalf of their participants through their respective
Depositaries, which in turn will hold such positions in accounts as DTC
participants.
Investors electing to hold their Global Securities through DTC will
follow the settlement practices applicable to prior home equity loan
asset-backed certificates issues. Investor securities custody accounts will be
credited with their holdings against payment in same-day funds on the
settlement date.
Investors electing to hold their Global Securities through Cedelbank
or Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to
the securities custody accounts on the settlement date against payment in
same-day funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important
to establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired
value date.
TRADING BETWEEN DTC PARTICIPANTS. Secondary market trading between
DTC participants will be settled using the procedures applicable to prior home
equity loan asset-backed certificates issues in same-day funds.
TRADING BETWEEN CEDELBANK AND/OR EUROCLEAR PARTICIPANTS. Secondary
market trading between Cedelbank participants or Euroclear participants will
be settled using the procedures applicable to conventional eurobonds in
same-day funds.
TRADING BETWEEN DTC SELLER AND CEDELBANK OR EUROCLEAR PURCHASER. When
Global Securities are to be transferred from the account of a DTC participant
to the account of a Cedelbank participant or a Euroclear participant, the
purchaser will send instructions to Cedelbank or Euroclear through a Cedelbank
participant or Euroclear participant at least one business day prior to
settlement. Cedelbank or Euroclear will instruct the respective depositary, as
the case may be, to receive the Global Securities against payment. Payment
will include interest accrued on the Global Securities from and including the
last coupon payment date to and excluding the settlement date, on the basis of
either the actual number of days in such accrual period and a year assumed to
consist of 360 days or a 360-day year of 12 30-day months as applicable to the
related class of Global Securities. For transactions settling on the 31st of
the month, payment will include interest accrued to and excluding the first
day of the following month. Payment will then be made by the respective
depositary of the DTC participant's account against delivery of the Global
Securities. After settlement has been completed, the Global Securities will be
credited to the respective clearing system and by the clearing system, in
accordance with its usual procedures, to the Cedelbank participant's or
Euroclear participant's account. The securities credit will appear the next
day European time and the cash debt will be back-valued to, and the interest
on the Global Securities will accrue from, the value date, which would be the
preceding day when settlement occurred in New York. If settlement is not
completed on the intended value date, the Cedelbank or Euroclear cash debt
will be valued instead as of the actual settlement date.
Cedelbank participants and Euroclear participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within Cedelbank or Euroclear. Under
this approach, they may take on credit exposure to Cedelbank or Euroclear
until the Global Securities are credited to their accounts one day later.
As an alternative, if Cedelbank or Euroclear has extended a line of
credit to them, Cedelbank participants or Euroclear participants can elect not
to preposition funds and allow that credit line to be drawn upon the finance
settlement. Under this procedure, Cedelbank participants or Euroclear
participants purchasing Global Securities would incur overdraft charges for
one day, assuming they cleared the overdraft when the Global Securities were
credited to their accounts. However, interest on the Global Securities would
accrue from the value date. Therefore, in many cases the investment income on
the Global Securities earned during that one-day period may substantially
reduce or offset the amount of such overdraft charges, although this result
will depend on each Cedelbank participant's or Euroclear participant's
particular cost of funds.
Since the settlement is taking place during New York business hours,
DTC participants can employ their usual procedures for sending Global
Securities to the respective European depositary for the benefit of Cedelbank
participants or Euroclear participants. The sale proceeds will be available to
the DTC seller on the settlement date. Thus, to the DTC participants a
cross-market transaction will settle no differently than a trade between two
DTC participants.
TRADING BETWEEN CEDELBANK OR EUROCLEAR SELLER AND DTC PURCHASER. Due
to time zone differences in their favor, Cedelbank participants and Euroclear
participants may employ their customary procedures for transactions in which
Global Securities are to be transferred by the respective clearing system,
through the respective depositary, to a DTC participant. The seller will send
instructions to Cedelbank or Euroclear through a Cedelbank participant or
Euroclear participant at least one business day prior to settlement. In these
cases Cedelbank or Euroclear will instruct the respective depositary, as
appropriate, to deliver the Global Securities to the DTC participant's account
against payment. Payment will include interest accrued on the Global
Securities from and including the last coupon payment to and excluding the
settlement date on the basis of either the actual number of days in such
accrual period and a year assumed to consist of 360 days or a 360-day year of
12 30-day months as applicable to the related class of Global Securities. For
transactions settling on the 31st of the month, payment will include interest
accrued to and excluding the first day of the following month. The payment
will then be reflected in the account of the Cedelbank participant or
Euroclear participant the following day, and receipt of the cash proceeds in
the Cedelbank participant's or Euroclear participant's account would be
back-valued to the value date, which would be the preceding day, when
settlement occurred in New York. Should the Cedelbank participant or Euroclear
participant have a line of credit with its respective clearing system and
elect to be in debt in anticipation of receipt of the sale proceeds in its
account, the back-valuation will extinguish any overdraft incurred over that
one-day period. If settlement is not completed on the intended value date,
receipt of the cash proceeds in the Cedelbank participant's or Euroclear
participant's account would instead be valued as of the actual settlement
date.
Finally, day traders that use Cedelbank or Euroclear and that
purchase Global Securities from DTC participants for delivery to Cedelbank
participants or Euroclear participants should note that these trades would
automatically fail on the sale side unless affirmative action were taken. At
least three techniques should be readily available to eliminate this potential
problem:
(a) borrowing through Cedelbank or Euroclear for one day, until the
purchase side of the day trade is reflected in their Cedelbank or Euroclear
accounts, in accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC
participant no later than one day prior to settlement, which would give the
Global Securities sufficient time to be reflected in their Cedelbank or
Euroclear account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the
trade so that the value date for the purchase from the DTC participant is at
least one day prior to the value date for the sale to the Cedelbank
participant or Euroclear participant.
U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through
Cedelbank or Euroclear, or through DTC if the holder has an address outside
the U.S., will be subject to the 30% U.S. withholding tax that generally
applies to payments of interest (including original issue discount) on
registered debt issued by U.S. Persons, unless (1) each clearing system, bank
or other financial institution that holds customers' securities in the
ordinary course of its trade or business in the chain of intermediaries
between such beneficial owner and the U.S. entity required to withhold tax
complies with applicable certification requirements and (2) such beneficial
owner takes one of the following steps to obtain an exemption or reduced tax
rate:
EXEMPTION FOR NON-U.S. PERSONS (FORM W-8). Beneficial owners of
Global Securities that are non-U.S. Persons can obtain a complete exemption
from the withholding tax by filing a signed Form W-8 (Certificate of Foreign
Status). If the information shown on Form W-8 changes, a new Form W-8 must be
filed within 30 days of such change.
EXEMPTION FOR NON-U.S. PERSONS WITH EFFECTIVELY CONNECTED INCOME
(FORM 4224). A non-U.S. Person, including a non-U.S. corporation or bank with
a U.S. branch, for which the interest income is effectively connected with its
conduct of a trade or business in the United States, can obtain an exemption
from the withholding tax by filing Form 4224 (Exemption from Withholding of
Tax on Income Effectively Connected with the Conduct of a Trade or Business in
the United States).
EXEMPTION OR REDUCED RATE FOR NON-U.S. PERSONS RESIDENT IN TREATY
COUNTRIES (FORM 1001). Non-U.S. persons that are certificate owners residing
in a country that has a tax treaty with the United States can obtain an
exemption or reduced tax rate (depending on the treaty terms) by filing Form
1001 (Ownership, Exemption or Reduced Rate Certificate). If the treaty
provides only for a reduced rate, withholding tax will be imposed at that rate
unless the filer alternatively files Form W-8. Form 1001 may be filed by the
certificate owners or his agent.
EXEMPTION FOR U.S. PERSONS (FORM W-9). U.S. Persons can obtain a
complete exemption from the withholding tax by filing Form W-9 (Payer's
Request for Taxpayer Identification Number and Certification).
U.S. FEDERAL INCOME TAX REPORTING PROCEDURE. The certificate owner of
a Global Security or, in the case of a Form 1001 or a Form 4224 filer, his
agent, files by submitting the appropriate form to the person through whom it
holds (the clearing agency, in the case of persons holding directly on the
books of the clearing agency). Form W-8 and Form 1001 are effective for three
calendar years and Form 4224 is effective for one calendar year.
The term "U.S. Person" means
(1) a citizen or resident of the United States,
(2) a corporation or partnership organized in or under the laws
of the United States or any political subdivision of the United
States,
(3) an estate the income of which is includible in gross income
for United States tax purposes, regardless of its source, or
(4) a trust if a court within the United States is able to
exercise primary supervision over the administration of the trust and
one or more United States trustees have authority to control all
substantial decisions of the trust. This summary does not deal with
all aspects of U.S. federal income tax withholding that may be
relevant to foreign holders of the Global Securities. Investors are
advised to consult their own tax advisors for specific tax advice
concerning their holding and disposing of the Global Securities.
<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 AUGUST 26, 1999
Prospectus
J.P. Morgan Acceptance Corporation I
Asset Backed Securities
(Issuable in Series)
----------------
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 5 OF THIS PROSPECTUS.
The securities represent obligations of the trust only and do not represent an
interest in or obligation of J.P. Morgan Acceptance Corporation I, the master
servicer or any of their affiliates.
This prospectus may be used to offer and sell the securities only if
accompanied by a prospectus supplement.
J.P. Morgan Acceptance Corporation I may periodically establish trusts which
will issue securities. The securities may be in the form of asset-backed
certificates or asset-backed notes. Each issue of securities will have its own
series designation.
Each trust will consist of one or more of the following:
o mortgage loans secured by senior or junior liens on one- to four-family
residential properties;
o closed-end and/or revolving home equity loans secured by senior or junior
liens on one- to four-family residential properties;
o home improvement installment sales contracts and installment loan
agreements unsecured or secured by senior or junior liens on one- to
four-family residential properties or by purchase money security
interests in the home improvements financed thereby;
o manufactured housing installment sales contracts and installment loan
agreements secured by senior or junior liens on manufactured homes or by
mortgages on real estate on which the manufactured homes are located;
o mortgaged backed securities issued or guaranteed by 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 they are issued.
In addition, even after the securities of a series have been issued and sold,
there can be no assurance that a resale market will develop.
The securities may be offered to the public through different methods as
described in "Method of Distribution" in this prospectus.
Neither the 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. 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..................................................................6
Limited Resale Market for Securities Could Adversely Affect
Your Ability to Liquidate Your Investment...............................6
Protection Against Losses is Limited Since Securities Will
Receive Payments Only From Certain Specified Sources....................6
Nature of Mortgages Securing the Loans May Delay Receipt of,
or Result in Shortfalls in Proceeds Payable on a Loan...................7
You Could Be Adversely Affected By Violations of Environmental
Laws....................................................................8
Value of Trust Assets May Be Less Than Outstanding Principal
Balance of the Related Securities.......................................8
THE TRUST FUND................................................................9
General..................................................................9
The Loans...............................................................11
Modification of Loans...................................................16
Agency Securities.......................................................17
Private Mortgage-Backed Securities......................................23
Representations by Sellers or Originators; Repurchases..................26
Substitution of Trust Fund Assets.......................................28
USE OF PROCEEDS..............................................................28
THE DEPOSITOR................................................................29
DESCRIPTION OF THE SECURITIES................................................29
General.................................................................29
Distributions on Securities.............................................32
Advances................................................................33
Reports to Securityholders..............................................34
Categories of Classes of Securities.....................................36
Indices Applicable to Floating Rate and Inverse Floating Rate
Classes................................................................39
LIBOR...................................................................40
COFI....................................................................41
Treasury Index..........................................................42
Prime Rate..............................................................43
Book-Entry Registration of Securities...................................43
CREDIT ENHANCEMENT...........................................................47
General.................................................................47
Subordination...........................................................48
Letter of Credit........................................................49
Insurance Policies, Surety Bonds and Guaranties.........................50
Over-Collateralization..................................................50
Spread Account..........................................................50
Reserve Accounts........................................................50
Pool Insurance Policies.................................................53
Cross-Collateralization.................................................54
Other Insurance, Surety Bonds, Guaranties, and Letters of
Credit.................................................................55
Derivative Products.....................................................55
YIELD AND PREPAYMENT CONSIDERATIONS..........................................55
THE AGREEMENTS...............................................................58
Assignment of the Trust Fund Assets.....................................58
No Recourse to Sellers, Originators, Depositor or
Master Servicer........................................................61
Payments on Loans; Deposits to Security Account.........................61
Pre-Funding Account.....................................................64
Sub-Servicing by Sellers................................................65
Hazard Insurance........................................................66
Realization Upon Defaulted Loans........................................68
Servicing and Other Compensation and Payment of Expenses................70
Evidence as to Compliance...............................................70
Matters Regarding the Master Servicer and the Depositor.................71
Events of Default; Rights Upon Event of Default.........................72
Amendment...............................................................75
Termination; Optional Termination.......................................76
The Trustee.............................................................77
MATERIAL LEGAL ASPECTS OF THE LOANS..........................................77
General.................................................................77
Foreclosure/Repossession................................................78
Environmental Risks.....................................................81
Rights of Redemption....................................................82
Anti-deficiency Legislation and Other Limitations on Lenders............83
Due-on-Sale Clauses.....................................................84
Enforceability of Prepayment and Late Payment Fees......................85
Applicability of Usury Laws.............................................85
The Contracts...........................................................85
Installment Contracts...................................................88
Soldiers'and Sailors'Civil Relief Act...................................89
Junior Mortgages; Rights of Senior Mortgagees...........................89
The Title I Program.....................................................91
Consumer Protection Laws................................................95
FEDERAL INCOME TAX CONSEQUENCES..............................................95
General.................................................................95
Taxation of Debt Securities.............................................96
Taxation of the REMIC and Its Holders..................................103
REMIC Expenses; Single Class REMICS....................................104
Taxation of the REMIC..................................................104
Taxation of Holders of Residual Interest Securities....................106
Administrative Matters.................................................109
Tax Status as a Grantor Trust..........................................109
Sale or Exchange.......................................................112
Miscellaneous Tax Aspects..............................................113
Tax Treatment of Foreign Investors.....................................113
Tax Characterization of the Trust Fund as a Partnership................114
Tax Consequences to Holders of the Notes...............................115
Tax Consequences to Holders of the Certificates........................117
Taxation of Trust as FASIT.............................................122
Treatment of FASIT Regular Securities..................................125
Treatment of High-Yield Interests......................................126
Tax Treatment of FASIT Ownership Securities............................126
STATE TAX CONSIDERATIONS....................................................127
ERISA CONSIDERATIONS........................................................127
General................................................................127
Prohibited Transactions................................................128
General................................................................128
Plan Asset Regulation..................................................128
Exemption 83-1.........................................................129
The Underwriter's Exemption............................................130
Insurance Company Purchasers...........................................134
Consultation with Counsel..............................................135
LEGAL INVESTMENT............................................................135
METHOD OF DISTRIBUTION......................................................136
LEGAL MATTERS...............................................................137
FINANCIAL INFORMATION.......................................................137
RATING......................................................................138
INDEX OF DEFINED TERMS......................................................140
<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 Certain 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
certain 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 such as 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
such as 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 are
subject to many of the delays and expenses that characterize lawsuits if
defenses or counterclaims are made. As a result, foreclosure actions can
sometimes take several years to complete and property proceeds may not cover
the defaulted loan amount. Some states prohibit a mortgage lender from
obtaining a judgment against the borrower for amounts not covered by property
proceeds if the property is sold outside of a judicial proceeding. 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 subject to any related senior mortgage. As a result, the
junior mortgage lender generally must either pay the related senior mortgage
lender in full at or before the foreclosure sale or agree to make the regular
payments on the senior mortgage. Since the trust will not have any source of
funds to satisfy any senior mortgage or to continue making payments thereon,
the trust's ability as a practical matter to foreclose on any junior mortgage
will be limited. 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 subject to federal laws relating to the
origination and underwriting of loans. These laws:
o require specified disclosures to the borrowers regarding the terms of the
loans;
o prohibit discrimination on the basis of age, race, color, sex, religion,
marital status, national origin, receipt of public assistance or the
exercise of any right under the consumer credit protection act in the
extension of credit;
o regulate the use and reporting of information related to the borrower's
credit experience;
o require additional application disclosures, limit changes that may be
made to the loan documents without the borrower's consent and restrict a
lender's ability to declare a default or to suspend or reduce a
borrower's credit limit to enumerated events;
o permit a homeowner to withhold payment if defective craftsmanship or
incomplete work do not meet the quality and durability standards agreed
to by the homeowner and the contractor; and
o limit the ability of the master servicer to collect full amounts of
interest on some loans and interfere with the ability of the master
servicer to foreclose on some properties.
If particular provisions of these federal laws are violated, the
master servicer may be unable to collect all or part of the principal or
interest on the loans. The trust also could be subject to damages and
administrative enforcement. 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 home
improvements financed thereby, 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 thereunder net, if and as provided in the related
prospectus supplement, of required amounts payable to the servicer of the
loans, agency securities or private mortgaged-backed securities, together
with payments in respect of, and other accounts, obligations or agreements,
in each case, as specified in the related prospectus supplement.
