<PAGE> 1
Filed Pursuant to Rule 424b2
Registration No. 333-75295-01
Prospectus supplement
To prospectus dated August 10, 1999
$525,000,000
(APPROXIMATE)
ADVANTA MORTGAGE LOAN TRUST 1999-3
ISSUER
MORTGAGE LOAN ASSET-BACKED CERTIFICATES, SERIES 1999-3
<TABLE>
<S> <C>
[ADVANTA LOGO] [ADVANTA LOGO]
ADVANTA CONDUIT RECEIVABLES, INC. ADVANTA MORTGAGE CORP. USA
SPONSOR MASTER SERVICER
</TABLE>
------------------------
WE SUGGEST THAT YOU READ
THE SECTION ENTITLED "RISK
FACTORS" STARTING ON PAGE
S-7 OF THIS PROSPECTUS
SUPPLEMENT AND PAGE 9 OF
THE PROSPECTUS AND
CONSIDER THESE FACTORS
BEFORE MAKING A DECISION
TO INVEST IN THE
CERTIFICATES.
These certificates
represent non-recourse
obligations of the trust
only and are not interests
in or obligations of any
other person or entity.
Neither these certificates
nor the mortgage loans
will be insured or
guaranteed by any
governmental agency or
instrumentality.
This prospectus supplement
may be used to offer and
sell the certificates only
if accompanied by the
prospectus.
THE TRUST IS OFFERING THE FOLLOWING SEVEN CLASSES
OF SENIOR CLASS A CERTIFICATES:
<TABLE>
<CAPTION>
INITIAL PASS- FINAL SCHEDULED
CLASS PRINCIPAL BALANCE THROUGH RATE PAYMENT DATE
----- ----------------- ------------- ----------------
<S> <C> <C> <C>
A-1 $117,581,000 6.81% May 25, 2014
A-2 $ 69,182,000 7.23% June 25, 2014
A-3 $ 46,259,000 7.38% October 25, 2017
A-4 $ 74,498,000 7.75% October 25, 2026
A-5 $ 29,980,000 8.04% August 25, 2029
A-6 $ 37,500,000 7.59% June 25, 2014
A-7 $150,000,000 Libor + 0.40% August 25, 2029
</TABLE>
The pass-through rates on the class A-5, A-6 and
A-7 certificates are subject to a cap.
The pass-through rates on the class A-5 and A-7
certificates step up after the clean-up call date.
Interest and principal on the class A certificates
is scheduled to be paid monthly on the 25th day of
the month, or the next business day. The first
scheduled payment date is September 27, 1999.
The property of the trust consists of two separate
groups of sub-prime residential mortgage loans; one
group consists entirely of fixed rate loans, and
the other group consists entirely of adjustable
rate loans. The trust will also hold cash for the
purchase of additional mortgage loans on or before
November 18, 1999.
Each class of the class A certificates will have
the benefit of an insurance policy from Ambac
Assurance Corporation which will guarantee payments
with respect to the class A certificates.
[AMBAC LOGO]
Delivery of the class A certificates is expected to be made in book-entry form
through the facilities of The Depository Trust Company, Cedelbank, and the
Euroclear System on or about August 24, 1999.
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO THE
CLASS PRICE TO PUBLIC DISCOUNT SPONSOR
- ----- ---------------- --------------------- -----------------------
<S> <C> <C> <C>
A-1 99.99164% 0.150% 99.84164%
A-2 99.99725% 0.200% 99.79725%
A-3 99.98982% 0.230% 99.75982%
A-4 99.98718% 0.300% 99.68718%
A-5 99.94730% 0.350% 99.59730%
A-6 99.97711% 0.250% 99.72711%
A-7 100.00000% 0.225% 99.77500%
- ----- ---------------- -------------- ----------------
Total $ 524,949,624.70 $ 1,180,805.20 $ 523,768,819.50
</TABLE>
Investors in the fixed rate certificates will also be required to pay the
interest that accrued on their certificates from the cut-off date to the date of
issuance. The proceeds to the sponsor were calculated before deducting expenses
payable by the sponsor, which are estimated to be approximately $500,000.00.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus supplement. Any representation to the
contrary is a criminal offense.
------------------------
UNDERWRITERS OF THE CLASS A-1, A-2, A-3, A-4, A-5 AND A-6 CERTIFICATES
BEAR, STEARNS & CO. INC. SALOMON SMITH BARNEY
UNDERWRITERS OF THE CLASS A-7 CERTIFICATES
BEAR, STEARNS & CO. INC. PRUDENTIAL SECURITIES SALOMON SMITH BARNEY
August 17, 1999
<PAGE> 2
IMPORTANT NOTICE ABOUT THE INFORMATION PRESENTED IN THIS PROSPECTUS SUPPLEMENT
AND THE ACCOMPANYING PROSPECTUS
We provide information to you about these securities in two separate
documents that progressively provide more detail: (1) the accompanying
prospectus, which provides general information, some of which may not apply to
this series of securities; and (2) this prospectus supplement, which describes
the specific terms of this series of securities.
This prospectus supplement does not contain complete information about
the offering of these securities. We suggest that you read both this prospectus
supplement and the prospectus in full. We cannot sell these securities to you
unless you have received both this prospectus supplement and the prospectus.
TABLE OF CONTENTS
SUMMARY .......................................................... S-3
RISK FACTORS ..................................................... S-7
DELINQUENCY AND LOSS INFORMATION ................................. S-10
THE MORTGAGE LOANS ............................................... S-12
The Fixed Rate Group .......................................... S-13
Conveyance of Subsequent Mortgage Loans to the Fixed Rate Group S-16
The ARM Group ................................................. S-17
Conveyance of Subsequent Mortgage Loans to the ARM Group ...... S-24
PREPAYMENT AND YIELD CONSIDERATIONS .............................. S-24
Projected Prepayments and Yields for Class A Certificates S-24
Payment Lag Feature of the Fixed Rate Certificates ............ S-39
USE OF PROCEEDS .................................................. S-39
THE SPONSOR AND THE MASTER SERVICER .............................. S-39
Recent Developments Related To Advanta Corp. .................. S-40
Pending Consumer Mortgage Lending Proposals ................... S-40
DESCRIPTION OF THE CERTIFICATES .................................. S-41
Pre-Funding Account Feature ................................... S-42
Capitalized Interest Account .................................. S-42
Pass-Through Rates ............................................ S-42
Distributions of Interest ..................................... S-44
Distributions of Principal .................................... S-44
Flow of Funds ................................................. S-45
Optional Redemption ........................................... S-46
Mandatory Redemption .......................................... S-47
Calculation of LIBOR .......................................... S-47
CREDIT ENHANCEMENT ............................................... S-48
Class A Certificate Distributions and Insured Payments
to the Owners of the Class A Certificates ................... S-49
THE CERTIFICATE INSURER .......................................... S-49
THE CERTIFICATE INSURANCE POLICY ................................. S-50
THE POOLING AND SERVICING AGREEMENT .............................. S-51
Formation of the Trust ........................................ S-52
Sale of Mortgage Loans ........................................ S-52
Termination of the Trust ...................................... S-52
MATERIAL FEDERAL INCOME TAX CONSEQUENCES ......................... S-52
REMIC Elections ............................................... S-53
Special Tax Attributes ........................................ S-53
Supplemental Interest Amounts ................................. S-53
Taxation of Foreign Investors ................................. S-54
Information Reporting and Backup Withholding .................. S-55
STATE TAXES ...................................................... S-55
ERISA CONSIDERATIONS ............................................. S-55
RATINGS .......................................................... S-56
LEGAL INVESTMENT CONSIDERATIONS .................................. S-57
UNDERWRITING ..................................................... S-57
EXPERTS .......................................................... S-59
LEGAL MATTERS .................................................... S-59
GLOSSARY ......................................................... S-60
S-2
<PAGE> 3
SUMMARY
- This summary highlights selected information from this prospectus
supplement and does not contain all of the information that you need to consider
in making your investment decision. To understand all of the terms of the
offering of the class A certificates, carefully read this entire prospectus
supplement and the accompanying prospectus.
- This summary provides an overview of structural provisions,
calculations, cash flows and other information to aid your understanding and is
qualified by the full description of the structural provisions, calculations,
cash flows and other information in this prospectus supplement and the
accompanying prospectus.
TITLE OF SERIES
Advanta Mortgage Loan Trust 1999-3, Mortgage Loan Asset-Backed Certificates,
Series 1999-3.
SPONSOR
Advanta Conduit Receivables, Inc.
MASTER SERVICER
Advanta Mortgage Corp. USA.
ISSUER
Advanta Mortgage Loan Trust 1999-3.
TRUSTEE
Bankers Trust Company of California, N.A.
THE TRUST
The sponsor is forming the Advanta Mortgage Loan Trust 1999-3 to hold two groups
of sub-prime residential mortgage loans. The trust will also hold cash on
deposit in a pre-funding account to be used for the sole purpose of purchasing
additional mortgage loans on or before November 18, 1999. All of the mortgage
loans will be originated or purchased by affiliates of the sponsor.
CERTIFICATE INSURER
The trustee will hold an insurance policy issued to it by Ambac Assurance
Corporation guaranteeing payment of minimum required monthly amounts due to the
owners of the class A certificates.
CLASS A CERTIFICATES OFFERED
$525,000,000 (approximate) Advanta Mortgage Loan Trust 1999-3, Mortgage Loan
Asset-Backed Certificates, Series 1999-3, Class A to be issued in the following
classes with initial principal balances as set forth below:
<TABLE>
<CAPTION>
INITIAL
PRINCIPAL PASS-THROUGH
CLASS TRANCHE TYPE BALANCE RATE
- --------- ------------------ ---------------- ---------------
<S> <C> <C> <C>
A-1 Senior Sequential $117,581,000 6.81%
A-2 Senior Sequential $69,182,000 7.23%
A-3 Senior Sequential $46,259,000 7.38%
A-4 Senior Sequential $74,498,000 7.75%
A-5 Senior Sequential $29,980,000 8.04%
A-6 Senior NAS $37,500,000 7.59%
A-7 Senior Floater $150,000,000 Libor + 0.40%
</TABLE>
- - a senior tranche is not subordinate to any other class;
- - a sequential tranche is a class in a series of sequential-pay classes;
- - a NAS tranche is a non-accelerated senior class, also known as a
lockout class; and
- - a floater tranche is a class having an adjustable interest rate.
The class A-5, A-6 and A-7 certificates are subject to a cap on the pass-through
rate.
The class A-5 and A-7 certificates are subject to an increase in the
pass-through rate on the payment date immediately following the month in which
the clean-up call may first be exercised.
S-3
<PAGE> 4
The trust will also issue subordinate certificates which are not being offered
by this prospectus supplement. The subordinate certificates will initially be
retained by the sponsor or its affiliates. The subordinate certificates are
subordinate to all class A certificates and essentially represent the excess of
the aggregate mortgage loan balance over the aggregate principal balance of the
class A certificates, plus any excess cashflow which is not required to be
applied to payments on the class A certificates.
The class A certificates will initially be issued in book-entry form through
DTC, Cedelbank or Euroclear.
INITIAL CUT-OFF DATE
As of the opening of business on August 1, 1999.
STATISTICAL CALCULATION DATE
As of the opening of business on August 1, 1999.
CLOSING DATE
On or about August 24, 1999.
FINAL SCHEDULED PAYMENT DATES
Although it is anticipated that the actual final payment date for each class
will occur earlier than the final scheduled payment date, the final scheduled
payment dates for each of the classes are as follows:
Final Scheduled
Class Payment Date
----- ------------
A-1 May 25, 2014
A-2 June 25, 2014
A-3 October 25, 2017
A-4 October 25, 2026
A-5 August 25, 2029
A-6 June 25, 2014
A-7 August 25, 2029
THE MORTGAGE LOANS
The mortgage loans owned by the trust will be segregated into two groups, one
group will consist of fixed rate mortgage loans and the other group will consist
of adjustable rate mortgage loans. The fixed rate group will consist of first or
junior lien sub-prime residential mortgage loans and the adjustable rate or ARM
group will consist of only first lien sub-prime residential mortgage loans.
See "The Mortgage Loans" for statistical information about the mortgage loans.
PRE-FUNDING FEATURE
The trust may purchase additional mortgage loans on or before November 18, 1999
for inclusion in either the fixed rate group or the ARM group. At the closing,
the trustee will hold in trust, from the proceeds of the sale of the class A
certificates, approximately $46,100,000, which may be applied to the purchase of
additional fixed rate mortgage loans for inclusion in the fixed rate group, and
approximately $12,750,000, which may be applied to the purchase of additional
adjustable rate mortgage loans for inclusion in the ARM group.
DISTRIBUTIONS
Owners of class A certificates will be entitled to receive payments of interest
each month. Owners of class A certificates may not necessarily receive a
distribution of principal in any given month. The amount of principal the owners
of class A certificates will be entitled to receive will vary depending on a
number of factors, including the payments received on the mortgage loans in the
mortgage loan group securing that class. Each month, the trustee will calculate
the amounts to be paid to the owners of the class A certificates.
Distributions will be made on each payment date to the owners of the class A
certificates as of the record date. The record date for the class A-1, A-2, A-3,
A-4, A-5, and A-6 certificates is the last day of the prior calendar month. The
record
S-4
<PAGE> 5
date for the class A-7 certificates is the business day immediately preceding
the payment date.
Owners of class A certificates will receive payments on the 25th day of each
month, or, if such day is not a business day, on the next business day. The
first payment date is September 27, 1999.
In summary, on each payment date the funds available to be distributed will be
applied in the following order of priority:
- first, to pay fees due to the master servicer, the trustee and
the certificate insurer;
- second, to pay interest on the class A certificates;
- third, to pay principal of the class A certificates;
- fourth, to reimburse the certificate insurer;
- fifth, to reimburse the master servicer for unreimbursed
advances and other expenses; and
- sixth, to make a distribution to the owners of the subordinate
certificates, a portion of which may be used to pay any
supplemental interest amounts on the class A-7 certificates.
The cashflows from the two mortgage loan groups are cross-collateralized.
CREDIT ENHANCEMENT
Credit enhancement refers to a mechanism that is intended to protect the owners
of the class A certificates against losses due to defaults on the mortgage
loans.
The class A certificates have the benefit of the following four types of credit
enhancement:
- the use of excess interest to cover losses and to distribute
principal in order to create overcollateralization;
- the subordination of distributions on the subordinate
certificates to the required distributions on the class A
certificates;
- the allocation of losses on the mortgage loans to the
subordinate certificates; and
- the certificate insurance policy.
OPTIONAL REDEMPTION
The master servicer or one of the master servicer affiliates will have the right
to exercise a clean-up call on any payment date that the outstanding principal
balance of the mortgage loans is less than or equal to 10% of the outstanding
principal balance of all of the mortgage loans acquired by the trust prior to
the end of the pre-funding period, calculated as of the date the trust acquired
the mortgage loans.
This clean-up call will result in the optional redemption of the class A
certificates at a price of par plus accrued interest.
MANDATORY REDEMPTION
The class A-1, A-2, A-3, A-4, A-5 and A-6 certificates will be redeemed in part
in sequential order on the payment date immediately following the end of the
pre-funding period to the extent of any cash remaining in the pre-funding
account which is attributable to the fixed rate group. This mandatory redemption
will occur on the payment date immediately following the end of the pre-funding
period.
The class A-7 certificates will be redeemed in part on the payment date
immediately following the end of the pre-funding period to the extent of any
cash remaining in the pre-funding account which is attributable to the ARM
group. This mandatory redemption will occur on the payment date immediately
following the end of the pre-funding period.
S-5
<PAGE> 6
DENOMINATIONS
The trust will issue the class A certificates in book-entry form in integral
multiples of $1,000.
RATINGS
The class A certificates will be rated Aaa by Moody's Investors Service, Inc.
and AAA by Standard & Poor's Rating Services, a division of The McGraw-Hill
Companies, Inc.
A security rating is not a recommendation to buy, sell or hold securities, and
may be subject to revision or withdrawal at any time by a rating agency.
FEDERAL TAX ASPECTS
Dewey Ballantine LLP acted as counsel to the trust and is of the opinion that:
- the trust will be treated as a real estate mortgage investment
conduit, or REMIC, for federal income tax purposes and
- the class A certificates will be regular interests in the
REMIC and will be treated as debt instruments of the REMIC for
federal income tax purposes.
ERISA CONSIDERATIONS
The class A certificates may be offered to pension, profit sharing and other
employee benefit plans subject to ERISA.
LEGAL INVESTMENT CONSIDERATIONS
The class A certificates will not be mortgage related securities under the
Secondary Mortgage Market Enhancement Act of 1984. Some potential investors may
be limited in their legal investment authority only to first-lien mortgages or
mortgage related securities and will not be able to invest in the class A
certificates.
S-6
<PAGE> 7
RISK FACTORS
We suggest that you consider the following risk factors and the
information under "Risk Factors" in the accompanying prospectus prior to any
purchase of any of the class A certificates.
THE MORTGAGE LOANS MAY PREPAY AT ANY TIME, RESULTING IN UNCERTAINTY AS TO THE
AMORTIZATION RATE OF THE CLASS A CERTIFICATES
- - FIXED RATE MORTGAGE LOANS. The mortgage loans in the fixed rate group are all
fixed rate mortgage loans. The rate of prepayments on fixed rate mortgage loans
is sensitive to prevailing interest rates. If prevailing interest rates fall
significantly below the coupon rates on the mortgage loans, the mortgage loans
are likely to be subject to higher prepayment rates than if prevailing interest
rates remain at or above the coupon rates on the mortgage loans. Conversely, if
prevailing interest rates rise significantly above the coupon rates on the
mortgage loans, the rate of prepayments is likely to decrease. The weighted
average lives of the class A certificates and, if purchased at other than par,
the yields realized by owners of the class A certificates will be sensitive to
rates of payment of principal on the mortgage loans. The yield on a class A
certificate that is purchased at a premium from its outstanding principal amount
may be adversely affected by higher than anticipated levels of prepayments on
the mortgage loans. Conversely, the yield on a class A certificate that is
purchased at a discount from its outstanding principal amount may be adversely
affected by lower than anticipated levels of prepayments on the mortgage loans.
- - ADJUSTABLE RATE MORTGAGE LOANS. The mortgage loans in the ARM group are all
adjustable rate mortgage loans, including hybrid mortgage loans which have a
fixed rate of interest for the first two years, three years, four years or five
years, which then converts to an adjustable rate. The prepayment experience on
the adjustable rate mortgage loans, including the hybrid mortgage loans may
differ from the prepayment experience on fixed rate mortgage loans due to
provisions which provide for conversion to an adjustable coupon rate, periodic
reset caps and maximum rates. In particular, the hybrid loans may be subject to
higher prepayment rates as they approach their first coupon rate change dates.
THE EFFECT A CERTIFICATE INSURER DEFAULT WILL HAVE ON THE RATINGS OF CLASS A
CERTIFICATES
The ratings assigned to the class A certificates by the rating agencies
will be based on the credit characteristics of the mortgage loans and on ratings
assigned to the financial strength of the certificate insurer. Any reduction in
the ratings assigned to the certificate insurer by the rating agencies could
result in the reduction of the ratings assigned to the class A certificates.
This reduction in ratings could adversely affect the liquidity and market value
of the class A certificates.
CREDIT ENHANCEMENT DOES NOT APPLY TO PREPAYMENT RISK OR INTEREST RATE RISK
The protection afforded by the overcollateralization provisions and by
the certificate insurance policy is protection for credit risk and not for
prepayment risk or interest rate risk. The certificate insurance policy does not
guarantee or insure that any particular rate of prepayment is experienced by the
trust.
S-7
<PAGE> 8
THE CLASS A-5, A-6 AND A-7 CERTIFICATES HAVE A CAP ON THEIR PASS-THROUGH RATE,
WHICH MAY LIMIT THE AMOUNT OF INTEREST YOU WILL RECEIVE.
- - CLASS A-5 AND A-6 CERTIFICATES. The class A-5 and A-6 certificates are each
subject to an available funds cap on their pass-through rate, which is equal to
the weighted average coupon rate on the mortgage loans in the fixed rate group
minus the fees of the trust attributable to the fixed rate group. This means
that the interest that is payable to the investors in these certificates may be
limited to the interest the trust receives on the mortgage loans in the fixed
rate group. If the weighted average interest rate of the mortgage loans in the
fixed rate group was reduced significantly, under a relatively high prepayment
scenario, the pass-through rates on the class A-5 and A-6 certificates could be
subject to the limitation imposed by the available funds cap. This cap may
reduce the amount of interest you, as an investor in these classes of
certificates, receive. In addition, the resulting shortfall in interest on the
class A-5 and A-6 certificates is not subject to any carry-forward feature and
will not be required to be repaid on any subsequent payment date.
- - CLASS A-7 CERTIFICATES. The class A-7 certificates have a pass-through rate
based on one-month LIBOR and is subject to an available funds cap. The mortgage
loans in the ARM group have coupon rates based on six-month LIBOR or one-year
constant treasury maturity. Since the base index for the coupon rate on the
mortgage loans in the ARM group differs from the base index for the pass-through
rate on the class A-7 certificates, the weighted-average coupon rate on the
mortgage loans in the ARM group could be below the pass-through rate, in which
case the pass-through rate would be capped at that lower rate. This cap would
reduce the amount of interest you, as an investor in this class of certificates,
will receive. Any shortfall in interest on the class A-7 certificates will be
carried forward to subsequent payment dates, but those amounts are not covered
by the certificate insurance policy and may not be paid in the event the class
A-7 certificates are redeemed early.
NON-OWNER OCCUPIED PROPERTIES MAY HAVE HIGHER RATES OF DEFAULT
As of the statistical calculation date, non-owner occupied properties
represent 4.30% by principal balance of the mortgage loans in the fixed rate
group and 3.95% by principal balance of the mortgage loans in the ARM group.
Vacation homes and second homes are not considered non-owner occupied
properties, and therefore are not included in these percentages. It is possible
that the rate of delinquencies, foreclosures and losses on mortgage loans
secured by non-owner occupied properties could be higher than for loans secured
by the primary residence of the mortgagor because the mortgagor will be inclined
to make payment on their primary residence first.
PRE-FUNDING FEATURE MAY RESULT IN AN EARLY PARTIAL REDEMPTION OF THE CLASS A
CERTIFICATES AND CAUSE THE CHARACTERISTICS OF THE POOL OF MORTGAGE LOANS TO VARY
- - MANDATORY REDEMPTION. In the event that the sponsor does not have enough
subsequent mortgage loans to sell to the trust on or before the end of the
pre-funding period, the class A certificates will be subject to a partial
mandatory redemption on the payment date immediately following the end of the
pre-funding period. The sponsor does not expect that a material amount of
principal redemption will occur due to insufficient amounts of subsequent
mortgage loans.
- - ELIGIBILITY OF SUBSEQUENT MORTGAGE LOANS. Each subsequent mortgage loan must
satisfy the eligibility criteria at the time of its acquisition by the trust
pursuant to the pre-funding feature. However, subsequent mortgage loans may have
been originated or purchased using credit criteria
S-8
<PAGE> 9
different from those which were applied to the mortgage loans initially conveyed
on the closing date, and may be of a different credit quality. As a result,
following the transfer of subsequent mortgage loans, the aggregate
characteristics of the mortgage loans then held in trust may vary from those
initially conveyed, but such variance is not expected to be material.
CERTIFICATEHOLDERS COULD BE ADVERSELY AFFECTED IN THE ABSENCE OF YEAR 2000
COMPLIANCE
Many existing computer programs use only two digits to identify a year
in the date field. These programs were designed and developed without
considering the impact of the upcoming change in the century. If not corrected,
many computer applications could fail or create erroneous results on or after
January 1, 2000. In connection with this issue Advanta Corp., the parent company
of the affiliated originators and of the master servicer, has completed an
evaluation of its systems, applications and vendor lists, and is implementing
project plans to modify existing computer programs, convert to new programs or
replace systems, to the extent necessary to address the upcoming change in the
century. Advanta Corp. has identified its significant business relationships,
including, without limitation, vendors, customers, asset management
counterparties and funding counterparties. Advanta Corp. has initiated
communications with these third parties to determine the extent to which Advanta
Corp. is vulnerable to these third parties' failure to remediate their own year
2000 issues. In the event that Advanta Corp.'s project plans are not timely or
successfully completed, there can be no assurance that the upcoming change in
the century will not have a material adverse effect on the operations of the
affiliated originators or of the master servicer, including a shut-down of
operations for a period of time, which may, in turn, have a material adverse
effect on the class A certificates. In addition, there can be no assurance that
the systems used by outside service providers, including sub-servicers providing
services to the master servicer, or other third parties upon which the
affiliated originators' and the master servicer's systems rely, will be
converted on a timely basis. Further, there can be no assurance that a failure
to convert by another company, or a conversion that is incompatible with the
affiliated originators' and the master servicer's systems, would not have a
material adverse effect on their operations, which may, in turn, have a material
adverse effect on the class A certificates. In the event that the systems or
programs of the trustee, or the certificate issuer are not year 2000 compliant,
there can be no assurance that there would not be a material adverse effect on
the operations of the trustee or the certificate insurer, respectively, which
may, in turn, have a material adverse effect on the class A certificates.
CERTIFICATEHOLDERS COULD BE ADVERSELY AFFECTED IF DTC ENCOUNTERS YEAR 2000
ISSUES
The management of DTC 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
issues. DTC has informed its participants and 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 to securityholders, book-entry deliveries, and
settlement of trades within DTC continue to function appropriately on and after
January 1, 2000. 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.
DTC's ability to perform properly its services is also dependent upon
other parties, including, but not limited to, issuers, their agents and its
participating organizations, through which the owners of the class A
certificates will hold their certificates, as well as 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 financial community that it is contacting, and will continue to
contact, third party vendors from whom DTC acquires services to: (a) impress
upon them the importance of these services being year 2000 compliant and (b)
determine the extent of their efforts for
S-9
<PAGE> 10
year 2000 remediation of their services. In addition, DTC has stated that it is
in the process of developing the contingency plans that it deems appropriate.
If problems associated with the year 2000 issue were to occur with
respect to DTC and the services described above, distributions to the owners of
class A certificates could be delayed or otherwise adversely affected.
According to DTC, the foregoing information with respect to DTC has
been provided to the financial community for information purposes only and is
not intended to serve as a representation, warranty or contract modification of
any kind.
------------------------
You can find a glossary of defined terms used in this prospectus
supplement beginning on page S-60.
DELINQUENCY AND LOSS INFORMATION
The following tables contain information relating to the delinquency,
loan loss and foreclosure experience of the master servicer for its servicing
portfolio. The servicing portfolio consists of fixed and adjustable rate
mortgage loans serviced as of June 30, 1999, and for each of the five prior year
ends. This servicing portfolio, called the owned and managed servicing
portfolio, includes, but is not limited to, the mortgage loans originated or
purchased on or prior to June 30, 1999. In addition to this portfolio, the
master servicer serviced, as of June 30, 1999, approximately 144,000 mortgage
loans with an aggregate principal balance as of such date of approximately $9.4
billion; these loans were not originated or purchased by the sponsor or its
affiliated originators but are being serviced for third parties on a contract
servicing basis. No loans being serviced for third parties are included in the
tables below.
Neither the sponsor nor the master servicer have reason to believe that
the delinquency and loss experience of the mortgage loans will differ in any
material respect from that of the master servicer's portfolio of owned and
managed mortgage loans, although there can be no assurance that this will be the
case.
DELINQUENCY AND FORECLOSURE EXPERIENCE OF THE
MASTER SERVICER'S OWNED AND MANAGED SERVICING PORTFOLIO
OF MORTGAGE LOANS
<TABLE>
<CAPTION>
SIX MONTHS ENDING YEAR ENDING DECEMBER 31
JUNE 30, 1999 1998 1997
--------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
--------------------------------------------------------------------------------------------------------
NUMBER DOLLAR NUMBER DOLLAR NUMBER DOLLAR
OF AMOUNT OF AMOUNT OF AMOUNT
LOANS (000) LOANS (000) LOANS (000)
<S> <C> <C> <C> <C> <C> <C>
Portfolio 112,132 $ 7,660,254 111,707 $ 7,664,919 74,525 $ 4,888,936
Delinquency
30-59 days 3.18% 2.89% 3.05% 2.76% 3.13% 2.99%
60-89 days 1.10% 1.01% 1.10% 1.08% 0.98% 0.98%
90 days or
more 1.94% 1.73% 1.45% 1.22% 1.39% 1.28%
------------- ----------- ---------- ------------- ---------- -------------
Total 6.22% 5.63% 5.60% 5.06% 5.50% 5.25%
Foreclosure
rate 3.46% 3.54% 2.85% 2.98% 2.10% 2.32%
REO properties 1.00% -- 0.78% -- 0.40% --
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31
-------------------------------------------------------------------------------------------
1996 1995 1994
-------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------
NUMBER DOLLAR NUMBER DOLLAR NUMBER DOLLAR
OF AMOUNT OF AMOUNT OF AMOUNT
LOANS (000) LOANS (000) LOANS (000)
<S> <C> <C> <C> <C> <C> <C>
Portfolio 43,303 $ 2,595,981 32,592 $1,797,582 26,446 $ 1,346,100
Delinquency
30-59 days 3.07% 2.90% 2.67% 2.44% 2.01% 1.57%
60-89 days 0.85% 0.90% 0.72% 0.71% 0.57% 0.45%
90 days or
more 1.45% 1.26% 1.69% 1.23% 1.85% 1.51%
------------- ------------- ---------- ---------- ---------- ------------
Total 5.37% 5.06% 5.08% 4.38% 4.43% 3.53%
Foreclosure
rate 1.62% 1.92% 1.29% 1.53% 1.35% 1.38%
REO properties 0.42% -- 0.52% -- 0.47% --
</TABLE>
The period of delinquency is based on the number of days payments are
contractually past due. The delinquency statistics for the period exclude loans
in foreclosure. The foreclosure rate reflects the
S-10
<PAGE> 11
number of mortgage loans in foreclosure as a percentage of the total number of
mortgage loans or the dollar amount of mortgage loans in foreclosure as a
percentage of the total dollar amount of mortgage loans, as the case may be, as
of the date indicated. REO properties are real estate owned properties which
relate to foreclosed mortgages or properties for which deeds in lieu of
foreclosure have been accepted, and held by the master servicer pending
disposition. The percentages for REO properties are calculated based on the
number of loans, not the dollar amount.