The pool will be created on the first day of the month of the issuance of the
related series of securities or any other date specified in the related
prospectus supplement, 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 below under "The Loans --
Underwriting Standards." The depositor will cause the trust fund assets to be
assigned without recourse to the trustee named in the related prospectus
supplement for the benefit of the holders of the securities of the related
series. The master servicer named in the related prospectus supplement will
service the trust fund assets, either directly or through other servicing
institutions 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 herein, 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 and
the proceeds thereof, issuing securities and making payments and distributions
thereon and related activities. No trust fund is expected to have any source
of capital other than its assets and any related credit enhancement.
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 herein under "The Trust Fund -- Representations by Sellers or
Originators; Repurchases" and "The Agreements -- Sub-Servicing By Sellers" and
"-- Assignment of the Trust Fund Assets", and its obligation, if any, to make
cash advances in the event of delinquencies in payments on or with respect to
the loans in the amounts described herein under "Description of the Securities
- -- Advances." The obligations of the master servicer to make advances may be
subject to limitations, as described herein and in the related prospectus
supplement.
The following is a brief description of the assets expected to be
included in the trust funds. If specific information respecting the trust fund
assets is not known at the time the related series of securities initially is
offered, more general information of the nature described below will be
provided in the related prospectus supplement, and specific information will
be set forth in a report on Form 8-K to be filed with the 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 that difference exceed plus or minus five percentage points for
any statistic that is expressed as a percentage of the cut-off date pool
principal balance.
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 such as 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 below or in the related prospectus supplement:
(a) Interest may be payable at a fixed rate, a rate adjustable from
time to time in relation to an index 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 subject to a prepayment fee,
which may be fixed for the life of the loan or may decline over time, and
may be prohibited for the life of the loan or for particular lockout
periods. Some loans may permit prepayments after expiration of the
applicable lockout period and may require the payment of a prepayment fee
in connection with any subsequent prepayment. Other loans may permit
prepayments without payment of a fee unless the prepayment occurs during
specified time periods. The loans may include "due on sale" clauses which
permit the mortgagee to demand payment of the entire loan in connection
with the sale or certain transfers of the related property. Other loans
may be assumable by persons meeting the then applicable underwriting
standards of the related seller.
A trust fund may contain 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 home improvements and manufactured homes financed thereby. The mortgaged
properties, the home improvements and the manufactured homes are collectively
referred to herein as the properties. The properties relating to loans will
consist primarily of detached or semi-detached one- to four-family dwelling
units, townhouses, rowhouses, individual condominium units, individual units
in planned unit developments, and other dwelling units--single-family
properties--or mixed-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 home
improvements financed thereby. 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 described below 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 such 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 rates or APR's or range of loan rates or APR's
borne by the loans,
(8) the maximum and minimum per annum loan 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 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 may agree,
subject to the terms and conditions set forth in the agreements for the
related series of securities, to modify, waive or amend any term of a loan in
a manner that is consistent with the servicing standard set forth in the
related agreement and 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 thereon, 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, thereby replenishing their funds for
additional lending. Fannie Mae acquires funds to purchase mortgage loans from
many capital market investors that may not ordinarily invest in mortgages,
thereby expanding the total amount of funds available for housing. Operating
nationwide, 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 if a Fannie Mae MBS or the series pass-through rate if a
Fannie Mae stripped mortgage-backed securities; and 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 Fannie Mae Certificate pass-through rate if a Fannie
Mae guaranteed mortgage-backed certificate, or the series pass-through rate if
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
thereon will be made by wire, and with respect to fully registered Fannie Mae
Certificates, distributions thereon 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 Freddie Mac Act. 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 thereof, 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 the
seller thereof. 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. Thereafter, the
remittance will be distributed monthly to the registered holder so as to be
received normally by the 15th day of each month. The Federal Reserve Bank of
New York maintains book-entry accounts with respect to 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
thereof 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 herein and
in the related prospectus supplement. Each Agency security which consists of
one or more stripped mortgage-backed securities will represent an undivided
interest in all or part of either the principal distributions 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) CMOs 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. The seller/servicer of the
loans underlying the PMBS will have entered into the PMBS agreement with a
trustee. 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 who may be subject to 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, as amended 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 private mortgage-backed securities
issued under the PMBS agreement. Additionally, although the mortgage loans
underlying the private mortgage-backed securities may be guaranteed by an
agency or instrumentality of the United States, the private mortgage-backed
securities themselves will not be so guaranteed.
Distributions of principal and interest will be made on the private
mortgage-backed securities on the dates specified in the related prospectus
supplement. The private mortgage-backed securities may be entitled to receive
nominal or no principal distributions or nominal or no interest distributions.
Principal and interest distributions will be made on the private
mortgage-backed securities by the PMBS trustee or the PMBS servicer. The PMBS
issuer or the PMBS servicer may have the 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 PMBS agreement, reserve funds, insurance policies, letters of
credit, financial guaranty insurance policies, guarantees or other types of
credit support may be provided with respect to the mortgage loans underlying
the private mortgage-backed securities or with respect to the private
mortgage-backed securities themselves.
Additional Information. The prospectus supplement for a series for
which the related trust fund includes private mortgage-backed securities will
specify:
(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 below will not arise if the relevant event that would
otherwise have given rise to a repurchase obligation with respect to a loan
occurs after the date of sale of the loan by the applicable originator 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 the unpaid
principal balance thereof as of the date of the repurchase plus accrued
interest thereon to the first day of the month following the month of
repurchase at the loan rate, less any advances or amount payable as related
servicing compensation if the seller or originator is the master servicer, or
(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 thereunder
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, as from time to time are subject to
the related indenture or pooling and servicing agreement, 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 as from time to time are required to be
deposited in the related security account, as described below under
"The Agreements -- Payments on Loans; Deposits to Security Account";
(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 thereof. Distributions on one or more classes of a
series of securities may be made prior to one or more other classes, after the
occurrence of specified events, in accordance with a schedule or formula or on
the basis of collections from designated portions of the related trust fund
assets, in each case as specified in the related prospectus supplement. The
timing and amounts of distributions may vary among classes or over time as
specified in the related prospectus supplement.
Distributions of principal and interest or of principal only or
interest only, as applicable, on the related securities will be made by the
trustee on each distribution date, 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 thereto 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 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 Code. All other classes of
securities in that series will constitute "regular interests" in the related
REMIC, as defined in the Code. As to each series with respect to which a REMIC
election is to be made, the trustee, the master servicer or a holder of the
related residual certificate will be obligated to take all actions required in
order to comply with applicable laws and regulations and will be obligated to
pay any prohibited transaction taxes. The trustee or the master servicer 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
therein 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 therefor, interest accrued during the specified
period on each class of securities entitled to interest, other than a class of
securities that provides for interest that accrues, but is not currently
payable 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, subject to the effect of negative amortization, if applicable.
If so provided in the related prospectus supplement, one or more
classes of securities will be entitled to receive all or a disproportionate
percentage of the payments of principal which are received from borrowers,
including 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 below
and in that prospectus supplement. If applicable, the trustee will be required
to make unscheduled distributions on the day and in the amount specified in
the related prospectus supplement if, due to substantial payments of
principal, including principal prepayments, on the trust fund assets, the
trustee or the master servicer determines that the funds available or
anticipated to be available from the security account and, if applicable, any
reserve account, may be insufficient to make required distributions on the
securities on the related distribution date. 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 therein;
(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 defines the more typical categories.
The prospectus supplement for a series of securities may identify the classes
which comprise that series by reference to the following categories.
Categories of Classes Definition
- -------------------- ----------
Principal Types
- ---------------
Accretion Directed.................. A class that receives principal
payments from the accreted interest
from specified Accrual classes. An
Accretion Directed class also may
receive principal payments from
principal paid on the underlying trust
fund assets for the related series.
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.
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 thereon. 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 thereon. 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, the Eleventh District Cost of Funds Index, the Treasury
Index, the Prime Rate, in each case calculated as described below or any other
index described in the related prospectus supplement.
LIBOR
On the date specified in the related prospectus supplement the person
designated in the related agreement will determine LIBOR by reference to the
quotations, as set forth on the Reuters Screen LIBO Page as defined in the
International Swap Dealers Association, Inc. Code of Standard Wording,
Assumptions and Provisions for Swaps, 1986 Edition or on the Telerate Screen
Page 3750 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 leading banks in the London Interbank market,
as of 11:00 a.m., London time, on that determination date. 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 will 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 as such or
if appointment of any reference bank is terminated, another leading bank
meeting the criteria specified above will be appointed.
The establishment of LIBOR on each LIBOR determination date by the
calculation agent and its calculation of the rate of interest for the
applicable classes for the related interest accrual period shall, in the
absence of manifest error, be final and binding.
COFI
The Eleventh District Cost of Funds Index is designed to represent
the monthly weighted average cost of funds for savings institutions in
Arizona, California and Nevada that are member institutions of the Eleventh
Federal Home Loan Bank District. The Eleventh District 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 re:
(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. So long as the
index for a month is announced on or before the tenth day of the second
following month, the interest rate for each class of securities of a series as
to which the applicable interest rate is determined by reference to an index
denominated as COFI for the interest accrual period commencing in the second
following month will be based on the Eleventh District Cost of Funds Index for
the second preceding month. If publication is delayed beyond the tenth day,
the interest rate will be based on the Eleventh District Cost of Funds Index
for the third preceding month.
If on the tenth day or any other day specified in the related
prospectus supplement of the month in which any interest accrual period
commences for a class of COFI securities the most recently published Eleventh
District Cost of Funds Index relates to a month prior to the third preceding
month, the index for the current interest accrual period and for each
succeeding interest accrual period will, except as described in the next to
last sentence of this paragraph, be based on the National Cost of Funds Index
published by the OTS for the third preceding month, or the fourth preceding
month if the National Cost of Funds Index for the third preceding month has
not been published on the tenth day of an interest accrual period. Information
on the National Cost of Funds Index may be obtained by writing the OTS at 1700
G Street, N.W., Washington, D.C. 20552 or calling (202) 906-6677, and the
current National Cost of Funds Index may be obtained by calling (202)
906-6988. If on any tenth day of the month in which an interest accrual period
commences the most recently published National Cost of Funds Index relates to
a month prior to the fourth preceding month, the applicable index for that
interest accrual period and each succeeding interest accrual period will be
based on LIBOR, as determined by the calculation agent in accordance with the
agreement relating to the series of securities. A change of index from the
Eleventh District Cost of Funds Index to an alternative index will result in a
change in the index level, and, particularly if LIBOR is the alternative
index, could increase its volatility.
The establishment of COFI by the calculation agent and its
calculation of the rates of interest for the applicable classes for the
related interest accrual period shall, in the absence of manifest error, be
final and binding.
Treasury Index
On the date specified in the related prospectus supplement for each
class of the securities of a series as to which the applicable interest rate
is determined by reference to an index denominated as a Treasury Index, the
calculation agent will ascertain the Treasury Index for Treasury securities of
the maturity and for the period, or, if applicable, date, specified in the
related prospectus supplement. 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 therein, 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 each
class of securities of a series as to which the applicable interest rate is
determined by reference to an index denominated as the Prime Rate, the
calculation agent will ascertain the Prime Rate for the related interest
accrual period. 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 below, 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
below, 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 below. Unless and until definitive
securities are issued, security owners who are not participants may transfer
ownership of Securities only through Participants and indirect participants by
instructing the Participants and indirect participants to transfer securities,
by book-entry transfer, through DTC for the account of the purchasers of those
securities, which account is maintained with their respective participants.
Under the 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--European time. The
relevant European international clearing system will, if the transaction meets
its settlement requirements, deliver instructions to the relevant depositary
to take action to effect final settlement on its behalf by delivering or
receiving securities in DTC, and making or receiving payment in accordance
with normal procedures for same day funds settlement applicable to DTC.
Cedelbank participants and Euroclear participants may not deliver instructions
directly to the European depositaries.
DTC is a limited-purpose trust company organized under the New York
Banking Law, a "banking organization" within the meaning of the New York
Banking Law, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York Uniform Commercial Code, and a "clearing
agency" registered pursuant to the provisions of Section 17A of the securities
Exchange Act of 1934. DTC is owned by a number of its direct participants and
by the New York Stock Exchange, Inc., the American Stock Exchange, Inc. and
the National Association of Securities Dealers, Inc.
Cedelbank is a duly licensed bank organized as a "societe anonyme",
limited company, under the laws of Luxembourg. Cedelbank holds securities for
its 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,
thereby eliminating the need for physical movement of certificates.
Transactions may be settled in Cedelbank in any of 37 currencies, including
United States dollars. Cedelbank provides to As Cedelbank participants, among
other things, services for safekeeping, administration, clearance and
settlement of internationally traded securities and securities lending and
borrowing. Cedelbank interfaces with domestic markets in several countries. As
a licensed bank, Cedelbank is subject to regulation by the Luxembourg Monetary
Institute. Cedelbank participants are recognized financial institutions around
the world, including underwriters, securities brokers and dealers, banks,
trust companies, clearing corporations and other organizations. Indirect
access to Cedelbank is also available to others, such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a Cedelbank participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for its participants
and to clear and settle transactions between Euroclear participants through
simultaneous electronic book-entry delivery against payment, thereby
eliminating the need for physical movement of certificates and any risk from
lack of simultaneous transfers of securities and cash. Transactions may be
settled in any of 32 currencies, including United States dollars. Euroclear
includes various other services, including securities lending and borrowing
and interfaces with domestic markets in several countries generally similar to
the arrangements for cross-market transfers with DTC described above.
Euroclear is operated by the Brussels, Belgium office of Morgan Guaranty Trust
Company of New York, 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 the Belgian branch of a New York banking corporation which
is a member bank of the Federal Reserve System. As a member bank of the
Federal Reserve System, it is regulated and examined by the Board of Governors
of the Federal Reserve System and the New York State Banking Department, as
well as the Belgian Banking Commission.
Securities clearance accounts and cash accounts with Morgan are
governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian
law. The Terms and Conditions govern transfers of securities and cash within
Euroclear, withdrawals of securities and cash from Euroclear, and receipts of
payments with respect to securities in Euroclear. All securities in Euroclear
are held on a fungible basis without attribution of specific certificates to
specific securities clearance accounts. The Euroclear operator acts under the
Terms and Conditions only on behalf of Euroclear participants, and has no
record of or relationship with persons holding through Euroclear participants.
Under a book-entry format, beneficial owners of the book-entry
securities may experience some delay in their receipt of payments, since
payments will be forwarded by the trustee to Cede & Co., as nominee of DTC.
Distributions with respect to securities held through Cedelbank or Euroclear
will be credited to the cash accounts of Cedelbank participants or Euroclear
participants in accordance with the relevant system's rules and procedures, to
the extent received by the relevant depositary. Distributions will be subject
to tax reporting in accordance with relevant United States tax laws and
regulations. See "Federal Income Tax Consequences -- Tax Treatment of Foreign
Investors" and "-- Tax Consequences to Holders of the Notes -- Backup
Withholding." Because DTC can only act on behalf of financial intermediaries,
the ability of a beneficial owner to pledge book-entry securities to persons
or entities that do not participate in the depository system, may be limited
due to the lack of physical certificates for book-entry securities.
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 relevant rules and procedures and subject to the ability
of the relevant depositary to effect those actions on its behalf through DTC.
DTC may take actions, at the direction of the related participants, with
respect to some securities which conflict with actions taken with respect to
other securities.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the trustee will be required to notify all beneficial
owners of the occurrence of that event and the availability through DTC of
definitive securities. Upon surrender by DTC of be global certificate or
certificates representing the book-entry securities and instructions for
re-registration, the trustee will issue definitive securities, and thereafter
the trustee will recognize the holders of the definitive securities as
securityholders under the applicable agreement.
Although DTC, Cedelbank and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of securities among participants
of DTC, Cedelbank and Euroclear, they are under no obligation to perform or
continue to perform those procedures and those procedures may be discontinued
at any time.
None of the master servicer, the depositor or the trustee will have
any responsibility for any aspect of the records relating to or payments made
on account of beneficial ownership interests of the book-entry securities held
by Cede & Co., as nominee of DTC, or for maintaining, supervising or reviewing
any records relating to the beneficial ownership interests.
Credit Enhancement
General
Credit enhancement may be provided with respect to one or more
classes of a series of securities or with respect to the related trust fund
assets. Credit enhancement may be in the form of a limited financial guaranty
policy issued by an entity named in the related prospectus supplement, the
subordination of one or more classes of the securities of that series, the
establishment of one or more reserve accounts, the use of a
cross-collateralization feature, use of a mortgage pool insurance policy, FHA
Insurance, VA Guarantee, bankruptcy bond, special hazard insurance policy,
surety bond, letter of credit, guaranteed investment contract,
overcollateralization, interest rate swap agreement, interest rate cap
agreement or another method of credit enhancement contemplated herein and
described in the related prospectus supplement, or any combination of the
foregoing. Credit enhancement will not provide protection against all risks of
loss and will not guarantee repayment of the entire principal balance of the
securities and interest thereon. If losses occur which exceed the amount
covered by credit enhancement or which are not covered by the credit
enhancement, securityholders will bear their allocable share of any
deficiencies.