LOAN LOSS EXPERIENCE
OF THE MASTER SERVICER'S OWNED AND MANAGED SERVICING
PORTFOLIO OF MORTGAGE LOANS
<TABLE>
<CAPTION>
SIX MONTHS
ENDING YEAR ENDING DECEMBER 31
---------------------------------------------------------------
JUNE 30, 1999 1998 1997 1996 1995 1994
---------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Average amount outstanding $7,728,766 $6,223,870 $3,677,342 $2,102,643 $1,540,238 $1,225,529
Net losses $ 23,374 $ 35,640 $ 18,435 $ 15,067 $ 13,830 $ 20,707
Net losses as a
percentage of average
amount outstanding 0.60% 0.57% 0.50% 0.72% 0.90% 1.69%
</TABLE>
The average amount outstanding during the period is the arithmetic
average of the principal balances of the mortgage loans outstanding on the last
business day of each month during the period. Net losses are amounts relating to
mortgage loans which have been determined by the master servicer to be
uncollectible, less amounts received by the master servicer as recoveries from
liquidation proceeds and deficiency judgements. The net loss percentage is an
annualized number.
The information above should not be considered as a basis for assessing
the likelihood, amount or severity of delinquencies, foreclosures or losses on
the mortgage loans. No assurances can be given that the delinquency, foreclosure
and loss experience presented in the tables above will be indicative of such
experience on the mortgage loans. The statistics shown above represent the
respective delinquency and foreclosure experiences only at the dates presented.
The aggregate delinquency, foreclosure and loss experience on the mortgage loans
will depend on the results obtained over the life of the trust. It should be
noted that if the residential real estate market should experience an overall
decline in property values, the actual rates of delinquencies, foreclosures and
losses could be higher than those previously experienced by the master servicer.
In addition, adverse economic conditions may effect the timely payment by
borrowers of scheduled payments of principal and interest on the mortgage loans
and, accordingly, the actual rates of delinquencies and foreclosures with
respect to the mortgage loans. The likelihood that borrowers will become
delinquent, the rate of foreclosures and the severity of any losses also may be
affected by a number of factors related to each borrower's personal
circumstances, including, but not limited to, unemployment or change in
employment and marital separation.
The changes in the delinquency and loss levels reported in the tables
above are the result of changes in the mix of origination sources offset by
changes in the seasoning of the owned and managed servicing portfolio. It is
expected that the owned and managed servicing portfolio will continue to season
due to slower expected rates of new originations. As a result, the master
servicer expects reported delinquency levels and loss levels to increase. In
addition, during 1994, the master servicer implemented a new policy for the
charge-off of closed end mortgage loans which resulted in additional mortgage
loans being charged off. Consequently, the loss rates for that year were higher
than they would have been under the previous policy.
S-11
<PAGE> 12
THE MORTGAGE LOANS
The mortgage loans will be used predominantly to refinance an existing
mortgage loan on more favorable terms, to consolidate debt, or to obtain cash
proceeds by borrowing against the borrower's equity in the mortgaged property.
Each mortgage loan in the trust will be assigned to either the fixed
rate group or the ARM group. Each of the mortgage loans in the fixed rate group
has a fixed coupon rate secured by either a first or junior lien on the
mortgaged property. Each mortgage loan contained in the ARM group has an
adjustable coupon rate secured by a first lien on the mortgaged property. The
class A-1, A-2, A-3, A-4, A-5 and A-6 certificates represent undivided ownership
interests in all mortgage loans contained or to be contained in the fixed rate
group, and the class A-7 certificates represent undivided ownership interests in
all mortgage loans contained or to be contained in the ARM group.
The combined loan-to-value ratios and loan-to-value ratios described
were calculated based upon the appraised values of the mortgaged properties at
the time of origination. Although, for purchase money loans, the combined
loan-to-value ratios and loan-to-value ratios may have been calculated using the
lower of the purchase price or appraised values of the mortgaged properties at
the time of origination. The appraised values may have declined since the date
of origination.
Owner-occupied properties include vacation homes and second homes.
Difference Between the Statistical Calculation Date and the Closing
Date.
The statistical information presented in this prospectus supplement is
computed based on the mortgage loans as of the opening of business on August 1,
1999, the statistical calculation date. All percentages are calculated based on
the aggregate outstanding principal balance of all mortgage loans in the trust,
or all of the mortgage loans in the applicable mortgage loan group, as of the
statistical calculation date.
As of the statistical calculation date, the fixed rate group mortgage
loans aggregated $331,565,396.67 and the ARM group mortgage loans aggregated
$142,935,184.92. The sponsor expects that the actual aggregate principal balance
of the mortgage loans to be sold to the trust on the closing date, as of the
initial cut-off date of August 1, 1999, plus the aggregate principal balance of
the mortgage loans to be conveyed to the trust during the pre-funding period
will represent approximately $377,700,000 in mortgage loans in the fixed rate
group and approximately $155,700,000 in mortgage loans in the ARM group.
As of the statistical calculation date, the mortgaged properties are
located in 50 states and the District of Columbia.
As of the statistical calculation date, the mortgage loans have
remaining terms to maturity of not greater than 30 years, no more than 1.97% of
the mortgage loans will be 30-59 days delinquent, 16.81% of the mortgage loans
are simple interest or date of payment loans, 83.19% are actuarial or
pre-computed loans, and 95.83% of the mortgage loans are secured by first lien
mortgages.
Prior to the closing date, some amortization of the mortgage loans will
occur and some mortgage loans may prepay in full or may be determined not to
meet the eligibility requirements for the final pools and as a result may not be
included in the final pools. Consequently, the statistical distribution of
characteristics as of the closing date or as of the end of the pre-funding
period for the fixed rate group and the ARM group will vary somewhat from the
statistical distribution of these characteristics computed as
S-12
<PAGE> 13
of the statistical calculation date as presented in this prospectus supplement,
although this variance will not be greater than five percent.
THE FIXED RATE GROUP
The following tables describe the fixed rate group of mortgage loans
and mortgaged properties as of the statistical calculation date.
The junior lien ratio of a mortgage loan which is in a junior lien
position is equal to the ratio of the original principal balance of the mortgage
loan to the sum of (1) the original principal balance of the mortgage loan and
(2) the outstanding principal balance of any lien on the mortgaged property
having priorities senior to that of the lien which secures the mortgage loan at
the time of origination of the mortgage loan.
FIXED RATE GROUP
GEOGRAPHIC DISTRIBUTION
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE % OF AGGREGATE
STATE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
California...................... 311 $ 32,757,983.68 9.88%
Ohio............................ 366 25,367,807.50 7.65
Michigan........................ 388 23,894,791.77 7.21
Illinois........................ 291 22,196,308.79 6.69
Pennsylvania.................... 380 21,709,620.59 6.55
New York........................ 197 15,850,295.63 4.78
Indiana......................... 241 14,401,913.31 4.34
Florida......................... 236 14,034,004.05 4.23
Maryland........................ 165 12,634,663.97 3.81
New Jersey...................... 135 11,979,871.03 3.61
Other........................... 2,121 136,738,136.35 41.25
-------------- ----------------- -----------------
TOTAL....................... 4,831 $ 331,565,396.67 100.00%
============== ================= =================
</TABLE>
The mortgaged properties in the fixed rate group are located in a total of 50
states and the District of Columbia.
FIXED RATE GROUP
DISTRIBUTION OF CLTVS
<TABLE>
<CAPTION>
RANGE OF NUMBER OF AGGREGATE % OF AGGREGATE
CLTV RATIOS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------------------- -------------------- ----------------------- -----------------
<S> <C> <C> <C>
95.01 - 100.00%........... 63 $ 4,392,949.69 1.32%
90.01 - 95.00............ 41 1,742,215.45 0.53
85.01 - 90.00............ 248 19,365,481.20 5.84
80.01 - 85.00............ 1,558 117,772,744.15 35.52
75.01 - 80.00............ 1,049 78,869,121.42 23.79
70.01 - 75.00............ 666 46,061,057.20 13.89
60.01 - 70.00............ 541 31,529,415.91 9.51
0.01 - 60.00............ 665 31,832,411.65 9.60
-------------------- ----------------------- --------------
TOTAL....................... 4,831 $ 331,565,396.67 100.00%
==================== ======================= ==============
</TABLE>
Minimum CLTV: 5.52%
Maximum CLTV: 100.00%
Weighted Average CLTV: 77.13%
S-13
<PAGE> 14
FIXED RATE GROUP
REMAINING TERM TO MATURITY DISTRIBUTION
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE % OF AGGREGATE
MONTHS REMAINING MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------------------- ------------------ -------------------- ---------------------
<S> <C> <C> <C>
1 - 60................ 38 $ 746,975.84 0.23%
61 - 120................ 280 9,108,307.77 2.75
121 - 180................ 2,176 147,565,599.55 44.50
181 - 240................ 986 61,769,558.73 18.63
241 - 300................ 35 2,194,246.48 0.66
301 - 360................ 1,316 110,180,708.30 33.23
------------------ -------------------- ---------------------
TOTAL....................... 4,831 $ 331,565,396.67 100.00%
================== ==================== =====================
</TABLE>
Minimum Remaining Term: 13 months
Maximum Remaining Term: 360 months
Weighted Average Remaining Term: 247 months
31.02% of the mortgage loans in the fixed rate group are balloon loans.
FIXED RATE GROUP
DISTRIBUTION OF PRINCIPAL BALANCES
<TABLE>
<CAPTION>
RANGE OF NUMBER OF AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------------------- ---------------------- ----------------------- -------------------
<S> <C> <C> <C>
$ 1 - $ 25,000.......... 608 $ 11,396,382.18 3.44%
25,001 - 50,000.......... 1,392 52,477,634.13 15.83
50,001 - 75,000.......... 1,354 83,638,947.64 25.22
75,001 - 100,000.......... 640 55,471,438.74 16.73
100,001 - 150,000.......... 544 65,402,479.38 19.73
150,001 - 200,000.......... 162 28,055,449.51 8.46
200,001 - 250,000.......... 70 15,711,295.19 4.74
250,001 - 300,000.......... 34 9,286,474.93 2.80
300,001 - 350,000.......... 15 4,850,318.08 1.46
350,001 - 900,000.......... 12 5,274,976.89 1.59
---------------------- ----------------------- -------------------
TOTAL....................... 4,831 $ 331,565,396.67 100.00%
====================== ======================= ===================
</TABLE>
Minimum Principal Balance: $ 2,093.95
Maximum Principal Balance: $ 898,960.62
Average Principal Balance: $ 68,632.87
S-14
<PAGE> 15
FIXED RATE GROUP
DISTRIBUTION OF MORTGAGE COUPON RATES
<TABLE>
<CAPTION>
RANGE OF NUMBER OF AGGREGATE % OF AGGREGATE
MORTGAGE COUPON RATES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------ -------------- ------------------ ------------------
<S> <C> <C> <C>
6.001 - 7.000%.......... 1 $ 65,321.28 0.02%
7.001 - 8.000........... 234 25,981,179.49 7.84
8.001 - 9.000........... 939 84,783,556.88 25.57
9.001 - 10.000........... 1,231 94,195,154.98 28.41
10.001 - 11.000........... 990 65,610,481.57 19.79
11.001 - 12.000........... 567 30,646,360.14 9.24
12.001 - 13.000........... 408 16,397,260.83 4.95
13.001 - 14.000........... 236 7,830,741.21 2.36
14.001 - 15.000........... 137 4,117,539.46 1.24
15.001 - 19.000........... 88 1,937,800.83 0.58
-------------- ------------------ ------------------
TOTAL....................... 4,831 $ 331,565,396.67 100.00%
============== ================== ==================
</TABLE>
Minimum Coupon Rate: 6.99%
Maximum Coupon Rate: 18.60%
Weighted Average Coupon Rate: 9.91%
FIXED RATE GROUP
LIEN POSITION
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE % OF AGGREGATE
LIEN POSITION MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------- --------------- ------------------- -----------------
<S> <C> <C> <C>
First Lien......................... 4,170 $ 311,755,782.87 94.03%
Second Lien........................ 661 19,809,613.80 5.97
--------------- ------------------- -----------------
TOTAL.......................... 4,831 $ 331,565,396.67 100.00%
=============== =================== =================
</TABLE>
FIXED RATE GROUP
DISTRIBUTION OF JUNIOR LIEN RATIOS
<TABLE>
<CAPTION>
RANGE OF NUMBER OF AGGREGATE % OF AGGREGATE
JUNIOR LIEN RATIOS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------- ----------------- ---------------------- --------------------
<S> <C> <C> <C>
0.01 - 10.00%........... 30 $ 510,741.75 2.58%
10.01 - 20.00............ 207 4,861,412.80 24.55
20.01 - 30.00............ 207 6,004,108.13 30.32
30.01 - 40.00............ 105 3,962,912.04 20.00
40.01 - 50.00............ 43 1,712,216.25 8.64
50.01 - 60.00............ 16 691,521.21 3.49
60.01 - 70.00............ 17 700,090.51 3.53
70.01 - 80.00............ 18 602,826.05 3.04
80.01 - 90.00............ 11 432,011.87 2.18
90.01 - 100.00............ 7 331,773.19 1.67
----------------- -------------------- --------------------
TOTAL....................... 661 $ 19,809,613.80 100.00%
================= ==================== ====================
</TABLE>
Minimum Junior Lien Ratio: 4.62%
Maximum Junior Lien Ratio: 96.38%
Weighted Average Junior Lien Ratio: 32.25%
S-15
<PAGE> 16
FIXED RATE GROUP
DISTRIBUTION OF PROPERTY TYPES
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE % OF AGGREGATE
PROPERTY TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------------- ----------------- ------------------- --------------------
<S> <C> <C> <C>
SF Detached/DeMinimus PUD.......... 4,174 $ 289,735,544.34 87.38%
SF Row House/Townhouse/Condo....... 231 13,047,480.35 3.94
Two to Four Family Home............ 219 16,946,928.10 5.11
Prefabricated Single Family........ 207 11,835,443.88 3.57
----------------- ------------------- --------------------
TOTAL.......................... 4,831 $ 331,565,396.67 100.00%
================= =================== ====================
</TABLE>
FIXED RATE GROUP
DISTRIBUTION OF OCCUPANCY STATUS
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE % OF AGGREGATE
OCCUPANCY STATUS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------------ ---------------- ----------------------- -------------------
<S> <C> <C> <C>
Owner Occupied, includes vacation
and second homes.................. 4,568 $ 317,319,215.28 95.70%
Non-Owner Occupied................. 263 14,246,181.39 4.30
---------------- ----------------------- -------------------
TOTAL......................... 4,831 $ 331,565,396.67 100.00%
================ ======================= ===================
</TABLE>
FIXED RATE GROUP
DISTRIBUTION OF SEASONING
<TABLE>
<CAPTION>
MONTHS ELAPSED NUMBER OF AGGREGATE % OF AGGREGATE
SINCE ORIGINATION MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
<S> <C> <C> <C>
0 - 6..................... 4,414 $ 305,304,504.33 92.07%
7 - 12..................... 287 21,004,766.91 6.34
13 - 24..................... 58 3,849,776.38 1.16
25 - 156..................... 72 1,406,349.05 0.43
----------------- -------------------- -------------------
TOTAL........................ 4,831 $ 331,565,396.67 100.00%
================= ==================== ===================
</TABLE>
Minimum Seasoning: 0 months
Maximum Seasoning: 154 months
Weighted Average Seasoning: 2 months
CONVEYANCE OF SUBSEQUENT MORTGAGE LOANS TO THE FIXED RATE GROUP
During the pre-funding period, the trust may acquire approximately
$46,100,000 aggregate principal balance of mortgage loans for assignment to the
fixed rate group. Accordingly, the characteristics of the fixed rate group will
vary following the acquisition by the trust of these additional mortgage loans.
Each individual fixed rate subsequent mortgage loan must have:
- a fixed rate of interest of at least 7.00%;
- a combined loan to value ratio not higher than 100.00%;
- a maturity date not later than August 2029, and
- a principal balance not greater than $500,000.00.
S-16
<PAGE> 17
THE ARM GROUP
The ARM group contains 3.67% of mortgage loans that bear an adjustable
coupon rate of six-month LIBOR plus a margin for the life of the loan, 1.01% of
mortgage loans that bear an adjustable coupon rate of one-year constant maturity
treasury plus a margin for the life of the loan, and 95.32% of the mortgage
loans, referred to as hybrid mortgage loans, that have a fixed coupon rate for
an initial period of time and then convert to an adjustable coupon rate.
In the ARM group, 95.19% of the mortgage loans are indexed on the
average of the six-month LIBOR rates based on quotations at five major banks as
set forth in the Money Rates section of The Wall Street Journal, Western
Edition, on the first business day of the month; 1.72% are indexed on the
average of the six-month LIBOR rates based on quotations at five major banks as
set forth in the Money Rates section of The Wall Street Journal, Western
Edition, on the most recent daily quote available; 0.68% are indexed on the
average of the six-month LIBOR rates based on quotations of major banks, as
published by Fannie Mae, on the first business day of the month; and 0.62% are
indexed on other six-month LIBOR rates. Furthermore, 1.72% of the ARM mortgage
loans are indexed on the one-year constant maturity treasury index published in
the Wall Street Journal as a key interest rate each week and 0.07% are indexed
on the weekly average of the one-year constant maturity treasury.
With respect to the hybrid mortgage loans in the ARM group, 0.12% bear
interest at a fixed rate of interest for a one-year period following
origination, 22.25% bear interest at a fixed rate of interest for a two-year
period following origination, 36.95% bear interest at a fixed rate of interest
for a three-year period following origination, 0.04% bear interest at a fixed
rate of interest for a four-year period following origination and 40.64% bear
interest at a fixed rate of interest for a five-year period following
origination. After their initial fixed rate periods, these mortgage loans bear
interest at adjustable rates indexed on six-month LIBOR or one-year constant
maturity treasury.
The following tables describe the ARM group of mortgage loans and the
mortgaged properties as of the opening of business on the statistical
calculation date.
ARM GROUP
GEOGRAPHIC DISTRIBUTION
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE % OF AGGREGATE
STATE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------------------- ----------------- --------------------- --------------------
<S> <C> <C> <C>
California...................... 111 $ 20,725,943.22 14.50%
Washington...................... 79 10,968,292.91 7.67
Michigan........................ 127 9,468,079.15 6.62
Illinois........................ 92 9,324,864.90 6.52
Ohio............................ 107 8,442,431.67 5.91
Pennsylvania.................... 85 6,102,303.42 4.27
Virginia........................ 57 5,662,812.95 3.96
Florida......................... 66 5,662,308.97 3.96
Oregon.......................... 48 5,397,318.75 3.78
Utah............................ 34 4,828,835.86 3.38
Other........................... 681 56,351,993.12 39.43
----------------- --------------------- --------------------
TOTAL....................... 1,487 $ 142,935,184.92 100.00%
================= ===================== ====================
</TABLE>
The mortgaged properties in the ARM group are located in 49 states.
S-17
<PAGE> 18
ARM GROUP
DISTRIBUTION OF LTVS
<TABLE>
<CAPTION>
RANGE OF NUMBER OF AGGREGATE % OF AGGREGATE
LTV RATIOS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
-------------------------------- ----------------- --------------------- ---------------------
<S> <C> <C> <C>
95.01 - 100.00%........... 21 $ 2,105,126.82 1.47%
90.01 - 95.00............ 13 942,028.15 0.66
85.01 - 90.00............ 103 11,442,825.89 8.01
80.01 - 85.00............ 601 62,494,542.29 43.71
75.01 - 80.00............ 346 36,285,640.55 25.39
70.01 - 75.00............ 170 13,664,046.35 9.56
60.01 - 70.00............ 123 9,199,675.92 6.44
0.01 - 60.00............ 110 6,801,298.95 4.76
----------------- --------------------- ---------------------
TOTAL....................... 1,487 $ 142,935,184.92 100.00%
================= ===================== =====================
</TABLE>
Minimum LTV: 15.89%
Maximum LTV: 100.00%
Weighted Average LTV: 80.10%
ARM GROUP
DISTRIBUTION OF CURRENT MORTGAGE COUPON RATES
<TABLE>
<CAPTION>
RANGE OF CURRENT NUMBER OF AGGREGATE % OF AGGREGATE
MORTGAGE COUPON RATES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------------------- ------------------- --------------------- --------------------
<S> <C> <C> <C>
7.001 - 8.000%........... 209 $ 24,172,384.36 16.91%
8.001 - 9.000............ 322 37,723,078.09 26.39
9.001 - 10.000............ 404 40,138,092.45 28.09
10.001 - 11.000............ 278 22,975,524.89 16.07
11.001 - 12.000............ 160 11,874,491.89 8.31
12.001 - 13.000............ 65 3,793,535.71 2.65
13.001 - 14.000............ 39 1,894,976.98 1.33
14.001 - 15.000............ 10 363,100.55 0.25
------------------- -------------------- -------------------
TOTAL....................... 1,487 $ 142,935,184.92 100.00%
=================== ==================== ===================
</TABLE>
Minimum Coupon Rate: 7.49%
Maximum Coupon Rate: 14.93%
Weighted Average Coupon Rate: 9.50%
S-18
<PAGE> 19
ARM GROUP
REMAINING TERM TO MATURITY DISTRIBUTION
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE % OF AGGREGATE
MONTHS REMAINING MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------- ----------------- ---------------------- ------------------
<S> <C> <C> <C>
1 - 60................ 3 $ 96,750.59 0.07%
61 - 120................ 17 731,928.44 0.51
121 - 180................ 39 1,997,903.05 1.40
181 - 240................ 74 4,335,199.72 3.03
241 - 300................ 6 326,496.85 0.23
301 - 360................ 1,348 135,446,906.27 94.76
----------------- ---------------------- ------------------
TOTAL....................... 1,487 $ 142,935,184.92 100.00%
================= ====================== ==================
</TABLE>
Minimum Remaining Term: 58 months
Maximum Remaining Term: 360 months
Weighted Average Remaining Term: 349 months
ARM GROUP
DISTRIBUTION OF PRINCIPAL BALANCES
<TABLE>
<CAPTION>
RANGE OF NUMBER OF AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------- ----------------- -------------------- ---------------------
<S> <C> <C> <C>
$ 1 - $ 25,000......... 53 $ 1,102,915.79 0.77%
25,001 - 50,000......... 304 12,159,240.66 8.51
50,001 - 75,000......... 401 24,847,362.01 17.38
75,001 - 100,000......... 250 21,890,233.11 15.31
100,001 - 150,000......... 264 31,883,016.96 22.31
150,001 - 200,000......... 97 16,605,568.12 11.62
200,001 - 250,000......... 39 8,692,554.79 6.08
250,001 - 300,000......... 44 12,201,084.13 8.54
300,001 - 350,000......... 11 3,564,321.68 2.49
350,001 - 400,000......... 12 4,523,560.36 3.16
400,001 - 450,000......... 6 2,504,503.48 1.75
450,001 - 500,000......... 4 1,923,543.41 1.35
500,001 - 550,000......... 2 1,037,280.42 0.73
----------------- -------------------- ---------------------
TOTAL....................... 1,487 $ 142,935,184.92 100.00%
================= ==================== =====================
</TABLE>
Minimum Principal Balance: $ 14,796.80
Maximum Principal Balance: $ 520,000.01
Average Principal Balance: $ 96,123.19
ARM GROUP
DISTRIBUTION OF PROPERTY TYPES
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE % OF AGGREGATE
PROPERTY TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------------ --------------------- ---------------------- -----------------
<S> <C> <C> <C>
SF Detached/DeMinimus PUD.......... 1,322 $ 129,595,810.43 90.67%
SF Row House/Townhouse/Condo....... 59 5,193,149.29 3.63
Two to Four Family Home............ 45 3,827,432.95 2.68
Prefabricated Single Family........ 61 4,318,792.25 3.02
--------------------- ---------------------- -----------------
TOTAL.......................... 1,487 $ 142,935,184.92 100.00%
===================== ====================== =================
</TABLE>
S-19
<PAGE> 20
ARM GROUP
DISTRIBUTION OF OCCUPANCY STATUS
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE % OF AGGREGATE
OCCUPANCY STATUS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------- ---------------- --------------------- -------------------
<S> <C> <C> <C>
Owner Occupied, including vacation
and second homes.................. 1,400 $ 137,282,654.95 96.05%
Non-Owner Occupied................. 87 5,652,529.97 3.95
---------------- --------------------- -------------------
TOTAL.......................... 1,487 $ 142,935,184.92 100.00%
================ ===================== ===================
</TABLE>
ARM GROUP
DISTRIBUTION OF SEASONING
<TABLE>
<CAPTION>
MONTHS ELAPSED NUMBER OF AGGREGATE % OF AGGREGATE
SINCE ORIGINATION MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------------------------------- ---------------- --------------------- ------------------
<S> <C> <C> <C>
0 - 6..................... 1,307 $ 119,446,333.38 83.57%
7 - 12..................... 147 19,994,800.82 13.99
13 - 24..................... 31 3,216,464.69 2.25
25 - 56..................... 2 277,586.03 0.19
---------------- --------------------- ------------------
TOTAL ..................... 1,487 $ 142,935,184.92 100.00%
================ ===================== ==================
</TABLE>
Minimum Seasoning: 0 months
Maximum Seasoning: 56 months
Weighted Average Seasoning: 3 months
ARM GROUP
DISTRIBUTION OF MAXIMUM MORTGAGE COUPON RATES
<TABLE>
<CAPTION>
RANGE OF MAXIMUM NUMBER OF AGGREGATE % OF AGGREGATE
MORTGAGE COUPON RATES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------------------- ----------------- ------------------- --------------------
<S> <C> <C> <C>
12.001 - 13.000%........... 1 $ 104,167.32 0.07%
13.001 - 14.000............ 2 350,209.14 0.25
14.001 - 15.000............ 216 25,097,978.27 17.56
15.001 - 16.000............ 356 41,221,410.67 28.84
16.001 - 17.000............ 407 40,297,990.54 28.19
17.001 - 18.000............ 255 20,494,873.54 14.34
18.001 - 19.000............ 146 10,118,477.72 7.08
19.001 - 20.000............ 62 3,437,337.97 2.40
20.001 - 21.000............ 33 1,530,742.61 1.07
21.001 - 22.000............ 9 281,997.14 0.20
----------------- ------------------- --------------------
TOTAL....................... 1,487 $ 142,935,184.92 100.00%
================= =================== ====================
</TABLE>
Minimum Coupon Rates: 12.99%
Maximum Coupon Rates: 21.93%
Weighted Average Coupon Rates: 16.39%
S-20
<PAGE> 21
ARM GROUP
DISTRIBUTION OF MINIMUM MORTGAGE COUPON RATES
<TABLE>
<CAPTION>
RANGE OF MINIMUM NUMBER OF AGGREGATE % OF AGGREGATE
MORTGAGE COUPON RATES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------------------- ---------------- ----------------------- --------------------
<S> <C> <C> <C>
4.001 - 5.000%........... 3 $ 264,082.61 0.18%
5.001 - 6.000............ 6 987,443.69 0.69
6.001 - 7.000............ 7 491,331.44 0.34
7.001 - 8.000............ 446 49,525,874.47 34.65
8.001 - 9.000............ 227 25,157,009.68 17.60
9.001 - 10.000............ 337 33,869,283.32 23.70
10.001 - 11.000............ 233 19,277,420.26 13.49
11.001 - 12.000............ 132 8,515,841.05 5.96
12.001 - 13.000............ 52 2,919,257.44 2.04
13.001 - 14.000............ 35 1,645,643.82 1.15
14.001 - 15.000............ 9 281,997.14 0.20
---------------- ----------------------- --------------------
TOTAL....................... 1,487 $ 142,935,184.92 100.00%
================ ======================= ====================
</TABLE>
Minimum Coupon Rates: 4.25%
Maximum Coupon Rates: 14.93%
Weighted Average Coupon Rates: 9.01%
ARM GROUP
DISTRIBUTION OF MARGINS
<TABLE>
<CAPTION>
RANGE OF NUMBER OF AGGREGATE % OF AGGREGATE
MARGINS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------------------- ------------------ --------------------- --------------------
<S> <C> <C> <C>
2.001 - 3.000%........... 138 $ 17,471,311.41 12.22%
3.001 - 4.000............ 154 18,419,114.22 12.89
4.001 - 5.000............ 254 25,851,101.82 18.09
5.001 - 6.000............ 328 32,379,822.98 22.64
6.001 - 7.000............ 312 27,727,544.26 19.40
7.001 - 8.000............ 185 14,749,095.61 10.32
8.001 - 9.000............ 79 4,473,173.06 3.13
9.001 - 10.000............ 30 1,680,626.79 1.18
10.001 - 11.000............ 7 183,394.77 0.13
------------------ --------------------- --------------------
TOTAL....................... 1,487 $ 142,935,184.92 100.00%
================== ===================== ====================
</TABLE>
Minimum Margin: 2.24%
Maximum Margin: 10.80%
Weighted Average Margin: 5.30%
ARM GROUP
DISTRIBUTION OF INTEREST RATE ADJUSTMENT FREQUENCIES
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE % OF AGGREGATE
RATE CHANGE PERIOD (MONTHS) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------- ---------------- -------------------- ---------------------
<S> <C> <C> <C>
6................................ 1,459 $ 140,379,862.12 98.21%
12............................... 28 2,555,322.80 1.79
---------------- -------------------- ---------------------
TOTAL........................ 1,487 $ 142,935,184.92 100.00%
================ ==================== =====================
</TABLE>
Interest rate adjustments follow an initial fixed-rate period for 95.32% of
the ARM mortgage loans.