Subordination
If so specified in the related prospectus supplement, protection
afforded to holders of one or more classes of securities of a series by means
of the subordination feature may be accomplished by the preferential right of
holders of one or more other classes of that series to distributions in
respect of scheduled principal, principal prepayments, interest or any
combination thereof that otherwise would have been payable to holders of one
or more classes of 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
thereafter by the various classes of senior securities, in each case under the
circumstances and subject to the limitations specified in that prospectus
supplement. The aggregate distributions in respect of delinquent payments on
the loans over the lives of the securities or at any time, the aggregate
losses in respect of defaulted loans which must be borne by the subordinated
securities by virtue of subordination and the amount of the distributions
otherwise distributable to the subordinated securityholders that will be
distributable to senior securityholders on any distribution date may be
limited as specified in the related prospectus supplement. If aggregate
distributions in respect of delinquent payment on the loans or aggregate
losses in respect of those loans were to exceed an amount specified in the
related prospectus supplement, holders of senior securities would experience
losses on the securities.
In addition to or in lieu of the foregoing, if so specified in the
related prospectus supplement, all or any portion of distributions otherwise
payable to holders of subordinated securities on any distribution date may
instead be deposited into one or more reserve accounts established with the
trustee or distributed to holders of senior securities. Deposits may be made
on each distribution date, for specified periods or until the balance in the
reserve account has reached a specified amount and, following payments from
the reserve account to holders of senior securities or otherwise, thereafter
to the extent necessary to restore the balance in the reserve account to
required levels, in each case as specified in the related prospectus
supplement. Amounts on deposit in the reserve account may be released to the
holders of classes of securities at the times and under the circumstances
specified in that prospectus supplement.
If specified in the related prospectus supplement, various classes of
senior securities and subordinated securities may themselves be subordinate in
their right to receive specified distributions to other classes of senior and
subordinated securities, respectively, through a cross-collateralization
mechanism or otherwise.
As between classes of senior securities and as between classes of
subordinated securities, distributions may be allocated among those classes:
(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 thereunder in an aggregate fixed
dollar amount, net of unreimbursed payments thereunder, equal to the
percentage specified in the related prospectus supplement of the aggregate
principal balance of the loans on the related cut-off date or of one or more
classes of securities. If so specified in the related prospectus supplement,
the letter of credit may permit drawings in the event of losses not covered by
insurance policies or other credit support, such as losses arising from damage
not covered by standard hazard insurance policies, losses resulting from the
bankruptcy of a borrower and the application of applicable provisions of the
federal Bankruptcy Code, or losses resulting from denial of insurance coverage
due to misrepresentations in connection with the origination of a loan. The
amount available under the letter of credit will, in all cases, be reduced to
the extent of the unreimbursed payments thereunder. The obligations of the
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 those securities or
classes thereof will be covered by insurance policies and/or surety bonds
provided by one or more insurance companies or sureties. Those instruments may
cover, with respect to one or more classes of securities of the related
series, timely distributions of interest and/or full distributions of
principal on the basis of a schedule of principal distributions set forth in
or determined in the manner specified in the related prospectus supplement. In
addition, if specified in the related prospectus supplement, a trust fund may
also include bankruptcy bonds, special hazard insurance policies, other
insurance or guaranties for the purpose of:
(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 therein of cash, United States Treasury
securities, instruments evidencing ownership of principal or
interest payments thereon, letters of credit, demand notes,
certificates of deposit or a combination thereof in the
aggregate amount specified in the related prospectus
supplement,
(2) by the deposit therein from time to time of amounts, as
specified in the related prospectus supplement to which the
subordinate securityholders, if any, would otherwise be
entitled or
(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 agency thereof,
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 thereof and subject to supervision
and examination by federal and/or state banking authorities,
provided that the commercial paper and/or long-term
unsecured debt obligations of that depository institution or
trust company, or in the case of the principal depository
institution in a holding company system, the commercial
paper or long-term unsecured debt obligations of the holding
company, but only if Moody's 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
the face amount thereof, bearing interest or sold at a
discount and issued by any corporation incorporated under
the laws of the United States or any state thereof which, at
the time of the investment, have one of the two highest
ratings of each rating agency, except that if the Rating
Agency is Moody's, the rating shall be the highest
commercial paper rating of Moody's for any securities, or a
lower rating as will not result in the downgrading or
withdrawal of the rating then assigned to the securities by
any rating agency rating those securities;
(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 thereof which on the date
of acquisition has been rated by each rating agency rating
those securities in their respective highest applicable
rating category or any lower rating as will not result in
the downgrading or withdrawal of the ratings then assigned
to those securities by each rating agency rating those
securities;
provided, that no instrument shall be a permitted investment if that
instrument evidences the right to receive interest only payments with respect
to the obligations underlying that instrument. If a letter of credit is
deposited with the trustee, the letter of credit will be irrevocable. 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, subject to the limitations described
below, cover loss by reason of default in payment on loans in the pool in an
amount equal to a percentage specified in the related prospectus supplement of
the aggregate principal balance of the loans on the cut-off date which are not
covered as to their entire outstanding principal balances by primary mortgage
insurance policies. As more fully described below, the master servicer will
present claims thereunder to the pool insurer on behalf of itself, the trustee
and the holders of the securities of the related series. The pool insurance
policies, however, are not blanket policies against loss, since claims
thereunder may only be made respecting particular defaulted loans and only
upon satisfaction of the conditions precedent described below. 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 thereunder 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 the principal balance thereof plus accrued and unpaid interest at the
loan rate to the date of the purchase and a portion of expenses incurred by
the master servicer on behalf of the trustee and securityholders, or (b) to
pay the amount by which the sum of the principal balance of the defaulted loan
plus accrued and unpaid interest at the loan rate to the date of payment of
the claim and the aforementioned expenses exceeds the proceeds received from
an approved sale of the property, in either case net of a portion of amounts
paid or assumed to have been paid under the related primary mortgage insurance
policy.
If any property securing a defaulted loan is damaged and proceeds, if
any, from the related hazard insurance policy or the applicable special hazard
insurance policy are insufficient to restore the damaged property to a
condition sufficient to permit recovery under the pool insurance policy, the
master servicer will not be required to expend its own funds to restore the
damaged property unless it determines that (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 thereof, 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, at the time of default or thereafter, 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 the coverage
provided thereby and of the application of the coverage to the identified
trust funds.
Other Insurance, Surety Bonds, Guaranties, and Letters of Credit
If specified in the related prospectus supplement, a trust fund may
also include bankruptcy bonds, special hazard insurance policies, other
insurance, guaranties, or similar arrangements for the purpose of:
(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 be subject to
prepayment penalties. The prepayment experience on the loans in a pool will
affect the weighted average life of the related series of securities.
The rate of prepayment on the loans cannot be predicted. Home equity
loans and home improvement contracts have been originated in significant
volume only during the past few years and the depositor is not aware of any
publicly available studies or statistics on the rate of prepayment of those
loans. Generally, home equity loans and home improvement contracts are not
viewed by borrowers as permanent financing. Accordingly, the loans may
experience a higher rate of prepayment than traditional first mortgage loans.
On the other hand, because home equity loans such as the revolving credit line
loans generally are not fully amortizing, the absence of voluntary borrower
prepayments could cause rates of principal payments lower than, or similar to,
those of traditional fully-amortizing first mortgage loans. The prepayment
experience of the related trust fund may be affected by a wide variety of
factors, including general economic conditions, prevailing interest rate
levels, the availability of alternative financing, homeowner mobility and the
frequency and amount of any future draws on any revolving credit line loans.
Other factors that might be expected to affect the prepayment rate of a pool
of home equity mortgage loans or home improvement contracts include the
amounts of, and interest rates on, the underlying senior mortgage loans, and
the use of first mortgage loans as long-term financing for home purchase and
subordinate mortgage loans as shorter-term financing for a variety of
purposes, including home improvement, education expenses and purchases of
consumer durables such as automobiles. Accordingly, the loans may experience a
higher rate of prepayment than traditional fixed-rate mortgage loans. In
addition, any future limitations on the 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 thereon. It is possible that borrowers may
fail to make the required periodic payments. In addition, collections on the
loans may vary due to seasonal purchasing and the payment habits of borrowers.
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. Loans
insured by the FHA, and Single Family Loans partially guaranteed by the VA,
are assumable with the consent of the FHA and the VA, respectively. Thus, the
rate of prepayments on the loans may be lower than that of conventional loans
bearing comparable interest rates. 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 be subject to higher prepayment rates than if prevailing
interest rates remain at or above those loan rates. Conversely, if prevailing
interest rates rise appreciably above the loan rates borne by the loans, those
loans are more likely to experience a lower prepayment rate than if prevailing
rates remain at or below those loan rates. However, there can be no assurance
that the preceding sentence will be the case.
When a full prepayment is made on a loan, the borrower is charged
interest on the principal amount of the loan 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 is
subject to many of the delays and expenses of other lawsuits 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 thereby effecting earlier retirement of the related series of securities.
See "The Agreements -Termination; Optional Termination."
The relative contribution of the various factors affecting prepayment
may also vary from time to time. There can be no assurance as to the rate of
payment of principal of the trust fund assets at any time or over the lives of
the securities.
The prospectus supplement relating to a series of securities will
discuss in greater detail the effect of the rate and timing of principal
payments, including prepayments, delinquencies and losses on the yield,
weighted average lives and maturities of those securities.
The Agreements
Set forth below is a description of the material provisions of 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 rate or APR, the maturity of the loan, the loan-to-value ratios or
combined loan-to-value ratios, as applicable, at origination and other
information.
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 thereon, 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
after receipt thereof, 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 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 such that, as evidenced by
an opinion of counsel, the securityholders have a claim with respect
to the funds in the security account or a perfected first priority
security interest against any collateral securing those funds that
is superior to the claims of any other depositors or general
creditors of the depository institution with which the security
account is maintained, or
(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 therein 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 in respect thereof
purchased by the master servicer, the depositor or any seller or
originators as described under "The Trust Funds -- Representations
by Sellers or Originators; Repurchases" or under "-- Assignment of
Trust Fund Assets" above and all proceeds of any Loan repurchased as
described under "-- Termination; Optional Termination" below;
(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 thereto;
(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 thereto) 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 acquired in respect thereof that has been purchased by the
master servicer pursuant to the Agreement, all amounts received
thereon and not taken into account in determining the principal
balance of the repurchased Loan;
(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 therein; 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
such that the proceeds of the policy shall be sufficient to prevent the
mortgagor and/or the mortgagee from becoming a co-insurer. All amounts
collected by the master servicer under any hazard policy, except for amounts
to be applied to the restoration or repair of the property or released to the
mortgagor or obligor in accordance with the master servicer's normal servicing
procedures will be deposited in the related security account. In the event
that the master servicer maintains a blanket policy insuring against hazard
losses on all the loans comprising part of a trust fund, it will conclusively
be deemed to have satisfied its obligation relating to the maintenance of
hazard insurance. A blanket policy may contain a deductible clause, in which
case the master servicer will be required to deposit from its own funds into
the related security account the amounts which would have been deposited
therein but for that clause.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements securing a loan
by fire, lightning, explosion, smoke, windstorm and hail, riot, strike and
civil commotion, subject to the conditions and exclusions particularized in
each policy. Although the policies relating to the loans may have been
underwritten by different insurers under different state laws in accordance
with different applicable forms and therefore may not contain identical terms
and conditions, the basic terms thereof are dictated by respective state laws,
and most policies typically do not cover any physical damage resulting from
the following: war, revolution, governmental actions, floods and other
water-related causes, earth movement including earthquakes, landslides and mud
flows, nuclear reactions, wet or dry rot, vermin, rodents, insects or domestic
animals, theft and, in some cases, vandalism. The foregoing list is merely
indicative of a subset of the kinds of uninsured risks and is not intended to
be all inclusive. If the property securing a loan is located in a federally
designated special flood area at the time of origination, the master servicer
will require the mortgagor or obligor to obtain and maintain flood insurance.
The hazard insurance policies covering properties securing the Loans
typically contain a clause which in effect requires the insured at all time to
carry insurance of a specified percentage of a specified percentage, generally
80% to 90%, of the full replacement value of the insured property in order to
recover the full amount of any partial loss. If the insured's coverage falls
below this specified percentage, then the insurer's liability in the event of
partial loss will not exceed the larger of (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 thereon decrease, and since improved real estate generally has
appreciated in value over time in the past, the effect of this requirement in
the event of partial loss may be that hazard insurance proceeds will be
insufficient to restore fully the damaged property. If specified in the
related prospectus supplement, a special hazard insurance policy will be
obtained to insure against a portion of the uninsured risks described above.
See "Credit Enhancement."
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 thereon
that is payable to securityholders, the trust fund will realize a loss in the
amount of that difference plus the aggregate of expenses incurred by the
master servicer in connection with the proceedings and which are reimbursable
under the agreement. In the unlikely event that any of those proceedings
result in a total recovery which is, after reimbursement to the master
servicer of its expenses, in excess of the principal balance of that loan plus
interest accrued thereon that is payable to securityholders, the master
servicer will be entitled to withdraw or retain from the security account
amounts representing its normal servicing compensation with respect to that
loan and 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 thereon that is payable to securityholders,
the master servicer will be entitled to withdraw or retain from the security
account amounts representing its normal servicing compensation with respect to
that loan. In the event that the master servicer has expended its own funds to
restore the damaged property and those funds have not been reimbursed under
the related hazard insurance policy, it will be entitled to withdraw from the
security account out of related liquidation proceeds or insurance proceeds an
amount equal to the expenses incurred by it, in which event the trust fund may
realize a loss up to the amount so charged. Since insurance proceeds cannot
exceed deficiency claims and a portion of expenses incurred by the master
servicer, no payment or recovery will result in a recovery to the trust fund
which exceeds the principal balance of the defaulted loan together with
accrued interest thereon. See "Credit Enhancement."
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 herein, in the case of a trust fund for which a REMIC election
has been made, the master servicer shall liquidate any property acquired
through foreclosure within 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
thereon and approved expenses over a specified percentage of the value of the
related mortgaged property. The master servicer will not cancel or refuse to
renew any primary mortgage insurance policy in effect at the time of the
initial issuance of a series of securities that is required to be kept in
force under the applicable agreement unless the replacement primary mortgage
insurance policy for the cancelled or nonrenewed policy is maintained with an
insurer whose claims-paying ability is sufficient to maintain the current
rating of the classes of securities of that series that have been rated.
FHA Insurance; VA Guaranties. Loans designated in the related
prospectus supplement as insured by the FHA will be insured by the FHA as
authorized under the United States Housing Act of 1937, as amended. In
addition to the Title I Program of the FHA, see "Material Legal Aspects of the
loans -- The Title I Program," some loans will be insured under various FHA
programs including the standard FHA 203(b) program to finance the acquisition
of one- to four-family housing units and the FHA 245 graduated payment
mortgage program. These programs generally limit the principal amount and
interest rates of the mortgage loans insured. Loans insured by FHA generally
require a minimum down payment of approximately 5% of the original principal
amount of the loan. No FHA-insured loans relating to a series may have an
interest rate or original principal amount exceeding the applicable FHA limits
at the time of origination of the related loan.
Loans designated in the related prospectus supplement as guaranteed
by the VA will be partially guaranteed by the VA under the Serviceman's
Readjustment Act of 1944, as amended. 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
FHLMC or other program as specified in the related prospectus supplement, the
servicing by or on behalf of the master servicer of mortgage loans or private
asset backed securities, or under pooling and servicing agreements
substantially similar to each other, including the related agreement, was
conducted in compliance with those agreements except for any significant
exceptions or errors in records that, in the opinion of the firm, the Audit
Program for Mortgages serviced for FHLMC, or the Uniform Single Attestation
Program for Mortgage Bankers, it is required to report. In rendering its
statement the firm may rely, as to matters relating to the direct servicing of
loans by sub-servicers, upon comparable statements for examinations conducted
substantially in compliance with the Uniform Single Attestation Program for
Mortgage Bankers or the Audit Program for Mortgages serviced for FHLMC
rendered within one year of that statement of firms of independent public
accountants with respect to the related sub-servicer.
Each agreement will also provide for delivery to the trustee, on or
before a specified date in each year, of an annual statement signed by two
officers of the master servicer to the effect that the master servicer has
fulfilled its obligations under the agreement throughout the preceding year.
Copies of the annual accountants' statement and the statement of
officers of the master servicer may be obtained by securityholders of the
related series without charge upon written request to the master servicer at
the address set forth in the related prospectus supplement.
Matters Regarding the Master Servicer and the Depositor
The master servicer under each pooling and servicing agreement or
master servicing agreement, as applicable, will be named in the related
prospectus supplement. Each servicing agreement will provide that the master
servicer may not resign from its obligations and duties under that agreement
except upon a determination that its duties thereunder are no longer
permissible under applicable law. The master servicer may, however, be removed
from its obligations and duties as set forth in the agreement. No resignation
will become effective until the trustee or a successor servicer has assumed
the master servicer's obligations and duties under the agreement.
Each 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 gross negligence in the
performance of duties thereunder or by reason of reckless disregard of
obligations and duties thereunder. 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
gross negligence in the performance of duties thereunder or by reason of
reckless disregard of obligations and duties thereunder. In addition, each
agreement will provide that neither the master servicer nor the depositor will
be under any obligation to appear in, prosecute or defend any legal action
which is not incidental to its respective responsibilities under the agreement
and which in its opinion may involve it in any expense or liability. The
master servicer or the depositor may, however, in its discretion undertake any
action which it may deem necessary or desirable with respect to the agreement
and the rights and duties of the parties thereto and the interests of the
securityholders thereunder. In that event, the legal expenses and costs of the
action and any liability resulting therefrom will be expenses, costs and
liabilities of the trust fund and the master servicer or the depositor, as the
case may be, will be entitled to be reimbursed therefor out of funds otherwise
distributable to securityholders.