S-21
<PAGE> 22
ARM GROUP
DISTRIBUTION OF PERIODIC INTEREST RATE ADJUSTMENT CAPS
<TABLE>
<CAPTION>
PERIODIC INTEREST RATE ADJUSTMENT NUMBER OF AGGREGATE % OF AGGREGATE
CAPS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------------ ----------------- --------------------- --------------------
<S> <C> <C> <C>
1.000%........................... 1,312 $ 121,973,501.58 85.33%
1.500............................ 146 18,379,126.70 12.86
2.000............................ 29 2,582,556.64 1.81
----------------- --------------------- --------------------
TOTAL........................ 1,487 $ 142,935,184.92 100.00%
================= ===================== ====================
</TABLE>
Minimum Periodic Cap: 1.00%
Maximum Periodic Cap: 2.00%
Weighted Average Periodic Cap: 1.08%
ARM GROUP
DISTRIBUTION OF LIFETIME INTEREST RATE ADJUSTMENT CAPS
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE % OF AGGREGATE
LIFETIME CAP MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------- ----------------- ------------------- -------------------
<S> <C> <C> <C>
5.850%........................... 1 $ 54,038.70 0.04%
6.000............................ 93 8,848,387.25 6.19
6.500............................ 5 389,582.47 0.27
7.000............................ 1,387 133,586,270.05 93.46
7.250............................ 1 56,906.45 0.04
----------------- ------------------- -------------------
TOTAL........................ 1,487 $ 142,935,184.92 100.00%
================= =================== ===================
</TABLE>
Minimum Lifetime Cap: 5.85%
Maximum Lifetime Cap: 7.25%
Weighted Average Lifetime Cap: 6.94%
S-22
<PAGE> 23
ARM GROUP
NEXT INTEREST ADJUSTMENT DATE DISTRIBUTION
<TABLE>
<CAPTION>
NEXT INTEREST NUMBER OF AGGREGATE % OF AGGREGATE
ADJUSTMENT DATE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------- --------------- ------------------------ -------------------
<S> <C> <C> <C>
August, 1999..................... 2 $ 93,235.19 0.07%
September, 1999.................. 1 94,511.40 0.07
October, 1999.................... 7 723,320.68 0.51
November, 1999................... 22 2,268,627.76 1.59
December, 1999................... 7 1,042,247.21 0.73
January, 2000.................... 14 1,723,757.97 1.21
February, 2000................... 7 846,346.78 0.59
March, 2000...................... 1 103,272.53 0.07
April, 2000...................... 4 366,727.95 0.26
May, 2000........................ 6 769,409.15 0.54
June, 2000....................... 5 361,404.12 0.25
July, 2000....................... 7 614,381.62 0.43
August, 2000..................... 4 523,028.20 0.37
September, 2000.................. 11 1,517,274.31 1.06
October, 2000.................... 17 2,917,087.94 2.04
November, 2000................... 13 2,617,484.15 1.83
December, 2000................... 26 4,381,964.74 3.07
January, 2001.................... 19 2,506,163.09 1.75
February, 2001................... 21 1,882,080.27 1.32
March, 2001...................... 27 2,125,893.84 1.49
April, 2001...................... 42 5,306,587.06 3.71
May, 2001........................ 11 1,359,063.62 0.95
June, 2001....................... 15 1,408,868.51 0.99
July, 2001....................... 16 1,423,387.44 1.00
August, 2001..................... 11 942,614.83 0.66
September, 2001.................. 6 381,440.41 0.27
October, 2001.................... 7 811,679.88 0.57
November, 2001................... 8 725,931.02 0.51
December, 2001................... 4 475,041.02 0.33
January, 2002.................... 10 732,950.46 0.51
February, 2002................... 11 722,740.22 0.51
March, 2002...................... 25 2,715,644.97 1.90
April, 2002...................... 46 5,228,858.03 3.66
May, 2002........................ 111 8,628,668.95 6.04
June, 2002....................... 151 11,757,727.27 8.22
July, 2002....................... 177 13,942,409.69 9.74
August, 2002..................... 42 3,471,365.00 2.43
October, 2002.................... 2 119,067.95 0.08
October, 2003.................... 2 151,890.62 0.11
November, 2003................... 2 255,699.64 0.18
December, 2003................... 2 91,752.26 0.06
February, 2004................... 1 60,874.91 0.04
March, 2004...................... 3 476,838.32 0.33
April, 2004...................... 2 588,305.49 0.41
May, 2004........................ 86 9,202,898.03 6.44
June, 2004....................... 152 14,717,572.10 10.29
July, 2004....................... 204 19,223,184.08 13.44
August, 2004..................... 117 10,533,904.24 7.37
--------------- ------------------------ ------------
TOTAL....................... 1,487 $ 142,935,184.92 100.00%
=============== ======================== ============
</TABLE>
Weighted Average Next Interest Adjustment Date: October, 2002
Weighted Average Number of Months to Next Interest Adjustment Date: 39
S-23
<PAGE> 24
CONVEYANCE OF SUBSEQUENT MORTGAGE LOANS TO THE ARM GROUP
During the pre-funding period, the trust may acquire approximately
$12,750,000 aggregate principal balance of mortgage loans for assignment to the
ARM group. Accordingly, the characteristics of the ARM group will vary following
the acquisition by the trust of these additional mortgage loans.
Each individual adjustable rate subsequent mortgage loan must have:
- a margin of at least 2.50%;
- a combined loan to value ratio not higher than 100.00%;
- a maturity date not later than August 2029, and
- a principal balance not greater than $500,000.00.
PREPAYMENT AND YIELD CONSIDERATIONS
PROJECTED PREPAYMENTS AND YIELDS FOR CLASS A CERTIFICATES
If purchased at other than par, the yield to maturity on the class A
certificates will be affected by the rate of the payment of principal of the
mortgage loans in the group securing that class. If the actual rate of payments
on the mortgage loans in the group is slower than the rate anticipated by an
investor who purchases a class A certificate backed by the affected group at a
discount, the actual yield to the investor will be lower than that investor's
anticipated yield. If the actual rate of payments on the mortgage loans in the
group is faster than the rate anticipated by an investor who purchases a class A
certificate backed by the affected group at a premium, the actual yield to that
investor will be lower than the investor's anticipated yield.
The rate of prepayments with respect to conventional fixed rate
mortgage loans has fluctuated significantly in recent years. If prevailing
interest rates fall significantly below the coupon rates on fixed rate mortgage
loans, the mortgage loans are likely to be subject to higher prepayment rates
than if prevailing rates remain at or above the coupon rate on the mortgage
loans. Conversely, if prevailing interest rates rise appreciably above the
coupon rates on fixed rate mortgage loans, the mortgage loans are likely to
experience a lower prepayment rate than if prevailing rates remain at or below
the interest rates on these mortgage loans.
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 coupon rates may encourage mortgagors to refinance their
adjustable rate mortgage loans to lock in a lower fixed interest rate.
Mortgage loans which have prepayment penalties may be less likely to
prepay, at least for those periods when the penalties are in effect. Prepayment
penalties are in effect for 91.74% of the mortgage loans in the fixed rate group
and 91.32% of the mortgage loans in the ARM group.
The final scheduled payment dates for the class A certificate have been
calculated assuming that each mortgage loan amortizes according to its terms and
no prepayments are received.
Weighted average life is the average amount of time that will elapse
from the date of issuance of a security until each dollar of principal of the
security is repaid to the investor. The weighted average life of each class of
certificate will be influenced by the rate at which principal payments on the
mortgage loans in the group securing the class are paid, which may be in the
form of scheduled amortization,
S-24
<PAGE> 25
accelerated amortization or prepayments, liquidation due to default, or as a
result of an early termination of the trust.
The model used in this prospectus supplement for the class A-1, A-2,
A-3, A-4, A-5 and A-6 certificates, called the prepayment assumption, represents
an assumed rate of prepayment each month relative to the then outstanding
principal balance of the fixed rate group for the life of the fixed-rate
mortgage loans. The 100% prepayment assumption assumes a conditional prepayment
rate of 3% per annum of the then outstanding principal balance of the fixed-rate
mortgage loans in the first month of their life and an additional 17/11% per
annum until the twelfth month. Beginning in the twelfth month and in each month
thereafter during their life, the 100% prepayment assumption assumes a
conditional prepayment rate of 20% per annum. As used in the table below, 0%
prepayment assumption assumes prepayment rates equal to 0% of the prepayment
assumption; i.e., no prepayments on the synthetic mortgage loans having the
characteristics described below. Correspondingly, 100% prepayment assumption
assumes prepayment rates equal to 100% of the prepayment assumption, and so
forth.
The model used in this prospectus supplement for the class A-7
certificates, called the CPR assumption, represents an assumed conditional
prepayment rate per annum of the then outstanding principal balance of the ARM
group for the life of the mortgage loans. Neither the prepayment assumption nor
the CPR assumption purport to be a historical description of prepayment
experience or a prediction of the anticipated rate of prepayment of any mortgage
loans, including the mortgage loans held by the trust. The sponsor believes that
no existing statistics of which it is aware provide a reliable basis for owners
of class A-7 certificates to predict the amount or the timing of receipt of
prepayments on the mortgage loans.
Investors in the class A-6 certificates, also known as the NAS or
lockout class, should be aware that the class A-6 certificates are not scheduled
to receive any portion of principal payments prior to the payment date occurring
in September 2002 and thereafter, they will receive a disproportionately small
or large portion of principal payments unless the principal balances of the
class A-1, A-2, A-3, A-4 and A-5 certificates have been paid off.
The tables below were prepared on the basis of the assumptions in the
following paragraph and there are discrepancies between the characteristics of
the actual mortgage loans and the characteristics of the mortgage loans assumed
in preparing the tables. Any discrepancy may have an effect upon the percentages
of the initial principal balances outstanding and the weighted average lives of
the class A certificates in the tables. In addition, since the actual mortgage
loans in each group 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, we have assumed that:
- the mortgage loans have the characteristics set forth
below,
- the closing date is August 24, 1999,
- distributions on the class A certificates are made on
the 25th day of each month regardless of the day on
which the payment actually occurs, commencing on
September 25, 1999,
- all prepayments are prepayments in full and include
30 days' interest,
- no early termination of the trust occurs, unless
otherwise specified,
- no mortgage loan is ever delinquent,
- the assumed levels of one-month LIBOR, six-month
LIBOR, and one-year CMT are 5.28750%, 5.88625% and
5.17200%, respectively,
S-25
<PAGE> 26
- the class A certificates have the pass-through rates
and original principal balances described in this
prospectus supplement,
- the reinvestment rate on cash balances in the
pre-funding account is assumed to be 5.25%, and
- all of the subsequent mortgage loans are delivered to
the trust approximately one month after the closing
date.
The weighted average life of each indicated class of class A
certificates has been determined by:
- multiplying the amount of each principal payment by
the number of years from the date of issuance to the
payment date of receipt;
- adding the results; and
- dividing the sum by the original principal balance of
the class A certificates of that class.
PREPAYMENT SCENARIOS
<TABLE>
<CAPTION>
Scenario Scenario Scenario Scenario Scenario Scenario Scenario
I II III IV V VI VII
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed rate group as a
percentage of the
prepayment assumption...... 0% 50% 100% 120% 150% 200% 250%
ARM group as a conditional
prepayment rate percentage. 0% 10% 20% 28% 35% 45% 55%
</TABLE>
FIXED RATE GROUP
REPRESENTATIVE MORTGAGE LOANS
FIXED RATE GROUP INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
ORIGINAL AMORTIZATION REMAINING
PRINCIPAL GROSS TERM TO MATURITY TERM TO MATURITY AMORTIZATION
BALANCE COUPON RATE (MONTHS) (MONTHS) METHOD
------------------ ----------- --------------------- ---------------- --------------
<S> <C> <C> <C> <C>
$ 8,420,773.74 10.437% 112 110 Level Pay
$ 46,134,614.56 10.475% 179 174 Level Pay
$ 61,769,558.73 9.714% 239 238 Level Pay
$ 112,374,954.78 9.706% 359 356 Level Pay
$ 102,865,494.86 9.946% 360 178 Balloon
------------------
$ 331,565,396.67
</TABLE>
S-26
<PAGE> 27
FIXED RATE GROUP SUBSEQUENT MORTGAGE LOANS
- ------------------------------------------
<TABLE>
<CAPTION>
ORIGINAL AMORTIZATION REMAINING
PRINCIPAL GROSS TERM TO MATURITY TERM TO MATURITY AMORTIZATION
BALANCE COUPON RATE (MONTHS) (MONTHS) METHOD
- ----------------- ----------- --------------------- ---------------- -------------
<S> <C> <C> <C> <C>
$ 1,170,246.73 10.437% 112 112 Level Pay
$ 6,411,392.04 10.475% 179 179 Level Pay
$ 8,584,202.15 9.714% 239 239 Level Pay
$ 15,616,904.94 9.706% 359 359 Level Pay
$ 14,295,362.00 9.946% 360 180 Balloon
- -----------------
$ 46,078,107.86
</TABLE>
ARM GROUP
REPRESENTATIVE MORTGAGE LOANS
ARM GROUP INITIAL MORTGAGE LOANS
- --------------------------------
<TABLE>
<CAPTION>
ORIGINAL REMAINING PERIODIC
GROSS TERM TO TERM TO MONTHS TO PERIODIC CAP
COUPON MATURITY MATURITY COUPON CAP(FIRST (SUBSEQUENT LIFE
PRINCIPAL BALANCE RATE (MONTHS) (MONTHS) ADJUSTMENT INDEX MARGIN RESET DATE) RESET DATES) LIFE CAP FLOOR
- ----------------- ---- -------- -------- ---------- ----------- ------ ----------- ------------ -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 5,250,989.03 10.924% 360 351 4 6 mo. LIBOR 6.663% 1.144% 1.144% 16.424% 9.699%
$ 163,824.45 9.250% 360 359 9 6 mo. LIBOR 4.125% 1.000% 1.000% 16.250% 7.490%
$ 30,214,901.86 9.803% 360 354 17 6 mo. LIBOR 6.200% 2.859% 1.169% 16.665% 9.728%
$ 49,875,394.43 9.683% 349 347 33 6 mo. LIBOR 5.879% 2.982% 1.067% 16.645% 9.617%
$ 54,922,502.62 8.981% 349 349 58 6 mo. LIBOR 4.118% 1.552% 1.001% 15.997% 8.021%
$ 1,539,311.71 9.872% 348 338 7 1 yr. CMT 6.401% 1.962% 2.000% 16.360% 7.632%
$ 524,597.12 10.898% 360 358 33 1 yr. CMT 5.625% 3.000% 2.000% 17.467% 10.467%
$ 443,663.70 10.038% 360 353 52 1 yr. CMT 6.517% 2.174% 2.000% 16.212% 10.038%
- ------------------
$ 142,935,184.92
</TABLE>
ARM GROUP SUBSEQUENT MORTGAGE LOANS
- -----------------------------------
<TABLE>
<CAPTION>
ORIGINAL REMAINING PERIODIC
GROSS TERM TO TERM TO MONTHS TO PERIODIC CAP
COUPON MATURITY MATURITY COUPON CAP(FIRST (SUBSEQUENT LIFE
PRINCIPAL BALANCE RATE (MONTHS) (MONTHS) ADJUSTMENT INDEX MARGIN RESET DATE) RESET DATES) LIFE CAP FLOOR
- ----------------- ---- -------- -------- ---------- ----- ------ ----------- ------------ -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 468,292.86 10.924% 360 360 6 6 mo. LIBOR 6.663% 1.144% 1.144% 16.424% 9.699%
$ 14,610.17 9.250% 360 360 12 6 mo. LIBOR 4.125% 1.000% 1.000% 16.250% 7.490%
$ 2,694,620.58 9.803% 360 360 24 6 mo. LIBOR 6.200% 2.859% 1.169% 16.665% 9.728%
$ 4,447,979.51 9.683% 349 349 36 6 mo. LIBOR 5.879% 2.982% 1.067% 16.645% 9.617%
$ 4,898,089.91 8.981% 349 349 60 6 mo. LIBOR 4.118% 1.552% 1.001% 15.997% 8.021%
$ 137,278.65 9.872% 348 348 12 1 yr. CMT 6.401% 1.962% 2.000% 16.360% 7.632%
$ 46,784.54 10.898% 360 360 36 1 yr. CMT 5.625% 3.000% 2.000% 17.467% 10.467%
$ 39,566.75 10.038% 360 360 60 1 yr. CMT 6.517% 2.174% 2.000% 16.212% 10.038%
--------------
$12,747,222.97
</TABLE>
The following tables set forth the percentages of the initial principal
amount of the class A certificates that would be outstanding after each of the
dates shown, based on prepayment scenarios described in the table entitled
Prepayment Scenarios. The percentages have been rounded to the nearest 1%.
S-27
<PAGE> 28
TO 10% CALL AND TO MATURITY
PERCENTAGE OF INITIAL CLASS A-1 CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
<TABLE>
<CAPTION>
DATES SCENARIO 1 SCENARIO 2 SCENARIO 3 SCENARIO 4 SCENARIO 5 SCENARIO 6 SCENARIO 7
- -------------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage 100 100 100 100 100 100 100
8/25/00 89 67 45 36 22 0 0
8/25/01 83 32 0 0 0 0 0
8/25/02 78 2 0 0 0 0 0
8/25/03 73 0 0 0 0 0 0
8/25/04 67 0 0 0 0 0 0
8/25/05 61 0 0 0 0 0 0
8/25/06 54 0 0 0 0 0 0
8/25/07 48 0 0 0 0 0 0
8/25/08 41 0 0 0 0 0 0
8/25/09 35 0 0 0 0 0 0
8/25/10 27 0 0 0 0 0 0
8/25/11 19 0 0 0 0 0 0
8/25/12 9 0 0 0 0 0 0
8/25/13 0 0 0 0 0 0 0
8/25/14 0 0 0 0 0 0 0
8/25/15 0 0 0 0 0 0 0
8/25/16 0 0 0 0 0 0 0
8/25/17 0 0 0 0 0 0 0
8/25/18 0 0 0 0 0 0 0
8/25/19 0 0 0 0 0 0 0
8/25/20 0 0 0 0 0 0 0
8/25/21 0 0 0 0 0 0 0
8/25/22 0 0 0 0 0 0 0
8/25/23 0 0 0 0 0 0 0
8/25/24 0 0 0 0 0 0 0
8/25/25 0 0 0 0 0 0 0
8/25/26 0 0 0 0 0 0 0
8/25/27 0 0 0 0 0 0 0
8/25/28 0 0 0 0 0 0 0
8/25/29 0 0 0 0 0 0 0
Weighted Average Life to 10%
Call and to Maturity
(years): 7.39 1.56 0.96 0.85 0.74 0.61 0.53
First Principal Payment to
10% Call and to Maturity
(years): 9/25/99 9/25/99 9/25/99 9/25/99 9/25/99 9/25/99 9/25/99
Last Principal Payment to
10% Call and to Maturity
(years): 7/25/13 10/25/02 5/25/01 2/25/01 11/25/00 8/25/00 7/25/00
Payment Window to 10% Call
and to Maturity (months): 167 38 21 18 15 12 11
Modified Duration to 10%
Call and to Maturity
(years): 5.3 1.4 0.9 0.8 0.7 0.6 0.5
</TABLE>
The weighted average life of each indicated class of class A
certificates has been determined by (i) multiplying the amount of each principal
payment by the number of years from the date of issuance to the related payment
dates, (ii) adding the results and (iii) dividing the sum of the respective
principal balance for the related class A certificates as of the closing date.
S-28
<PAGE> 29
TO 10% CALL AND TO MATURITY
- ---------------------------
<TABLE>
<CAPTION>
DATES SCENARIO 1 SCENARIO 2 SCENARIO 3 SCENARIO 4 SCENARIO 5 SCENARIO 6 SCENARIO 7
- -------------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage 100 100 100 100 100 100 100
8/25/00 100 100 100 100 100 98 59
8/25/01 100 100 75 45 2 0 0
8/25/02 100 100 0 0 0 0 0
8/25/03 100 61 0 0 0 0 0
8/25/04 100 23 0 0 0 0 0
8/25/05 100 0 0 0 0 0 0
8/25/06 100 0 0 0 0 0 0
8/25/07 100 0 0 0 0 0 0
8/25/08 100 0 0 0 0 0 0
8/25/09 100 0 0 0 0 0 0
8/25/10 100 0 0 0 0 0 0
8/25/11 100 0 0 0 0 0 0
8/25/12 100 0 0 0 0 0 0
8/25/13 97 0 0 0 0 0 0
8/25/14 0 0 0 0 0 0 0
8/25/15 0 0 0 0 0 0 0
8/25/16 0 0 0 0 0 0 0
8/25/17 0 0 0 0 0 0 0
8/25/18 0 0 0 0 0 0 0
8/25/19 0 0 0 0 0 0 0
8/25/20 0 0 0 0 0 0 0
8/25/21 0 0 0 0 0 0 0
8/25/22 0 0 0 0 0 0 0
8/25/23 0 0 0 0 0 0 0
8/25/24 0 0 0 0 0 0 0
8/25/25 0 0 0 0 0 0 0
8/25/26 0 0 0 0 0 0 0
8/25/27 0 0 0 0 0 0 0
8/25/28 0 0 0 0 0 0 0
8/25/29 0 0 0 0 0 0 0
Weighted Average Life to 10%
Call and to Maturity
(years): 14.75 4.36 2.36 2.01 1.65 1.30 1.08
First Principal Payment to
10% Call and to Maturity
(years): 7/25/13 10/25/02 5/25/01 2/25/01 11/25/00 8/25/00 7/25/00
Last Principal Payment to
10% Call and to Maturity
(years): 6/25/14 5/25/05 8/25/02 2/25/02 9/25/01 3/25/01 12/25/00
Payment Window to 10% Call
and to Maturity (months): 12 32 16 13 11 8 6
Modified Duration to 10%
Call and to Maturity
(years): 8.8 3.6 2.1 1.8 1.5 1.2 1.0
</TABLE>
The weighted average life of each indicated class of class A
certificates has been determined by (i) multiplying the amount of each principal
payment by the number of years from the date of issuance to the related payment
dates, (ii) adding the results and (iii) dividing the sum of the respective
principal balance for the related class A certificates as of the closing date.
S-29
<PAGE> 30
TO 10% CALL AND TO MATURITY
- ---------------------------
<TABLE>
<CAPTION>
DATES SCENARIO 1 SCENARIO 2 SCENARIO 3 SCENARIO 4 SCENARIO 5 SCENARIO 6 SCENARIO 7
- -------------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage 100 100 100 100 100 100 100
8/25/00 100 100 100 100 100 100 100
8/25/01 100 100 100 100 100 6 0
8/25/02 100 100 96 43 0 0 0
8/25/03 100 100 17 0 0 0 0
8/25/04 100 100 0 0 0 0 0
8/25/05 100 87 0 0 0 0 0
8/25/06 100 48 0 0 0 0 0
8/25/07 100 25 0 0 0 0 0
8/25/08 100 0 0 0 0 0 0
8/25/09 100 0 0 0 0 0 0
8/25/10 100 0 0 0 0 0 0
8/25/11 100 0 0 0 0 0 0
8/25/12 100 0 0 0 0 0 0
8/25/13 100 0 0 0 0 0 0
8/25/14 69 0 0 0 0 0 0
8/25/15 28 0 0 0 0 0 0
8/25/16 9 0 0 0 0 0 0
8/25/17 0 0 0 0 0 0 0
8/25/18 0 0 0 0 0 0 0
8/25/19 0 0 0 0 0 0 0
8/25/20 0 0 0 0 0 0 0
8/25/21 0 0 0 0 0 0 0
8/25/22 0 0 0 0 0 0 0
8/25/23 0 0 0 0 0 0 0
8/25/24 0 0 0 0 0 0 0
8/25/25 0 0 0 0 0 0 0
8/25/26 0 0 0 0 0 0 0
8/25/27 0 0 0 0 0 0 0
8/25/28 0 0 0 0 0 0 0
8/25/29 0 0 0 0 0 0 0
Weighted Average Life to 10%
Call and to Maturity
(years): 15.57 7.18 3.61 3.01 2.41 1.82 1.47
First Principal Payment to
10% Call and to Maturity
(years): 6/25/14 5/25/05 8/25/02 2/25/02 9/25/01 3/25/01 12/25/00
Last Principal Payment to
10% Call and to Maturity
(years): 2/25/17 9/25/08 12/25/03 3/25/03 6/25/02 9/25/01 4/25/01
Payment Window to 10% Call
and to Maturity (months): 33 41 17 14 10 7 5
Modified Duration to 10%
Call and to Maturity
(years): 9.0 5.4 3.1 2.6 2.1 1.6 1.4
</TABLE>
The weighted average life of each indicated class of class A
certificates has been determined by (i) multiplying the amount of each principal
payment by the number of years from the date of issuance to the related payment
dates, (ii) adding the results and (iii) dividing the sum of the respective
principal balance for the related class A certificates as of the closing date.
S-30
<PAGE> 31
TO 10% CALL AND TO MATURITY
- --------------------------
PERCENTAGE OF INITIAL CLASS A-4 CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
<TABLE>
<CAPTION>
DATES SCENARIO 1 SCENARIO 2 SCENARIO 3 SCENARIO 4 SCENARIO 5 SCENARIO 6 SCENARIO 7
- -------------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage 100 100 100 100 100 100 100
8/25/00 100 100 100 100 100 100 100
8/25/01 100 100 100 100 100 100 50
8/25/02 100 100 100 100 84 26 0
8/25/03 100 100 100 78 37 0 0
8/25/04 100 100 73 42 6 0 0
8/25/05 100 100 46 19 0 0 0
8/25/06 100 100 27 3 0 0 0
8/25/07 100 100 20 0 0 0 0
8/25/08 100 100 10 0 0 0 0
8/25/09 100 85 0 0 0 0 0
8/25/10 100 70 0 0 0 0 0
8/25/11 100 56 0 0 0 0 0
8/25/12 100 43 0 0 0 0 0
8/25/13 100 31 0 0 0 0 0
8/25/14 100 0 0 0 0 0 0
8/25/15 100 0 0 0 0 0 0
8/25/16 100 0 0 0 0 0 0
8/25/17 93 0 0 0 0 0 0
8/25/18 78 0 0 0 0 0 0
8/25/19 64 0 0 0 0 0 0
8/25/20 57 0 0 0 0 0 0
8/25/21 49 0 0 0 0 0 0
8/25/22 41 0 0 0 0 0 0
8/25/23 32 0 0 0 0 0 0
8/25/24 22 0 0 0 0 0 0
8/25/25 11 0 0 0 0 0 0
8/25/26 0 0 0 0 0 0 0
8/25/27 0 0 0 0 0 0 0
8/25/28 0 0 0 0 0 0 0
8/25/29 0 0 0 0 0 0 0
Weighted Average Life to 10%
Call (years): 22.04 12.44 6.34 5.01 3.83 2.72 2.08
First Principal Payment to
10% Call (years): 2/25/17 9/25/08 12/25/03 3/25/03 6/25/02 9/25/01 4/25/01
Last Principal Payment to 10%
Call (years): 8/25/26 6/25/14 5/25/09 6/25/07 12/25/04 4/25/03 5/25/02
Payment Window to 10%
Call (months): 115 70 66 52 31 20 14
Modified Duration to 10%
Call (years): 10.2 7.7 4.8 4.0 3.2 2.4 1.9
</TABLE>
The weighted average life of each indicated class of class A
certificates has been determined by (i) multiplying the amount of each principal
payment by the number of years from the date of issuance to the related payment
dates, (ii) adding the results and (iii) dividing the sum of the respective
principal balance for the related class A certificates as of the closing date.
S-31
<PAGE> 32
TO 10% CALL
PERCENTAGE OF INITIAL CLASS A-5 CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
<TABLE>
<CAPTION>
DATES SCENARIO 1 SCENARIO 2 SCENARIO 3 SCENARIO 4 SCENARIO 5 SCENARIO 6 SCENARIO 7
- -------------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage 100 100 100 100 100 100 100
8/25/00 100 100 100 100 100 100 100
8/25/01 100 100 100 100 100 100 100
8/25/02 100 100 100 100 100 100 54
8/25/03 100 100 100 100 100 71 0
8/25/04 100 100 100 100 100 0 0
8/25/05 100 100 100 100 74 0 0
8/25/06 100 100 100 100 0 0 0
8/25/07 100 100 100 0 0 0 0
8/25/08 100 100 100 0 0 0 0
8/25/09 100 100 0 0 0 0 0
8/25/10 100 100 0 0 0 0 0
8/25/11 100 100 0 0 0 0 0
8/25/12 100 100 0 0 0 0 0
8/25/13 100 100 0 0 0 0 0
8/25/14 100 97 0 0 0 0 0
8/25/15 100 0 0 0 0 0 0
8/25/16 100 0 0 0 0 0 0
8/25/17 100 0 0 0 0 0 0
8/25/18 100 0 0 0 0 0 0
8/25/19 100 0 0 0 0 0 0
8/25/20 100 0 0 0 0 0 0
8/25/21 100 0 0 0 0 0 0
8/25/22 100 0 0 0 0 0 0
8/25/23 100 0 0 0 0 0 0
8/25/24 100 0 0 0 0 0 0
8/25/25 100 0 0 0 0 0 0
8/25/26 98 0 0 0 0 0 0
8/25/27 0 0 0 0 0 0 0
8/25/28 0 0 0 0 0 0 0
8/25/29 0 0 0 0 0 0 0
Weighted Average Life to
10% Call (years): 27.45 15.23 9.75 7.84 6.04 4.25 3.12
First Principal Payment to
10% Call (years): 8/25/26 6/25/14 5/25/09 6/25/07 12/25/04 4/25/03 5/25/02
Last Principal Payment to
10% Call (years): 2/25/27 11/25/14 5/25/09 6/25/07 10/25/05 2/25/04 1/22/03
Payment Window to 10% Call
(months): 7 6 1 1 11 11 9
Modified Duration to 10%
Call (years): 10.7 8.5 6.5 5.6 4.6 3.5 2.7
</TABLE>
The weighted average life of each indicated class of class A
certificates has been determined by (i) multiplying the amount of each principal
payment by the number of years from the date of issuance to the related payment
dates, (ii) adding the results and (iii) dividing the sum of the respective
principal balance for the related class A certificates as of the closing date.
S-32
<PAGE> 33
TO 10% CALL
- -----------
PERCENTAGE OF INITIAL CLASS A-6 CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
<TABLE>
<CAPTION>
DATES SCENARIO 1 SCENARIO 2 SCENARIO 3 SCENARIO 4 SCENARIO 5 SCENARIO 6 SCENARIO 7
- -------------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage 100 100 100 100 100 100 100
8/25/00 100 100 100 100 100 100 100
8/25/01 100 100 100 100 100 100 100
8/25/02 100 100 100 100 100 100 100
8/25/03 99 94 90 88 85 79 0
8/25/04 98 89 80 77 71 0 0
8/25/05 96 80 66 61 53 0 0
8/25/06 94 70 51 45 0 0 0
8/25/07 85 46 24 0 0 0 0
8/25/08 76 30 11 0 0 0 0
8/25/09 68 20 0 0 0 0 0
8/25/10 60 13 0 0 0 0 0
8/25/11 52 8 0 0 0 0 0
8/25/12 44 5 0 0 0 0 0
8/25/13 36 3 0 0 0 0 0
8/25/14 0 0 0 0 0 0 0
8/25/15 0 0 0 0 0 0 0
8/25/16 0 0 0 0 0 0 0
8/25/17 0 0 0 0 0 0 0
8/25/18 0 0 0 0 0 0 0
8/25/19 0 0 0 0 0 0 0
8/25/20 0 0 0 0 0 0 0
8/25/21 0 0 0 0 0 0 0
8/25/22 0 0 0 0 0 0 0
8/25/23 0 0 0 0 0 0 0
8/25/24 0 0 0 0 0 0 0
8/25/25 0 0 0 0 0 0 0
8/25/26 0 0 0 0 0 0 0
8/25/27 0 0 0 0 0 0 0
8/25/28 0 0 0 0 0 0 0
8/25/29 0 0 0 0 0 0 0
Weighted Average Life
to 10% Call (years): 11.71 8.10 6.73 6.26 5.43 4.28 3.40
First Principal
Payment to 10% Call
(years): 9/25/02 9/25/02 9/25/02 9/25/02 9/25/02 9/25/02 9/25/02
Last Principal Payment
to 10% Call (years): 6/25/14 6/25/14 5/25/09 6/25/07 10/25/05 2/25/04 1/25/03
Payment Window to 10%
Call (months): 142 142 81 58 38 18 5
Modified Duration to
10% Call (years): 7.4 5.7 5.0 4.8 4.3 3.5 2.9
</TABLE>
The weighted average life of each indicated class of class A
certificates has been determined by (i) multiplying the amount of each principal
payment by the number of years from the date of issuance to the related payment
dates, (ii) adding the results and (iii) dividing the sum of the respective
principal balance for the related class A certificates as of the closing date.