Except as otherwise specified in the related prospectus supplement,
any person into which the master servicer may be merged or consolidated, or
any person resulting from any merger or consolidation to which the master
servicer is a party, or any person succeeding to the business of the master
servicer, will be the successor of the master servicer under each agreement
and further provided that the merger, consolidation or succession does not
adversely affect the then current rating or ratings of the class or classes of
securities of that series that have been rated.
Events of Default; Rights Upon Event of Default
Pooling and Servicing Agreement; Master Servicing Agreement. Events
of default under each 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
therein;
(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; and
(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" herein in the event that
payments in respect thereto are insufficient to make payments required in the
agreement. The assets of the trust fund will be sold only under the
circumstances and in the manner specified in the related prospectus
supplement.
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
thereunder and have offered to the trustee reasonable indemnity, and the
trustee for 60 days has neglected or refused to institute any proceeding.
Indenture. Except as otherwise specified in the related prospectus
supplement, events of default under the indenture for each series of notes
include:
(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 thereof
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 percentage interests of the notes of that series.
If, following an event of default with respect to any series of
notes, the notes of that series have been declared to be due and payable, the
trustee may, in its discretion, notwithstanding the acceleration, elect to
maintain possession of the collateral securing the notes of that series and to
continue to apply distributions on the collateral as if there had been no
declaration of acceleration if the collateral continues to provide sufficient
funds for the payment of principal of and interest on the notes of that series
as they would have become due if there had not been a declaration. In
addition, the trustee may not sell or otherwise liquidate the collateral
securing the notes of a series following an event of default, other than a
default in the payment of any principal or interest on any note of that series
for five days or more, unless:
(a) the holders of 100% of the 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 the unpaid principal amount thereof less the amount of
the discount which is unamortized.
Subject to the provisions of the indenture relating to the duties of
the trustee, in case an event of default shall occur and be continuing with
respect to a series of notes, the trustee shall be under no obligation to
exercise any of the rights or powers under the Indenture at the request or
direction of any of the holders of notes of that series, unless those holders
offered to the trustee security or indemnity satisfactory to it against the
costs, expenses and liabilities which might be incurred by it in complying
with that request or direction. Subject to those provisions for
indemnification and limitations contained in the indenture, the holders of a
majority of the then aggregate outstanding amount of the notes of that series
shall have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the trustee or exercising any trust or
power conferred on the trustee with respect to the notes of that series, and
the holders of a majority of the then aggregate outstanding amount of the
notes of that series may, in some cases, waive any default with respect
thereto, except a default in the payment of principal or interest or a default
in respect of a covenant or provision of the indenture that cannot be modified
without the waiver or consent of all the holders of the outstanding notes of
that series affected thereby.
Amendment
Except as otherwise specified in the related prospectus supplement,
each agreement may be amended by the depositor, the master servicer and the
trustee, without the consent of any of the securityholders, and any other
party specified in the related prospectus supplement:
(1) to cure any ambiguity;
(2) to correct or supplement any provision therein which may be
defective or inconsistent with any other provision therein; or
(3) to make any other revisions with respect to matters or
questions arising under the Agreement which are not
inconsistent with the provisions thereof, provided that the
amendment will not adversely affect in any material respect the
interests of any securityholder.
An amendment will be deemed not to adversely affect in any material respect
the interests of the securityholders if the person requesting that amendment
obtains a letter from each rating agency requested to rate the class or
classes of securities of that series stating that the amendment will not
result in the downgrading or withdrawal of the respective ratings then
assigned to the related securities. In addition, to the extent provided in the
related agreement, an agreement may be amended without the consent of any of
the securityholders, to change the manner in which the security account is
maintained, provided that any change does not adversely affect the then
current rating on the class or classes of securities of that series that have
been rated. In addition, if a REMIC election is made with respect to a trust
fund, the related agreement may be amended to modify, eliminate or add to any
of its provisions to the extent necessary to maintain the qualification of the
related trust fund as a REMIC, provided that the trustee has received an
opinion of counsel to the effect that the action is necessary or helpful to
maintain that qualification.
Except as otherwise specified in the related prospectus supplement,
each agreement may also be amended by the depositor, the master servicer and
the trustee with consent of holders of securities of the related series
evidencing not less than 66% of the aggregate voting interests of each class
affected thereby for the purpose of adding any provisions to or changing in
any manner or eliminating any of the provisions of the agreement or of
modifying in any manner the rights of the holders of the related securities;
provided, however, that no amendment of this type may (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 subject thereto 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 --see "Federal Income Tax Consequences", from the
related trust fund of all of the remaining trust fund assets and all property
acquired in respect of those trust fund assets.
Any purchase of trust fund assets and property acquired in respect of
trust fund assets evidenced by a series of securities will be made at the
option of the master servicer, any other person or, if applicable, the holder
of the REMIC residual interest, at a price specified in the related prospectus
supplement. The exercise of that option will effect early retirement of the
securities of that series, but the right of the master servicer, any other
person or, if applicable, the holder of the REMIC residual interest, to so
purchase is subject to the principal balance of the related trust fund assets
being less than the percentage specified in the related prospectus supplement
of the aggregate principal balance of the trust fund assets at the Cut-off
Date for the Series. Upon that requirement being satisfied, the parties
specified in the related prospectus supplement may purchase all trust fund
assets and thereby effect retirement of the related series of securities. In
that event, the applicable purchase price will be sufficient to pay the
aggregate outstanding principal balance of that series of securities and any
undistributed shortfall in interest of that series of securities as will be
described in the related prospectus supplement. The foregoing is subject to
the provision that if a REMIC election is made with respect to a trust fund,
any repurchase pursuant to clause (2) above will be made only in connection
with a "qualified liquidation" of the REMIC within the meaning of Section
860F(g)(4) of the Code.
Indenture. The indenture will be discharged with respect to a series
of notes, other than continuing rights specified in the indenture, upon the
delivery to the trustee for cancellation of all the notes of that series or,
with specified limitations, upon deposit with the trustee of funds sufficient
for the payment in full of all of the notes of that series.
In addition to that discharge with limitations, the indenture will
provide that, if so specified with respect to the notes of any series, the
related trust fund will be discharged from any and all obligations in respect
of the notes of that series, except for specified obligations relating to
temporary notes and exchange of notes, to register the transfer of or exchange
notes of that series, to replace stolen, lost or mutilated notes of that
series, to maintain paying agencies and to hold monies for payment in trust,
upon the deposit with the Trustee, in trust, of money and/or direct
obligations of or obligations guaranteed by the United States of America which
through the payment of interest and principal in respect thereof in accordance
with their terms will provide money in an amount sufficient to pay the
principal of and each installment of interest on the notes of that series on
the last scheduled distribution date for the notes and any installment of
interest on those notes in accordance with the terms of the Indenture and the
notes of that series. In the event of that defeasance and discharge of notes
of a series, holders of notes of that series would be able to look only to
money and/or direct obligations for payment of principal and interest, if any,
on their notes until maturity.
The Trustee
The trustee under each 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 subject to the loan is located. Deeds of
trust are used almost exclusively in California instead of mortgages. A
mortgage creates a lien upon the real property encumbered by the mortgage,
which lien is generally not prior to the lien for real estate taxes and
assessments. Priority between mortgages depends on their terms and generally
on the order of recording with a state or county office. There are two parties
to a mortgage, the mortgagor, who is the borrower and owner of the mortgaged
property, and the mortgagee, who is the lender. Under the mortgage instrument,
the mortgagor delivers to the mortgagee a note or bond and the mortgage.
Although a deed of trust is similar to a mortgage, a deed of trust formally
has three parties, the borrower-property owner called the trustor, similar to
a mortgagor, a lender, similar to a mortgagee, called the beneficiary, and a
third-party grantee called the trustee. Under a deed of trust, the borrower
grants the property, irrevocably until the debt is paid, in trust, generally
with a power of sale, to the trustee to secure payment of the obligation. A
security deed and a deed to secure debt are special types of deeds which
indicate on their face that they are granted to secure an underlying debt. By
executing a security deed or deed to secure debt, the grantor conveys title
to, as opposed to merely creating a lien upon, the subject property to the
grantee until the time at which the underlying debt is repaid. The trustee's
authority under a deed of trust, the mortgagee's authority under a mortgage
and the grantee's authority under a security deed or deed to secure debt are
governed by law and, with respect to some deeds of trust, the directions of
the beneficiary.
Cooperatives. A portion of the loans may be cooperative loans. The
cooperative owns all the real property that comprises the project, including
the land, separate dwelling units and all common areas. The cooperative is
directly responsible for project management and, in most cases, payment of
real estate taxes and hazard and liability insurance. If there is a blanket
mortgage on the cooperative and/or underlying land, as is generally the case,
the cooperative, as project mortgagor, is also responsible for meeting these
mortgage obligations. A blanket mortgage is ordinarily incurred by the
cooperative in connection with the construction or purchase of the
cooperative's apartment building. The interest of the occupant under
proprietary leases or occupancy agreements to which that cooperative is a
party are generally subordinate to the interest of the holder of the blanket
mortgage in that building. If the cooperative is unable to meet the payment
obligations arising under its blanket mortgage, the mortgagee holding the
blanket mortgage could foreclose on that mortgage and terminate all
subordinate proprietary leases and occupancy agreements. In addition, the
blanket mortgage on a cooperative may provide financing in the form of a
mortgage that does not fully amortize with a significant portion of principal
being due in one lump sum at final maturity. The inability of the cooperative
to refinance this mortgage and its consequent inability to make the final
payment could lead to foreclosure by the mortgagee providing the financing. A
foreclosure in either event by the holder of the blanket mortgage could
eliminate or significantly diminish the value of any collateral held by the
lender who financed the purchase by an individual tenant-stockholder of
cooperative shares or, in the case of a trust fund including cooperative
loans, the collateral securing the cooperative loans.
The cooperative is owned by tenant-stockholders who, through
ownership of stock, shares or membership certificates in the corporation,
receive proprietary leases or occupancy agreements which confer exclusive
rights to occupy specific units. Generally, a tenant-stockholder of a
cooperative must make a monthly payment to the cooperative representing that
tenant-stockholder's pro rata share of the cooperative's payments for its
blanket mortgage, real property taxes, maintenance expenses and other capital
or ordinary expenses. An ownership interest in a cooperative and accompanying
rights is financed through a cooperative share loan evidenced by a promissory
note and secured by a security interest in the occupancy agreement or
proprietary lease and in the related cooperative shares. The lender takes
possession of the share certificate and a counterpart of the proprietary lease
or occupancy agreement, and a financing statement covering the proprietary
lease or occupancy agreement and the cooperative shares is filed in the
appropriate state and local offices to perfect the lender's interest in its
collateral. Subject to the limitations discussed below, upon default of the
tenant-stockholder, the lender may sue for judgment on the promissory note,
dispose of the collateral at a public or private sale or otherwise proceed
against the collateral or tenant-stockholder as an individual as provided in
the security agreement covering the assignment of the proprietary lease or
occupancy agreement and the pledge of cooperative shares.
Foreclosure/Repossession
Deed of Trust. Foreclosure of a deed of trust is generally
accomplished by a non-judicial sale under a specific provision in the deed of
trust which authorizes the trustee to sell the property at public auction upon
any default by the borrower under the terms of the note or deed of trust. In
some states, that foreclosure also may be accomplished by judicial action in
the manner provided for foreclosure of mortgages. In addition to any notice
requirements contained in a deed of trust, in some states, like California,
the trustee must record a notice of default and send a copy to the
borrower-trustor, to any person who has recorded a request for a copy of any
notice of default and notice of sale, to any successor in interest to the
borrower-trustor, to the beneficiary of any junior deed of trust and to other
specified persons. In some states, including California, the borrower-trustor
has the right to reinstate the loan at any time following default until
shortly before the trustee's sale. In general, the borrower, or any other
person having a junior encumbrance on the real estate, may, during a
statutorily prescribed reinstatement period, cure a monetary default by paying
the entire amount in arrears plus other designated costs and expenses incurred
in enforcing the obligation. Generally, state law controls the amount of
foreclosure expenses and costs, including attorney's fees, which may be
recovered by a lender. After the reinstatement period has expired without the
default having been cured, the borrower or junior lienholder no longer has the
right to reinstate the loan and must pay the loan in full to prevent the
scheduled foreclosure sale. If the deed of trust is not reinstated within any
applicable cure period, a notice of sale must be posted in a public place and,
in most states, including California, published for a specific period of time
in one or more newspapers. In addition, some state laws require that a copy of
the notice of sale be posted on the property and sent to all parties having an
interest of record in the real property. In California, the entire process
from recording a notice of default to a non-judicial sale usually takes four
to five months.
Mortgages. Foreclosure of a mortgage is generally accomplished by
judicial action. The action is initiated by the service of legal pleadings
upon all parties having an interest in the real property. Delays in completion
of the foreclosure may occasionally result from difficulties in locating
necessary parties. Judicial foreclosure proceedings are often not contested by
any of the parties. When the mortgagee's right to foreclosure is contested,
the legal proceedings necessary to resolve the issue can be time consuming.
After the completion of a judicial foreclosure proceeding, the court generally
issues a judgment of foreclosure and appoints a referee or other court officer
to conduct the sale of the property. In some states, mortgages may also be
foreclosed by advertisement, pursuant to a power of sale provided in the
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.
Thereafter, subject to the right of the borrower in some states to remain in
possession during the redemption period, the lender will assume the burden of
ownership, including obtaining hazard insurance and making those repairs at
its own expense as are necessary to render the property suitable for sale. The
lender will commonly obtain the services of a real estate broker and pay the
broker's commission in connection with the sale of the property. Depending
upon market conditions, the ultimate proceeds of the sale of the property may
not equal the lender's investment in the property. Any loss may be reduced by
the receipt of any mortgage guaranty insurance proceeds.
Courts have imposed general equitable principles upon foreclosure.
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 restrictions on transfer as set forth in the cooperative's certificate of
incorporation and bylaws, as well as the proprietary lease or occupancy
agreement, and may be cancelled by the cooperative for failure by the
tenant-stockholder to pay rent or other obligations or charges owed by that
tenant-stockholder, including mechanics' liens against the cooperative
apartment building incurred by that tenant-stockholder. The proprietary lease
or occupancy agreement generally permits the Cooperative to terminate that
lease or agreement in the event an obligor fails to make payments or defaults
in the performance of covenants required thereunder. Typically, the lender and
the cooperative enter into a recognition agreement which establishes the
rights and obligations of both parties in the event of a default by the
tenant-stockholder on its obligations under the proprietary lease or occupancy
agreement. A default by the tenant-stockholder under the proprietary lease or
occupancy agreement will usually constitute a default under the security
agreement between the lender and the tenant-stockholder.
The recognition agreement generally provides that, in the event that
the tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the cooperative will take no action to terminate the lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the cooperative will recognize the
lender's lien against proceeds form the sale of the cooperative apartment,
subject, however, to the cooperative's right to sums due under that
proprietary lease or occupancy agreement. The total amount owed to the
cooperative by the tenant-stockholder, which the lender generally cannot
restrict and does not monitor, could reduce the value of the collateral below
the outstanding principal balance of the cooperative loan and accrued and
unpaid interest thereon.
Recognition agreements also provide that in the event of a
foreclosure on a cooperative loan, the lender must obtain the approval or
consent of the cooperative as required by the proprietary lease before
transferring the cooperative shares or assigning the proprietary lease.
Generally, the lender is not limited in any rights it may have to dispossess
the tenant-stockholders.
In some states, foreclosure on the cooperative shares is accomplished
by a sale in accordance with the provisions of Article 9 of the UCC and the
security agreement relating to those shares. Article 9 of the UCC requires
that a sale be conducted in a "commercially reasonable" manner. Whether a
foreclosure sale has been conducted in a "commercially reasonable" manner will
depend on the facts in each case. In determining commercial reasonableness, a
court will look to the notice given the debtor and the method, manner, time,
place and terms of the foreclosure. Generally, a sale conducted according to
the usual practice of banks selling similar collateral will be considered
reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be
applied first to pay the costs and expenses of the sale and then to satisfy
the indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to
reimbursement is subject to the right of the cooperative to receive sums due
under the proprietary lease or occupancy agreement. If there are proceeds
remaining, the lender must account to the tenant-stockholder for the surplus.
Conversely, if a portion of the indebtedness remains unpaid, the
tenant-stockholder is generally responsible for the deficiency. See
"--Anti-Deficiency Legislation and Other Limitations on Lenders" below.
In the case of foreclosure on a building which was converted from a
rental building to a building owned by a cooperative under a non-eviction
plan, some states require that a purchaser at a foreclosure sale take the
property subject to rent control and rent stabilization laws which apply to
some tenants who elected to remain in the building but who did not purchase
shares in the cooperative when the building was so converted.