S-33
<PAGE> 34
TO 10% CALL
- -----------
PERCENTAGE OF INITIAL CLASS A-7 CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
<TABLE>
<CAPTION>
DATES SCENARIO 1 SCENARIO 2 SCENARIO 3 SCENARIO 4 SCENARIO 5 SCENARIO 6 SCENARIO 7
- -------------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage 100 100 100 100 100 100 100
8/25/00 97 87 76 68 61 51 41
8/25/01 96 77 59 47 37 25 15
8/25/02 95 68 46 33 25 15 8
8/25/03 95 60 36 24 16 8 0
8/25/04 94 53 29 17 10 0 0
8/25/05 93 47 23 12 7 0 0
8/25/06 92 41 18 9 0 0 0
8/25/07 91 37 14 0 0 0 0
8/25/08 90 33 11 0 0 0 0
8/25/09 88 29 0 0 0 0 0
8/25/10 87 26 0 0 0 0 0
8/25/11 85 23 0 0 0 0 0
8/25/12 83 20 0 0 0 0 0
8/25/13 81 18 0 0 0 0 0
8/25/14 79 15 0 0 0 0 0
8/25/15 76 0 0 0 0 0 0
8/25/16 73 0 0 0 0 0 0
8/25/17 70 0 0 0 0 0 0
8/25/18 66 0 0 0 0 0 0
8/25/19 62 0 0 0 0 0 0
8/25/20 58 0 0 0 0 0 0
8/25/21 53 0 0 0 0 0 0
8/25/22 47 0 0 0 0 0 0
8/25/23 41 0 0 0 0 0 0
8/25/24 35 0 0 0 0 0 0
8/25/25 28 0 0 0 0 0 0
8/25/26 20 0 0 0 0 0 0
8/25/27 0 0 0 0 0 0 0
8/25/28 0 0 0 0 0 0 0
8/25/29 0 0 0 0 0 0 0
Weighted Average Life 20.28 6.81 3.68 2.64 2.04 1.47 1.09
to 10% Call (years):
First Principal 9/25/99 9/25/99 9/25/99 9/25/99 9/25/99 9/25/99 9/25/99
Payment to 10% Call
(years):
Last Principal Payment 2/25/27 11/25/14 5/25/09 6/25/07 10/25/05 2/25/04 1/25/03
to 10% Call (years):
Payment Window to 10% 330 183 117 94 74 54 41
Call (months):
</TABLE>
The weighted average life of each indicated class of class A
certificates has been determined by (i) multiplying the amount of each principal
payment by the number of years from the date of issuance to the related payment
dates, (ii) adding the results and (iii) dividing the sum of the respective
principal balance for the related class A certificates as of the closing date.
S-34
<PAGE> 35
TO MATURITY
- -----------
PERCENTAGE OF INITIAL CLASS A-4 CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
<TABLE>
<CAPTION>
DATES SCENARIO 1 SCENARIO 2 SCENARIO 3 SCENARIO 4 SCENARIO 5 SCENARIO 6 SCENARIO 7
- -------------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage 100 100 100 100 100 100 100
8/25/00 100 100 100 100 100 100 100
8/25/01 100 100 100 100 100 100 50
8/25/02 100 100 100 100 84 26 0
8/25/03 100 100 100 78 37 0 0
8/25/04 100 100 73 42 6 0 0
8/25/05 100 100 46 19 0 0 0
8/25/06 100 100 27 3 0 0 0
8/25/07 100 100 20 0 0 0 0
8/25/08 100 100 10 0 0 0 0
8/25/09 100 85 1 0 0 0 0
8/25/10 100 70 0 0 0 0 0
8/25/11 100 56 0 0 0 0 0
8/25/12 100 43 0 0 0 0 0
8/25/13 100 31 0 0 0 0 0
8/25/14 100 0 0 0 0 0 0
8/25/15 100 0 0 0 0 0 0
8/25/16 100 0 0 0 0 0 0
8/25/17 93 0 0 0 0 0 0
8/25/18 78 0 0 0 0 0 0
8/25/19 64 0 0 0 0 0 0
8/25/20 57 0 0 0 0 0 0
8/25/21 49 0 0 0 0 0 0
8/25/22 41 0 0 0 0 0 0
8/25/23 32 0 0 0 0 0 0
8/25/24 22 0 0 0 0 0 0
8/25/25 11 0 0 0 0 0 0
8/25/26 0 0 0 0 0 0 0
8/25/27 0 0 0 0 0 0 0
8/25/28 0 0 0 0 0 0 0
8/25/29 0 0 0 0 0 0 0
Weighted Average Life to
Maturity (years): 22.04 12.44 6.34 5.01 3.83 2.72 2.08
First Principal Payment to
Maturity (years): 2/25/17 9/25/08 12/25/03 3/25/03 6/25/02 9/25/01 4/25/01
Last Principal Payment to
Maturity (years): 8/25/26 6/25/14 9/25/09 8/25/07 12/25/04 4/25/03 5/25/02
Payment Window to
Maturity (months): 115 70 70 54 31 20 14
Modified Duration to
Maturity (years): 10.2 7.7 4.8 4.0 3.2 2.4 1.9
</TABLE>
The weighted average life of each indicated class of class A
certificates has been determined by (i) multiplying the amount of each principal
payment by the number of years from the date of issuance to the related payment
dates, (ii) adding the results and (iii) dividing the sum of the respective
principal balance for the related class A certificates as of the closing date.
S-35
<PAGE> 36
TO MATURITY
- -----------
PERCENTAGE OF INITIAL CLASS A-5 CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
<TABLE>
<CAPTION>
DATES SCENARIO 1 SCENARIO 2 SCENARIO 3 SCENARIO 4 SCENARIO 5 SCENARIO 6 SCENARIO 7
- -------------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage 100 100 100 100 100 100 100
8/25/00 100 100 100 100 100 100 100
8/25/01 100 100 100 100 100 100 100
8/25/02 100 100 100 100 100 100 54
8/25/03 100 100 100 100 100 71 0
8/25/04 100 100 100 100 100 22 0
8/25/05 100 100 100 100 74 7 0
8/25/06 100 100 100 100 50 4 0
8/25/07 100 100 100 99 49 4 0
8/25/08 100 100 100 80 37 4 0
8/25/09 100 100 100 60 24 1 0
8/25/10 100 100 79 44 15 0 0
8/25/11 100 100 60 30 8 0 0
8/25/12 100 100 44 20 3 0 0
8/25/13 100 100 32 13 0 0 0
8/25/14 100 97 12 2 0 0 0
8/25/15 100 74 6 0 0 0 0
8/25/16 100 60 3 0 0 0 0
8/25/17 100 48 0 0 0 0 0
8/25/18 100 37 0 0 0 0 0
8/25/19 100 28 0 0 0 0 0
8/25/20 100 23 0 0 0 0 0
8/25/21 100 18 0 0 0 0 0
8/25/22 100 13 0 0 0 0 0
8/25/23 100 9 0 0 0 0 0
8/25/24 100 6 0 0 0 0 0
8/25/25 100 3 0 0 0 0 0
8/25/26 98 0 0 0 0 0 0
8/25/27 63 0 0 0 0 0 0
8/25/28 24 0 0 0 0 0 0
8/25/29 0 0 0 0 0 0 0
Weighted Average Life
to Maturity (years): 28.35 18.67 12.93 11.04 8.17 4.72 3.18
First Principal
Payment to Maturity
(years): 8/25/26 6/25/14 9/25/09 8/25/07 12/25/04 4/25/03 5/25/02
Last Principal Payment
to Maturity (years): 3/25/29 8/25/26 11/25/17 5/25/15 8/25/13 11/25/09 7/25/03
Payment Window to
Maturity (months): 32 147 99 94 105 80 15
Modified Duration to
Maturity (years): 10.8 9.3 7.7 7.0 5.7 3.8 2.7
</TABLE>
The weighted average life of each indicated class of class A
certificates has been determined by (i) multiplying the amount of each principal
payment by the number of years from the date of issuance to the related payment
dates, (ii) adding the results and (iii) dividing the sum of the respective
principal balance for the related class A certificates as of the closing date.
S-36
<PAGE> 37
TO MATURITY
- ---------
PERCENTAGE OF INITIAL CLASS A-6 CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
<TABLE>
<CAPTION>
DATES SCENARIO 1 SCENARIO 2 SCENARIO 3 SCENARIO 4 SCENARIO 5 SCENARIO 6 SCENARIO 7
- -------------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage 100 100 100 100 100 100 100
8/25/00 100 100 100 100 100 100 100
8/25/01 100 100 100 100 100 100 100
8/25/02 100 100 100 100 100 100 100
8/25/03 99 94 90 88 85 79 70
8/25/04 98 89 80 77 71 62 32
8/25/05 96 80 66 61 53 39 13
8/25/06 94 70 51 45 36 21 4
8/25/07 85 46 24 18 11 9 0
8/25/08 76 30 11 7 3 2 0
8/25/09 68 20 5 2 1 0 0
8/25/10 60 13 2 1 0 0 0
8/25/11 52 8 1 0 0 0 0
8/25/12 44 5 0 0 0 0 0
8/25/13 36 3 0 0 0 0 0
8/25/14 0 0 0 0 0 0 0
8/25/15 0 0 0 0 0 0 0
8/25/16 0 0 0 0 0 0 0
8/25/17 0 0 0 0 0 0 0
8/25/18 0 0 0 0 0 0 0
8/25/19 0 0 0 0 0 0 0
8/25/20 0 0 0 0 0 0 0
8/25/21 0 0 0 0 0 0 0
8/25/22 0 0 0 0 0 0 0
8/25/23 0 0 0 0 0 0 0
8/25/24 0 0 0 0 0 0 0
8/25/25 0 0 0 0 0 0 0
8/25/26 0 0 0 0 0 0 0
8/25/27 0 0 0 0 0 0 0
8/25/28 0 0 0 0 0 0 0
8/25/29 0 0 0 0 0 0 0
Weighted Average Life
to Maturity (years): 11.71 8.10 6.80 6.48 6.10 5.64 4.69
First Principal
Payment to Maturity
(years): 9/25/02 9/25/02 9/25/02 9/25/02 9/25/02 9/25/02 9/25/02
Last Principal Payment
to Maturity (years): 6/25/14 6/25/14 6/25/14 6/25/14 6/25/13 9/25/09 6/25/07
Payment Window to
Maturity (months): 142 142 142 142 130 85 58
Modified Duration to
Maturity (years): 7.4 5.7 5.1 4.9 4.7 4.4 3.8
</TABLE>
The weighted average life of each indicated class of class A
certificates has been determined by (i) multiplying the amount of each principal
payment by the number of years from the date of issuance to the related payment
dates, (ii) adding the results and (iii) dividing the sum of the respective
principal balance for the related class A certificates as of the closing date.
S-37
<PAGE> 38
TO MATURITY
- -----------
PERCENTAGE OF INITIAL CLASS A-7 CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
<TABLE>
<CAPTION>
DATES SCENARIO 1 SCENARIO 2 SCENARIO 3 SCENARIO 4 SCENARIO 5 SCENARIO 6 SCENARIO 7
- -------------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage 100 100 100 100 100 100 100
8/25/00 97 87 76 68 61 51 41
8/25/01 96 77 59 47 37 25 15
8/25/02 95 68 46 33 25 15 8
8/25/03 95 60 36 24 16 8 4
8/25/04 94 53 29 17 10 4 1
8/25/05 93 47 23 12 7 2 0
8/25/06 92 41 18 9 4 1 0
8/25/07 91 37 14 6 3 0 0
8/25/08 90 33 11 4 1 0 0
8/25/09 88 29 9 3 1 0 0
8/25/10 87 26 7 2 0 0 0
8/25/11 85 23 6 1 0 0 0
8/25/12 83 20 4 1 0 0 0
8/25/13 81 18 3 0 0 0 0
8/25/14 79 15 2 0 0 0 0
8/25/15 76 13 2 0 0 0 0
8/25/16 73 12 1 0 0 0 0
8/25/17 70 10 1 0 0 0 0
8/25/18 66 9 1 0 0 0 0
8/25/19 62 7 0 0 0 0 0
8/25/20 58 6 0 0 0 0 0
8/25/21 53 5 0 0 0 0 0
8/25/22 47 4 0 0 0 0 0
8/25/23 41 3 0 0 0 0 0
8/25/24 35 2 0 0 0 0 0
8/25/25 28 2 0 0 0 0 0
8/25/26 20 1 0 0 0 0 0
8/25/27 11 0 0 0 0 0 0
8/25/28 2 0 0 0 0 0 0
8/25/29 0 0 0 0 0 0 0
Weighted Average Life
to Maturity (years): 20.42 7.60 4.03 2.80 2.15 1.56 1.15
First Principal
Payment to Maturity
(years): 9/25/99 9/25/99 9/25/99 9/25/99 9/25/99 9/25/99 9/25/99
Last Principal Payment
to Maturity (years): 1/25/29 11/25/27 2/25/21 2/25/15 9/25/11 5/25/08 3/22/06
Payment Window to
Maturity (months): 353 339 258 186 145 105 79
</TABLE>
The weighted average life of each indicated class of class A
certificates has been determined by (i) multiplying the amount of each principal
payment by the number of years from the date of issuance to the related payment
dates, (ii) adding the results and (iii) dividing the sum of the respective
principal balance for the related class A certificates as of the closing date.
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<PAGE> 39
PAYMENT LAG FEATURE OF THE FIXED RATE CERTIFICATES
Interest on the class A-1, A-2, A-3, A-4, A-5 and A-6 certificates
accrues during the calendar month immediately preceding the month in which the
related payment date occurs. Because the date that investors actually receive
their distributions can be up to 25 days after the calendar month during which
interest accrues, the effective yield to the owners of the class A-1, A-2, A-3,
A-4, A-5 and A-6 certificates will be below that otherwise produced by the
pass-through rates for their certificates.
USE OF PROCEEDS
Certificate net proceeds will be used by the sponsor to acquire the
mortgage loans from the originators or from temporary financing facilities. One
or more of the underwriters, or their respective affiliates, may have provided
temporary financing facilities to the sponsor or one or more of its affiliates
and may receive a portion of the proceeds as a repayment of the temporary
financing facilities.
THE SPONSOR AND THE MASTER SERVICER
The sponsor, Advanta Conduit Receivables, Inc., is a subsidiary of
Advanta Mortgage Corp. USA, the master servicer, and is an indirect subsidiary
of Advanta Corp., a Delaware corporation. Advanta Corp. is a publicly-traded
company with its principal executive offices located in Spring House,
Pennsylvania which as of June 30, 1999 has assets in excess of $3.7 billion and
consolidated managed assets in excess of $12.3 billion. See "The Sponsor" in the
prospectus.
As of June 30, 1999, the master servicer and its subsidiaries were
servicing
- approximately 112,000 closed-end, fixed rate and adjustable
rate mortgage loans in the owned and managed servicing
portfolio, representing an aggregate outstanding principal
balance of approximately $7.6 billion, and
- approximately 144,000 mortgage loans which are serviced for
third parties on a contract servicing basis representing an
aggregate outstanding principal balance of approximately
$9.4 billion.
As of June 30, 1999, the sponsor or its affiliates have issued 44
series of closed-end and revolving mortgage asset-backed securities with an
original balance of approximately $12.8 billion.
The master servicer may resign or be removed, in accordance with the
terms of the pooling and servicing agreement. No removal or resignation shall
become effective until the trustee or a successor servicer has assumed the
master servicer's responsibilities and obligations in accordance with the
pooling and servicing agreement. The master servicer may not assign its
obligations under the pooling and servicing agreement, in whole or in part,
unless it has first obtained the written consent of the trustee and the
certificate insurer, which consent will not be unreasonably withheld. Any
assignee must meet the eligibility requirements for a successor servicer set
forth in the pooling and servicing agreement. See "The Agreements -- Removal and
Resignation of the Master Servicer" in the prospectus.
The master servicer may enter into sub-servicing agreements with
qualified sub-servicers with respect to the servicing of all or any portion of
the mortgage loans. Affiliates of the master servicer which are qualified to
service mortgage loans are master servicer affiliates. No sub-servicing
agreements discharge the master servicer from its servicing obligations which
will include the obligation to make advances. See "Mortgage Loan Program and
Underwriting Guidelines -- The Master Servicer May Act Through Sub-Servicers" in
the prospectus.
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<PAGE> 40
The master servicer has the right, but not the obligation, to purchase
from the trust any mortgage loan which is in default or for which a default is
reasonably foreseeable.
RECENT DEVELOPMENTS RELATED TO ADVANTA CORP.
On January 22, 1999, Fleet Financial Group, Inc. and some of its
affiliates filed a complaint against Advanta Corp. and some of its subsidiaries
in Delaware Chancery Court bringing a lawsuit relating to the transaction
between Advanta Corp. and some of its affiliates and Fleet Financial Group, Inc.
and some of its affiliates which closed on February 20, 1998. Pursuant to the
transaction Advanta Corp. contributed substantially all of its consumer credit
card business to a limited liability company controlled by Fleet Financial
Group, Inc. The lawsuit centers around post-closing adjustments and other
matters relating to the transaction. Fleet seeks damages of approximately $141
million.
On February 16, 1999 Advanta Corp. filed an answer to the complaint
denying the material allegations of the complaint. Advanta Corp. also filed
counterclaims against Fleet Financial Group, Inc. and some of its affiliates
seeking damages of approximately $101 million from Fleet. Although the outcome
of this litigation cannot be determined, Advanta Corp. does not expect this
litigation to have a material adverse effect on the financial position or future
operating results of Advanta Corp. or Advanta Mortgage Corp. USA.
This prospectus supplement contains forward-looking statements that are
subject to risks and uncertainties that could cause actual results to materially
differ from those projected. Additional risks that may affect Advanta Corp.'s
performance are detailed in Advanta Corp.'s filings with the Securities and
Exchange Commission, including its most recent Annual Report on Form 10-K and
its Quarterly Reports on Form 10-Q.
The ability of Advanta Corp.'s subsidiaries to honor their financial
and other obligations is to some extent influenced by the financial condition of
Advanta Corp. Such obligations, as they are related to the trust and the class A
certificates, primarily consist of the sponsor's obligation to repurchase
mortgage loans which are inconsistent with representations and warranties in the
pooling and servicing agreement, as well as the obligations of the master
servicer pursuant to the pooling and servicing agreement. To the extent the
sponsor's and master servicer's ability to perform such obligations is adversely
affected, the mortgage loans may experience an increased level of delinquencies
and losses.
PENDING CONSUMER MORTGAGE LENDING PROPOSALS
A number of consumer lending proposals have been proposed on the
federal and state levels, which may impact the sponsor's, the originators' and
the master servicer's origination and servicing procedures.
Federal Proposals. On May 4, 1999, the Clinton Administration announced
the Clinton-Gore Plan for Financial Privacy and Consumer Protection. Among other
things, the Clinton-Gore Plan would extend the scope of HOEPA, the home
ownership and equity protection act. HOEPA loans, or Section 32 loans, are
subject to special disclosure requirements under Section 129 of the federal
Truth in Lending Act. In addition, state and federal credit protection laws may
limit collection of principal and interest on the mortgage loans describing
sanctions and damages that may be imposed for violations of various mortgage
lending laws, these violations and sanctions may be imposed on the owner of a
HOEPA loan, such as the trust.
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<PAGE> 41
The Clinton-Gore Plan also urges Congress to adopt recommendations made
by the Federal Reserve Board and the Department of Housing and Urban Development
and to enhance disclosures made under the Real Estate Settlement Procedures Act.
Congressional hearings have been scheduled.
Although these proposals are not in legislative form, it is likely that
a number of them will be offered as amendments to financial modernization and
bankruptcy reform legislation. The form in which any of the foregoing will be
adopted, if at all, cannot be predicted. Accordingly, the sponsor, the master
servicer and the originators have no way to determine what, if any, impact they
will have on their origination and servicing procedures in the future.
State Proposals. Several states are considering legislation along the
same lines as the federal HOEPA. These proposals would prohibit the collection
of some fees, the financing of points or fees, prepayment penalties, balloon
notes, and lending with the intent to foreclose. Also being considered are
statutory requirements that all HOEPA borrowers receive government approved
counseling before taking out a loan. These proposals are strongly opposed by the
mortgage lending industry and are likely to be substantially revised before
passage.
DESCRIPTION OF THE CERTIFICATES
The class A certificates will be issued by the trust under a pooling
and servicing agreement, among the sponsor, the master servicer and the trustee.
The trust will also issue one or more classes of subordinate certificates which
are not being offered by this prospectus supplement. The subordinate
certificates will be retained initially by the sponsor or its affiliates.
Distributions on the class A certificates are required to be made on
each payment date. Payment dates are the 25th day of each calendar month, or if
the 25th day is not a business day, the next succeeding business day. The first
payment date will be September 27, 1999. Payments will be made to the owners of
record. The owners of record of the class A-1, A-2, A-3, A-4, A-5 and A-6
certificates are the owners as of the last day of the prior calendar month. The
owners of record of the class A-7 certificates are the owners as of the business
day immediately preceding the payment date.
Distributions will be made in amounts equal to the product of (a) the
owner's percentage interest in the class and (b) the amount distributed to that
class of class A certificate on that payment date.
Persons in whose name a class A certificate is registered in the
register maintained by the trustee are the owners of the class A certificates.
For so long as the class A certificates are in book-entry form with DTC, the
only owner under the pooling and servicing agreement will be Cede. No person
acquiring a beneficial interest in a class A certificate will be entitled to
receive a definitive certificate representing that person's interest in the
trust, except in the event that physical certificates are issued because DTC
becomes unable or unwilling to act as depository and no suitable replacement can
be found. All references to the owners of class A certificates mean and include
the rights of the beneficial owners. See "Description of the Securities -- Form
of Securities" in the prospectus.
Each class A certificate will evidence the right to receive on each
payment date the class A distribution amount for that class, in each case until
the principal balance of the class has been reduced to zero. The owners of the
subordinate certificates will be entitled to receive distributions of residual
cashflow not required to be applied to other purposes.
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<PAGE> 42
PRE-FUNDING ACCOUNT FEATURE
On the closing date, up to approximately $46,100,000 will be deposited
in the pre-funding account from the proceeds of the sale of the class A-1, A-2,
A-3, A-4, A-5 and A-6 certificates to be used to acquire subsequent mortgage
loans for the fixed rate group. Similarly, on the closing date, up to
approximately $12,750,000 will be deposited in the pre-funding account from the
proceeds of the sale of the class A-7 certificates, to be used to acquire
subsequent mortgage loans for the ARM group. During the pre-funding period, the
sponsor may deliver subsequent mortgage loans to the trustee for assignment to
either the fixed rate group or the ARM group in exchange for a corresponding
release of money from the pre-funding account. Each of the subsequent mortgage
loans must be reasonably acceptable to the certificate insurer. The sponsor
expects that the amounts originally deposited will be reduced to less than
$100,000 by the end of the pre-funding period. Any amount remaining in the
pre-funding account with respect to the fixed rate group not used to purchase
additional fixed rate mortgage loans will be used to partially redeem the class
A-1, A-2, A-3, A-4, A-5 and A-6 certificates on a sequential basis. Any amount
remaining in the pre-funding account with respect to the ARM group not used to
purchase additional adjustable rate mortgage loans will be used to partially
redeem the class A-7 certificates. The redemption will occur on the payment date
that immediately follows the end of the pre-funding period.
The pre-funding period is the period from the closing date until the
earlier of
- the date on which the amount on deposit in the pre-funding
account is less than $100,000,
- November 18, 1999 or
- the occurrence of an event of default under the pooling and
servicing agreement.
CAPITALIZED INTEREST ACCOUNT
On the closing date, a portion of the sale proceeds of the class A
certificates will be deposited in a capitalized interest account to be used, as
necessary, by the trustee during the pre-funding period to make up for any
shortfalls that may arise in the event that interest collected on the mortgage
loans is insufficient to pay all of the interest due on the class A certificates
and expenses during that period. Any amounts remaining in the capitalized
interest account which were not used for these purposes will be paid directly to
the owners of the subordinated certificates on the payment date immediately
following the end of the pre-funding period.
PASS-THROUGH RATES
The pass-through rates applicable to the class A certificates for any
payment date are as follows:
CLASS A-1 PASS-THROUGH RATE: 6.81% per annum.
CLASS A-2 PASS-THROUGH RATE: 7.23% per annum.
CLASS A-3 PASS-THROUGH RATE: 7.38% per annum.
CLASS A-4 PASS-THROUGH RATE: 7.75% per annum.
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<PAGE> 43
CLASS A-5 PASS-THROUGH RATE: The lesser of
(1) for any payment date which occurs
on or prior to the Step-Up Payment
Date, 8.04% per annum, and for any
payment date thereafter 8.54%, and
(2) the Fixed Rate Group Available
Funds Cap Rate for that payment
date.
CLASS A-6 PASS-THROUGH RATE: The lesser of
(1) 7.59% per annum, and
(2) the Fixed Rate Group Available
Funds Cap Rate for that payment
date.
CLASS A-7 PASS-THROUGH RATE: The lesser of
(1) for any payment date which occurs
on or prior to the Step-Up Payment
Date, LIBOR plus 0.40% per annum,
and for any payment date
thereafter, LIBOR plus 0.80% per
annum, this rate being the Class
A-7 Formula Pass-Through Rate, and
(2) the ARM Group Available Funds Cap
Rate for that payment date.
The owners of class A-7 certificates may be entitled to Supplemental
Interest Amounts. The Supplemental Interest Amount for the class A-7
certificates is the excess of
(1) the interest due on the class A-7 certificates on any
payment date calculated at the Class A-7 Formula
Pass-Through Rate, over
(2) the interest due on the class A-7 certificates calculated
at the ARM Group Available Funds Cap Rate.
If a Supplemental Interest Amount is due, the owner of one of the
subordinate certificates has agreed to pay this amount from the sources of funds
specified in the pooling and servicing agreement, including amounts which would
otherwise be distributed to that owner on that payment date. If the full amount
of any Supplemental Interest Amount is not paid on any payment date, then the
unpaid amount will accrue interest at the Class A-7 Formula Pass-Through Rate
until it is paid. If the clean-up call is exercised, any Supplemental Interest
Amount then owing to the owners of the class A-7 certificates might not be paid
in full.
The certificate insurer does not guarantee the payment of, nor do the
ratings assigned to the class A-7 certificates address the likelihood of the
payment of, any Supplemental Interest Amount.
The Fixed Rate Group Available Funds Cap Rate for any payment date is
an amount, expressed as a per annum rate and calculated on the basis of a
360-day year consisting of 12 months of 30 days each, equal to
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<PAGE> 44
(1) the aggregate amount of interest accrued and collected (or
advanced) on all of the mortgage loans in the fixed rate group during
the prior calendar month minus the aggregate amount of the servicing
fee, the trustee's fee and the premiums due to the certificate insurer
for the fixed rate group, on that payment date, divided by
(2) the aggregate principal balance of the mortgage loans in
the fixed rate group as of the opening of business on the first day of
the prior calendar month.
The ARM Group Available Funds Cap Rate for any payment date is an
amount, expressed as a per annum rate and calculated on the basis of a 360-day
year and the actual number of days elapsed in the period beginning on the prior
payment date to and including the day prior to the applicable payment date,
equal to
(1) (a) the aggregate amount of interest accrued and collected
or advanced on all of the mortgage loans in ARM Group minus the
aggregate of the servicing fee, the trustee's fee and the premiums due
to the certificate insurer, for the ARM Group, on that payment date and
(b) commencing on the seventh payment date following the closing date,
minus an amount equal to 0.75% per annum times the aggregate principal
balance of the mortgage loans in ARM Group as of the opening of
business on the first day of the prior calendar month divided by
(2) the aggregate principal balance of the mortgage loans in
the ARM group as of the opening of business on the first day of the
prior calendar month.
The Step-Up Payment Date is the payment date immediately following the
calendar month in which the clean-up call is first permitted to occur.
DISTRIBUTIONS OF INTEREST
For each payment date, the interest due on the class A-1, A-2, A-3,
A-4, A-5 and A-6 certificates will be the interest which has accrued at the
pass-through rates for those classes during the immediately preceding calendar
month. The interest due on the class A-7 certificates will be the interest which
has accrued at the pass-through rate for class A-7 from the preceding payment
date, or from the closing date in the case of the first payment date, to and
including the day prior to the current payment date. The interest due on the
class A-7 certificates on the first payment date will accrue from the closing
date to and including the day prior to the first payment date.
All calculations of interest on the class A-1, A-2, A-3, A-4, A-5 and
A-6 certificates will be made on the basis of a 360-day year consisting of 12
months of 30 days each; all calculations of interest on the class A-7
certificates will be made on the basis of the actual number of days elapsed in
the period from the prior payment date to and including the day prior to the
applicable payment date, divided by 360.
DISTRIBUTIONS OF PRINCIPAL
The owners of the class A certificates will be entitled to receive
monthly distributions of principal on each payment date which reflect
collections of principal during the prior month on the mortgage loans in the
group securing that class.
The overcollateralization provisions of the trust result in a limited
acceleration of principal payments to the owners of the class A certificates.
These overcollateralization provisions are more fully described under "Credit
Enhancement -- Overcollateralization and Cross-collateralization Provisions."
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<PAGE> 45
On each payment date, the owners of each class of class A certificates
will receive the Principal Distribution Amount for that class.
FLOW OF FUNDS
On each payment date, the Group Available Funds applicable to each
group will be applied in the following order of priority:
- to the payment of the Interest Distribution Amount for that group,
applied pro rata among all classes in that group;
- to the payment of the unpaid Interest Distribution Amount relating
to the other group, to the extent the Group Available Funds for the
other group are insufficient to pay that amount in full;
- to the payment of the Base Principal Distribution Amount as the
Principal Distribution Amount for that group, applied sequentially
as described below;
- to the payment of the Overcollateralization Deficit, if any for that
group;
- to the payment of any Overcollateralization Deficit remaining with
respect to the other group, to the extent the Group Available Funds
for the other group are insufficient to pay that amount in full;
- to reimburse the certificate insurer for amounts owed to it for that
group;
- to reimburse the certificate insurer for amounts owed to it for the
other group, to the extent the Group Available Funds for the other
group are insufficient to pay that amount in full;
- to the payment of the Overcollateralization Increase Amount for that
group;
- to the payment of the Overcollateralization Increase Amount with
respect to the other group, to the extent the Group Available Funds
for the other group are insufficient to pay that amount in full;
- to reimburse the servicer or the trustee for any advances and
expenses not previously reimbursed; and
- to the owner of the subordinate certificates, or otherwise as
provided in the pooling and servicing agreement.
The Principal Distribution Amount for the fixed rate group is required
to be distributed on each payment date in the following order of priority:
- first, to the class A-6 certificates, in an amount equal to the
lesser of (a) the class A-6 Principal Distribution Amount for that
payment date and (b) the outstanding principal balance of the class
A-6 certificates on that payment date;
- second, to the class A-1 through the class A-5 certificates,
sequentially, in the amounts necessary to reduce their respective
principal balances to zero;
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<PAGE> 46
- third, to the class A-6 certificates, without regard to the class
A-6 Principal Distribution Amount, any remaining amount of the
Principal Distribution Amount for that payment date, until the class
A-6 certificate principal balance has been reduced to zero.
However, if on any payment date a certificate insurer default has
occurred and an Overcollateralization Default exists in the fixed rate group,
the Principal Distribution Amount for the fixed rate group will be distributed
proportionally, and not sequentially, to the owners of the class A-1, A-2, A-3,
A-4, A-5 and A-6 certificates.
The ARM Group Principal Distribution Amount will be distributed on each
payment date to the owners of the class A-7 certificates, until the class A-7
certificate principal balance has been reduced to zero.
The amount of each distribution guaranteed by the certificate insurer
under the policy is, for each group and any payment date, the sum of the
Interest Distribution Amount and any Overcollateralization Deficit, in each case
for the group.
The certificate insurance policy does not require that the certificate
insurer fund realized losses until the time that the aggregate, cumulative
realized losses have created an Overcollateralization Deficit for a group. The
certificate insurance policy does not cover the master servicer's failure to
make delinquency advances until the time that the aggregate, cumulative amount
of the unpaid delinquency advances, when added to realized losses, have created
an Overcollateralization Deficit for a group.
OPTIONAL REDEMPTION
Clean-Up Call. The master servicer, and any of the master servicer
affiliates, will have the right to exercise a clean-up call, which would enable
them to purchase all the mortgage loans from the trust on any payment date after
the outstanding aggregate principal balance of the mortgage loans in the trust
has declined to 10% or less of the sum of (a) the aggregate principal balance of
the initial mortgage loans as of the cut-off date and (b) the aggregate
principal balance of the subsequent mortgage loans acquired by the trust as of
each subsequent cut-off date. This purchase will result in the redemption of the
class A certificates at a price equal to the outstanding principal amount of the
class A certificates, plus accrued interest. The first payment date on which the
option may be exercised is the clean-up call date. The clean-up call applies to
the trust as a whole, and not to either group individually.
Upon Loss of REMIC Status. If the trust loses its status as a REMIC, it
would then be in danger of becoming a taxable entity. This offering does not
contemplate that the trust would have to pay income taxes, and the trust, if it
were to become subject to income tax, might not have enough revenues to pay the
taxes and to make required payments on the class A certificates. Consequently,
if the trust loses it REMIC status, the master servicer or any of the master
servicer affiliates and the certificate insurer will each have an option to
redeem the class A certificates at a price equal to the outstanding principal
amount of the class A certificates, plus accrued interest.
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<PAGE> 47
MANDATORY REDEMPTION
Class A-1, A-2, A-3, A-4, A-5 and A-6 Certificates. In the event that,
by the end of the pre-funding period, not all of the amounts originally
deposited in the pre-funding account with respect to the fixed rate group has
been used to acquire subsequent fixed rate mortgage loans, then the class A-1,
A-2, A-3, A-4, A-5 and A-6 certificates will be prepaid in part on the payment
date immediately following the end of the pre-funding period in accordance with
the sequential payment priorities from and to the extent of these remaining
funds.
Class A-7 Certificates. In the event that, by the end of the
pre-funding period, not all of the amounts originally deposited in the
pre-funding account with respect to the ARM group has been used to acquire
subsequent adjustable rate mortgage loans, then the class A-7 certificates will
be prepaid in part on the payment date immediately following the pre-funding
period from and to the extent of the remaining funds.
CALCULATION OF LIBOR
On each interest determination date, which is the second business day
preceding each payment date or, in the case of the first payment date, the
second business day preceding the closing date, the trustee will determine the
London interbank offered rate for one-month U.S. dollar deposits, or LIBOR, for
the next accrual period for the class A-7 certificates. LIBOR will be
established on the basis of the offered rates of the reference banks for
one-month U.S. dollar deposits, as they appear on the Telerate Page 3750, as of
11:00 a.m., London time, on the interest determination date. As used in this
section, business day means a day on which banks are open for dealing in foreign
currency and exchange in London and New York City; and reference banks means
leading banks, selected by the trustee, which are engaged in transactions in
Eurodollar deposits in the international Eurocurrency market (1) with an
established place of business in London, (2) which have been designated by the
trustee after consultation with the master servicer and (3) which are not
controlling, controlled by, or under common control with the sponsor.
On each interest determination date, the trustee will determine LIBOR
for the next accrual period for the class A-7 certificates as follows:
first, on the basis of the offered rate for one-month United States
dollar deposits, as this rate appears on Telerate Page 3750, as of 11:00
a.m., London time.
second, if the rate does not appear on Telerate Page 3750 as of
11:00 a.m. London time, LIBOR will be the arithmetic mean of the offered
quotations of two or more reference banks, rounded to the nearest whole
multiple of 1/16%.
third, if fewer than two reference banks provide offered quotations,
LIBOR will be the higher of:
- LIBOR as determined on the previous interest determination date
and
- the reserve interest rate.
The reserve interest rate is the rate per annum that the trustee
determines to be either the arithmetic mean, rounded to the nearest whole
multiple of 1/16%, of the one-month U.S. dollar lending rates which New York
City banks, selected by the trustee, are quoting on the interest determination
date to the principal London offices of leading banks in the London interbank
market or, in the event that the trustee cannot determine the arithmetic mean,
the lowest one-month U.S. dollar lending rate which New
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<PAGE> 48
York City banks, selected by the trustee, are quoting on the interest
determination date to leading European banks.
The establishment of LIBOR on each interest determination date by the
trustee and the trustee's calculation of the rate of interest applicable to the
class A-7 certificates for the accrual period will, in the absence of manifest
error, be final and binding. Each rate of interest may be obtained by
telephoning the trustee at 1-800-735-7777.
CREDIT ENHANCEMENT
The credit enhancement for the class A certificates is a combination of
the credit enhancement provided by the overcollateralization and
cross-collateralization provisions of the trust, as well as the external credit
enhancement provided by the certificate insurance policy.
Overcollateralization and Cross-collateralization. Each class of class
A certificates are secured by a group of mortgage loans. The mortgage loans have
coupon rates which on average are higher than the sum of the pass-through rates
on the class A certificates and the with fees payable by the trust to the master
servicer, the trustee and the certificate insurer. In the absence of losses and
delinquencies on the mortgage loans, the trust will have excess cashflow which
will be available to provide credit enhancement. The difference between (a) the
sum of (1) the mortgage loans' aggregate principal balance and (2) the amount on
deposit in the pre-funding account and (b) the class A certificates' aggregate
outstanding principal balance, with respect to a particular group, is the
overcollateralization which is available to absorb losses on the mortgage loans.
The amount of overcollateralization with respect to each group must be
maintained at specified required levels, which are permitted to reduce or step
down over time.
The trust will use the excess cashflow described above to make payments
of principal on the class A certificates for the purpose of maintaining the
overcollateralization at its required amount. Using mortgage loan coupon
payments received by the trust to pay class A certificate principal has the
effect of amortizing the class A certificates more quickly, and to a greater
degree, than the mortgage loans amortize. This feature thus builds up
overcollateralization, or replenishes overcollateralization which would
otherwise be reduced as a result of losses on the mortgage loans.
The trust also has the benefit of a cross-collateralization feature,
which allows the trust to use the excess cashflow generated by one group to cure
shortfalls that may arise in the other group, but only after satisfying the
minimum needs of the first group.
The Certificate Insurance Policy. If losses on a group are so severe
that the overcollateralization level becomes negative, meaning that the class A
certificates' aggregate outstanding principal balance exceeds the aggregate
principal balance of the mortgage loans in the group securing that class, after
taking into account all of the overcollateralization and cross-collateralization
provisions, then the trustee will make a claim on the certificate insurance
policy for an amount equal to the shortfall. The amount claimed will then be
passed-through as a principal distribution to the affected classes of class A
certificates, reducing their aggregate outstanding principal balance and
re-establishing parity with the principal balance of the mortgage loans. The
certificate insurance policy can only be drawn upon for principal in the event
of a negative overcollateralization situation; it cannot be drawn upon to
maintain the required positive level of overcollateralization.
Under extreme loss or delinquency scenarios applicable to the group
securing their class, investors in the class A certificates may temporarily not
receive distributions of principal.
S-48
<PAGE> 49
CLASS A CERTIFICATE DISTRIBUTIONS AND INSURED PAYMENTS TO THE OWNERS OF THE
CLASS A CERTIFICATES
No later than the second business day prior to each payment date the
trustee will be required to determine the Group Available Funds for each group.
If the Insured Distribution Amount for a group exceeds the Group Available Funds
for that group on any payment date, the trustee will be required to draw the
amount of the insufficiency from the certificate insurer under the certificate
insurance policy. Amounts which cannot be distributed to the owners of the class
A certificates as a result of proceedings under the United States Bankruptcy
Code or similar insolvency laws will not be considered in determining the amount
of Group Available Funds available on any payment date.
THE CERTIFICATE INSURER
The following information has been supplied by Ambac Assurance
Corporation for inclusion in this prospectus supplement. No representation is
made by the sponsor, the master servicer, the underwriter or any of their
affiliates as to the accuracy or completeness of this information.
Ambac Assurance Corporation is a Wisconsin-domiciled stock insurance
corporation regulated by the Office of the Commissioner of Insurance of the
State of Wisconsin and licensed to do business in 50 states, the District of
Columbia, the Commonwealth of Puerto Rico and the Territory of Guam. Ambac
Assurance Corporation primarily insures newly issued municipal and structured
finance obligations. Ambac Assurance Corporation is a wholly-owned subsidiary of
Ambac Financial Group, Inc., a 100% publicly-held company. Moody's Investors
Service, Inc., Standard & Poor's Ratings Services, a division of The McGraw-Hill
Companies, Inc. and Fitch IBCA, Inc. have each assigned a triple-A financial
strength rating to Ambac Assurance Corporation.
The consolidated financial statements of the certificate insurer and
its subsidiaries as of December 31, 1998 and December 31, 1997 and for each of
the years in the three-year period ended December 31, 1998, prepared in
accordance with generally accepted accounting principles, included in the Annual
Report on Form 10-K of Ambac Financial Group, Inc. -- which was filed with the
Securities and Exchange Commission on March 30, 1999; Securities and Exchange
Commission File No. 1-10777 -- and the unaudited consolidated financial
statements of the certificate insurer and subsidiaries as of June 30, 1999 and
for the periods ending June 30, 1999 and June 30, 1998, included in the
Quarterly Report on Form 10-Q of Ambac Financial Group, Inc. for the period
ended June 30, 1999 -- which was filed with the Securities and Exchange
Commission on August 13, 1999 -- are incorporated by reference into this
prospectus supplement and are deemed to constitute a part of this prospectus
supplement. Any statement contained in a document incorporated by reference
shall be modified or superseded for the purposes of this prospectus supplement
to the extent that a statement contained by reference in this prospectus
supplement also modifies or supersedes that statement. Any statement so modified
or superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this prospectus supplement.
All financial statements of the certificate insurer and its
subsidiaries included in documents filed by Ambac Financial Group, Inc. with the
Securities and Exchange Commission under section 13(a), 13(c), 14 or 15(d) of
the Securities Exchange Act of 1934, subsequent to the date of this prospectus
supplement and prior to the termination of the offering of the class A
certificates are deemed to be incorporated by reference into this prospectus
supplement and to be a part of this prospectus supplement from the respective
dates of filing.
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<PAGE> 50
The following table sets forth the capitalization of the certificate
insurer as of December 31, 1996, December 31, 1997, December 31, 1998 and June
30, 1999, respectively, in conformity with generally accepted accounting
principles.
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 30,
1996 1997 1998 1999
------- ------- ------- -------
(Unaudited)
<S> <C> <C> <C> <C>
Unearned premiums $ 995 $1,184 $1,303 $1,349
Other liabilities 259 562 548 413
------- ------- ------- -------
Total liabilties $ 1254 $1,746 $1,851 $1,762
======= ======= ======= =======
Stockholder's equity:(1)
Common stock $ 82 $ 82 $ 82 $ 82
Additional paid-in capital 515 521 541 644
Accumulated other comprehensive income 66 118 138 39
Retained earnings 992 1,180 1,405 1,530
------- ------- ------- -------
Total stockholder's equity 1,655 1,901 2,166 2,295
------- ------- ------- -------
Total liabilities and stockholder's equity $2,909 $3,647 $4,017 $4,057
======= ======= ======= =======
</TABLE>
(1) Components of stockholder's equity have been restated for all periods
presented to reflect "Accumulated other comprehensive income" in
accordance with the Statement of Financial Accounting Standards No. 130
"Reporting Comprehensive Income" adopted by the certificate insurer
effective January 1, 1998. As this new standard only requires
additional information in the financial statements, it does not affect
the certificate insurer's financial position or results of operations.
For additional financial information concerning the certificate
insurer, see the audited and unaudited financial statements of the certificate
insurer incorporated by reference in this prospectus supplement. Copies of the
financial statements of the certificate insurer incorporated by reference in
this prospectus supplement and copies of the certificate insurer's annual
statement for the year ended December 31, 1998 prepared in accordance with
statutory accounting standards are available, without charge, from the
certificate insurer. The address of the certificate insurer's administrative
offices and its telephone number are One State Street Plaza, 17th Floor, New
York, New York 10004 and (212) 668-0340.
The certificate insurer makes no representation regarding the class A
certificates or the advisability of investing in the class A certificates and
makes no representation regarding, nor has it participated in the preparation
of, this prospectus supplement other than the information supplied by the
certificate insurer and presented under the headings "The Certificate Insurer"
and "The Certificate Insurance Policy" and in the financial statements
incorporated in this prospectus supplement by reference.
THE CERTIFICATE INSURANCE POLICY
The following information has been supplied by Ambac Assurance
Corporation for inclusion in this prospectus supplement. No representation is
made by the sponsor, the master servicer, the underwriter or any of their
affiliates as to the accuracy or completeness of this information.
The certificate insurer, in consideration of the payment of the premium
and subject to the terms of the certificate insurance policy, agrees
unconditionally and irrevocably to pay to the trustee for the benefit of the
applicable owners of the class A certificates, that portion of the Insured
Amounts which shall become Due for Payment but shall be unpaid by reason of
Nonpayment.
The certificate insurer will make such payments to the trustee from its
own funds on the later of (a) the business day following receipt of the Notice
to the certificate insurer of Nonpayment or (b) the
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<PAGE> 51
business day on which the Insured Amounts are Due for Payment. The certificate
insurer shall be subrogated to all the owners' rights to payment on the class A
certificates to the extent of the insurance disbursements so made. Once payments
of the Insured Amounts have been made to the trustee, the certificate insurer
shall have no further obligation in respect of such Insured Amounts. Payment of
Insured Amounts shall be made only at the time set forth in the certificate
insurance policy and no accelerated payment of Insured Amounts shall be made
regardless of any acceleration of any of the class A certificates, unless such
acceleration is at the sole option of the certificate insurer.
The certificate insurance policy does not cover shortfalls, if any,
attributable to the liability of the trust, any REMIC or the trustee for
withholding taxes, if any, including interest and penalties related to that
liability. The certificate insurance policy does not cover, and Insured Payments
do not include, any shortfalls due to the application of the Soldiers' and
Sailors' Civil Relief Act, and any Supplemental Interest Amounts.
The certificate insurer will pay any Insured Payment that is a
Preference Amount on the business day following receipt on a business day by the
certificate insurer of a certified copy of the order requiring the return of a
preference payment, and other documentation as is reasonably required by the
certificate insurer. This documentation shall be in a form satisfactory to the
certificate insurer, provided that if the documents are received after 12:00
noon New York City time on that business day, they will be deemed to be received
on the following business day.
Insured Payments due under the certificate insurance policy unless
otherwise stated in the certificate insurance policy will be disbursed by the
certificate insurer to the trustee on behalf of the owners of the class A
certificates by wire transfer of immediately available funds in the amount of
the Insured Payment.
Any notice under the certificate insurance policy may be made at the
address listed below for the certificate insurer or such other address as the
certificate insurer shall specify in writing to the trustee.
The notice address of the certificate insurer is One State Street
Plaza, New York, New York 10004, Attention: General Counsel, or such other
address as the certificate insurer shall specify to the trustee in writing. The
certificate insurance policy is being issued under and pursuant to, and shall be
construed under, the laws of the State of New York, without giving effect to the
conflict of laws principles thereof.
In the event that the certificate insurer were to become insolvent, any
claims arising under the certificate insurance policy would be excluded from
coverage by the California Insurance Guaranty Association, established pursuant
to the laws of the State of California.
THE INSURANCE PROVIDED BY THE CERTIFICATE INSURANCE POLICY IS NOT
COVERED BY THE PROPERTY/CASUALTY INSURANCE SECURITY FUND SPECIFIED BY THE
INSURANCE LAWS OF THE STATE OF NEW YORK.
The certificate insurance policy is not cancelable for any reason. The
premium on the certificate insurance policy is not refundable for any reason.
THE POOLING AND SERVICING AGREEMENT
In addition to the provisions of the pooling and servicing agreement
summarized elsewhere in this prospectus supplement and the prospectus, the
following is a summary of other provisions of the pooling and servicing
agreement.
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<PAGE> 52
FORMATION OF THE TRUST
The trust will be created and established pursuant to the pooling and
servicing agreement on the closing date. On such date, the sponsor will cause
the trust to acquire the mortgage loans and the trust will issue the class A
certificates.
The property of the trust shall include all money, instruments and
other property to the extent such money, instruments and other property are
subject or intended to be held in trust for the benefit of the owners of the
class A certificates, and all proceeds thereof.
SALE OF MORTGAGE LOANS
Not later than the closing date the sponsor will cause the originators
to transfer the initial mortgage loans under one or more mortgage loan transfer
agreements between the originators and the sponsor. In these transfer agreements
the originators will make representations and warranties and the sponsor will
assign its rights to enforce the representations and warranties to the trustee.
The sponsor on the closing date will cause the trust to acquire all
right, title and interest of the originators in each mortgage loan listed on the
schedule delivered to the trustee on the closing date and all their right, title
and interest in all principal collected and all interest accrued on or after the
initial cut-off date on each of those mortgage loans, excluding any premium
recapture.
TERMINATION OF THE TRUST
The pooling and servicing agreement will provide that the trust will
terminate upon the payment to the owners of all certificates of all amounts
required to be paid those owners and to the certificate insurer of all amounts
required to be paid to the certificate insurer as reimbursement for any prior
drawings on the certificate insurance policy after the latest to occur of (a)
the final payment or other liquidation of the last mortgage loan or (b) the
disposition of all property acquired in respect of any mortgage loan remaining
in the trust estate or (c) at any time when a qualified liquidation of the trust
estate is effected as described in the next paragraph.
To effect a qualified liquidation of the trust, the owners of all class
A certificates then outstanding will be required (1) unanimously to direct the
trustee on behalf of the trust to adopt a plan of complete liquidation, as
contemplated by section 860F(a)(4) of the Internal Revenue Code and (2) to
furnish to the trustee an opinion of counsel reasonably acceptable to the
trustee to the effect that such liquidation constitutes a qualified liquidation.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
Investors may wish to review the following discussion of the material
anticipated federal income tax consequences of the purchase, ownership and
disposition of the Supplemental Interest Amounts and the class A certificates
together with the information in the section "Material Federal Income Tax
Consequences" in the prospectus.
The discussion in this section and in the prospectus is based upon
laws, regulations, rulings and decisions now in effect, all of which are subject
to change. The discussion below and in the prospectus does not purport to deal
with all federal tax consequences applicable to all categories of investors,
some of which may be subject to special rules. Investors may wish to consult
their own tax advisors in determining the federal, state, local and any other
tax consequences to them of the purchase, ownership and disposition of the
Supplemental Interest Amounts and the class A certificates. References in this
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<PAGE> 53
section and in the "ERISA Considerations" section to the code and sections are
to the Internal Revenue Code.
REMIC ELECTIONS
The trustee will cause one or more REMIC elections to be made with
respect to specified assets of the trust for federal income tax purposes. Dewey
Ballantine LLP, special tax counsel, will advise that, in its opinion, for
federal income tax purposes, assuming the REMIC elections are made and
compliance with the pooling and servicing agreement, the trust will be treated
as a REMIC for federal income tax purposes. Each of the class A certificates
will be a regular interest in a REMIC.
For federal income tax purposes, regular interests in a REMIC are
treated as debt instruments issued by the REMIC on the date on which those
interests are created, and not as ownership interests in the REMIC or its
assets. Owners of class A certificates that otherwise report income under a cash
method of accounting will be required to report income with respect to the class
A certificates under an accrual method.
It is anticipated that the class A certificates will not have any
original issue discount other than possibly original issue discount within a de
minimus exception and that accordingly the provisions of sections 1271 through
1273 and 1275 generally will not apply to the class A certificates. Original
issue discount will be considered de minimus if it is less than 0.25% of the
principal amount of a class A certificate multiplied by its expected weighted
average life. Because rules regarding the accrual of income on prepayable debt
instruments such as the class A certificates have not yet been issued by the
Internal Revenue Service, the proper treatment regarding possible original issue
discount and the accrual of income on the class A certificates is not clear.
Potential investors may wish to consult their own tax advisors regarding an
investment in the class A certificates. The prepayment assumption that will be
used in determining the rate of accrual of original issue discount on the class
A certificates, other than the class A-7 certificates, is 120% of the prepayment
assumption. The prepayment assumption that will be used in determining the rate
of accrual of original issue discount on the class A-7 certificates is 28% of
the CPR assumption. No representation is made that any of the mortgage loans
will prepay at these rates or any other rate. See "Prepayment and Yield
Considerations -Projected Prepayments and Yields for Class A Certificates" in
this prospectus supplement and "Material Federal Income Tax Consequences --
Discount and Premium" in the prospectus.
SPECIAL TAX ATTRIBUTES
The class A certificates possess special tax attributes by virtue of
the REMIC provisions of the code. See "Material Federal Income Tax Consequences
- -- REMIC Securities -- Special Tax Attributes" in the prospectus.
SUPPLEMENTAL INTEREST AMOUNTS
The owners of the class A-7 certificates and the rights to receive
Supplemental Interest Amounts will be treated for tax purposes as owning two
separate investments:
- the class A-7 certificates without the right to receive
Supplemental Interest Amounts and
- the right to receive the Supplemental Interest Amounts.
The owners of the class A-7 certificates must allocate the purchase
price of their certificates between these two investments based on their
relative fair market values. The purchase price allocated to
S-53
<PAGE> 54
the first investment will be the issue price of the class A-7 certificates for
calculating accruals of original issue discount. See "Material Federal Income
Tax Consequences -- Discount and Premium" in the prospectus.
The proper federal income tax treatment of the Supplemental Interest
Amounts is not clear and tax counsel can not make a reliable estimation of the
degree of certainty of treatment among several possible treatments and unknown
other treatments the IRS may apply to the Supplemental Interest Amounts. Tax
counsel believes that a likely treatment of the Supplemental Interest Amounts is
as a notional principal contract. The trust intends to treat the Supplemental
Interest Amounts for federal income tax purposes as a notional principal
contract. Treasury Regulations under section 446 relating to notional principal
contracts provide that taxpayers, regardless of their method of accounting,
generally must recognize the ratable daily portion of a periodic payment for the
taxable year to which that portion relates. Assuming treatment as a notional
principal contract, any Supplemental Interest Amounts will be periodic payments.
Income with respect to periodic payments under a notional principal contract for
a taxable year should constitute ordinary income. The purchase price allocated
to the right to receive the Supplemental Interest Amounts will be treated as a
nonperiodic payment under these regulations. This nonperiodic payment may be
amortized using several methods, including the level payment method described in
these regulations.
Alternative federal income tax characterization of the Supplemental
Interest Amounts is possible, including treatment of the Supplemental Interest
Amounts as indebtedness or an interest in a partnership. The amount, timing and
character of the income and deductions for an owner of Supplemental Interest
Amounts would differ if the Supplemental Interest Amounts were held to
constitute indebtedness or an interest in a partnership, but for most investors
in most circumstances, those differences would not be material. Because the
trust will treat the Supplemental Interest Amounts as a notional principal
contract, the master servicer will not attempt to satisfy the tax reporting
requirements that would apply under these alternative characterizations of the
Supplemental Interest Amounts. Investors that are foreign persons may wish to
consult their own tax advisors in determining the federal, state, local and
other tax consequences to them of the purchase, ownership and disposition of the
Supplemental Interest Amounts.
The right to receive the Supplemental Interest Amounts will not
constitute: a real estate asset within the meaning of section 856(c)(5)(B) if
held by a real estate investment trust; a qualified mortgage within the meaning
of section 860G(a)(3) or a permitted investment within the meaning of section
860G(a)(5) if held by a REMIC; or assets described in section 7701(a)(19)(C)(xi)
if held by a thrift. Moreover, other special rules may apply to some categories
of investors, including dealers in securities and dealers in notional principal
contracts.
If the master servicer, acting directly or through a permitted
designee, exercises its right to an optional termination, the Supplemental
Interest Amount might not be paid in full.
TAXATION OF FOREIGN INVESTORS
Foreign investors will not be subject to U.S. withholding on income
from the Supplemental Interest Amounts, if this income is not connected with a
U.S. trade or business and the foreign investor certifies its foreign status.
The Treasury Department has issued new regulations which make modifications to
the requirements set forth in Annex I to the prospectus. These new regulations
will generally be effective for payments made after December 31, 2000. We
suggest that prospective investors consult their tax advisors regarding these
new regulations.
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<PAGE> 55
INFORMATION REPORTING AND BACKUP WITHHOLDING
The trustee will furnish or make available, within a reasonable time
after the end of each calendar year, to each person who held a class A
certificate at any time during this year, the information required by applicable
rules to assist the holders in preparing their federal income tax returns, or to
enable holders to make the information available to beneficial owners or
financial intermediaries that hold the certificates on behalf of beneficial
owners. In particular, this information will include a statement of the adjusted
issue price of the class A certificate at the beginning of each accrual period.
In addition, the reports will include information necessary to compute the
accrual of any market discount that may arise upon secondary trading of class A
certificates.
Distributions of interest and principal as well as distributions of
proceeds from the sale of the class A certificates, may be subject to the backup
withholding requirement under section 3406 at a rate of 31% if the recipients of
these distributions fail to furnish to the payor information, including their
taxpayer identification numbers, or otherwise fail to establish an exemption
from this tax. Any amounts deducted and withheld from a distribution to a
recipient would be allowed as a credit against the recipient's federal income
tax. Furthermore, penalties may be imposed by the IRS on a recipient of
distributions that is required to supply information but does not do so in the
proper manner. See "Material Federal Income Consequences -- Backup Withholding"
in the prospectus.
STATE TAXES
The sponsor makes no representations regarding the tax consequences of
purchase, ownership or disposition of the class A certificates and Supplemental
Interest Amounts under tax laws of any state. Investors considering an
investment in the class A certificates and Supplemental Interest Amounts may
wish to consult their own tax advisors regarding these tax consequences.
All investors should consult their own tax advisors regarding the
federal, state, local or foreign tax consequences of the purchase, ownership and
disposition of the class A certificates and the Supplemental Interest Amounts.
ERISA CONSIDERATIONS
Investors may wish to review the material set forth in this section
together with the information in the section "ERISA Considerations" in the
prospectus.
The class A certificates may be offered to pension, profit sharing and
other employee benefit plans subject to ERISA. A fiduciary of any such plan or
any other person investing plan assets of any such plan, including an insurance
company investing through its general or separate accounts, may wish to review
with its legal advisors whether the purchase or holding of class A certificates
could give rise to a transaction prohibited or not otherwise permissible under
ERISA or section 4975 of the code.
The Department of Labor has issued to the underwriters individual
prohibited transaction exemptions which, as described under the section "ERISA
Considerations -- Certificates" in the prospectus, provide exemptive relief for
certain transactions relating to investments in pass-through certificates issued
by trusts which hold obligations such as the mortgage loans. As of the initial
cut-off date, there is no single mortgage loan included in the trust that
constitutes more than five percent of the aggregate unamortized principle
balance of the assets of the trust. Before purchasing a class A certificate
based on the underwriters' exemptions, a fiduciary of a plan should itself
confirm (1) that such certificate
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<PAGE> 56
constitutes a certificate for purposes of the underwriters' exemptions and (2)
that the conditions and other requirements set forth in the underwriters'
exemptions would be satisfied.
Any person purchasing a class A-7 certificate and the right to receive
Supplemental Interest Amounts will have acquired, for purposes of ERISA and for
federal income tax purposes, the class A-7 certificate without the right to
receive the Supplemental Interest Amounts, together with the right to receive
the Supplemental Interest Amounts. The underwriters' exemptions do not apply to
the acquisition, holding or resale of the right to receive the Supplemental
Interest Amounts. Accordingly, the acquisition of the right to receive the
Supplemental Interest Amounts by a plan could result in a prohibited transaction
unless another administrative exemption to ERISA's prohibited transaction rules
is applicable. One or more alternative exemptions may be available with respect
to the initial purchase, holding and resale of the right to receive the
Supplemental Interest Amounts, including, but not limited to:
- Prohibited Transaction Class Exemption 91-38, regarding
investments by bank collective investment funds;
- Prohibited Transaction Class Exemption 90-1, regarding
investments by insurance company pooled separate accounts;
- Prohibited Transaction Class Exemption 84-14, regarding
transactions negotiated by qualified professional asset
managers;
- Prohibited Transaction Class Exemption 96-23, regarding
transactions negotiated by in-house asset managers; or
- Prohibited Transaction Class Exemption 75-1, Part II, regarding
principal transactions by broker-dealers.