Environmental Risks
Real property pledged as security to a lender may subject the lender
to unforeseen environmental risks. Under the laws of some states,
contamination of a property may give rise to a lien on the property to assure
the payment of the costs of clean-up. In several states a lien to assure the
payment of the costs of clean-up has priority over the lien of an existing
mortgage against that property. In addition, under 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 ("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 many of the Properties will be
owner-occupied, it is anticipated that prepayment charges may not be imposed
with respect to many of the loans. The absence of that type of a restraint on
prepayment, particularly with respect to fixed rate loans having higher loan
rates, may increase the likelihood of refinancing or other early retirement of
those loans or contracts. Late charges and prepayment fees are typically
retained by servicers as additional servicing compensation.
Applicability of Usury Laws
Title V 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 the home improvements financed thereby grant to the originator of
those contracts a purchase money security interest in the home improvements to
secure all or part of the purchase price of the home improvements and related
services. A financing statement generally is not required to be filed to
perfect a purchase money security interest in consumer goods. The purchase
money security interests are assignable. In general, a purchase money security
interest grants to the holder a security interest that has priority over a
conflicting security interest in the same collateral and the proceeds of that
collateral. However, to the extent that the collateral subject to a purchase
money security interest becomes a fixture, in order for the related purchase
money security interest to take priority over a conflicting interest in the
fixture, the holder's interest in that home improvement must generally be
perfected by a timely fixture filing. In general, a security interest does not
exist under the UCC in ordinary building material incorporated into an
improvement on land. Home improvement contracts that finance lumber, bricks,
other types of ordinary building material or other goods that are deemed to
lose that characterization upon incorporation of those materials into the
related property, will not be secured by a purchase money security interest in
the home improvement being financed.
Enforcement of Security Interest in Home Improvements. So long as the
home improvement has not become subject to the real estate law, a creditor can
repossess a home improvement securing a contract by voluntary surrender, by
"self-help" repossession that is "peaceful"--i.e., without breach of the
peace--or, in the absence of voluntary surrender and the ability to repossess
without breach of the peace, by judicial process. The holder of a contract
must give the debtor a number of days' notice, which varies from 10 to 30 days
depending on the state, prior to commencement of any repossession. The UCC and
consumer protection laws in most states place restrictions on repossession
sales, including requiring prior notice to the debtor and commercial
reasonableness in effecting a repossession sale. The law in most states also
requires that the debtor be given notice of any sale prior to resale of the
unit that the debtor may redeem at or before the resale.
Under the laws 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 certain circumstances, may become subject
to real estate title and recording laws. As a result, a security interest in a
manufactured home could be rendered subordinate to the interests of other
parties claiming an interest in the manufactured home under applicable state
real estate law. In order to perfect a security interest in a manufactured
home under real estate laws, the secured party must file either a "fixture
filing" under the provisions of the UCC or a real estate mortgage under the
real estate laws of the state where the home is located. These filings must be
made in the real estate records office of the county where the manufactured
home is located. If so specified in the related prospectus supplement, the
manufactured housing contracts may contain provisions prohibiting the borrower
from permanently attaching the manufactured home to its site. So long as the
borrower does not violate this agreement, a security interest in the
manufactured home will be governed by the certificate of title laws or the
UCC, and the notation of the security interest on the certificate of title or
the filing of a UCC financing statement will be effective to maintain the
priority of the security interest in the manufactured home. If, however, a
manufactured home is permanently attached to its site, the related lender may
be required to perfect a security interest in the manufactured home under
applicable real estate laws.
In the event that the owner of a manufactured home moves it to a
state other than the state in which the manufactured home initially is
registered, under the laws of most states the perfected security interest in
the manufactured home would continue for four months after that relocation and
thereafter only if and after the owner re-registers the manufactured home in
that state. If the owner were to relocate a manufactured home to another state
and not re-register a security interest in that state, the security interest
in the manufactured home would cease to be perfected. A majority of states
generally require surrender of a certificate of title to re-register a
manufactured home; accordingly, the secured party must surrender possession if
it holds the certificate of title to that manufactured home or, in the case of
manufactured homes registered in states which provide for notation of lien on
the certificate of title, notice of surrender would be given to the secured
party noted on the certificate of title. In states which do not require a
certificate of title for registration of a manufactured home, re-registration
could defeat perfection.
Under the laws of most states, liens for repairs performed on a
manufactured home and liens for personal property taxes take priority over a
perfected security interest in the manufactured home.
Consumer Protection Laws. The so-called "Holder-in-Due Course" rule
of the FTC is intended to defeat the ability of the transferor of a consumer
credit contract which is the seller of goods which gave rise to the
transaction, and particular, related lenders and assignees, to transfer that
contract free of notice of claims by the debtor thereunder. The effect of this
rule is to subject the assignee of a contract of this type to all claims and
defenses which the debtor could assert against the seller of goods. Liability
under this rule is limited to amounts paid under a contract; however, the
obligor also may be able to assert the rule to set off remaining amounts due
as a defense against a claim brought by the Trustee against that obligor.
Numerous other federal and state consumer protection laws impose requirements
applicable to the origination and lending pursuant to the contracts, including
the Truth in Lending Act, the Federal Trade Commission Act, the Fair Credit
Billing Act, the Fair Credit Reporting Act, the Equal Credit Opportunity Act,
the Fair Debt Collection Practices Act and the Uniform Consumer Credit Code.
In the case of some of these laws, the failure to comply with their provisions
may affect the enforceability of the related contract.
Applicability of Usury Laws. Title V provides that, subject to the
following conditions, state usury limitations shall not apply to any contract
which is secured by a first lien on certain kinds of consumer goods. The
contracts would be covered if they satisfy certain conditions governing, among
other things, the terms of any prepayments, late charges and deferral fees and
requiring a 30-day notice period prior to instituting any action leading to
repossession of the related unit.
Title V authorized any state to reimpose limitations on interest
rates and finance charges by adopting before April 1, 1983 a law or
constitutional provision which expressly rejects application of the federal
law. Fifteen states adopted a similar law prior to the April 1, 1983 deadline.
In addition, even where Title V was not rejected, any state is authorized by
the law to adopt a provision limiting discount points or other charges on
loans covered by Title V.
Installment Contracts
The loans may also consist of installment contracts. Under an
installment contract the seller (hereinafter referred to in this section as
the "lender") retains legal title to the property and enters into an agreement
with the purchaser hereinafter referred to in this section as the "borrower")
for the payment of the purchase price, plus interest, over the term of that
contract. Only after full performance by the borrower of the contract is the
lender obligated to convey title to the property to the purchaser. As with
mortgage or deed of trust financing, during the effective period of the
installment contract, the borrower is generally responsible for maintaining
the property in good condition and for paying real estate taxes, assessments
and hazard insurance premiums associated with the property.
The method of enforcing the rights of the lender under an installment
contract varies on a state-by-state basis depending upon the extent to which
state courts are willing, or able pursuant to state statute, to enforce the
contract strictly according to its terms. The terms of installment contracts
generally provide that upon a default by the borrower, the borrower loses his
or her right to occupy the property, the entire indebtedness is accelerated,
and the buyer's equitable interest in the property is forfeited. The lender in
that type of a situation does not have to foreclose in order to obtain title
to the property, although in some cases a quiet title action is in order if
the borrower has filed the installment contract in local land records and an
ejectment action may be necessary to recover possession. In a few states,
particularly in cases of borrower default during the early years of an
installment contract, the courts will permit ejectment of the buyer and a
forfeiture of his or her interest in the property. However, most state
legislatures have enacted provisions by analogy to mortgage law protecting
borrowers under installment contracts from the harsh consequences of
forfeiture. Under those statutes, a judicial or nonjudicial foreclosure may be
required, the lender may be required to give notice of default and the
borrower may be granted some grace period during which the installment
contract may be reinstated upon full payment of the default amount and the
borrower may have a post-foreclosure statutory redemption right. In other
states, courts in equity may permit a borrower with significant investment in
the property under an installment contract for the sale of real estate to
share in the proceeds of sale of the property after the indebtedness is repaid
or may otherwise refuse to enforce the forfeiture clause. Nevertheless,
generally speaking, the lender's procedures for obtaining possession and clear
title under an installment contract in a given state are simpler and less
time-consuming and costly than are the procedures for foreclosing and
obtaining clear title to a property subject to one or more liens.
Soldiers' and Sailors' Civil Relief Act
Generally, under the terms of the Soldiers' and Sailors' Civil Relief
Act of 1940, as amended, 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, thereby extinguishing the junior mortgagee's lien unless the junior
mortgagee asserts its subordinate interest in the property in foreclosure
litigation and, possibly, satisfies the defaulted senior mortgage. A junior
mortgagee may satisfy a defaulted senior loan in full and, in some states, may
cure a default and bring the senior loan current, in either event adding the
amounts expended to the balance due on the junior loan. In most states, absent
a provision in the mortgage or deed of trust, no notice of default is required
to be given to a junior mortgagee.
The standard form of the mortgage used by most institutional lenders
confers on the mortgagee the right both to receive all proceeds collected
under any hazard insurance policy and all awards made in connection with
condemnation proceedings, and to apply the proceeds and awards to any
indebtedness secured by the mortgage, in that order as the mortgagee may
determine. Thus, in the event improvements on the property are damaged or
destroyed by fire or other casualty, or in the event the property is taken by
condemnation, the mortgagee or beneficiary under senior mortgages will have
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 the property and not to commit or permit any
waste thereof, and to appear in and defend any action or proceeding purporting
to affect the property or the rights of the mortgagee under the mortgage. Upon
a failure of the mortgagor to perform any of these obligations, the mortgagee
is given the right under some mortgages to perform 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 (the "Title I
Program"). Under the Title I Program, the FHA is authorized and empowered to
insure qualified lending institutions against losses on eligible loans. The
Title I Program operates as a coinsurance program in which the FHA insures up
to 90% of specified losses incurred on an individual insured loan, including
the unpaid principal balance of the loan, but only to the extent of the
insurance coverage available in the lender's FHA insurance coverage reserve
account. The owner of the loan bears the uninsured loss on each loan.
The types of loans which are eligible for FHA insurance under the
Title I Program include property improvement loans ("Property Improvement
Loans" or "Title I Loans"). A Property Improvement Loan or Title I Loan means
a loan made to finance actions or items that substantially protect or improve
the basic livability or utility of a property and includes single family
improvement loans.
There are two basic methods of lending or originating loans, which
include a "direct loan" or a "dealer loan." With respect to a direct loan, the
borrower makes application directly to a lender without any assistance from a
dealer, which application may be filled out by the borrower or by a person
acting at the direction of the borrower who does not have a financial interest
in the loan transaction, and the lender may disburse the loan proceeds solely
to the borrower or jointly to the borrower and other parties to the
transaction. With respect to a dealer loan, the dealer, who has a direct or
indirect financial interest in the loan transaction, assists the borrower in
preparing the loan application or otherwise assists the borrower in obtaining
the loan from lender and the lender may distribute proceeds solely to the
dealer or the borrower or jointly to the borrower and the dealer or other
parties. With respect to a dealer Title I Loan, a dealer may include a seller,
a contractor or supplier of goods or services.
Loans insured under the Title I Program are required to have fixed
interest rates and, generally, provide for equal installment payments due
weekly, biweekly, semi-monthly or monthly, except that a loan may be payable
quarterly or semi-annually in order to correspond with the borrower's
irregular flow of income. The first or last payments or both may vary in
amount but may not exceed 150% of the regular installment payment, and the
first payment may be due no later than two months from the date of the loan.
The note must contain a provision permitting full or partial prepayment of the
loan. The interest rate may be established by the lender and must be fixed for
the term of the loan and recited in the note. Interest on an insured loan must
accrue from the date of the loan and be calculated according to the actuarial
method. The lender must assure that the note and all other documents
evidencing the loan are in compliance with applicable federal, state and local
laws.
Each insured lender is required to use prudent lending standards in
underwriting individual loans and to satisfy the applicable loan underwriting
requirements under the Title I Program prior to its approval of the loan and
disbursement of loan proceeds. Generally, the lender must exercise prudence
and diligence to determine whether the borrower and any co-maker is solvent
and an acceptable credit risk, with a reasonable ability to make payments on
the loan obligation. The lender's credit application and review must determine
whether the borrower's income will be adequate to meet the periodic payments
required by the loan, as well as the borrower's other housing and recurring
expenses. 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 thereon having the highest permissible loan
amount.
Borrower eligibility for a Title I Loan requires that the borrower
have at least a one-half interest in either fee simple title to the real
property, a lease 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 therein may be earmarked with respect to each
or any eligible loans insured thereunder, if a determination is made by the
Secretary of HUD that it is in its interest to do so. Origination and
acquisitions of new eligible loans will continue to increase a lender's
insurance coverage reserve account balance by 10% of the amount disbursed,
advanced or expended in originating or acquiring the eligible loans registered
with the FHA for insurance under the Title I Program. The Secretary of HUD may
transfer insurance coverage between insurance coverage reserve accounts with
earmarking with respect to a particular insured loan or group of insured loans
when a determination is made that it is in the Secretary's interest to do so.
The lender may transfer, except as collateral in a bona fide
transaction, insured loans and loans reported for insurance only to another
qualified lender under a valid Title I contract of insurance. Unless an
insured loan is transferred with recourse or with a guaranty or repurchase
agreement, the FHA, upon receipt of written notification of the transfer of
that loan in accordance with the Title I regulations, will transfer from the
transferor's insurance coverage reserve account to the transferee's insurance
coverage reserve account an amount, if available, equal to 10% of the actual
purchase price or the net unpaid principal balance of that loan--whichever is
less. However, under the Title I Program not more than $5,000 in insurance
coverage shall be transferred to or from a lender's insurance coverage reserve
account during any October 1 to September 30 period without the prior approval
of the Secretary of HUD.
Claims Procedures Under Title I. Under the Title I Program, the
lender may accelerate an insured loan following a default on that loan only
after the lender or its agent has contacted the borrower in a face-to-face
meeting or by telephone to discuss the reasons for the default and to seek its
cure. If the borrower does not cure the default or agree to a modification
agreement or repayment plan, the lender will notify the borrower in writing
that, unless within 30 days the default is cured or the borrower enters into a
modification agreement or repayment plan, the loan will be accelerated and
that, if the default persists, the lender will report the default to an
appropriate credit agency. The lender may rescind the acceleration of maturity
after full payment is due and reinstate the loan only if the borrower brings
the loan current, executes a modification agreement or agrees to an acceptable
repayment plan.
Following acceleration of maturity upon a secured Title I Loan, the
lender may either (a) proceed against the property under any security
instrument, or (b) make a claim under the lender's contract of insurance. If
the lender chooses to proceed against the property under a security
instrument, or if it accepts a voluntary conveyance or surrender of the
property, the lender may file an insurance claim only with the prior approval
of the Secretary of HUD.
When a lender files an insurance claim with the FHA under the Title I
Program, the FHA reviews the claim, the complete loan file and documentation
of the lender's efforts to obtain recourse against any dealer who has agreed
thereto, certification of compliance with applicable state and local laws in
carrying out any foreclosure or repossession, and evidence that the lender has
properly filed proofs of claims where the borrower is bankrupt or deceased.
Generally, a claim for reimbursement for loss on any Title I Loan must be
filed with the FHA no later than nine months after the date of default of that
loan. Concurrently with filing the insurance claim, the lender shall assign to
the United States of America the lender's entire interest in the loan note, or
a judgment in lieu of the note, in any security held and in any claim filed in
any legal proceedings. If, at the time the note is assigned to the United
States, the Secretary has reason to believe that the note is not valid or
enforceable against the borrower, the FHA may deny the claim and reassign the
note to the lender. If either defect is discovered after the FHA has paid a
claim, the FHA may require the lender to repurchase the paid claim and to
accept a reassignment of the loan note. If the lender subsequently obtains a
valid and enforceable judgment against the borrower, the lender may resubmit a
new insurance claim with an assignment of the judgment. The FHA may contest
any insurance claim and make a demand for repurchase of the loan at any time
up to two years from the date the claim was certified for payment and may do
so thereafter in the event of fraud or misrepresentation on the part of the
lender.
Under the Title I Program the amount of an FHA insurance claim
payment, when made, is equal to the claimable amount, up to the amount of
insurance coverage in the lender's insurance coverage reserve account. For the
purposes hereof, the claimable amount means an amount equal to 90% of the sum
of:
(a) the unpaid loan obligation, net unpaid principal and the
uncollected interest earned to the date of default, with
adjustments thereto if the lender has proceeded against
property securing that loan;
(b) the interest on the unpaid amount of the loan obligation from
the date of default to the date of the claim's initial
submission for payment plus 15 calendar days, but not to exceed
9 months from the date of default, calculated at the rate of 7%
per annum;
(c) the uncollected court costs;
(d) the attorney's fees not to exceed $500; and
(e) the expenses for recording the assignment of the security to
the United States.
Consumer Protection Laws
Numerous federal and state consumer protection laws impose
substantive requirements upon mortgage lenders in connection with the
origination, servicing and enforcement of 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 therewith. 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.
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 Code, the regulations promulgated
thereunder, including, where applicable, proposed regulations, and the
judicial and administrative rulings and decisions now in effect, all of which
are subject to change or possible differing interpretations. The statutory
provisions, regulations, and interpretations on which this interpretation is
based are subject to change, and such a change could apply retroactively.
The summary does not purport to deal with all aspects of federal
income taxation that may affect particular investors in light of their
individual circumstances, nor with certain types of investors subject to
special treatment under the federal income tax laws. This summary focuses
primarily upon investors who will hold securities as "capital assets",
generally, property held for investment, within the meaning of Section 1221 of
the Code, but much of the discussion is applicable to other investors as well.