The sponsor believes that the conditions of Prohibited Transaction
Class Exemption 75-1, Part II will be met with respect to the acquisition of a
right to receive the Supplemental Interest Amounts by a plan, so long as no
underwriter is a fiduciary with respect to the plan and is not a party in
interest with respect to the plan by reason of being a participating employer or
affiliate.
Any plan fiduciary considering the purchase of class A certificates may
wish to consult with its counsel as to the potential applicability of ERISA, the
Internal Revenue Code, the underwriters' exemptions and, with respect to the
class A-7 certificates, other administrative exemptions prior to making an
investment in the certificates. Moreover, each plan fiduciary may wish to
determine whether, under the general fiduciary standards of investment prudence
and diversification, an investment in the class A certificates is appropriate
for the plan, taking into account the overall investment policy of the plan and
the composition of the plan's investment portfolio.
The sale of the class A certificates to a plan is in no respect a
representation by the sponsor or the underwriters that this investment meets all
relevant legal requirements with respect to investments by plans generally or by
any particular plan or that this investment is appropriate for plans generally
or any particular plan.
RATINGS
It is a condition of the original issuance of the class A certificates
that they receive ratings of "AAA" by Standard & Poor's, and "Aaa" by Moody's.
The ratings assigned to the class A certificates will
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<PAGE> 57
be based on the mortgage loans, as well as the financial strength of the
certificate insurer. These ratings will be the views of the rating agencies
only.
Explanations of the significance of these ratings may be obtained from
Standard & Poor's, whose principal offices are located at 55 Water Street, New
York, New York 10041 and Moody's, whose principal offices are located at 99
Church Street, New York, New York 10007. There is no assurance that these
ratings will continue for any period of time or that these ratings will not be
revised or withdrawn. Any revision or withdrawal of the ratings may have an
adverse effect on the market price of the class A certificates. A security
rating is not a recommendation to buy, sell or hold securities.
The ratings assigned to the class A certificates do not address the
likelihood of the payment of any Supplemental Interest Amounts.
Moody's ratings on mortgage loan pass-through certificates address the
likelihood of the receipt by the owners of all distributions to which the owners
are entitled. Moody's rating opinions address the structural and legal issues
and tax related aspects associated with the class A certificates, including the
nature of the mortgage loans and the credit quality of the credit enhancement
provider. Moody's ratings on pass-through certificates do not represent any
assessment of the likelihood that principal prepayments may differ from those
originally anticipated.
The ratings do not address the possibility that, as a result of
principal prepayments, certificateholders may receive a lower than anticipated
yield.
The ratings of the class A certificates should be evaluated
independently from similar ratings on other types of securities.
The sponsor has not requested a rating of the class A certificates by
any rating agency other than Moody's and Standard & Poor's and the sponsor has
not provided information relating to the class A certificates or the mortgage
loans to any rating agency other than Moody's and Standard & Poor's. There can
be no assurance as to whether any other rating agency will rate the class A
certificates or, if another rating agency rates them, what rating would be
assigned by that rating agency. Any unsolicited rating assigned by another
rating agency to the class A certificates may be lower than the rating assigned
to the class A certificates by Moody's and Standard & Poor's.
LEGAL INVESTMENT CONSIDERATIONS
No class of the class A certificates will constitute mortgage related
securities for purposes of the Secondary Mortgage Market Enhancement Act of
1984.
UNDERWRITING
The sponsor has agreed to cause the trust to sell the class A
certificates to the underwriters, and the underwriters have agreed to purchase
the class A certificates.
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<PAGE> 58
In the underwriting agreement, the underwriters have agreed to purchase
the entire principal amount of the class A certificates in the following
amounts:
<TABLE>
<CAPTION>
Principal Amount of Principal Amount of Principal Amount of
Underwriter Class A-1 Class A-2 Class A-3
----------- ------------------- ------------------- -------------------
<S> <C> <C> <C>
Bear, Stearns & Co. Inc.................... $58,790,500 $34,591,000 $23,129,500
Salomon Smith Barney Inc................... $58,790,500 $34,591,000 $23,129,500
------------ ----------- -----------
Total ............................ $117,581,000 $69,182,000 $46,259,000
</TABLE>
<TABLE>
<CAPTION>
Principal Amount of Principal Amount of Principal Amount of
Underwriter Class A-4 Class A-5 Class A-6
----------- ------------------- ------------------- -------------------
<S> <C> <C> <C>
Bear, Stearns & Co. Inc.................... $37,249,000 $14,990,000 $18,750,000
Salomon Smith Barney Inc................... $37,249,000 $14,990,000 $18,750,000
------------ ----------- -----------
Total ............................ $74,498,000 $29,980,000 $37,500,000
</TABLE>
<TABLE>
<CAPTION>
Principal Amount of
Underwriter Class A-7
----------- -------------------
<S> <C>
Bear, Stearns & Co. Inc.................... $50,000,000
Salomon Smith Barney Inc................... $50,000,000
Prudential Securities Incorporated......... $50,000,000
------------
Total ............................ $150,000,000
</TABLE>
The underwriters have informed the sponsor that they propose initially
to offer the class A certificates to the public at the price set forth on the
cover page hereof, and to specified dealers at a price less a selling concession
not in excess of the following amounts; the underwriters may allow, and these
dealers may reallow, a reallowance concession not in excess of the following
amounts:
<TABLE>
<CAPTION>
Selling Reallowance
Class Concession Concession
----- ---------- ----------
<S> <C> <C> <C>
A-1 0.100% 0.075%
A-2 0.140% 0.105%
A-3 0.160% 0.120%
A-4 0.200% 0.150%
A-5 0.250% 0.185%
A-6 0.170% 0.125%
A-7 0.160% 0.120%
</TABLE>
After the initial public offering, the public offering price and the
selling concessions and reallowance concessions may be changed.
The sponsor and Advanta Mortgage Holding Corporation, an affiliate of
the sponsor, have agreed to indemnify the underwriters against liabilities under
the Securities Act of 1933.
In connection with this offering and in compliance with applicable law
and industry practice, the underwriter(s) may overallot or effect transactions
which stabilize, maintain or otherwise affect the market price of the class A
certificates at a level above that which might otherwise prevail in the open
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<PAGE> 59
market, including stabilizing bids, effecting syndicate covering transactions or
imposing penalty bids. A stabilizing bid means the placing of any bid, or the
effecting of any purchase, for the purpose of pegging, fixing or maintaining the
price of a security. A syndicate covering transaction means the placing of any
bid on behalf of the underwriting syndicate or the effecting of any purchase to
reduce a short position created in connection with the offering. A penalty bid
means an arrangement that permits the managing underwriter to reclaim a selling
concession from a syndicate member in connection with the offering when class A
certificates originally sold by the syndicate member are purchased in syndicate
covering transactions. The underwriter(s) are not required to engage in any of
these activities, which, if commenced, may be discontinued at any time.
The sponsor has been advised by the underwriters that the underwriters
presently intend to make a market in the class A certificates, as permitted by
applicable laws and regulations. The underwriter(s) are not obligated, to make a
market in the class A certificates and any market making may be discontinued at
any time at the sole discretion of the underwriters. Accordingly, no assurance
can be given as to the liquidity of, or trading markets for, the class A
certificates.
EXPERTS
The consolidated balance sheets of Ambac Assurance Corporation and its
subsidiaries as of December 31, 1998 and December 31, 1997 and for each of the
years in the three-year period ended December 31, 1998 are incorporated by
reference in this prospectus supplement and in the registration statement in
reliance on the report of KPMG LLP, independent certified public accountants,
incorporated by reference herein, and upon the authority of said firm as experts
in accounting and auditing.
LEGAL MATTERS
Legal matters relating to the validity of the issuance of the class A
certificates will be passed upon for the sponsor by Dewey Ballantine LLP, New
York, New York, and for the underwriters by Fried, Frank, Harris, Shriver &
Jacobson, New York, New York.
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GLOSSARY
"ARM GROUP AVAILABLE FUNDS CAP RATE" means, for any payment date, an
amount, expressed as a per annum rate and calculated on the basis of a 360-day
year and the actual number of days elapsed in the period beginning on the prior
payment date to and including the day prior to the applicable payment date,
equal to
(1) (a) the aggregate amount of interest accrued and collected
or advanced on all of the mortgage loans in ARM Group minus for the
aggregate of the servicing fee, the trustee's fee and the premiums due
to the certificate insurer, for the ARM Group, on that payment date,
and (b) commencing on the seventh payment date following the closing
date, minus an amount equal to 0.75% per annum times the aggregate
principal balance of the mortgage loans in ARM Group as of the opening
of business on the first day of the prior calendar month divided by
(2) the aggregate principal balance of the mortgage loans in
the ARM group as of the opening of business on the first day of the
prior calendar month.
"BASE PRINCIPAL DISTRIBUTION AMOUNT" for any payment date for each group
is the lesser of:
(a) the Group Available Funds for that group, plus any Insured Payment
for that group and minus the Interest Distribution Amount for that
group, and
(b) (1) the sum, without duplication of:
(A) the principal actually collected by the master servicer with
respect to the mortgage loans in the group during the prior
month;
(B) the principal balance of each mortgage loan in that group
which either was repurchased by the sponsor or an originator
or purchased by the master servicer or any sub-servicer in
connection with that payment date;
(C) any amounts delivered by the sponsor or an originator in
connection with that payment date because of a substitution of
a mortgage loan in that group;
(D) all net liquidation proceeds related to principal and actually
collected by the master servicer with respect to the mortgage
loans in that group during the prior month;
(E) the proceeds related to principal received by the trustee from
any termination of that group;
minus
-----
(2) the amount, if any, by which the level of
overcollateralization exceeds the amount of
overcollateralization required to be maintained with respect
to that group for that payment date.
"CLASS A INTEREST DISTRIBUTION AMOUNT" means, for each class and
payment date, the interest due with respect to that class, together with any
unpaid interest shortfalls relating to that class from prior accrual periods.
The Class A Interest Distribution Amount for the class A-7 certificates does not
include any Supplemental Interest Amount.
S-60
<PAGE> 61
"CLASS A-6 PRINCIPAL DISTRIBUTION AMOUNT" for any payment date will be
the applicable percentage of the Class A-6 Pro Rata Principal Distribution
Amount with respect to that payment date as follows:
<TABLE>
<CAPTION>
Payment Dates Applicable Percentage
------------- ---------------------
<S> <C>
September 1999 -- August 2002 0%
September 2002 -- August 2004 45%
September 2004 -- August 2005 80%
September 2005 -- August 2006 100%
September 2006 and thereafter 300%
</TABLE>
"CLASS A-6 PRO RATA PRINCIPAL DISTRIBUTION AMOUNT" for a payment date
is the product of (x) the Fixed Rate Group Class A Principal Distribution Amount
for that payment date and (y) a fraction, the numerator of which is the class
A-6 certificate principal balance immediately prior to that payment date and the
denominator of which is the aggregate principal balance of all fixed rate group
certificates immediately prior to that payment date.
"COMBINED LOAN-TO-VALUE RATIO" or "CLTV" means, for any mortgage loan,
the ratio of (A) the sum of the original principal balance of the mortgage loan
plus any outstanding principal balances of mortgage loans senior to the mortgage
loan, calculated at the date of origination of the mortgage loan to (B) the
appraised value of the mortgaged property at the time of origination of the
mortgage loan.
"DEFICIENCY AMOUNT" means, for any group and any payment date, the
excess, if any, of Required Distributions over the Group Available Funds.
"DUE FOR PAYMENT" shall mean with respect to an Insured Amount, the
payment date on which Insured Amounts are due or, with respect to an Insured
Payment which is a Preference Amount, the business day on which the
documentation required by the certificate insurer referred to above has been
received by the certificate insurer.
"EXCESS CASHFLOW" for a group is equal to the Group Available Funds for
that group minus the aggregate Class A Interest Distribution Amount and the Base
Principal Distribution Amount for that group.
"FIXED RATE GROUP AVAILABLE FUNDS CAP RATE" means, for any payment
date, an amount, expressed as a per annum rate and calculated on the basis of a
360-day year consisting of 12 months of 30 days each, equal to
(1) the aggregate amount of interest accrued and collected (or
advanced) on all of the mortgage loans in the fixed rate group during
the prior calendar month minus the aggregate amount of the servicing
fee, the trustee's fee and the premiums due to the certificate insurer
for the fixed rate group, on that payment date, divided by
(2) the aggregate principal balance of the mortgage loans in
the fixed rate group as of the opening of business on the first day of
the prior calendar month.
"GROUP AVAILABLE FUNDS" is the amount for each group available to the
trustee for distribution to the owners on a payment date, after taking into
account any amounts transferred as a result of cross-collateralization, and
after deducting the servicing fees, trustee's fees and the premiums due to the
certificate insurer on that payment date.
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<PAGE> 62
"INSURED AMOUNTS" shall mean, with respect to any payment date, any
Deficiency Amount for such payment date.
"INSURED DISTRIBUTION AMOUNT" means, with respect to each group and any
payment date, the sum of the Interest Distribution Amount and any
Overcollateralization Deficit, in each case for the group. The Insured
Distribution Amount does not include any shortfalls due to the application of
the Soldiers' and Sailors' Civil Relief Act or any Supplemental Interest
Amounts.
"INSURED PAYMENTS" shall mean, the aggregate amount actually paid by
the certificate insurer to the trustee in respect of (i) Insured Amounts for a
payment date and (ii) Preference Amounts for any given business day.
"INTEREST ACCRUAL PERIOD" for each payment date and for the class A-1,
A-2, A-3, A-4, A-5 and A-6 certificates is each calendar month; for the class
A-7 certificates is the period from the preceding payment date, or, in the case
of the first payment date, from the closing date, through the day preceding the
payment date.
"INTEREST DETERMINATION DATE" the second business day preceding each
payment date or, in the case of the first payment date, on the second business
day preceding the closing date.
"INTEREST DISTRIBUTION AMOUNT" means, for each class and payment date,
the interest due with respect to that class, together with any unpaid interest
shortfall relating to that class from prior payment dates. The Interest
Distribution Amount for the class A-7 certificates does not include any
Supplemental Interest Amount.
"LOAN-TO-VALUE RATIO" or "LTV" means, for any mortgage loan, the ratio
of (A) the original principal balance of the mortgage loan to (B) the appraised
value of the mortgaged property at the time of origination of the mortgage loan.
"NONPAYMENT" shall mean, with respect to any payment date, a Deficiency
Amount owing in respect of such payment date.
"NOTICE" means the notice sent in writing by telecopy, in the form
acceptable to the certificate insurer, the original of which is subsequently
delivered by registered or certified mail, from the trustee specifying the
Insured Amount which shall be due and owing on the applicable payment date.
"OVERCOLLATERALIZATION DEFICIT" for a group and any payment date is the
amount, if any, by which:
(1) the aggregate principal balance of the class A
certificates backed by that group, after taking into account all
distributions to be made on that payment date, except for any payment
to be made as to principal from the proceeds of the certificate
insurance policy, exceeds
(2) the aggregate principal balance of the mortgage loans in
the group securing those classes as of the close of business on the
last day of the prior month, plus any amounts held by the trustee in
the pre-funding account for those classes.
"OVERCOLLATERALIZATION INCREASE AMOUNT" means, with respect to a group,
the actual amount of Excess Cashflow actually applied as an accelerated payment
of principal of class A certificates in the group.
S-62
<PAGE> 63
"PREFERENCE AMOUNT" means any payment of principal or interest on a
class A certificate which has become Due for Payment and which is made to an
owner of a class A certificate by or on behalf of the trustee which has been
deemed a preferential transfer and was previously recovered from its owner
pursuant to the United States Bankruptcy Code in accordance with a final,
nonappealable order of a court of competent jurisdiction.
"PRINCIPAL DISTRIBUTION AMOUNT" for a group is the sum of:
- the Base Principal Distribution Amount for that group and
payment date;
- the Overcollateralization Deficit for that group, but only to
the extent that it can be funded on that payment date from
Excess Cashflow available from both groups;
- any remaining Overcollateralization Deficit for that group on
that payment date, to the extent funded by the certificate
insurer as an Insured Payment; and
- the amount necessary to increase the overcollateralization for
that group to its required level, but only to the extent it can
be funded on the payment date from Excess Cashflow available
from both groups.
"REQUIRED DISTRIBUTIONS" means, with respect to each group and (1) any
payment date occurring prior to the payment date in August 2029, the Insured
Distribution Amount -- net of any shortfalls arising due to the application of
the Soldiers' and Sailors' Civil Relief Act -- with respect to that group and
(2) the payment date occurring in August 2029, the aggregate outstanding
principal balance, if any, of that class of class A certificates, after giving
effect to all other payments of principal on that class of class A certificates
on that payment date.
"STEP-UP PAYMENT DATE" means, the payment date following the calendar
month in which the clean-up call is first permitted to occur.
"SUPPLEMENTAL INTEREST AMOUNT" means, for the class A-7 certificates
and any payment date, the amount of interest that would otherwise be paid on the
class A-7 certificates on that payment date if not for the application of the
available fund cap rate.
S-63
<PAGE> 64
PROSPECTUS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
[ADVANTA LOGO] [ADVANTA LOGO]
ADVANTA CONDUIT RECEIVABLES, INC. ADVANTA MORTGAGE CORP. USA
Sponsor Master Servicer
</TABLE>
Mortgage Loan Asset-Backed Securities,
Issuable in Series
- --------------------------------------------------------------------------------
Advanta Conduit Receivables, Inc. may sell, from time to time, a series of
mortgage loan asset-backed securities backed solely by the assets of the issuing
trust. The assets of each trust consist primarily of a pool of mortgage loans.
<TABLE>
<S> <C>
THE SECURITIES --
- will be issued from time to time in series
WE SUGGEST THAT YOU READ THE SECTION ENTITLED
"RISK FACTORS" ON PAGE 9 OF THIS PROSPECTUS - will be issued by trusts established by Advanta
AND CONSIDER THESE FACTORS BEFORE MAKING A Conduit Receivables, Inc.
DECISION TO INVEST IN THESE SECURITIES.
- will be backed by one or more pools of mortgage
These securities are mortgage loan asset- loans held by the issuing trust
backed securities which represent interests in
or obligations of the trust issuing that - will be rated in one of the four highest rating
series of securities and are not interests in categories by at least one nationally recognized
or obligations of any other person or entity. statistical rating organization
- may have the benefit of one or more forms of
Neither these securities nor the mortgage credit enhancement, such as insurance policies,
loans will be insured or guaranteed by any overcollateralization, subordination or reserve
governmental agency or instrumentality. funds.
Retain this prospectus for future reference. THE ASSETS --
This prospectus may not be used to consummate The assets of each trust will primarily consist of
sales of securities unless accompanied by the a pool of mortgage loans, funds on deposit in one
prospectus supplement relating to the offering or more accounts and forms of credit support
of these securities. described in this prospectus and in the prospectus
supplement.
</TABLE>
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS AUGUST 10, 1999
<PAGE> 65
IMPORTANT INFORMATION ABOUT THE INFORMATION PRESENTED IN THIS PROSPECTUS
AND THE ACCOMPANYING PROSPECTUS SUPPLEMENT
We provide information to you about the securities in two separate
documents that progressively provide more detail: (1) this prospectus, which
provides general information, some of which may not apply to a particular series
of securities, and (2) the prospectus supplement, which describes the specific
terms of your series of securities.
This prospectus by itself does not contain complete information about
the offering of your securities; the balance of that information is contained in
the prospectus supplement. We suggest that you read both this prospectus and the
prospectus supplement in full. We cannot sell the securities to you unless you
have received both this prospectus and the prospectus supplement.
TABLE OF CONTENTS
PAGE
SUMMARY OF PROSPECTUS...............................4
RISK FACTORS........................................9
THE MORTGAGE LOANS.................................15
Interest Payments on the Mortgage Loans......18
Prepayment Fees; Due on Sale Clauses;
Assumable Mortgage Loans.....................18
Statistical Information Concerning the
Mortgage Loans...............................18
MORTGAGE LOAN PROGRAM AND UNDERWRITING GUIDELINES..19
Description of Underwriting Guidelines.......20
Representations and Warranties Concerning
the Mortgage Loans...........................23
The Master Servicer May Act Through Sub-
Servicers....................................23
DESCRIPTION OF THE SECURITIES......................24
General Payment Terms of Securities..........25
Payment Date Distributions...................26
Determination of Principal and Interest on
the Securities...............................26
Yield Considerations.........................27
Maturity And Prepayment Considerations.......28
Form of Securities...........................29
Assignment of Mortgage Loans.................31
Pre-Funding Feature; Mandatory Prepayment....31
Payments on Mortgage Loans; Deposits to
Accounts.....................................32
Withdrawals from the Principal and Interest
Account......................................33
Delinquency Advances and Servicing Advances..34
Reports to Securityholders...................36
DESCRIPTION OF CREDIT ENHANCEMENT..................36
Financial Guaranty Insurance Policies........36
Cross Support Among Classes..................37
Overcollateralization........................37
Subordination of Classes.....................38
Letter of Credit.............................38
Reserve Accounts.............................38
Derivative Contracts.........................38
Reduction or Substitution of Credit
Enhancement .................................38
SERVICING PROCEDURES...............................39
Collection and Other Servicing Procedures....39
2
<PAGE> 66
Realization Upon Defaulted Mortgage Loans....41
Hazard Insurance Policies....................42
THE SPONSOR........................................43
THE MASTER SERVICER................................43
AVAILABLE INFORMATION; INCORPORATION OF
INFORMATION BY REFERENCE......................43
THE AGREEMENTS.....................................45
Servicing and Other Compensation and Payment
of Expenses..................................45
Evidence as to Compliance....................45
Removal and Resignation of the Master
Servicer ....................................46
Amendments to the Agreements.................47
Retirement of Securities; Redemption.........47
The Trustee..................................48
LEGAL ASPECTS OF MORTGAGE LOANS....................49
Enforcement of the Mortgage Note.............49
Deeds of Trust or Mortgages..................50
Cooperative Loans............................51
Foreclosure of Mortgage Loans................51
Foreclosure on Cooperative Loans.............52
Rights of Redemption.........................53
Environmental Legislation....................53
Enforceability of Mortgage Loans Provisions..53
California Deeds of Trust....................54
Applicability of Usury Laws..................55
Soldiers' and Sailors' Civil Relief Act of
1940 ........................................55
MATERIAL FEDERAL INCOME TAX CONSEQUENCES...........56
Grantor Trust Securities.....................57
REMIC Securities.............................59
Special Tax Attributes.......................59
Debt Securities..............................67
Partnership Interests........................68
FASIT Securities.............................70
Discount and Premium.........................72
Backup Withholding...........................76
Foreign Investors............................76
STATE TAX CONSIDERATIONS...........................78
ERISA CONSIDERATIONS...............................78
Certificates.................................79
Notes........................................81
Consultation With Counsel....................82
REPORTS............................................82
INVESTMENT MATTERS.................................82
USE OF PROCEEDS....................................83
METHODS OF DISTRIBUTION............................83
LEGAL MATTERS......................................83
FINANCIAL INFORMATION..............................83
ADDITIONAL INFORMATION.............................83
ANNEX I.............................................1
3
<PAGE> 67
SUMMARY OF PROSPECTUS
- - This summary highlights selected information from this prospectus and does
not contain all of the information that you need to consider in making your
investment decision. To understand all of the terms of the offering of the
securities, carefully read this entire prospectus and the accompanying
prospectus supplement.
- - This summary provides an overview of the structural elements, calculations,
cash flows and other information to aid your understanding and is qualified by
the full description of these calculations, cash flows and other information in
this prospectus and the accompanying prospectus supplement.
SECURITIES
Mortgage loan asset-backed certificates and mortgage loan asset-backed
notes issuable from time to time in series, in fully registered form or book
entry only form, in authorized denominations, as described in the prospectus
supplement.
THE SPONSOR
Advanta Conduit Receivables, Inc. is a Nevada corporation whose principal
offices are located at 10790 Rancho Bernardo Road, San Diego, California 92127
and its telephone number is (858) 676-3099.
THE MASTER SERVICER
Advanta Mortgage Corp. USA or its successors and assigns.
THE SUB-SERVICERS
The master servicer may appoint sub-servicers, who may be affiliates, to
perform its servicing duties.
ISSUER OF SECURITIES
The issuer of each series of securities will be a trust established by the
sponsor or one of its affiliates. The securities will either be notes or
certificates. Notes will represent indebtedness of the trust. Certificates will
represent beneficial ownership interests in the trust.
THE MORTGAGE LOANS
Each trust will hold one or more pools of mortgage loans, which may
include:
- - conventional, non-government insured mortgage loans secured by one-to-four
family residential properties;
- - mortgage loans secured by condominiums or security interests in shares in
cooperative housing corporations;
- - mortgage loans on manufactured homes;
- - mortgage loans secured by junior liens on mortgaged properties;
- - non-conforming mortgage loans;
- - mortgage loans with loan-to-value ratios in excess of 100% of the appraised
value of the related mortgaged property but not in excess of 125%; and
- - revolving home equity lines of credit.
The mortgage loans may be located in any one of the 50 states, the District
of Columbia or the Commonwealth of Puerto Rico.
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<PAGE> 68
The sponsor will direct each trust to acquire the mortgage loans from
affiliated originators, unaffiliated originators or warehouse trusts.
- - Mortgage loans originated by affiliated originators will have been
originated in accordance with the sponsor's underwriting guidelines.
- - Mortgage loans originated by unaffiliated originators and purchased by the
sponsor or its affiliates will have been originated either in accordance
with the sponsor's guidelines or in accordance with guidelines approved by
the sponsor.
- - Mortgage loans may have been purchased by the sponsor in bulk acquisitions
and those loans will have been originated in accordance with the original
originator's guidelines.
The majority of the mortgage loans will be non-conforming mortgage loans
in that they have credit characteristics that do not meet Fannie Mae or Freddie
Mac underwriting guidelines.
THE SECURITIES
The securities of a series may be issued in one or more classes, as
specified in the prospectus supplement. One or more classes of securities of
each series:
- - may be entitled to receive distributions allocable only to principal, only
to interest or to any combination of principal and interest;
- - may only be entitled to receive distributions of prepayments of principal
throughout the lives of the securities or during specified periods;
- - may be subordinated in its right to receive distributions of scheduled
payments of principal, prepayments of principal, and payments of principal
and interest to one or more other classes of the same series throughout the
life of the securities or during specified periods;
- - may be entitled to receive distributions only after a specified period of
time has passed, a specified amount of principal has been paid down, or a
specified percentage of credit enhancement has built up: this could take
the form of a lockout feature, in which a class receives no principal
distributions for an initial period, then receives all principal
distributions for a period: subordinated classes could be entitled to
receive payments of principal only after a specified overcollaterization
target had been met;
- - may be entitled to receive distributions in accordance with a schedule or
formula or on the basis of collections from designated portions of the
assets in the issuing trust;
- - may be entitled to receive interest at a fixed rate or a rate that is
subject to change from time to time;
- - may accrue, and not pay, interest until other classes of the series have
been paid in full; the accrued interest will be added to the principal or
notional amount of the securities and will be payable only after the other
classes have been paid; and
- - may be entitled to distributions allocable to interest only after the
occurrence of specified events; the accrued interest will be added to the
principal or notional amount of the securities until the specified events
occur.
The timing and amounts of distributions may vary among classes, over time, or
otherwise as specified in the prospectus supplement.
5
<PAGE> 69
Interest only and principal only securities are subject to investment risks
that are a function of the prepayment speed of the underlying pool of mortgage
loans, optional or mandatory prepayment features of the securities, and the
price paid for the securities. Some investors in these securities could lose
their investment. The ratings assigned to these securities frequently will not
address these risks, so a substantial loss may not be inconsistent with a high
rating. These interest only and principal only securities are appropriate
investments only for sophisticated investors who are able to independently
assess the risks of their investment.
DISTRIBUTIONS ON THE SECURITIES
Owners of securities will be entitled to receive payments in the manner
described in the prospectus supplement. The prospectus supplement will specify:
- - whether distributions will be made monthly, quarterly, semi-annually or at
other intervals;
- - the amount allocable to payments of principal and the amount allocable to
payments of interest on any distribution date; and
- - the priorities which govern the distributions of principal and interest.
PRE-FUNDING FEATURE
A trust may enter into agreements with the sponsor, in which the sponsor
will request or direct the trust to acquire mortgage loans after the securities
are issued. The transfer of mortgage loans after the date the securities are
issued is known as the pre-funding feature. Any subsequent mortgage loans will
be required to conform to the requirements described in the prospectus
supplement. If the pre-funding feature is used, the trustee or indenture trustee
will be required to deposit all or a portion of the proceeds of the sale of the
securities of the series in a segregated account. The subsequent mortgage loans
will be transferred to the trust in exchange for money released from the
segregated account. These transfers must occur within a specified period, not to
exceed one year. If a trust elects federal income treatment as a REMIC or as a
grantor trust, the pre-funding period will be limited to three months. If all of
the monies originally deposited in the account are not used by the end of the
specified period, all remaining monies will be applied as a mandatory prepayment
of a class or classes of securities.
OPTIONAL REDEMPTION
The master servicer or any of its affiliated sub-servicers or, if
applicable, the credit enhancement provider may, at their respective options,
cause the early redemption of a series of securities through the purchase of the
mortgage loans in the trust. The optional redemption may only occur on a date
following the date when the aggregate outstanding principal balance of either
the securities or the mortgage loans is reduced below a specified percentage of
their respective original balances.
MANDATORY REDEMPTION
The trustee or the indenture trustee, as applicable, the master servicer or
any of its affiliated sub-servicers or other persons specified in the prospectus
supplement may be required to cause the early redemption of a series of
securities by soliciting competitive bids for the purchase of the assets of the
trust or otherwise.
If a pre-funding feature is used for any series of securities, at the end
of the pre-
6
<PAGE> 70
funding period any unused amounts will be applied as a mandatory redemption of a
class or classes of securities.
ADVANCES
The servicer of the mortgage loans may be obligated to advance delinquent
installments of interest, or principal and interest, less applicable servicing
fees, on the mortgage loans. The obligation to make advances may be limited to
amounts due to the owners of securities of the series, amounts deemed to be
recoverable from late payments or liquidation proceeds, specified periods or to
any combination of these considerations. The extent of the obligation to make
advances will be specified in the prospectus supplement. The advance will be
recoverable as specified in the prospectus supplement.
In addition, the servicer may be obligated, in some months to pay interest
shortfalls which arise due to prepayments on the mortgage loans in the month in
which the prepayment occurs. The payment must come from the servicer's own funds
without any right of reimbursement but are limited to the servicing fee the
master servicer collected that month.
CREDIT ENHANCEMENT
Credit enhancement refers to a mechanism that is intended to protect the
owners of securities against losses due to defaults on the mortgage loans. A
series of securities, or some of the classes within the series, may have the
benefit of one or more types of credit enhancement including but not limited to,
the following:
- - the use of excess interest to cover losses and to distribute as principal
to create overcollateralization;
- - the subordination of distributions on the lower classes of securities to
the required distributions in more senior classes of securities;
- - the allocation of losses on the mortgage loans to the lower classes of
securities; and
- - the use of cross support, reserve funds, financial guarantee insurance
policies, guarantees, letters of credit and similar instruments and
arrangements.
The protection against losses afforded by any credit enhancement will be
limited in the manner described in the prospectus supplement.
BOOK ENTRY REGISTRATION
One or more classes of a series of securities may be issued in book entry
form in the name of a clearing agency registered with the Securities and
Exchange Commission or its nominee. Transfers and pledges of book entry
securities may be made only through entries on the books of the clearing agency.
All references to the holders or owners of securities mean the beneficial
owners, unless the context specifically requires otherwise.
FEDERAL INCOME
TAX CONSEQUENCES
The securities of each series will, for federal income tax purposes,
constitute one of the following:
- - interests in a trust treated as a grantor trust under applicable provisions
of the Internal Revenue Code,
- - regular interests or residual interests in a trust treated as a real estate
mortgage investment conduit or REMIC under
7
<PAGE> 71
Sections 860A through 860G of the Internal Revenue Code,
- - debt issued by a trust,
- - interests in a trust which is treated as a partnership, or
- - regular interests or high-yield interests in a trust treated as a financial
asset securitization investment conduit or FASIT under Sections 860H
through 860L of the Internal Revenue Code.
We suggest that you review Material Federal Income Tax Consequences
beginning on page 56 in this prospectus and in the prospectus supplement. In
addition, you may wish to consult your own tax advisor concerning your
investment.
ERISA CONSIDERATIONS
A fiduciary of a pension, profit sharing or other employee benefit plan may
wish to review with its legal advisors whether the purchase, holding or
disposition of securities could give rise to a prohibited transaction under
ERISA, or Section 4975 of the Internal Revenue Code, and whether an exemption
from the prohibited transaction rules is available. We suggest that you review
ERISA Considerations beginning on page 79 in this prospectus and in the
prospectus supplement.
LEGAL INVESTMENT MATTERS
The prospectus supplement will state whether or not the securities will
constitute mortgage related securities under the Secondary Mortgage Market
Enhancement Act of 1984.
RATING
Each class of securities offered by a prospectus supplement will be rated
in one of the four highest rating categories of at least one nationally
recognized statistical rating agency.
RISK FACTORS
Investment in the securities will be subject to one or more risk factors,
including declines in the value of mortgaged properties, prepayment of mortgage
loans, higher risks of defaults on particular types of mortgage loans,
limitations on security for the mortgage loans, limitations on credit
enhancement and various other factors. We suggest that you read Risk Factors
beginning on page 9 in this prospectus and in the prospectus supplement for a
discussion of these and other risk factors that you may wish to consider before
investing in the securities.
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RISK FACTORS
You may wish to consider the following risk factors prior to any
purchase of any class of securities. You may also wish to consider the
information under the caption "Risk Factors" in the accompanying prospectus
supplement.
YOU MAY NOT BE ABLE TO SELL YOUR SECURITIES, AND MAY HAVE TO HOLD YOUR
SECURITIES TO MATURITY EVEN THOUGH YOU MAY WANT TO SELL IT.
A secondary market for these securities is unlikely to develop. If it does
develop, it may not provide you with sufficient liquidity of investment or
continue for the life of these securities. The underwriters may establish a
secondary market in the securities, although no underwriter will be obligated to
do so. The securities are not expected to be listed on any securities exchange
or quoted in the automated quotation system of a registered securities
association.
Issuance of the securities in book-entry form may also reduce the liquidity in
the secondary trading market, since some investors may be unwilling to purchase
securities for which they cannot obtain definitive physical securities.
PREPAYMENTS ON THE MORTGAGE LOANS COULD CAUSE YOU TO BE PAID EARLIER THAN YOU
EXPECT, WHICH MAY ADVERSELY AFFECT YOUR YIELD TO MATURITY.
- - The yield to maturity of the securities may be adversely affected by a
higher or lower than anticipated rate of prepayments on the mortgage loans.
If you purchase a security at a premium based on your expectations as to
its maturity or weighted average life, and the security pays principal more
quickly than you expected, your yield will be reduced and you may not
recover the premium you paid.
- - The yield to maturity on interest only securities will be extremely
sensitive to the rate of prepayments on the mortgage loans. If the mortgage
loans prepay very quickly the yield on an interest only security could be
dramatically reduced.
- - The mortgage loans may be prepaid in full or in part at any time, although
prepayment may require the borrower to pay a prepayment penalty or premium.
These penalties will generally not be property of the trust, and will not
be available for distributions to you.
- - We cannot predict the rate of prepayments of the loans, which is influenced
by a wide variety of economic, social and other factors, including
prevailing mortgage market interest rates, the availability of alternative
financing, local and regional economic conditions and homeowner mobility.
Therefore, we can give no assurance as to the level of prepayments that a
trust will experience.
- Prepayments may result from mandatory redemptions relating to unused
monies held in pre-funding accounts, voluntary early payments by borrowers,
payments in connection with refinancings of the first mortgages, sales of
mortgaged properties subject to "due-on-sale" provisions and liquidations
due to default, as well as the receipt of proceeds from mortgage
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insurance policies, credit life and disability insurance policies. In
addition, repurchases or purchases of mortgage loans from the trust or the
payment of substitution adjustments will have the same effect on the
securities as a prepayment of the loans.
- - One or more classes of securities of any series may be subject to optional
or mandatory redemption in whole or in part, on or after a specified date,
or on or after the time when the aggregate outstanding principal amount of
the mortgage loans or the securities is less than a specified amount or
percentage.
Any of the foregoing principal prepayments may adversely affect the yield to
maturity of the prepaid securities. Since prevailing interest rates are subject
to fluctuation, there can be no assurance that you will be able to reinvest
these prepaid amounts at a yield equaling or exceeding the yield on your
securities. You will bear the risk of reinvesting unscheduled distributions
resulting from a redemption.
CREDIT ENHANCEMENT, IF PROVIDED, WILL BE LIMITED IN BOTH AMOUNT AND SCOPE OF
COVERAGE, AND MAY NOT BE SUFFICIENT TO COVER ALL LOSSES OR RISKS ON YOUR
INVESTMENT.
Credit enhancement may be provided in limited amounts to cover some, but not
all, types of losses on the mortgage loans and may reduce over time in
accordance with a schedule or formula. Furthermore, credit enhancement may
provide only very limited coverage as to some types of losses, and may provide
no coverage as to other types of losses. Credit enhancement does not directly or
indirectly guarantee to the investors any specified rate of prepayments, which
is one of the principal risks of your investment. The amount and types of credit
enhancement coverage, the identification of any entity providing the credit
enhancement, the terms of any subordination and any other information will be
described in the accompanying prospectus supplement.
PROPERTY VALUES MAY DECLINE, LEADING TO HIGHER LOSSES ON THE MORTGAGE LOANS.
An investment in securities which are backed by residential real estate loans
may be affected by a decline in real estate values and changes in the borrowers'
financial condition. If property values decline, the rates of delinquencies and
foreclosures could rise, increasing the likelihood of loss. If these losses are
not covered by any credit enhancement, you will bear the risk of these losses
and will have to look primarily to the value of the mortgaged properties for
recovery of the outstanding principal and unpaid interest on the defaulted
loans.
MORTGAGE LOANS WITH BALLOON PAYMENT FEATURES MAY HAVE GREATER DEFAULT RISK.
Some of the mortgage loans may be balloon loans that provide for the payment of
a large remaining principal balance in a single payment at maturity. The
mortgagor on this type of loan may not be able to pay the large payment, and may
also be unable to refinance the mortgage loan at maturity. As a result, the
default risk associated with balloon loans may be greater than that associated
with fully amortizing loans because of the large payment at maturity.
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MORTGAGE LOANS WITH HIGH LOAN-TO-VALUE RATIOS MAY NOT HAVE ADEQUATE SECURITY IN
THE EVENT OF A DEFAULT, WHICH MAY RESULT IN MORE SEVERE LOSSES.
Even though all of the mortgage loans will be secured by residential real
estate, in some cases the value of the real estate may be close to, or even less
than, the amount of the mortgage loan. As a result, the mortgaged properties may
not provide adequate security for these high loan-to-value loans. The
underwriting analysis for high loan-to-value loans relies more heavily on the
mortgagor's creditworthiness than on the protection afforded by the security
interest in the mortgaged property.
Additionally, there is also the risk that if mortgagor sells the property, he or
she may be unable to pay the mortgage loan in full from the proceeds of the sale
and may default. The costs incurred by the servicer in the collection and
liquidation of high loan-to-value loans may be higher than for other loans,
because the servicer may be required to pursue collection solely against the
mortgagor and not the property. Consequently, the losses on defaulted high
loan-to-value loans may be more severe as there is no assurance that proceeds
from the sale will be sufficient to repay the mortgage loan.
MORTGAGE LOANS SECURED BY JUNIOR LIENS MAY EXPERIENCE HIGHER RATES OF
DELINQUENCIES AND LOSSES.
Some of the mortgage loans will be secured by second, or even more junior, liens
which are subordinate to the rights of the more senior mortgagees. As a result,
the proceeds from any liquidation, insurance or condemnation proceedings will be
available to satisfy the principal balance of a mortgage loan only to the extent
that the claims of all senior mortgagees have been satisfied in full. In
addition, a mortgagee secured by a junior lien may not foreclose on the
mortgaged property unless it either pays off the senior mortgage or undertakes
to make payments on the senior mortgage. The trust will not have any source of
funds to satisfy any senior mortgage or make payments due to any senior
mortgagee. This lack of funds could prevent the trust from foreclosing on a
junior lien mortgage in a timely manner which may lead to increased loss.
FORECLOSURE OF MORTGAGED PROPERTIES INVOLVE DELAYS AND EXPENSE AND COULD CAUSE
LOSSES ON THE MORTGAGE LOANS.
Even if the mortgaged properties provide adequate security for the mortgage
loans, substantial delays could be encountered and substantial costs could be
incurred in connection with the foreclosure of defaulted loans, and
corresponding delays in the receipt of the foreclosure proceeds could occur. The
master servicer will have limited discretion to permit delinquent loans to
remain delinquent for an extended period of time, which will delay the receipt
of net proceeds to the trust. Foreclosures are regulated by state statutes,
rules and judicial decisions and are subject to many of the delays and expenses
of other lawsuits, sometimes requiring several years to complete. The master
servicer will in most cases be entitled to reimburse itself for any expenses it
has paid in attempting to recover amounts due on the liquidated loans, including
payments to prior lienholders, accrued fees of the master servicer, legal fees
and costs of legal action, real estate taxes, and maintenance and preservation
expenses, all which will reduce the amount of the net proceeds to the trust and
the amount available to make distributions to you.
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GEOGRAPHIC CONCENTRATION OF MORTGAGED PROPERTIES MAY RESULT IN HIGHER LOSSES, IF
PARTICULAR REGIONS EXPERIENCE DOWNTURNS.
Some geographic regions from time to time will experience weaker regional
economic conditions and housing markets than will other regions, and,
consequently, will experience higher rates of loss and delinquency. The mortgage
loans series of securities may be concentrated in these weaker regions, and
these concentrations may present risks in addition to those present for similar
asset-backed securities without these concentrations. Information about
geographic concentration of mortgaged properties will be specified in the
accompanying prospectus supplement.
ENVIRONMENTAL CONDITION OF THE MORTGAGED PROPERTY MAY GIVE RISE TO LIABILITY FOR
THE TRUST, WHICH COULD REDUCE THE AMOUNTS AVAILABLE TO PAY YOU ON YOUR
SECURITIES.
Real property pledged as security to the trust may be subject to environmental
risks which could cause losses on your securities. Under the laws of some
states, contamination of a mortgaged property may give rise to a lien on the
mortgaged property to assure the costs of clean up. In several states, this type
of lien has priority over the lien of an existing mortgage or owner's interest
against the property. In addition, under the laws of some states and under
federal law, a lender may be liable for costs of addressing releases or
threatened releases of hazardous substances that require remedy at a property,
if agents or employees of the lender have become sufficiently involved in the
operations of the borrower, regardless of whether or not the environmental
damage or threat was caused by a prior owner. A lender such as a trust also will
increase its risk of environmental liability upon the foreclosure of the
mortgaged property, since the trust may then become the legal owner of the
property.
SECURITY INTERESTS IN MANUFACTURED HOMES MAY NOT BE PERFECTED AND THE TRUST MAY
NOT REALIZE UPON THE FULL AMOUNT DUE UNDER THE MORTGAGE LOAN.
Some of the mortgage loans may be secured by manufactured homes and, in some
cases, the real estate on which the manufactured home is located. Some federal
and state laws, which do not apply to other types of mortgage loans, limit the
master servicer's ability to foreclose on manufactured homes or may limit the
amount realized to less than the amount due under the mortgage loan. These
limitations could cause losses on your securities.
STATE AND FEDERAL CREDIT PROTECTION LAWS MAY LIMIT COLLECTION OF PRINCIPAL AND
INTEREST ON THE MORTGAGE LOANS.
Residential mortgage lending is highly regulated at both the federal and state
levels and violations of these laws, policies and principles may limit the
ability of the servicer to collect all or part of the amounts due on the
mortgage loans, may entitle the borrower to a refund of amounts previously paid
and, in addition, could subject the trust, as the owner of the mortgage loan, to
claims for damages and to administrative enforcement. The occurrence of any of
the foregoing could cause losses on your securities.
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THE SOLDIERS' AND SAILORS' CIVIL RELIEF ACT MAY LIMIT THE MASTER SERVICER'S
ABILITY TO COLLECT ON THE MORTGAGE LOANS.
The terms of the Soldiers' and Sailors' Civil Relief Act of 1940, or similar
state mortgage legislation, benefit mortgagors who enter military service,
including a mortgagor who is a member of the National Guard or is in reserve
status at the time of the origination of the mortgage loan and is later called
to active duty. These mortgagors may not be charged interest, including fees and
charges, above an annual rate of 6% during the period of the mortgagor's active
duty status, unless a court orders otherwise upon application of the lender. The
implementation of the Soldiers' and Sailors' Civil Relief Act could have an
adverse effect, for an indeterminate period of time, on the ability of the
servicer to collect full amounts of interest on these mortgage loans.
In addition, the Soldiers' and Sailors' Civil Relief Act imposes limitations
that would impair the ability of the master servicer to foreclose on loans
during the mortgagor's period of active duty status. Thus, in the event that
these mortgage loans go into default, there may be delays and losses occasioned
by the inability to foreclose on the mortgaged property in a timely fashion.
THE RATINGS ASSIGNED TO YOUR SECURITIES BY THE RATING AGENCIES MAY BE LOWERED OR
WITHDRAWN AT ANYTIME, WHICH MAY AFFECT YOUR ABILITY TO SELL YOUR SECURITIES.
The ratings assigned to the securities will be based on, among other things, the
adequacy of the assets of the trust and any credit enhancement for a series of
securities. Any rating which is assigned may not remain in effect for any given
period of time or may be lowered or withdrawn entirely by the rating agencies
if, in their judgment, circumstances in the future so warrant. Ratings may also
be lowered or withdrawn because of an adverse change in the financial or other
condition of a provider of credit enhancement or a change in the rating of a
credit enhancement provider's long term debt at anytime, which may affect your
ability to sell your securities.
THE SPONSOR'S UNDERWRITING STANDARDS ARE LESS STRINGENT THAN THOSE USED BY
FEDERAL AGENCIES, WHICH MAY INCREASE RISK OF DEFAULT.
The sponsor's and its affiliates' underwriting standards consider, among other
things, a mortgagor's credit history, repayment ability and debt-to-income
ratio, as well as the value of the mortgaged property. The sponsor's and its
affiliates' mortgage loan program provides for the origination of mortgage loans
with credit characteristics that do not meet Fannie Mae or Freddie Mac
underwriting guidelines. These mortgage loans may be more likely to become
delinquent or go into default than mortgage loans which are eligible under
Fannie Mae or Freddie Mac guidelines, and may experience higher rates of
delinquency and default.
A TRUST WITH A PRE-FUNDING FEATURE MAY NOT BE ABLE TO ACQUIRE ENOUGH ADDITIONAL
MORTGAGE LOANS, LEADING TO AN UNEXPECTED PREPAYMENT.
In the event that the sponsor does not have enough subsequent mortgage loans to
deliver to a trust on or before the end of the pre-funding period, the
securityholders will receive a prepayment of principal. Any principal prepayment
may adversely affect the yield to maturity of your securities if you purchased
them at a premium. Prevailing interest rates are subject to
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fluctuation, so you may not be able to reinvest a prepayment at yields at or
above the yields on your securities.
A TRUST MAY INCLUDE MORTGAGE LOANS PURCHASED IN BULK FROM ANOTHER ORIGINATOR,
THESE MORTGAGE LOANS MAY NOT PERFORM AS WELL AS THE MORTGAGE LOANS ORIGINATED BY
THE SPONSOR OR ITS AFFILIATES.
A trust may include mortgage loans acquired in a bulk purchase. These mortgage
loans may be of a different credit quality than the sponsor's and its
affiliates' own mortgage loans, and may only be reviewed by the sponsor on a
sample basis. These mortgage loans may experience higher rates of delinquencies
and defaults.
ADJUSTABLE RATE MORTGAGE LOANS MAY BE MORE LIKELY TO DEFAULT WHEN THE LOAN
PAYMENTS INCREASE.
Adjustable rate mortgage loans may be underwritten on the basis of an low
initial interest rate and an assessment that mortgagors will have the ability to
make higher payments as a result of a higher interest rate after relatively
short periods of time. In some instances, mortgagors' income may not be
sufficient to enable them to continue to make their loan payments as the amount
of the payments increase, therefore the likelihood of default will increase.
PAY-FOR-PERFORMANCE MORTGAGE LOANS MAY REDUCE AMOUNT OF COLLECTIONS ON THE
MORTGAGE LOANS WHICH MAY ADVERSELY AFFECT INVESTMENT.
Some of the mortgage loans may constitute pay-for-performance mortgage loans
which are originated with a stated coupon rate which may decrease if the
mortgagor maintains a steady history of timely payments over a specified period
of time. A decrease in coupon rate, although indicative of good payment
performance, may result in decreased cash proceeds received by the trust and as
a result, less cash will be available for distribution to securityholders.
INTEREST ONLY FEATURE OF REVOLVING HOME EQUITY LINES OF CREDIT MAY ADVERSELY
AFFECT INVESTMENT.
The home equity lines of credit have an interest only feature during the initial
three or five year draw period, and borrowers are only required to pay the
greater of $50.00 or the finance charge that accrued on the outstanding balance
of the home equity line of credit during the billing period. No principal
payments are required during the draw period. As a result, amounts collected by
the trust attributable to principal payments may be minimal during the draw
period and little or no principal will be paid to holders of securities issued
by the trust during the draw period.
The master servicer or the originator may each extend the draw period of a
revolving home equity line of credit in accordance with the terms of the loan
agreement. The decision to extend the draw period may include a review of
specific credit criteria. The ability to postpone the amortization of principal
by extending the draw period may have the additional effect of increasing the
combined loan-to-value ratio of the mortgage loan which in turn may increase the
likelihood of default.
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THE TRUSTS
From time to time, Advanta Conduit Receivables, Inc., in its capacity
as the sponsor of the trusts, will cause a separate trust to issue one or more
series of mortgage loan asset-backed certificates or mortgage loan asset-backed
notes. The primary assets of each trust will consist of a segregated pool of
one- to four-family residential mortgage loans, acquired by that trust from one
or more originators, the sponsor, its affiliates or from trusts created by the
sponsor or its affiliates to finance the origination of mortgage loans. The
certificates issued by a trust will represent beneficial ownership interests in
the mortgage loans held by that trust, and the notes will represent debt secured
by the mortgage loans.
Each trust will be established by to a trust agreement between the
sponsor and the designated trustee.
Securities that represent debt of a trust will be issued under an
indenture and securities that represent beneficial ownership interests in a
trust will be issued under a trust agreement.
The mortgage loans held by each trust will be master serviced by
Advanta Mortgage Corp. USA.
Each security will be backed only by the assets of the trust that
issued the security, and not the assets of any other trust except that in
limited situations, collections on mortgage loans in one trust in excess of
amounts needed to pay the securities may be used to make payments on securities
issued by other trusts, or may be reallocated as directed by the sponsor.
In the case of any individual trust, the contractual arrangements
relating to the establishment of the trust, the servicing of the mortgage loans
and the issuance of the securities may be contained in a single agreement, or in
several agreements which combine aspects of the trust agreement, the servicing
agreement and the indenture. For purposes of this prospectus, the term
agreements means all of the agreements relating to the establishment of the
trust, the servicing of the mortgage loans held by the trust and the issuance of
the securities by the trust.
THE MORTGAGE LOANS
TYPES OF MORTGAGE LOANS WHICH WILL BE HELD BY THE TRUSTS.
Each pool will consist primarily of mortgage loans, minus any portion
of the accrued interest payments due that may have been retained by any
originator or broker, or any other interest retained by the sponsor or any
affiliate of the sponsor, including interest accrued and principal collected
prior to the cut-off date. The mortgage loans will be evidenced by mortgage
notes secured by mortgages or deeds of trust or other similar security
instruments creating a lien on one- to four-family residential properties. The
mortgaged properties will consist primarily of attached or detached
single-family dwelling units, two- to four-family dwelling units, condominiums,
townhouses, row houses, individual units in planned-unit developments,
cooperative apartment loans secured by security interests in shares issued by
cooperatives, small mixed use properties, and manufactured houses. The mortgaged
properties may be owner
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occupied properties, which includes second and vacation homes, and non-owner
occupied properties. A mortgage loan may also be secured by the pledge of a
limited amount of non real estate collateral, such as fixtures or personal
property that includes, but is not limited to, furniture and appliances.
The mortgaged properties may be located in any one of the fifty states,
the District of Columbia, Puerto Rico or any other territories of the United
States. The mortgage loans will be what are commonly referred to as conventional
loans, meaning loans that are not insured or guaranteed by any governmental
agency. Mortgage loans with loan-to-value ratios or principal balances greater
than a specified amount may be covered wholly or partially by primary mortgage
insurance policies.
Each mortgage loan will be selected by the sponsor for inclusion in a
trust from among mortgage loans originated by one or more institutions
affiliated with the sponsor, or purchased by the sponsor from banks, savings and
loan associations, mortgage bankers, mortgage brokers, investment banking firms,
the FDIC and other mortgage loan originators or purchasers not affiliated with
the sponsor. The characteristics of the mortgage loans in a trust will be
described in the prospectus supplement.
All of the mortgage loans will have payments that are due monthly or
bi-weekly, and will consist of one or more of the following types:
- - Fixed-rate, fully-amortizing mortgage loans which may include mortgage
loans converted from adjustable-rate mortgage loans or otherwise modified
providing for level monthly payments of principal and interest and terms at
origination or modification of generally not more than 30 years;
- - Adjustable rate mortgage loans having original or modified terms to
maturity of generally not more than 30 years with a coupon rate that
adjusts periodically, at the intervals described in the mortgage note over
the term of the mortgage loan. The adjustable coupon rate is equal to the
sum of a fixed margin and a specified index such as, by way of example:
- - U.S. treasury securities of a specified constant maturity,
- - weekly auction average investment yield of U.S. treasury bills of specified
maturities,
- - prime,
- - the cost of funds of member institutions for the Federal Home Loan Bank of
San Francisco, or
- - London Interbank Offered Rate.
The prospectus supplement will describe the relevant index, and aggregate
information regarding the highest, lowest and weighted average margins with
respect to the adjustable rate loans in the trust. An adjustable rate loan may
include a provision that allows the mortgagor to convert the adjustable coupon
rate to a fixed rate at some point during the term.
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- - Fixed-rate, graduated payment mortgage loans having original or modified
terms to maturity of generally not more than 30 years with monthly payments
during the first year calculated on the basis of an assumed coupon rate
that will be lower than the coupon rate for to the mortgage loan in
subsequent years. Deferred interest, if any, will be added to the principal
balance of the mortgage loans;
- - Fixed-rate, graduated payment mortgage loans having original or modified
terms to maturity of generally not more than 30 years with monthly payments
in subsequent years that are calculated on the basis of an assumed coupon
rate that will be lower than the coupon rate for the loan in the first year
or first two years. These mortgage loans require that the mortgagor qualify
under certain positive criteria, including, but not limited to, a good
payment history;
- - Balloon mortgage loans, which are mortgage loans having original or
modified terms to maturity of generally 5 to 15 years, which may have level
monthly payments of principal and interest based generally on a 10- to
30-year amortization schedule. The amount of the monthly payment may remain
constant until the maturity date, upon which date the full outstanding
principal balance on the balloon loan will be due and payable;
- - Modified mortgage loans, which are fixed or adjustable rate mortgage loans
providing for terms at the time of modification of generally not more than
30 years. Modified mortgage loans may have been consolidated or have had
various terms changed, mortgage loans which have been converted from
adjustable rate mortgage loans to fixed rate mortgage loans, or
construction loans which have been converted to permanent mortgage loans;
- - Hybrid mortgage loans which are originated having original or modified
terms to maturity of not more than 30 years with monthly payments during
the first two, three, four, or five years, as applicable, calculated at a
fixed coupon rate, which fixed coupon rate then converts to an adjustable
rate for the remainder of the term of the loan. Hybrid loans are included
in adjustable rate mortgage loan pools in most instances;
- - Revolving home equity loans. Interest on each revolving home equity loan
may be computed and payable monthly on the average daily outstanding
principal balance of the loan. From time to time prior to the expiration of
the draw period, additional principal amounts on the revolving home equity
loan may be borrowed up to a maximum amount set forth in the credit line
agreement. Under a revolving home equity loan, during the draw period, the
borrower is obligated to pay only the amount of interest which accrues on
the loan during the billing cycle, but may also elect to pay all or a
portion of the principal. Following the conclusion of the draw period, the
borrower must begin to make regular scheduled payments of principal and
interest commence;
- - Mortgage loans, which contain a feature permitting the coupon rate to be
adjusted one or more times, but not below a specified floor, depending on
the mortgagor's history of payments over a specified period or periods of
time; or
- - Convertible mortgage loans, which can be either adjustable rate loans,
which allow the mortgagors to convert the adjustable rates to a fixed rate
at some point during the life of the
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mortgage loans or fixed rate mortgage loans, which allow the mortgagors to
convert the fixed rates to an adjustable rate.
INTEREST PAYMENTS ON THE MORTGAGE LOANS
Interest will be calculated on each mortgage loan by one of three
methods:
Date of Payment or Simple Interest. This method provides that interest
is charged to the mortgagor at the applicable coupon rate on the outstanding
principal balance of the mortgage note and calculated based on the number of
days elapsed between receipt of the mortgagor's last payment through receipt of
the mortgagor's most current payment. The interest is deducted from the
mortgagor's payment amount and the remainder, if any, of the payment is applied
as a reduction to the outstanding principal balance of the mortgage note.
Actuarial Loans. This method provides that interest is charged to the
mortgagor, and payments are due from the mortgagor, as of a scheduled day of
each month which is fixed at the time of origination.
Rule of 78's Loans. This method provides for the payment by the
mortgagor of a specified total amount of payments, payable in equal monthly
installments on each due date, which total represents the principal amount
financed and add-on interest in an amount calculated on the basis of the stated
coupon rate for the term of the mortgage loan. The rate at which the amount of
add-on interest is earned and, correspondingly, the amount of each fixed monthly
payment allocated to reduction of the outstanding principal are calculated in
accordance with the rule of 78's.
PREPAYMENT FEES; DUE ON SALE CLAUSES; ASSUMABLE MORTGAGE LOANS
Prepayments of principal may be subject to a prepayment fee, which may
be fixed for the life of the mortgage loan, may decline over time or may be
prohibited for a period of time. The mortgage loans may include due-on-sale
clauses which permit the mortgagee to demand payment of the entire mortgage loan
in connection with the sale or transfer of the mortgaged property. Other
mortgage loans may be assumable by persons meeting the then applicable
underwriting standards of the originator.
STATISTICAL INFORMATION CONCERNING THE MORTGAGE LOANS
The prospectus supplement for each series of securities will contain
statistical information on the characteristics of the mortgage loans held by the
trust. This statistical information may be based on a sample of the mortgage
loans, and will be presented as of a statistical calculation date, which may
also be the cut-off date. The statistical information may include, among other
things, to the extent applicable to the particular trust:
- - the aggregate outstanding principal balance;
- - the average outstanding principal balance;
- - the range of loan-to-value ratios and combined loan-to-value ratios;
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- - the range of the coupon rates; and
- - the geographical distribution of the mortgage loans.
If the statistical information presented in a prospectus supplement is
calculated as of a date earlier than the cut-off date for the trust, the actual
statistical characteristics as of the cut-off date will not deviate by more than
5% from the information that is presented.
Preliminary or more general information about the mortgage loans may be
included in the prospectus supplement, and specific or final information about
the mortgage loans may be contained in the agreements, which will be filed with
the Securities and Exchange Commission and will be made available to holders of
the series within fifteen days after the initial issuance of the securities.
The loan-to-value ratio of a mortgage loan is equal to the ratio,
expressed as a percentage, of the original principal balance of the mortgage
loan to the appraised value of the mortgaged property at the time of origination
of the mortgage loan. The combined loan-to-value ratio of a mortgage loan at any
given time is the ratio, expressed as a percentage of the sum of the original
principal balance of the mortgage loan plus, if applicable, the then current
principal balance of all mortgage loans secured by liens on the mortgaged
property having priorities senior to that of the lien which secures the mortgage
loan to the appraised value of the mortgaged property at the time of origination
of the mortgage loan. In general, for purchase money mortgage loans, the
loan-to-value and the combined loan-to-value ratios are calculated using the
lower of the purchased price or appraised values of the mortgaged properties at
the time of origination.
MORTGAGE LOAN PROGRAM AND UNDERWRITING GUIDELINES
As a general matter, the sponsor's mortgage loan program will consist
of the origination and purchase of mortgage loans to mortgagors with
non-conforming credit. A borrower with non-conforming credit is a borrower who
does not meet the standard underwriting guidelines of Fannie Mae or Freddie Mac.
However, each trust may contain mortgage loans which do conform to Fannie Mae or
Freddie Mac standard underwriting guidelines.
The mortgagors generally will have obtained the mortgage loans for one
or more of four reasons:
- - to purchase the mortgaged property,
- - to refinance an existing mortgage loan on more favorable terms,
- - to consolidate debt, or
- - to obtain cash proceeds by borrowing against the mortgagor's equity in the
mortgaged property.