Prospective investors are advised to consult their own tax advisers concerning
the federal, state, local and any other tax consequences to them of the
purchase, ownership and disposition of the securities.
The federal income tax consequences to holders of securities will
vary depending on whether:
(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 of 1986, as amended, or the 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.
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 Form 8-K on behalf of the related trust fund containing an opinion
of counsel to the depositor with respect to the validity of the information
set forth under "Federal Income Tax Consequences" herein and in the related
prospectus supplement.
Taxation of Debt Securities
General. If securities of a series being issued as certificates or
notes are structured as indebtedness secured by the assets of the trust fund,
assuming compliance with all provisions of the related documents and
applicable law, Brown & Wood LLP, special counsel to the depositor, is of the
opinion that the securities will be treated as debt for United States federal
income tax purposes, and 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 the Regular
Interest Securities will be taxable as ordinary income and taken into account
using the accrual method of accounting, regardless of the holder's normal
accounting method. Interest, other than OID, on securities, other than Regular
Interest Securities, that are characterized as indebtedness for federal income
tax purposes will be includible in income by holders thereof in accordance
with their usual methods of accounting. Securities characterized as debt for
federal income tax purposes and Regular Interest Securities will be referred
to hereinafter collectively as "Debt Securities."
Debt Securities that are Compound Interest Securities--Generally,
securities all or a portion of the interest on which is not paid
currently--will, and certain of the other Debt Securities may, be issued with
OID . The following discussion is based in part on the OID 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 certain issues relevant to prepayable securities, such as
the Debt Securities.
In general, OID, if any, will equal the difference between the stated
redemption price at maturity of a Debt Security and its issue price. A holder
of a Debt Security must include OID in gross income as ordinary interest
income as it accrues under a method taking into account an economic accrual of
the discount. In general, OID must be included in income in advance of the
receipt of the cash representing that income. The amount of OID on a Debt
Security will be considered to be zero if it is less than a de minimis amount
determined under the Code.
The issue price of a Debt Security is the first price at which a
substantial amount of Debt Securities of that class are sold to the public,
excluding bond houses, brokers, underwriters or wholesalers. If less than a
substantial amount of a particular class of Debt Securities is sold for cash
on or prior to the related closing date, the issue price for such class will
be treated as the fair market value of such class on such closing date. The
issue price of a Debt Security also includes the amount paid by an initial
Debt Security holder for accrued interest that relates to a period prior to
the issue date of the Debt Security. The stated redemption price at maturity
of a Debt Security includes the original principal amount of the Debt
Security, but generally will not include distributions of interest if such
distributions constitute "qualified stated interest."
Under the OID Regulations, qualified stated interest generally means
interest payable at a single fixed rate or qualified variable rate, as
described below, provided that 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 such Debt Securities includes all distributions of interest as
well as principal thereon. Where the interval between the issue date and the
first distribution date on a Debt Security is either longer or shorter than
the interval between subsequent distribution dates, all or part of the
interest foregone, in the case of the longer interval, and all of the
additional interest, in the case of the shorter interval, will be included in
the stated redemption price at maturity and tested under the de minimis rule
described below. In the case of a Debt Security with a long first period which
has non-de minimis OID, all stated interest in excess of interest payable at
the effective interest rate for the long first period will be included in the
stated redemption price at maturity and the Debt Security will generally have
OID. Holders of Debt Securities should consult their own tax advisors to
determine the issue price and stated redemption price at maturity of a Debt
Security.
Under the de minimis rule OID on a Debt Security will be considered
to be zero if 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 such
income will be capital gain if the Debt Security is held as a capital asset.
However, accrual method holders may elect to accrue all de minimis OID as well
as market discount under a constant interest method.
Debt Securities may provide for interest based on a qualified
variable rate. Under the OID Regulations, interest is treated as payable at a
qualified variable rate and not as contingent interest if, generally:
(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, certain 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 subject to Code Section
1272(a)(6), such as the Debt Securities. Additionally, the OID Regulations do
not contain provisions specifically interpreting Code Section 1272(a)(6).
Until the Treasury issues guidance to the contrary, the Trustee intends to
base its computation on Code Section 1272(a)(6) and the OID Regulations as
described in this prospectus. However, because no regulatory guidance
currently exists under Code Section 1272(a)(6), there can be no assurance that
such methodology represents the correct manner of calculating OID.
The holder of a Debt Security issued with OID must include in gross
income, for all days during its taxable year on which it holds 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 accounts, 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 such 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, such as certain 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 Prepayment
Assumption 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 such holder in that period. The holder will eventually be
allowed a loss (or will be allowed to report a lesser amount of income) to the
extent that the aggregate amount of distributions on the securities is
deducted as a result of a trust fund asset default. However, the timing and
character of 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 such premium only if it has in effect an
election under Section 171 of the Code with respect to all taxable debt
instruments held by that holder, as described below. Alternatively, the IRS
could assert that an Interest Weighted Security should be taxable under the
rules governing bonds issued with contingent payments. This treatment may be
more likely in the case of Interest Weighted Securities that are Stripped
Securities as described below. See "--Tax Status as a Grantor Trust --
Discount or Premium on Pass-Through Securities."
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 below, the loans underlying such
security, originally issued at a discount, OID in the relevant period to total
OID remaining to be paid.
Section 1277 of the Code provides that, regardless of the origination
date of the Debt Security, or, in the case of a Pass-Through Security, the
loans, the excess of interest paid or accrued to purchase or carry a security,
or, in the case of a Pass-Through Security, as described below, the underlying
loans, with market discount over interest received on 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 the taxable year the election is
made and thereafter, in which case the interest deferral rule will not apply.
Premium. A holder who purchases a Debt Security, other than an
Interest Weighted Security to the extent described above, at a cost greater
than its stated redemption price at maturity, generally will be considered to
have purchased the security at a premium, which it may elect to amortize as an
offset to interest income on the security, and not as a separate deduction
item, on a constant yield method. Although no regulations addressing the
computation of premium accrual on securities similar to the securities have
been issued, the legislative history of 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 acquired thereafter
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 the year
of the election or thereafter. Similarly, a holder of a Debt Security that
makes this election for a Debt Security that is acquired at a premium will be
deemed to have made an election to amortize bond premium with respect to all
debt instruments having amortizable bond premium that the holder owns or
acquires. The election to accrue interest, discount and premium on a constant
yield method with respect to a Debt Security is irrevocable.
Taxation of the REMIC and Its Holders
General. 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 will deliver an opinion
generally to that effect and to the effect that the securities designated as
"regular interests" in the REMIC will be regular interests in a REMIC and will
be treated as indebtedness issued by the REMIC, and that the securities
designated as the sole class of "residual interests" in the REMIC will be
treated as the "residual interest" in the REMIC for United States federal
income tax purposes for as long as all of the provisions of the applicable
agreement are complied with and the statutory and regulatory requirements are
satisfied. Securities will be designated as "Regular Interests" or "Residual
Interests" in a REMIC, as specified in the related prospectus supplement.
Except to the extent specified otherwise in a prospectus supplement,
if a REMIC election is made with respect to a series of securities, (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 certain pass-through entities but not including real estate
investment trusts, the expenses will be deductible only to the extent that
such expenses, plus other "miscellaneous itemized deductions" of the holder of
a Regular Interest Security, exceed 2% of 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 such 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 certain 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 certain pass-through entities, but not including real
estate investment trusts, will be unable to deduct servicing fees payable on
the loans or other administrative expenses of the REMIC for a given taxable
year, to the extent that 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 such discount in income,
but without regard to the de minimis rules. See "Federal Income Tax
Consequences -- General" above. However, a REMIC that acquires loans at a
market discount must include 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 such day.
The holder of a Residual Interest Security must report its
proportionate share of the taxable income of the REMIC whether or not it
receives cash distributions from the REMIC attributable to the income or loss.
The reporting of taxable income without corresponding distributions could
occur, for example, in certain REMIC issues in which the loans held by the
REMIC were issued or acquired at a discount, since mortgage prepayments cause
recognition of discount income, while the corresponding portion of the
prepayment could be used in whole or in part to make principal payments on
REMIC Regular Interests issued without any discount or at an insubstantial
discount -- if this occurs, it is likely that cash distributions will exceed
taxable income in later years. Taxable income may also be greater in earlier
years of 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, whereas interest income with respect to loans will generally remain
constant over time as a percentage of loan principal.
In any event, because the holder of a residual interest is taxed on
the net income of the REMIC, the taxable income derived from a Residual
Interest Security in a given taxable year will not be equal to the taxable
income associated with investment in a corporate bond or stripped instrument
having similar cash flow characteristics and pretax yield. Therefore, the
after-tax yield on the Residual Interest Security may be less than that of 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 such excess.
Sale or Exchange. A holder of a Residual Interest Security will
recognize gain or loss on the sale or exchange of a Residual Interest Security
equal to the difference, if any, between the amount realized and 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 certain cooperatives were to own a Residual Interest Security, a portion of
dividends, or other distributions, paid by the real estate investment trust,
or other entity, would be treated as excess inclusion income. If a Residual
Security is owned by a foreign person, excess inclusion income is subject to
tax at a rate of 30% which may not be reduced by treaty, is not eligible for
treatment as "portfolio interest" and is subject to certain additional
limitations. See "-- Tax Treatment of Foreign Investors." The Small Business
Job Protection Act of 1996 eliminated the special rule permitting Section 593
institutions 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 such Residual
Interest Security at the beginning of such quarterly period. The adjusted
issue price of a Residual Interest Security at the beginning of each calendar
quarter will equal its issue price, calculated in a manner analogous to the
determination of the issue price of a Regular Interest Security, increased by
the aggregate of the daily accruals for prior calendar quarters, and
decreased, but not below zero, by the amount of loss allocated to a holder and
the amount of distributions made on the Residual Interest Security before the
beginning of the quarter. The long-term federal rate, which is announced
monthly by the Treasury Department, is an interest rate that is based on the
average market yield of outstanding marketable obligations of the United
States government having remaining maturities in excess of nine years.
Under the REMIC Regulations, in 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 political subdivision thereof, any foreign
government, any international organization, or any agency or instrumentality
of any of the foregoing, a rural electric or telephone cooperative described
in Section 1381(a)(2)(C) of the Code, or any entity exempt from the tax
imposed by Sections 1-1399 of the Code, if 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 below, a transfer of a Residual
Interest Security to a United States person will be disregarded for all
Federal tax purposes unless no significant purpose of the transfer was to
impede the assessment or collection of tax. A Residual Interest Security is a
"noneconomic residual interest" unless, at the time of the transfer (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 certain transfers of
residual interests by foreign persons to United States persons. See "-- Tax
Treatment of Foreign Investors."
Mark to Market Rules. Under IRS regulations, a REMIC Residual
Interest Security acquired after January 3, 1995 cannot be marked-to-market.
Administrative Matters
The REMIC's books must be maintained on a calendar year basis and the
REMIC must file an annual federal income tax return. The REMIC will also be
subject to the procedural and administrative rules of the Code applicable to
partnerships, including the determination of any adjustments to, among other
things, items of REMIC income, gain, loss, deduction, or credit, by the IRS in
a unified administrative proceeding.
Tax Status as a Grantor Trust
General. If the related prospectus supplement does not specify that
an election will be made to treat the assets of the trust fund as one or more
REMICs or to treat the trust fund as a partnership, then 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, such arrangement will not be treated as an association taxable as a
corporation for United States federal income tax purposes, and the securities
will be treated as representing ownership interests in the related trust fund
assets 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 such circumstances, a holder of a Pass-Through Security will
be considered to have purchased a pro rata undivided interest in each of the
loans. 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, such
income will consist of a pro rata share of all of the income derived from all
of the loans and, in the case of Stripped Securities, 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 thereon and any undistributed
principal payments, is less than or greater than the portion of the principal
balance of the loan allocable to the security, the interest in the loan
allocable to the Pass-Through Security will be deemed to have been acquired at
a discount or premium, respectively.
The treatment of any discount will depend on whether the discount
represents OID or market discount. In the case of a loan with OID in excess of
a prescribed de minimis amount or a Stripped Security, a holder of a security
will be required to report as interest income in each taxable year its share
of the amount of OID that accrues during that year in the manner described
above. OID with respect to a loan could arise, for example, by virtue of the
financing of points by the originator of the loan, or by virtue of the
charging of points by the originator of the loan in an amount greater than a
statutory de minimis exception, in circumstances under which the points are
not currently deductible pursuant to applicable Code provisions. Any market
discount or premium on a loan will be includible in income, generally in the
manner described above, except that in the case of Pass-Through Securities,
market discount is calculated with respect to the loans underlying the
security, rather than with respect to the security. A holder of a security
that acquires an interest in a loan originated after July 18, 1984 with more
than a de minimis amount of market discount, generally, the excess of the
principal amount of the loan over the purchaser's allocable purchase price,
will be required to include accrued market discount in income in the manner
set forth above. See "-- Taxation of Debt Securities; Market Discount" and "--
Premium" above.
In the case of market discount on a Pass-Through Security
attributable to loans originated on or before July 18, 1984, the holder
generally will be required to allocate the portion of such discount that is
allocable to a loan among the principal payments on the loan and to include
the discount allocable to each principal payment in ordinary income at the
time 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 certain
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 such stripped
interest is purchased with an issue price equal to its purchase price or, if
more than one stripped interest is purchased, the ratable share of the
purchase price allocable to such stripped interest.
Servicing fees in excess of reasonable servicing fees, excess
servicing, will be treated under the stripped bond rules. If the excess
servicing fee is less than 100 basis points -- i.e., 1% interest on the loan
principal balance, or the securities are initially sold with a de minimis
discount, assuming no prepayment assumption is required, any non-de minimis
discount arising from a subsequent transfer of the securities should be
treated as market discount. The IRS appears to require that reasonable
servicing fees be calculated on a loan by loan basis, which could result in
some loans being treated as having more than 100 basis points of interest
stripped off.
The Code, OID Regulations and judicial decisions provide no direct
guidance as to how the interest and original issue discount rules are to apply
to Stripped Securities and other Pass-Through Securities. Under the 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
such period. However, the 1986 Act does not, absent Treasury regulations,
appear specifically to cover instruments such as the Stripped Securities which
technically represent ownership interests in the underlying loans, rather than
being debt instruments "secured by" those loans. Nevertheless, it is believed
that the Cash Flow Bond Method is a reasonable method of reporting income for
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 such holder pays for a security, plus amounts of original issue or
market discount included in income and reduced by any payments received, other
than qualified stated interest payments, and any amortized premium. Gain or
loss recognized on a sale, exchange, or redemption of a security, measured by
the difference between the amount realized and the security's basis as so
adjusted, will generally be capital gain or loss, assuming that the security
is held as a capital asset. 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 such 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 certain
circumstances, be subject to "backup withholding" at a rate of 31% with
respect to distributions or the proceeds of a sale of certificates to or
through brokers that represent interest or original issue discount on the
securities. This withholding generally applies if the holder of a security
(1) fails to furnish the trustee with its TIN;
(2) furnishes the trustee an incorrect TIN;
(3) fails to report properly interest, dividends or other
"reportable payments" as defined in the Code; or
(4) under certain circumstances, fails to provide the trustee or
the holder's securities broker with a certified statement,
signed under penalty of perjury, that the TIN provided is its
correct number and that the holder is not subject to backup
withholding.
Backup withholding will not apply, however, with respect to certain payments
made to holders of securities, including payments to certain 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 such year and the amount of tax withheld, if any, with respect to
payments on the securities.
Tax Treatment of Foreign Investors
Subject to the discussion below with respect to trust funds as to
which a partnership election is made, under the Code, unless interest,
including OID, paid on a security, other than a Residual Interest Security, is
considered to be "effectively connected" with a trade or business conducted in
the United States by a nonresident alien individual, foreign partnership or
foreign corporation, 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 such interest payments. These provisions supersede the
generally applicable provisions of United States law that would otherwise
require the issuer to withhold at a 30% rate, unless 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 such income does not qualify for exemption from
United States withholding tax as "portfolio interest." It is clear that, to
the extent that a payment represents a portion of REMIC taxable income that
constitutes excess inclusion income, a holder of a Residual Interest Security
will not be entitled to an exemption from or reduction of the 30%, or lower
treaty rate, withholding tax rule. If the payments are subject to United
States withholding tax, they generally will be taken into account for
withholding tax purposes only when paid or distributed, or when the Residual
Interest Security is disposed of. The Treasury has statutory authority,
however, to promulgate regulations which would require such amounts to be
taken into account at an earlier time in order to prevent the avoidance of
tax. 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 certain transition rules. Prospective securityholders who are
foreign persons are strongly urged to consult their own tax advisors with
respect to the New Withholding Regulations.
Tax Characterization of the Trust Fund as a Partnership
If the related prospectus supplement specifies that an election will
be made to treat the trust fund as a partnership, pursuant to agreements upon
which counsel shall conclude that (1) the trust fund will not have certain
characteristics necessary for a business trust to be classified as an
association taxable as a corporation and (2) the nature of the income of the
trust fund will exempt it from the rule that certain publicly traded
partnerships are taxable as corporations or the issuance of the securities has
been structured as a private placement under an IRS safe harbor, so that the
trust fund will not be characterized as a publicly traded partnership taxable
as a corporation, then assuming compliance with the related agreement and
related documents and applicable law, Brown & Wood LLP, special counsel to the
depositor, 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 such tax that is unpaid by the trust fund.
Tax Consequences to Holders of the Notes
Treatment of the Notes as Indebtedness. In the case of a trust fund
that issues notes intended to be debt for federal income tax purposes, the
trust fund will agree, and the holders of notes will agree by their purchase
of notes, to treat the notes as debt for federal income tax purposes. Special
counsel to the depositor will, 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 thereon 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. Certain special rules apply if a short-term note is
purchased for more or less than its principal amount.
Sale or Other Disposition. If a holder of a note sells a note, the
holder will recognize gain or loss in an amount equal to the difference
between the amount realized on the sale and the holder's adjusted tax basis in
the note. The adjusted tax basis of a note to a particular holder of a note
will equal the holder's cost for the note, increased by any market discount,
acquisition discount, OID and gain previously included by such holder in
income with respect to the note and decreased by the amount of bond premium,
if any, previously amortized and by the amount of principal payments
previously received by such holder with respect to 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 certain other financial institutions, the
organization or institution may provide the relevant signed statement to the
withholding agent; in that case, however, the signed statement must be
accompanied by a Form W-8 or substitute form provided by the foreign person
that owns the note. If the interest is not portfolio interest, then it will be
subject to United States federal income and withholding tax at a rate of 30
percent, unless reduced or eliminated pursuant to an applicable tax treaty.
Any capital gain realized on the sale, redemption, retirement or
other taxable disposition of a note by a foreign person will be exempt from
United States federal income and withholding tax, provided that (1) such 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 certain qualifying income tests. Nonetheless, treatment of the
notes as equity interests in such a publicly traded partnership could have
adverse tax consequences to certain holders. For example, income to certain
tax-exempt entities, including pension funds, would be "unrelated business
taxable income," income to foreign holders generally would be subject to U.S.
tax and U.S. tax return filing and withholding requirements, and individual
holders might be subject to certain limitations on their ability to deduct
their share of the trust fund's expenses.
Tax Consequences to Holders of the Certificates
Treatment of the Trust Fund as a Partnership. In the case of a trust
fund that will elect to be treated as a partnership, the trust fund and the
master servicer will agree, and the holders of certificates will agree by
their purchase of certificates, to treat the trust fund as a partnership for
purposes of federal and state income tax, franchise tax and any other tax
measured in whole or in part by income, with the assets of the partnership
being the assets held by the trust fund, the partners of the partnership being
the holders of certificates, and the notes being debt of the partnership.
However, the proper characterization of the arrangement involving the trust
fund, the certificates, the notes, the trust fund and the master servicer is
not clear because there is no authority on transactions closely comparable to
that contemplated herein.
A variety of alternative characterizations are possible. For example,
because the certificates have certain features characteristic of debt, the
certificates might be considered debt of the trust fund. Any such
characterization would not result in materially adverse tax consequences to
holders of certificates as compared to the consequences from treatment of the
certificates as equity in a partnership, described below. The following
discussion assumes that the certificates represent equity interests in a
partnership.
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.
Such allocation will be reduced by any amortization by the trust fund of
premium on loans that corresponds to any excess of the issue price of
certificates over their principal amount. All remaining taxable income of the
trust fund will be allocated to the depositor. Based on the economic
arrangement of the parties, this approach for allocating trust fund income
should be permissible under applicable Treasury regulations, although no
assurance can be given that the IRS would not require a greater amount of
income to be allocated to holders of certificates. Moreover, even under the
foregoing method of allocation, holders of certificates may be allocated
income equal to the entire pass-through rate plus the other items described
above even though the trust fund might not have sufficient cash to make
current cash distributions of 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 such 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 such calculations be made separately for each
loan, the trust fund might be required to incur additional expense but it is
believed that there would not be a material adverse effect on holders of
certificates.
Discount and Premium. It is believed that the loans were not issued
with OID, and, therefore, the trust fund should not have OID income. However,
the purchase price paid by the trust fund for the loans may be greater or less
than the remaining principal balance of the loans at the time of purchase. If
so, the loan will have been acquired at a premium or discount, as the case may
be. As indicated above, the trust fund will make this calculation on an
aggregate basis, but might be required to recompute it on a loan by loan
basis.
If the trust fund acquires the loans at a market discount or premium,
the trust fund will elect to include any such discount in income currently as
it accrues over the life of the loans or to offset any such premium against
interest income on the loans. As indicated above, a portion of 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 such a termination occurs, the trust
fund will be considered to contribute all of its assets and liabilities to a
new partnership and, immediately thereafter, to liquidate by distributing
interests in the new partnership to the certificateholders, with the trust
fund, as the new partnership, thereafter continuing the business of the
partnership deemed liquidated. The trust fund will not comply with certain
technical requirements that might apply when 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 thereto, 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 such a monthly convention may not be permitted by existing
regulations. If a monthly convention is not allowed, or only applies to
transfers of less than all of the partner's interest, taxable income or losses
of the trust fund might be reallocated among the holders of certificates. The
trust fund's method of allocation between transferors and transferees may be
revised to conform to a method permitted by future regulations.
Section 754 Election. In the event that a holder of a certificate
sells its certificates at a profit, loss, the purchasing holder of a
certificate will have a higher, lower, basis in the certificates than the
selling holder of a certificate had. The tax basis of the trust fund's assets
will not be adjusted to reflect that higher, or lower, basis unless the trust
fund were to file an election under Section 754 of the Code. In order to avoid
the administrative complexities that would be involved in keeping accurate
accounting records, as well as potentially onerous information reporting
requirements, the trust fund will not make 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 below and such nominees will be required
to forward such information to the beneficial owners of the certificates.
Generally, holders must file tax returns that are consistent with the
information return filed by the trust fund or be subject to penalties unless
the holder notifies the IRS of all such inconsistencies.
Under Section 6031 of the Code, any person that holds certificates as
a nominee at any time during a calendar year is required to furnish the trust
fund with a statement containing 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) certain
information on certificates that were held, bought or sold on behalf of such
person throughout the year. In addition, brokers and financial institutions
that hold certificates through a nominee are required to furnish directly to
the trust fund information as to themselves and their ownership of
certificates. A clearing agency registered under Section 17A of the Exchange
Act is not required to furnish any such information statement to the trust
fund. The information referred to above for any calendar year must be
furnished to the trust fund on or before the following January 31. Nominees,
brokers and financial institutions that fail to provide the trust fund with
the information described above may be subject to penalties.
The depositor will be designated as the tax matters partner in the
related agreement and, as such, will be responsible for representing the
holders of certificates in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years after the date on which
the partnership information return is filed. Any adverse determination
following an audit of the return of the trust fund by the appropriate taxing
authorities could result in an adjustment of the returns of the holders of
certificates, and, under certain circumstances, a holder of a certificate may
be precluded from separately litigating a proposed adjustment to the items of
the trust fund. An adjustment could also result in an audit of a holder's
returns and adjustments of items not related to the income and losses of the
trust fund.
Tax Consequences to Foreign Holders of Certificates. It is not clear
whether the trust fund would be considered to be engaged in a trade or
business in the United States for purposes of federal withholding taxes with
respect to non-U.S. persons because there is no clear authority dealing with
that issue under facts substantially similar to those described herein.
Although it is not expected that the trust fund would be engaged in a trade or
business in the United States for 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
thereof or the District of Columbia, except, in the case of a partnership as
otherwise provided by regulations, an estate, the income of which is
includible in gross income for U.S. federal income tax purposes regardless of
its source or a trust whose administration is subject to the primary
supervision of a United States court and has one or more United States persons
who have authority to control all substantial decisions of the trust.
Each foreign holder might be required to file a U.S. individual or
corporate income tax return, including, in the case of a corporation, the
branch profits tax, on its share of the trust fund's income. Each foreign
holder must obtain a taxpayer identification number from the IRS and submit
that number to the trust fund on Form W-8 in order to assure appropriate
crediting of the taxes withheld. A foreign holder generally would be entitled
to file with the IRS a claim for refund with respect to taxes withheld by the
trust fund taking the position that no taxes were due because the trust fund
was not engaged in a U.S. trade or business. However, interest payments made,
or accrued, to a holder of a certificate who is a foreign person generally
will be considered guaranteed payments to the extent such payments are
determined without regard to the income of the trust fund. If these interest
payments are properly characterized as guaranteed payments, then the interest
will not be considered "portfolio interest." As a result, holders of
certificates will be subject to United States federal income tax and
withholding tax at a rate of 30 percent, unless reduced or eliminated pursuant
to an applicable treaty. In such case, a foreign holder would only be entitled
to claim a refund for that portion of the taxes in excess of the taxes that
should be withheld with respect to the guaranteed payments.
Backup Withholding. Distributions made on the certificates and
proceeds from the sale of the certificates will be subject to a "backup"
withholding tax of 31% if, in general, the certificateholder fails to comply
with certain identification procedures, unless the holder is an exempt
recipient under applicable provisions of the Code.
Taxation of Trust as FASIT
In the opinion of Brown & Wood LLP, special tax counsel to the trust
fund, if a FASIT election is made with respect to a series of securities, the
trust fund will be formed to qualify as a FASIT. The Small Business and Job
Protection Act of 1996 added Section 860H through 860L to the Code (the "FASIT
Provisions"), which provide for a new type of entity for federal income tax
purposes known as a FASIT. Although the FASIT provisions of the Code became
effective on September 1, 1997, no Treasury regulations or other
administrative guidance have been issued with respect for those provisions.
Accordingly, definitive guidance cannot be provided with respect to many
aspects of the tax treatment of FASIT Regular Securityholders. Investors
should also note that the FASIT discussion contained herein constitutes only a
summary of the U.S. federal income tax consequences to the holders of FASIT
Securities. With respect to each series of FASIT Regular Securities, the
related prospectus supplement will provide a detailed discussion regarding the
federal income tax consequences associated with the particular transaction.
FASIT Securities will be classified as either FASIT Regular
Securities, which generally will be treated as debt for U.S. federal income
tax purposes, or FASIT Ownership Securities, which generally are not treated
as debt for such purposes, but rather as representing rights and
responsibilities with respect to the taxable income or loss of the related
series FASIT. The prospectus supplement for each series of securities will
indicate which securities of 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 the ownership interest
security will constitute the "regular interests" and the "ownership interest,"
respectively, if:
(1) a FASIT election is in effect,
(2) certain tests concerning (A) the composition of the FASIT's
assets and (B) the nature of the Securityholders' interests in
the FASIT are met on a continuing basis, and
(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 the close of the third month beginning after the
closing date and at all times thereafter (the "FASIT Qualification Test").
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) certain hedging instruments -- generally, interest and currency
rate swaps and credit enhancement contracts -- that are
reasonably required to guarantee or hedge against the FASIT's
risks associated with being the obligor on FASIT interests,
(5) contract rights to acquire qualifying debt instruments or
qualifying hedging instruments,
(6) FASIT regular interests, 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 such holder.
Interest in a FASIT. In addition to the foregoing asset qualification
requirements, the interests in a FASIT also must meet certain requirements.
All of the interests in a FASIT must belong to either of the following: (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, such interest is payable at either (a) a
fixed rate with respect to the principal amount of the regular
interest or (b) a permissible variable rate with respect to
that principal amount. Permissible variable rates for FASIT
regular interests are the same as those for REMIC regular
interests -- i.e., certain qualified floating rates and
weighted average rates.
Interest will be considered to be based on a permissible variable rate if
generally:
(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 such 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 regular interest 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
domestic C corporations that are fully subject to corporate income tax
("Eligible Corporations"), other FASITs, and dealers in securities who acquire
such interests as inventory, rather than for investment. In addition, holders
of High-Yield Interests are subject to limitations on offset of income derived
from such interest. See "Federal Income Tax Consequences--Taxation of Trust as
a FASIT--Treatment of High-Yield Interests."
Consequences of Disqualification. If the trust fund fails to comply
with one or more of the Code's ongoing requirements for FASIT status during
any taxable year, the Code provides that its FASIT status may be lost for that
year and thereafter. If FASIT status is lost, the treatment of the former
FASIT and interests therein for U.S. federal income tax purposes is uncertain.
Although the Code authorizes the Treasury to issue regulations that address
situations where a failure to meet the requirements for FASIT status occurs
inadvertently and in good faith, such regulations have not yet been issued. It
is possible that disqualification relief might be accompanied by sanctions,
such as the imposition of a corporate tax on all or a portion of the FASIT's
income for the period of time in which the requirements for FASIT status are
not satisfied. Nevertheless, in the opinion of Tax Counsel, if the trust fund
fails to qualify as a FASIT it will qualify as a partnership. See "--Taxation
of the Trust Fund as Partnership."
Treatment of FASIT Regular Securities
Payments received by holders of FASIT Regular Securities generally
will be accorded the same tax treatment under the Code as payments received on
other taxable debt instruments. Holders of FASIT Regular Securities must
report income from 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
certain securities dealers. Holders of High-Yield Securities are subject to
limitations on their ability to use current losses or net operating loss
carryforwards or carrybacks to offset any income derived from those
securities.
If the FASIT Regular Security is sold, the securityholder generally
will recognize gain or loss upon the sale in the manner described below for
offered senior securities. See "Taxation of Trust as Partnership--Treatment of
Senior Securities--Sale or Other Disposition." In addition, if a FASIT regular
interest becomes wholly or partially worthless as a result of losses on the
underlying assets, certain holders of 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 "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
such holder, then section 475 of the Code will continue to apply to such
securities, except that the amount realized under the mark-to-market rules or
the securities' value after applying special valuation rules contained in the
FASIT provisions. Those special valuation rules generally require that the
value of debt instruments that are not traded on an established securities
market be determined by calculating the present value of the reasonably
expected payments under the instrument using a discount rate of 120% of the
applicable Federal rate, compounded semi-annually.
The holder of a FASIT Ownership Security will be subject to a tax
equal to 100% of the net income derived by the FASIT from any "prohibited
transactions." Prohibited transactions include
(1) the receipt of income derived from assets that are not
permitted assets,
(2) certain dispositions of permitted assets,
(3) the receipt of any income derived from any loan originated by a
FASIT, and
(4) in certain cases, the receipt of income representing a
servicing fee or other compensation. Any series for which a
FASIT election is made generally will be structured in order to
avoid application of the prohibited transaction tax.
State Tax Considerations
In addition to the federal income tax consequences described in
"Federal Income Tax Consequences," potential investors should consider the
state and local income tax consequences of the acquisition, ownership, and
disposition of the securities. State and local income tax law may differ
substantially from the corresponding federal law, and this discussion does not
purport to describe any aspect of the income tax laws of any state or
locality. Therefore, potential investors should consult their own tax advisors
with respect to the various state and local tax consequences of an investment
in the securities.
ERISA Considerations
General
ERISA and the Code impose certain requirements on employee benefit
plans and certain other retirement plans and arrangements, including, but not
limited to, individual retirement accounts and annuities, as well as on
collective investment funds and certain separate and general accounts in which
the plans or arrangements are invested (all of which are hereinafter referred
to as a "Plan"). Generally, ERISA applies to investments made by Plans. Among
other things, ERISA requires that the assets of Plans be held in trust and
that the trustee, or other duly authorized fiduciary, have exclusive authority
and discretion to manage and control the assets of those Plans. ERISA also
imposes certain duties on persons who are fiduciaries of Plans. Under ERISA,
any person who exercises any authority or control respecting the management or
disposition of the assets of a Plan is considered to be a fiduciary of such
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 below, 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 below, 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
certain transactions involving the assets of a Plan and "disqualified
persons", within the meaning of the Code, and "parties in interest", within
the meaning of ERISA; collectively "Parties in Interest", who have 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 such an investment
might constitute or give rise to a prohibited transaction under ERISA or the
Code, or whether there is an applicable exemption.
Plan Asset Regulation
The 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 such assets would be subject to
ERISA's fiduciary standards. Under the Plan Asset Regulation, generally when a
Plan invests in another entity, the Plan's assets do not include, solely by
reason of 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, as amended -- nor a
security issued by an investment company registered under the Investment
Company Act of 1940, as amended, the assets of the entity will be treated as
assets of the Plan unless 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 such
features would be considered "substantial," noting that the question of
whether a plan's interest has substantial equity features is an inherently
factual one, but that in making a determination it would be appropriate to
take into account whether the equity features are such that a Plan's
investment would be a practical vehicle for the indirect provision of
investment management services. The prospectus supplement issued in connection
with a particular series of securities will indicate the anticipated treatment
of these Securities under the Plan Asset Regulation.
Exemption 83-1
In Prohibited Transaction Class Exemption 83-1, the DOL exempted from
ERISA's prohibited transaction rules certain transactions relating to the
operation of residential mortgage pool investment trusts and the purchase,
sale and holding of "mortgage pool pass-through certificates" in the initial
issuance of those certificates. PTE 83-1 permits, subject to certain
conditions, transactions which might otherwise be prohibited between Plans and
Parties in Interest with respect to those Plans related to the origination,
maintenance and termination of mortgage pools consisting of mortgage loans
secured by first or second mortgages or deeds of trust on single-family
residential property, and the acquisition and holding of certain mortgage pool
pass-through certificates representing an interest in those mortgage pools by
Plans. If the general conditions of PTE 83-1 are satisfied, investments by a
Plan in Single Family Securities certificates that represent interests in a
pool consisting of loans 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 certain specified events would be a "mortgage pass-through
certificate" for purposes of PTE 83-1.
PTE 83-1 sets forth three general conditions which must be satisfied
for any transaction to be eligible for exemption:
(1) the maintenance of a system of insurance or other protection
for the pooled mortgage loans and property securing such loans,
and for indemnifying securityholders against reductions in
pass-through payments due to property damage or defaults in
loan payments in an amount not less than the greater of one
percent of the aggregate principal balance of all covered
pooled mortgage loans or the principal balance of the largest
covered pooled mortgage loan;
(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" herein with respect to such Single Family Securities is
maintained in an amount not less than the greater of one percent of the
aggregate principal balance of the loans or the principal balance of the
largest loan. See "Description of the Securities" herein. In the absence of a
ruling that the system of insurance or other protection with respect to a
series of Single Family Securities satisfies the first general condition
referred to above, there can be no assurance that these features will be so
viewed by the DOL. The trustee will not be affiliated with the depositor.
Each Plan fiduciary or other person who is responsible for making the
investment decisions whether to purchase or commit to purchase and to hold
Single Family Securities must make its own determination as to whether the
first and third general conditions, and the specific conditions described
briefly in the preceding paragraph, of PTE 83-1 have been satisfied, or as to
the availability of any other prohibited transaction exemptions.
The Underwriter's Exemption
The DOL has granted to J.P. Morgan Securities Inc. an administrative
exemption (Prohibited Transaction Exemption 90-23, 55 Fed. Reg. 20545 (1990)
from certain of the prohibited transaction rules of ERISA and the related
excise tax provisions of Section 4975 of the Code with respect to the initial
purchase, the holding and the subsequent resale by Plans of certificates in
pass-through trusts that consist of certain receivables, loans, and other
obligations that meet the conditions and requirements of the 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 such an exemption.
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 therewith; and
(6) the Plan investing in the certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the SEC
under the Securities Act of 1933, as amended.
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 such other investment
pools must have been rated in one of the three highest rating
categories of S&P, Moody's, Fitch or Duff & Phelps for at least one
year prior to the Plan's acquisition of the securities; and
(iii) certificates evidencing interests in such other
investment pools must have been purchased by investors other than
Plans for at least one year prior to any Plan's acquisition of the
securities.
On July 21, 1997, the DOL published in the Federal Register
an amendment to the J.P. Morgan Exemption, which extends exemptive
relief to certain mortgage-backed and asset-backed securities
transactions using pre-funding accounts for trusts issuing
pass-through certificates. The amendment generally allows mortgage
loans or other secured receivables (the "Obligations") supporting
payments to certificateholders, and having a value equal to no more
than twenty-five percent (25%) of the total principal amount of the
certificates being offered by the trust, to be transferred to the
trust within a 90-day or three-month period following the closing
date (the "Pre-Funding Period"), instead of requiring that all such
Obligations be either identified or transferred on or before the
closing date. The relief is available when the following conditions
are met:
(1) The ratio of the amount allocated to the pre-funding
account to the total principal amount of the certificates being
offered (the "Pre-Funding Limit") must not exceed twenty-five
percent (25%).
(2) All Obligations transferred after the closing date
(the "Additional Obligations") must meet the same terms and
conditions for eligibility as the original Obligations used to
create the trust, which terms and conditions have been approved
by a rating agency.
(3) The transfer of such Additional Obligations to the
trust during the Pre-Funding Period must not result in the
certificates to be covered by the Exemption receiving a lower
credit rating from a rating agency upon termination of the
Pre-Funding Period than the rating that was obtained at the
time of the initial issuance of the certificates by the trust.
(4) Solely as a result of the use of pre-funding, the
weighted average annual percentage interest rate for all of the
Obligations in the trust at the end of the Pre-Funding Period
must not be more than 100 basis points lower than the average
interest rate for the Obligations transferred to the trust on
the closing date.
(5) In order to insure that the characteristics of the
Additional Obligations are substantially similar to the
original Obligations which were transferred to the trust fund:
(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 such letter, the independent accountant must use
the same type of procedures as were applicable to the
Obligations transferred to the trust as of the closing
date.
(6) The Pre-Funding Period must end no later than three
months or 90 days after the closing date or earlier in certain
circumstances if the pre-funding account falls below the
minimum level specified in the pooling and servicing agreement
or an Event of Default occurs.
(7) Amounts transferred to any pre-funding account and/or
capitalized interest account used in connection with the
pre-funding may be invested only in certain permitted
investments.
(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.
(9) The related pooling and servicing agreement must
describe the permitted investments for the pre-funding account
and/or capitalized interest account and, if not disclosed in
the related prospectus or prospectus supplement, the terms and
conditions for eligibility of Additional Obligations.
Moreover, the Exemption provides relief from certain
self-dealing/conflict of interest prohibited transactions that may occur when
any person who has discretionary authority or renders investment advice with
respect to the investment of plan assets causes a Plan to acquire certificates
in a trust, provided that, among other requirements:
(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 such
person has discretionary authority or renders investment advice
are invested in certificates representing an interest in one or
more trusts containing assets sold or serviced by the same
entity.
The J.P. Morgan Exemption does not apply to Plans sponsored by the seller, the
depositor, J.P. Morgan and the other underwriters set forth in the related
prospectus supplement, the trustee, the master servicer, any sub-servicer, the
pool insurer, any obligor with respect to the trust fund asset included in the
trust fund constituting more than five percent of the aggregate unamortized
principal balance of the assets in the trust fund, or any affiliate of any of
such parties -- the Restricted Group.
The 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 hereof, there is no single trust fund asset included in the
trust fund that constitutes more than five percent of the aggregate
unamortized principal balance of the assets of the trust fund.
Insurance Company Purchasers
Purchasers that are insurance companies should consult with their
legal advisors with respect to the applicability of Prohibited Transaction
Class Exemption 95-60, regarding transactions by insurance company general
accounts. In addition to any exemption that may be available under PTE 95-60
for the purchase and holding of securities by an insurance company general
account, the Small Business Job Protection Act of 1996 added a new Section
401(c) to ERISA, which provides certain exemptive relief from the provisions
of Part 4 of Title I of ERISA and Section 4975 of the Code, including the
prohibited transaction restrictions imposed by ERISA and the Code, for
transactions involving an insurance company general account. Pursuant to
Section 401(c) of ERISA, the DOL published proposed regulations on December
22, 1997, but the required final regulations (the "401(c) Regulations") have
not been issued as of the date thereof. The 401(c) Regulations which are to
provide guidance for the purpose of determining, in cases where insurance
policies supported by an insurer's general account are issued to or for the
benefit of a Plan on or before December 31, 1998, which general account assets
constitute plan assets. Section 401(c) of ERISA generally provides that, until
the date which is 18 months after the 401(c) Regulations become final, no
person shall be subject to liability under Part 4 of Title I of ERISA and
Section 4975 of the Code on the basis of a claim that the assets of an
insurance company general account constitute plan assets, unless (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 certain breaches of fiduciary duty which would also
constitute a violation of federal or state criminal law. Any assets of an
insurance company general account which support insurance policies issued to a
Plan after December 31, 1998 or issued to Plans on or before December 31, 1998
for which the insurance company does not comply with the 401(c) Regulations
may be treated as plan assets. In addition, because Section 401(c) does not
relate to insurance company separate accounts, separate account assets are
still treated as plan assets of any Plan invested in 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 therein were satisfied,
that the exemption would apply to all transactions involving a trust fund.
Prospective Plan investors should consult with their legal counsel concerning
the impact of ERISA and the Code and the potential consequences to their
specific circumstances prior to making an investment in the securities.
Any fiduciary or other investor of plan assets that proposes to
acquire or hold securities on behalf of a Plan or with plan assets should
consult with its counsel with respect to the potential applicability of the
fiduciary responsibility provisions of ERISA and the prohibited transaction
provisions of ERISA and Section 4975 of the Code to the proposed investment
and the 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 securities offered thereby 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 any such entities. Under SMMEA,
if a state enacts legislation prior to October 4, 1991 specifically limiting
the legal investment authority of any such entities with respect to "mortgage
related securities," securities will constitute legal investments for entities
subject to such legislation only to the extent provided therein. Approximately
twenty-one states adopted such legislation prior to the October 4, 1991
deadline. SMMEA provides, however, that in no event will the enactment of 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 such contractual commitment was made or those
securities were acquired prior to the enactment of such legislation.
SMMEA also amended the legal investment authority of
federally-chartered depository institutions as follows: federal savings and
loan associations and federal savings banks may invest in, sell or otherwise
deal in securities without limitations as to the percentage of their assets
represented thereby, federal credit unions may invest in mortgage related
securities, and national banks may purchase securities for their own account
without regard to the limitations generally applicable to investment
securities set forth in 12 U.S.C. 24 (Seventh), subject in each case to such
regulations as the applicable federal authority may prescribe. In this
connection, federal credit unions should review the 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, such
"high-risk mortgage securities" include securities such as securities not
entitled to distributions allocated to principal or interest, or subordinated
securities. Under the Policy Statement, it is the responsibility of each
depository institution to determine, prior to purchase, and at stated
intervals thereafter, whether a particular mortgage derivative product is a
"high-risk mortgage security," and whether the purchase, or retention, of 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 certain investors,
including depository institutions, either to purchase securities or to
purchase securities representing more than a specified percentage of the
investor's assets. Investors should consult their own legal advisors in
determining whether and to what extent the securities constitute legal
investments for such investors.
Method of Distribution
The securities offered hereby and by the related prospectus
supplement will be offered in series. The distribution of the securities may
be effected from time to time in one or more transactions, including
negotiated transactions, at a fixed public offering price or at varying prices
to be determined at the time of sale or at the time of commitment therefor. If
so specified in the related prospectus supplement, the securities will be
distributed in a firm commitment underwriting, subject to the terms and
conditions of the underwriting agreement, by J.P. Morgan Securities Inc., an
affiliate of the depositor, acting as underwriter with other underwriters, if
any, named therein. 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 such
offering and any agreements to be entered into between the depositor and
purchasers of securities of that series.
The depositor will indemnify J.P. Morgan Securities Inc. and any
underwriters against civil liabilities, including liabilities under the
Securities Act of 1933, or will contribute to payments J.P. Morgan Securities
Inc. and any underwriters may be required to make in respect of those civil
liabilities.
Securities will be sold primarily to institutional investors.
Purchasers of securities, including dealers, may, depending on the facts and
circumstances of such purchases, be deemed to be "underwriters" within the
meaning of the Securities Act of 1933 in connection with reoffers and sales by
them of securities. Certificateholders should consult with their legal
advisors in this regard prior to any such reoffer or sale.
As to each series of securities, only those classes rated in an
investment grade rating category by any rating agency will be offered hereby.
Any non-investment grade class may be initially retained by the depositor, and
may be sold by the depositor at any time in private transactions.
Legal Matters
The validity of the securities of each series, including certain
federal income tax consequences with respect thereto, will be passed upon for
the depositor by Brown & Wood LLP.
Financial Information
A new trust fund will be formed with respect to each series of
securities and no trust fund will engage in any business activities or have
any assets or obligations prior to the issuance of the related series of
securities. Accordingly, no financial statements with respect to any trust
fund will be included in this prospectus or in the related prospectus
supplement.
Rating
It is a condition to the issuance of the securities of each series
offered hereby and by the prospectus supplement that they shall have been
rated in one of the four highest rating categories by the nationally
recognized statistical rating agency or agencies 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 such
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 such 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
such investor to experience a lower than anticipated yield or that an investor
purchasing a security at a significant premium might fail to recoup its
initial investment under certain prepayment scenarios.
There is also no assurance that any rating will remain in effect for
any given period of time or that it may not be lowered or withdrawn entirely
by the rating agency in the future if in its judgment circumstances in the
future so warrant. In addition to being lowered or withdrawn due to any
erosion in the adequacy of the value of the trust fund assets or any credit
enhancement with respect to a series, such rating might also be lowered or
withdrawn among other reasons, because of an adverse change in the financial
or other condition of a credit enhancement provider or a change in the rating
of 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 such
that the outstanding principal balances of the loans in a particular trust
fund and any secondary financing on the related properties become equal to or
greater than the value of the properties, the rates of delinquencies,
foreclosures and losses could be higher than those now generally experienced
in the mortgage lending industry. In additional, adverse economic conditions,
which may or may not affect real property values, may affect the timely
payment by mortgagors of scheduled payments of principal and interest on the
loans and, accordingly, the rates of delinquencies, foreclosures and losses
with respect to any trust fund. To the extent that such losses are not covered
by credit enhancement, such losses will be borne, at least in part, by the
holders of one or more classes of the securities of the related series.
<PAGE>
Index of Defined Terms Term
----
401(c) Regulations..........................................................134
agreement....................................................................10
borrower.....................................................................88
claimable amount.............................................................94
Contingent Regulations.......................................................99
Debt Securities..............................................................97
DOL.........................................................................128
ERISA.......................................................................127
IRS..........................................................................99
lender.......................................................................88
Moody's......................................................................51
OID..........................................................................97
Parties in Interest.........................................................128
Permitted Investments........................................................51
Plan........................................................................127
Plan Asset Regulation.......................................................128
Prime Rate...................................................................43
Property Improvement Loans...................................................91
RCRA.........................................................................82
Regular Interests...........................................................103
Relief Act...................................................................89
REMIC........................................................................96
Residual Interests..........................................................103
secured creditor exclusion...................................................81
securityholders..............................................................44
strip........................................................................37
Subordinated securities......................................................48
Title I Loans................................................................91
Title I Program..............................................................91
<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............................... $331,278.89
===========
Trustee's Fees and Expenses........................
**
Printing and Engraving.............................
**
Legal Fees and Expenses............................
**
Blue Sky Fees......................................
**
Accounting Fees and Expenses.......................
**
Rating Agency Fees.................................
**
Miscellaneous......................................
**
Total.............................................. $
**
================================================================================
* All amounts, except the SEC Registration Fee, are estimates of
aggregate expenses incurred or to be incurred in connection with the issuance
and distribution of Securities in an aggregate principal amount assumed for
these purposes to be equal to $_____ of Securities registered hereby.
** To be filed by amendment.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under Section 8(b) of the proposed form of Underwriting Agreement,
the Underwriters are obligated under certain circumstances to indemnify
certain controlling persons of the Registrant against certain liabilities,
including liabilities under the Securities Act of 1933, as amended (the
"Act").
The Registrant's Certificate of Incorporation provides for
indemnification of directors and officers of the Registrant to the full extent
permitted by Delaware law.
Section 145 of the Delaware General Corporation Law provides, in
substance, that Delaware corporations shall have the power, under specified
circumstances, to indemnify their directors, officers, employees and agents in
connection with actions, suits or proceedings brought against them by a third
party or in the right of the corporation, by reason of the fact that they were
or are such directors, officers, employees or agents, against expenses
incurred in any such action, suit or proceeding. The Delaware General
Corporation Law also provides that the Registrant may purchase insurance on
behalf of any such director, officer, employee or agent.
ITEM 16. EXHIBITS.
(a) FINANCIAL STATEMENTS:
None.
(b) EXHIBITS:
1.1 Form of Underwriting Agreement.*
3.1 Restated Certificate of Incorporation of the Registrant.*
3.2 By-laws of the Registrant.*
4.1 Forms of Pooling and Servicing Agreement.*
4.2 Form of Trust Agreement.*
4.3 Form of Indenture.*
5.1 Opinion of Brown & Wood LLP as to legality of the
Securities.
8.1 Opinion of Brown & Wood LLP as to certain tax matters.
10.1 Form of Mortgage Loan Purchase Agreement.*
23.1 Consent of Brown & Wood LLP (included in Exhibits 5.1 and
8.1 hereto).
24.1 Powers of Attorney (included on Page II-4).
- --------------------
* To be filed by amendment.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933, as amended;
(ii) To reflect in the Prospectus any facts or events
arising after the effective date of the registration statement (or
the most recent post-effective amendment thereof) which, individually
or in the aggregate, represent a fundamental change in the
information set forth in the registration statement; and
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, as amended, each such post-effective amendment shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered that remain unsold at the
termination of the offering.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, as amended, each
filing of the registrant's annual report pursuant to Section 13(a) or Section
15(d) of the Securities Exchange Act of 1934, as amended (and, where
applicable, each filing of an employee benefit plan's annual report pursuant
to Section 15(d) of the Securities Exchange Act of 1934, as amended), that is
incorporated by reference in the registration statement shall be deemed a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended, may be permitted to directors, officers
and controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against
public policy as expressed in the Securities Act of 1933, as amended, and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act of 1933, as
amended, and will be governed by the final adjudication of such issue.
<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. 1 TO THE Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in New York, New York, on the
23RD day of AUGUST, 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 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) AUGUST 23, 1999
David M. Duzyk
- ----------------------------
* Controller (Principal Financial and Accounting AUGUST 23, 1999
Officer)
Aashish R. Kamat
- ----------------------------
* Director , Chairman of the Board AUGUST 23, 1999
William S. Demchak
- ----------------------------
* DIRECTOR AUGUST 23, 1999
DEBRA F. STONE
- ----------------------------
* DIRECTOR AUGUST 23, 1999
Edwin F. McMichael
- ----------------------------
*BY: /S/ DAVID M. DUZYK
ATTORNEY-IN-FACT
</TABLE>