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It is the sponsor's practice to solicit existing mortgagors for the
possible refinancing of their existing mortgages if the mortgagors indicate that
they are looking for more favorable terms.
DESCRIPTION OF UNDERWRITING GUIDELINES
The following is a description of the underwriting guidelines
customarily employed by the sponsor and its affiliates in originating or
acquiring mortgage loans. The sponsor's and its affiliates' underwriting
guidelines are less stringent than the standards generally acceptable to Fannie
Mae and Freddie Mac with regard to the mortgagor's credit standing and repayment
ability. Mortgagors who qualify under the sponsor's underwriting guidelines may
not satisfy Fannie Mae and Freddie Mac underwriting guidelines for any number of
reasons, including, without limitation, unsatisfactory payment histories or
debt-to-income ratios, or a record of derogatory credit items such as
outstanding judgments or prior bankruptcies.
The underwriting guidelines to be used in originating or acquiring the
mortgage loans are primarily intended to assess the creditworthiness of the
mortgagor, the value of the mortgaged property and the adequacy of the property
as collateral for the mortgage loans.
Originators' underwriting procedures customarily utilize one of two
types of underwriting guidelines: the sponsor guidelines, which are guidelines
of the sponsor and its affiliated originators and approved guidelines, which are
guidelines of approved unaffiliated originators.
Mortgage loans that are originated by the sponsor and its affiliated
originators are underwritten using the sponsor's guidelines. Mortgage loans that
are purchased by the sponsor and its affiliated originators are underwritten
utilizing either the sponsor's guidelines or the approved guidelines.
SPONSOR'S GUIDELINES
The sponsor's guidelines consider the value and adequacy of the
mortgaged property as collateral for the proposed mortgage loan but also takes
into consideration the mortgagor's credit standing and repayment ability. There
are three major steps in the sponsor's underwriting process: (1) identify the
eligibility and appropriate credit grade of the mortgagor, (2) evaluate the
eligibility and lendable equity of the mortgaged property, and (3) ensure the
loan terms meet those acceptable for that credit grade. On a case by case basis
the sponsor may determine that, based on compensating factors, a prospective
mortgagor may not strictly qualify under a particular underwriting credit grade
risk category but warrants an underwriting exception. Compensating factors may
include, without limitation, relatively low loan-to-value ratio, relatively low
debt-to-income ratio, stable employment and amount of time borrower has lived in
the same residence. It is anticipated that a number of the mortgage loans
underwritten in accordance with the sponsor's guidelines will have been
originated based on underwriting exceptions. The sponsor's guidelines are
revised continuously based on opportunities and prevailing conditions in the
nonconforming credit residential mortgage market, as well as the expected market
for the securities.
In addition to mortgage loans originated by the sponsor and its
affiliated originators, the sponsor and its affiliated originators may purchase
mortgage loans from unaffiliated originators
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which were underwritten in accordance with the sponsor's guidelines. The sponsor
generally will review or cause to be reviewed only a limited portion of the
mortgage loans purchased from unaffiliated originators for conformity with the
sponsor's guidelines.
The sponsor's guidelines permit the origination and purchase of
mortgage loans with multi-tiered credit characteristics tailored to individual
credit profiles. In general, the sponsor's guidelines require an analysis of the
equity in the mortgaged property, the payment history of the borrower, the
borrower's ability to repay debt, the property type, and the characteristics of
the underlying first mortgage, if any. A lower maximum combined loan-to-value
ratio is required for lower gradations of credit quality and higher property
values.
The mortgage loans generally are secured by either owner occupied
properties, including second and vacation homes, or non-owner occupied
properties which, in either case are single-family residences, which may be
detached, part of a two- to four-family dwelling, a condominium unit, coop or a
unit in a planned unit development. The sponsor's guidelines generally require
that the combined loan-to-value ratio of a mortgage loan not exceed 100%, after
taking into account the amount of any primary mortgage insurance applicable to
the mortgage loan.
One of the sponsor's programs specifically relates to mortgage loans
with combined loan-to-value ratios in excess of 100%, but with a maximum of
125%. This program is known as the high LTV program. Under this high LTV
program, relatively more emphasis in the underwriting analysis is placed on the
borrower's payment history and ability to repay debt, rather than on the
property value of the mortgaged property. High LTV loans are generally targeted
as debt consolidation loans for borrowers with generally strong credit ratings.
Lending decisions for these loans are based on an analysis of the prospective
mortgagor's documented cash flow and credit history supplemented by a property
value evaluation deemed appropriate by the sponsor.
For high LTV loans which are senior liens, the sponsor requires hazard
insurance. For high LTV loans which are in a junior lien position, the sponsor
requires verification of the existence of hazard insurance at the time of
origination, but does not generally track hazard insurance after origination.
The value of each property proposed as security for a mortgage loan is
determined by either a full appraisal, a limited appraisal conducted on a
drive-by basis, or a statistical valuation. Two full appraisals are generally
required for properties valued over $500,000.
The sponsor's guidelines provide for the origination of loans under
three general loan programs:
- - a full verification program for salaried or self-employed borrowers,
- - a lite documentation program for borrowers who may have income which cannot
be verified by traditional methods and
- - a non-income verification program for salaried and self-employed borrowers.
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However, the sponsor's guidelines allow for some borrowers with existing loans
to refinance loans with either limited, or no, verification of income. The
sponsor may also purchase pools of mortgage loans which may include some
mortgage loans originated under a non-income verification program for non
salaried or self-employed borrowers.
A credit report by an independent, nationally recognized credit
reporting agency is required reflecting the applicant's complete credit history.
The credit report should reflect delinquencies of 30 days or more,
repossessions, judgments, foreclosures, garnishments, bankruptcies and similar
instances of adverse credit that can be discovered by a search of public
records. All taxes and assessments not included in the payment are required to
be verified as current. For junior loan mortgages, verification of the
outstanding balance, the payment status and whether local taxes, interest,
insurance and assessments are included in the applicant's monthly payment is
required.
In connection with purchase-money loans, the sponsor's guidelines
generally require an acceptable source of funds for downpayment, verification of
the source of the downpayment and adequate cash reserves for owner occupied
second homes and non-owner occupied homes. Adequate equity in the mortgaged
property is used as a countervailing consideration to the first three
requirements.
Loan applicants are protected by laws which offer them a time frame
after loan documents are signed during which the applicant has the right to
cancel the mortgage loan. This time frame is known as the rescission period. The
rescission period must have expired prior to funding a loan and may not be
waived by the applicant except as permitted by law.
The sponsor's guidelines generally require title insurance coverage
issued by an approved ALTA or CLTA title insurance company on each mortgage loan
it purchases. Any of the sponsor, the originator, or their assignees must be
named as the insured party. Where title insurance is not required the sponsor's
guidelines require a property report and title search to evidence that the title
or lien position is as indicated on the mortgage loan application.
The applicant is required to secure property insurance in an amount
sufficient to cover the mortgage loan and any senior mortgage. If the sum of any
outstanding senior mortgage and the mortgage loan exceeds the cost of rebuilding
the mortgaged property, which generally does not include land value, insurance
equal to replacement value may be accepted. The respective originator or its
designee is required to ensure that its name and address is properly added to
the mortgagee clause of the insurance policy. In the event the sponsor or the
originator's name is added to a loss payee clause and the policy does not
provide for written notice of policy changes or cancellation, an endorsement
adding the provision is required.
APPROVED GUIDELINES
The sponsor and its affiliated originators may purchase mortgage loans
or pools of mortgage loans, in whole or in part, from originators that are not
affiliated with the sponsor, unaffiliated originators. The underwriting
guidelines employed by unaffiliated originators may deviate from the sponsor's
guidelines but are approved by the sponsor prior to their purchasing the
mortgage loans or pools of mortgage loans and are documented as part of the loan
sale purchase agreement. The sponsor or its affiliated originators will
reunderwrite a representative
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sample of the mortgage loans to ensure that the mortgage loans, on a sample
basis, are in conformity with the approved guidelines. There can be no assurance
that every mortgage loan was originated in conformity with the approved
guidelines, or that the quality or performance of mortgage loans underwritten
under to the approved guidelines will be equivalent under all circumstances.
BULK PURCHASES
Mortgage loans purchased in bulk may be originated by a variety of
originators under several different underwriting guidelines. The purchase of
bulk mortgage loans may not conform to either the requirements of the sponsor's
guidelines or the approved guidelines. The sponsor will reunderwrite the
mortgage loans acquired in a bulk purchase on a sample basis. This
reunderwriting may be performed by the sponsor or its affiliated originators or
a third party acting at the direction of the sponsor.
REPRESENTATIONS AND WARRANTIES CONCERNING THE MORTGAGE LOANS
The sponsor will make a number of representations and warranties to the
trust regarding the mortgage loans. The assignment of the mortgage loans to the
trustee will be without recourse, except in the event of a breach of one of
these representations or warranties. The material representations and warranties
state that the schedule of mortgage loans is correct, all material loan
documentation has been provided, not more than a specified amount of loans are
delinquent, and that the mortgage loans were originated in accordance with
applicable laws.
If a breach of any representation or warranty occurs in respect of a
mortgage loan, that materially and adversely affects the interests of the
securityholders in the mortgage loan, the sponsor or the originator may be
obligated to purchase, or cause to be purchased, unqualified mortgage loan from
the trust.
To a limited extent the sponsor, or the originator, may substitute a
qualifying replacement mortgage loan for an unqualified mortgage loan, rather
than repurchase it.
The master servicer will be required to enforce the purchase or
substitution obligations for the benefit of the trustee and the securityholders,
following the practices it would employ in its good faith business judgment if
it were the owner of the mortgage loan. This purchase or substitution obligation
will not, however, become an obligation of the master servicer in the event the
sponsor or the originator fails to honor the obligation. The foregoing will
constitute the sole remedy available to securityholders or the trustee for a
breach of representation.
THE MASTER SERVICER MAY ACT THROUGH SUB-SERVICERS
An originator of a mortgage loan that is affiliated with the sponsor
may act as the sub-servicer for its mortgage loans. A third party acting as a
sub-servicer for the mortgage loans will be required to meet additional
standards concerning its mortgage loan servicing portfolio, including a minimum
tangible net worth under generally accepted accounting principles and other
qualifications.
A sub-servicer may be obligated to make advances to the trust for
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- - delinquent installments of principal or interest or principal and interest,
net of any sub-servicing or other compensation, on mortgage loans,
- - taxes and insurance premiums not paid by the mortgagor on a timely basis,
- - interest shortfalls resulting from prepayments of the outstanding principal
balance of a mortgage loan to zero.
The sub-servicer will be entitled to reimbursement for
servicing-related expenditures that it makes to the same extent that the master
servicer would be reimbursed.
No assurance can be given that the sub-servicers will be able to, or
will, carry out their advancing or payment obligations, however the master
servicer will remain obligated as if they were servicing the mortgage loans.
As compensation for its servicing duties, the sub-servicer may be
entitled to receive a fee. The sub-servicer may also be entitled to collect and
retain, as part of its servicing compensation, any late charges or prepayment
penalties. See "The Agreements -- Servicing and Other Compensation and Payment
of Expenses" and "Description of the Securities -- Delinquency Advances and
Servicing Advances" for more information.
A sub-servicer may transfer its servicing obligations to another entity
but only with the prior written approval of the master servicer.
DESCRIPTION OF THE SECURITIES
The securities will be issued in series. The following summaries
describe the material provisions of the securities.
The securities may be offered in the form of certificates representing
beneficial ownership interests in the mortgage loans held by the trust or in the
form of notes representing debt secured by the mortgage loans held by the trust.
Each series or class of securities may have a different rate of
interest, which may be fixed or adjustable. The prospectus supplement will
specify the interest rate for each series or class of securities, or the initial
interest rate and the method for determining subsequent changes to the interest
rate.
A series may include one or more classes of interest only or principal
only securities. In addition, a series may include two or more classes that
differ as to timing, sequential order, priority of payment, interest rate or
amount of distributions of principal or interest or both. Distributions of
principal or interest or both on any class may be made upon the occurrence of
specified events, in accordance with a schedule or formula, or on the basis of
collections from designated assets of the trust. A series may include one or
more classes of securities, as to which accrued interest will not be distributed
but rather will be added to the principal or notional balance of the security on
each payment date.
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A series of securities may include one or more classes of securities
that are senior to one or more classes of subordinate securities in respect of
distributions of principal and interest and allocations of losses on the
mortgage loans.
Each trust may also issue classes of subordinated equity securities
which will represent the right to receive the proceeds of the trust property
after all required payments have been made to the holders of all of the senior
and subordinate notes or certificates issued by the trust, and following any
required deposits to any reserve account that may be established for the benefit
of the holders of the notes or certificates. These subordinated classes may
constitute what are commonly referred to as the residual interest, seller's
interest or the general partnership interest, depending upon the treatment of
the trust for federal income tax purposes. These subordinated classes generally
will not have principal and interest components. Any losses suffered by the
trust will first be absorbed by the residual class of securities, or as
described in the prospectus supplement.
The prospectus supplement relating to a series of securities will
describe the following specific terms of that series:
- - the aggregate principal amount, interest rate, and authorized denominations
of each class of securities;
- - a statistical profile of the mortgage loans backing that series;
- - the terms of any credit enhancement for that series;
- - a description of other material assets in the trust, including any reserve
fund;
- - the final scheduled distribution date of each class of securities;
- - the method used to calculate the rate at which interest on each class of
securities will accrue, the time period during which interest on each class
of securities will accrue, the order of priority of the application of
interest to the respective classes and the manner of distribution of
interest among each class of securities;
- - the method to be used to calculate the amount of principal required to be
applied to each class of securities of each series on each payment date,
the timing of the application of principal and the order of priority of the
application of principal to the respective classes of securities;
- - additional information about the plan of distribution of the securities;
and
- - the federal income tax characterization of the securities.
GENERAL PAYMENT TERMS OF SECURITIES
Securityholders will be entitled to receive payments on their
securities on specified payment dates. Payment dates will occur monthly,
quarterly or semi-annually, as described in the prospectus supplement.
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The prospectus supplement will describe a record date for each payment
date, as of which the trustee or its paying agent will fix the identity of the
securityholders for the purpose of receiving payments on that payment date. The
prospectus supplement and the agreements will describe a period, known as the
remittance period, prior to each payment date. Interest accrued and principal
collected on the mortgage loans during a remittance period will be required to
be remitted by the master servicer to the trustee prior to the payment date and
will be used to distribute payments to securityholders on that payment date.
The agreements may provide that all or a portion of the principal
collected on the mortgage loans may be applied by the trustee to the acquisition
of subsequent mortgage loans during a specified period rather than used to
distribute payments of principal to securityholders during that period. These
securities would then possess an interest only period, also commonly referred to
as a revolving period, which will be followed by an amortization period. Any
interest only or revolving period may terminate prior to the end of the
specified period and result in an earlier than expected amortization of the
securities.
None of the securities or the mortgage loans will be guaranteed or
insured by any governmental agency or instrumentality, the sponsor, the master
servicer, any sub-servicer, the trustee, any originator or any of their
respective affiliates.
PAYMENT DATE DISTRIBUTIONS
On each payment date, distributions of principal and accrued interest
or, where applicable, of principal only or interest only, on each class of
securities will be made either by the trustee or a paying agent appointed by the
trustee, to the persons who are registered as securityholders at the close of
business on the record date. Interest that accrues and is not payable on a class
of securities may be added to the principal balance of each security of the
class. Distributions will be made in immediately available funds, by wire
transfer or otherwise, to the account of a securityholder. If the securityholder
has notified the trustee or the paying agent, as the case may be, and the
agreements provide, payment may be in the form of a check mailed to the address
of the person entitled thereto as it appears on the register. The final payment
distribution upon retirement of the securities will be made only upon
presentation and surrender of the securities at the office or agency of the
trustee specified in the notice to securityholders of the final distribution.
DETERMINATION OF PRINCIPAL AND INTEREST ON THE SECURITIES
The method of determining, and the amount of, distributions of
principal and interest or, principal only or interest only, on a particular
series of securities will be described in the prospectus supplement. Each class
of securities, except for principal only securities, may bear interest at a
different interest rate. Interest on the securities will be calculated either on
the basis of a 360-day year consisting of twelve 30-day months, on the basis of
the actual number of days in the accrual period over 360 or on the basis of the
actual number of days in the accrual period over 365 or as described in the
prospectus supplement.
On each payment date for a series of securities, the trustee or the
paying agent will distribute to each securityholder of record an amount equal to
the percentage interest represented
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by the security held by the holder multiplied by the total amount to be
distributed on that payment date on account of that class.
For a series of securities that includes two or more classes, the
timing, sequential order, priority of payment, amount of distributions in
respect of principal, any schedule or formula or other provisions applicable to
the determination of distributions among multiple classes of senior securities
or subordinate securities will be described in the prospectus supplement.
Prior to each payment date the trustee will determine the amounts of
principal and interest which will be due to securityholders on that payment
date. If the amount then available to the trustee is insufficient to cover the
amount due to securityholders, the trustee will be required to notify the credit
enhancement provider, and the credit enhancement provider, in most instances,
will be required to fund the deficiency.
YIELD CONSIDERATIONS
The yield to maturity of a security will depend on the price paid, its
interest rate and the rate of payment of principal on the security or on its
notional amount, if the security is not entitled to payments of principal, as
well as other factors.
A class of securities may be entitled to payments of interest at a
fixed, variable maximum interest rate, commonly referred to as an available
funds cap, which is calculated based on the weighted average of the mortgage
loan coupon rates minus any interest strips retained by the originator and all
trust fees, if so specified in the prospectus supplement, or at another maximum
interest rate as may be described in the prospectus supplement.
The yield on the securities also will be affected by liquidations of
mortgage loans following mortgagor defaults and by purchases of mortgage loans
in the event of breaches of representations. The yield to maturity on some types
of securities, including interest only and principal only securities, and
securities in a series including more than one class, may be relatively more
sensitive to the rate of prepayment on the mortgage loans than other classes of
securities. See "Mortgage Loan Program and Underwriting Guidelines --
Representations and Warranties Concerning the Mortgage Loans" above and
"Description of the Securities -- Assignment of Mortgage Loans" below.
The timing of changes in the rate of principal payments on or
repurchases of the mortgage loans may significantly affect an investor's actual
yield to maturity, even if the average rate of principal payments experienced
over time is consistent with an investor's expectation. As a result, the effect
on an investor's yield of principal payments and repurchases occurring at a rate
higher, or lower, than the rate anticipated by the investor during the period
immediately following the issuance of a series of securities would not be fully
offset by a subsequent like reduction or increase in the rate of principal
payments.
For some of the adjustable rate loans, the coupon rate at origination
may be a teaser rate which is below the rate that would result if the index and
margin were applied at origination. The repayment of any mortgage loan with a
teaser rate may be dependent on the ability of the mortgagor to make larger
monthly payments following the adjustment of the coupon rate.
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MATURITY AND PREPAYMENT CONSIDERATIONS
The original terms to maturity of the mortgage loans in a given trust
will vary depending upon the type of mortgage loans included in the trust. The
prospectus supplement for a series of securities will contain information
concerning the types and maturities of the mortgage loans in the trust. The
mortgage loans may be prepaid in full or in part at any time although the
mortgagor may be required to pay a prepayment penalty or premium. These
prepayment penalties will generally not be property of the trust. The prepayment
experience of the mortgage loans in a trust will affect the maturity, average
life and yield of the securities.
Payment of the full outstanding principal balance of a balloon loan
will generally depend on the mortgagor's ability to obtain refinancing of the
mortgage loan or to sell the mortgaged property prior to the maturity of the
balloon loan. The ability to obtain refinancing will depend on a number of
factors prevailing at the time refinancing or sale is required, including,
without limitation, real estate values, the mortgagor's financial situation,
prevailing mortgage loan coupon rates, the mortgagor's equity in the mortgaged
property, tax laws and prevailing general economic conditions. Neither the
sponsor, the master servicer, nor any of their affiliates will be obligated to
refinance or repurchase any mortgage loan or to sell any mortgaged property
because of a maturing balloon payment.
A number of factors, including homeowner mobility, economic conditions,
enforceability of due-on-sale clauses, mortgage market interest rates and the
availability of mortgage funds, affect prepayment experience. The mortgage loans
that contain due-on-sale provisions permitting the mortgagee to accelerate the
maturity of the mortgage loan upon transfer of the underlying mortgaged
property. The master servicer will enforce any due-on-sale clause to the extent
it has knowledge of the transfer if it is entitled to do so under applicable
law. The master servicer will not take any action to enforce a due-on-sale
provision which would adversely affect or jeopardize coverage under any
applicable insurance policy. The extent to which adjustable rate loans are
assumed by purchasers of the mortgaged properties rather than prepaid by the
mortgagors in connection with the sales of the mortgaged properties will affect
the weighted average life of the series of securities. For a description of
provisions of the agreements and certain legal developments that may affect the
prepayment experience on the mortgage loans. See "Serving Procedures --
Collection and Other Servicing Procedures" and "Legal Aspects of the Mortgage
Loans -- Enforceability of Mortgage Loan Provisions".
There can be no assurance as to the rate of prepayment of the mortgage
loans. The sponsor is not aware of any reliable, publicly available statistics
relating to the principal prepayment experience of diverse portfolios of
mortgage loans over an extended period of time. All statistics known to the
sponsor for prepayment experience on mortgage loans indicates that while some
mortgage loans may remain outstanding until their stated maturities, a
substantial number will be paid prior to their respective stated maturities.
Although the coupon rates on adjustable rate loans will be subject to
periodic adjustments, these adjustments will not increase or decrease the coupon
rates by more than a fixed percentage amount on each adjustment date, not
increase the coupon rates over a fixed percentage amount and be based on an
index which may not rise and fall consistently with mortgage market interest
rate rates plus the margin. As a result, the coupon rates on the
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adjustable rate loans in a trust at any time may not equal the prevailing rates
for similar, newly originated adjustable rate mortgage loans. In some rate
environments, the prevailing rates on fixed-rate mortgage loans may be
sufficiently low in relation to the then current coupon rates on adjustable rate
loans that the rate of prepayment of adjustable rate loans may increase as a
result of refinancings. There can be no certainty as to the rate of prepayments
on the mortgage loans during any period or over the life of any series of
securities.
All or a portion of the collected principal may be retained by the
trustee, and held in temporary investments, including mortgage loans, for a
specified period prior to being distributed payments of principal to
securityholders. The result of the retention and temporary investment by the
trustee of principal would be to slow the amortization rate of the securities
relative to the amortization rate of the mortgage loans, or to attempt to match
the amortization rate of the securities to an amortization schedule established
at the time the securities are issued. Those features may terminate upon the
occurrence of events to be described in the prospectus supplement, resulting in
the need to make principal payments to the securityholders and an acceleration
of the amortization of the securities.
FORM OF SECURITIES
We expect that the securities of each series will be issued in
uncertificated book-entry form, and will be registered in the name of Cede, the
nominee of the DTC. The prospectus supplement will state if the securities will
be in physical rather than book-entry form. DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a clearing corporation within the meaning of the Uniform
Commercial Code and a clearing agency registered under the Securities Exchange
Act. DTC was created to hold securities for its participants and facilitate the
clearance and settlement of securities transactions between its participants
through electronic book-entry changes in their accounts, eliminating the need
for physical movement of certificates. DTC's participants include securities
brokers and dealers, banks, trust companies and clearing corporations and may
include other organizations. Indirect access to the DTC system also is available
to indirect participants such as brokers, dealers, banks and trust companies
that clear through or maintain a custodial relationship with a DTC participant,
either directly or indirectly.
Under a book-entry format, securityholders that are not DTC
participants or indirect participants but desire to purchase, sell or otherwise
transfer ownership of securities registered in the name of Cede, as nominee of
DTC, may do so only through participants and indirect participants. In addition,
these securityholders will receive all distributions of principal of and
interest on the securities from the trustee through DTC and its participants.
Securityholders may receive payments after the payment date because DTC will
forward these payments to its participants, which thereafter will be required to
forward these payments to indirect participants or securityholders. Unless and
until physical securities are issued, it is anticipated that the only
securityholder will be Cede, as nominee of DTC, and that the beneficial holders
of securities will not be recognized by the trustee as securityholders under the
agreements. Securityholders which are not DTC participants will only be
permitted to exercise their rights under the agreements through DTC or through
its participants.
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Under the rules, regulations and procedures creating and affecting DTC
and its operations, DTC is required to make book-entry transfers among its
participants and is required to receive and transmit payments of principal of
and interest on the securities. DTC's participants and indirect participants are
required to make book-entry transfers and receive and transmit payments on
behalf of their respective securityholders. Accordingly, although
securityholders will not possess physical securities, the rules provide a
mechanism by which securityholders will receive distributions and will be able
to transfer their interests.
Unless and until physical securities are issued, securityholders who
are not DTC participants may transfer ownership of securities only through DTC
participants by instructing those participants to transfer securities, through
DTC for the account of the purchasers of the securities, which account is
maintained with their respective participants. Under DTC's rules and in
accordance with DTC's normal procedures, transfers of ownership of securities
will be executed through DTC and the accounts of the respective participants at
DTC will be debited and credited. Similarly, the respective participants will
make debits or credits, as the case may be, on their records on behalf of the
selling and purchasing securityholders.
Because DTC can only act on behalf of its participants, who in turn act
on behalf of indirect participants and some banks, the ability of a
securityholder to pledge securities to persons or entities that do not
participate in the DTC system, or otherwise take actions in respect of the
securities may be limited due to the lack of a physical certificate for the
securities.
DTC in general advises that it will take any action permitted to be
taken by a securityholder under the agreements only at the direction of one or
more of its participants to whose account the securities are credited.
Additionally, DTC advises that it will take actions only at the direction of and
on behalf of its participants whose holdings include current principal amounts
of outstanding securities that satisfy the minimum percentage established in the
agreements. DTC may take conflicting actions if directed by its participants.
Any securities initially registered in the name of Cede, as nominee of
DTC, will be issued in fully registered, certificated form to securityholders or
their nominees, rather than to DTC or its nominee only under the events
specified in the agreements and described in the prospectus supplement. Upon the
occurrence of any of the events specified in the agreements and the prospectus
supplement, DTC will be required to notify its participants of the availability
through DTC of physical certificates. Upon surrender by DTC of the securities
and receipt of instruction for reregistration, the trustee will issue the
securities in the form of physical certificates, and thereafter the trustee will
recognize the holders of the physical certificates as securityholders.
Thereafter, payments of principal of and interest on the securities will be made
by the trustee directly to securityholders in accordance with the procedures set
forth in the agreements. The final distribution of any security whether physical
certificates or securities registered in the name of Cede, however, will be made
only upon presentation and surrender of the securities on the final payment date
at the office or agency specified in the notice of final payment to
securityholders.
None of the sponsor, the originators, the master servicer or the
trustee will have any liability for any actions taken by DTC or its nominee or
Cedel or Euroclear, including, without limitation, actions for any aspect of the
records relating to or payments made on account of the
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securities held by Cede, as nominee for DTC, or for maintaining, supervising or
reviewing any records relating to the securities.
ASSIGNMENT OF MORTGAGE LOANS
At the time of issuance of a series of securities, the sponsor will
direct or request the mortgage loans to be acquired by the trust to be assigned
to the trustee together with all interest accrued and principal collected in
respect of the mortgage loans on or after the cut-off date. Each mortgage loan
will be identified in a schedule appearing as an exhibit to the agreements.
In connection with the establishment of a trust, the sponsor may first
transfer the mortgage loan to an affiliate and the affiliate will then transfer
the mortgage loan to the trust. The prospectus supplement will describe any
requirements for the delivery of mortgage documents, such as mortgage notes and
assignments of mortgage, in connection with the establishment of the trust.
The trustee will be authorized to appoint a custodian to maintain
possession of and, if applicable, to review the documents relating to the
mortgage loans as the agent of the trustee.
PRE-FUNDING FEATURE; MANDATORY PREPAYMENT
A trust may contain a feature which allows the sponsor or its
affiliates to transfer subsequent mortgage loans to the trust following the date
the trust is established and the securities are issued. Any mortgage loans
subsequently transferred to a trust will be required to conform to required
mortgage loan characteristics, and satisfaction of the conditions in the
agreements.
If the pre-funding feature is to be used, then the trustee will be
required to deposit a portion of the net proceeds received in connection with
the sale of one or more classes of securities in a segregated account. The
subsequent mortgage loans will be transferred to the trust in exchange for money
released by the trustee from this segregated pre-funding account. These
transfers must occur within a specified period, not to exceed one year, from the
date the trust was established. If a trust elects federal income treatment as a
REMIC or as a grantor trust, the pre-funding period will be limited to three
months.
During the pre-funding period, the monies deposited to the pre-funding
account will be invested in one or more of the following eligible investments:
- - Direct general obligations of the United States or the obligations of any
agency or instrumentality of the United States fully and unconditionally
guaranteed, the timely payment or the guarantee of which constitutes a full
faith and credit obligation of the United States.
- - Federal Housing Administration debentures rated Aa2 or higher by Moody's
and AA or better by Standard & Poor's.
- - Freddie Mac senior debt obligations rated Aa2 or higher by Moody's and AA
or better by Standard & Poor's.
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- - Federal Home Loan Banks' consolidated senior debt obligations rated Aa2 or
higher by Moody's and AA or better by Standard & Poor's.
- - Federal funds, certificates of deposit, time and demand deposits, and
bankers' acceptances which have original maturities of not more than 365
days of any domestic bank, the short-term debt obligations of which are
rated A-1 or better by Standard & Poor's and P-1 by Moody's.
- - Investment agreements approved by the credit enhancement provider or the
trustee.
- - Commercial paper which has an original maturities of not more than 365 days
rated A-1 or better by Standard & Poor's and P-1 or better by Moody's.
- - Investments in money market funds rated AAAm or AAAM-G by Standard & Poor's
and Aaa by Moody's.
- - Other investments approved in writing by the credit enhancement provider or
the trustee and acceptable to the rating agencies.
The agreements will require that, if all monies originally deposited to
a pre-funding account are not used by the end of the pre-funding period, then
any remaining monies will be applied as a mandatory prepayment of principal on
the securities.
PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO ACCOUNTS
As set forth in the agreements, the master servicer will deposit or
will cause to be deposited into one or more accounts, known as the principal and
interest account, the following amounts for the mortgage loans:
- - all payments on account of principal, including principal prepayments;
- - all payments on account of accrued interest, net of the portion of each
payment thereof retained by the master servicer, if any, as its servicing
fee or other compensation and any interest accrued prior to the cut-off
date;
- - all net liquidation proceeds received and retained, if any, in connection
with the liquidation of any defaulted mortgage loan, by foreclosure, deed
in lieu of foreclosure or otherwise. All proceeds of any mortgage insurance
policy and proceeds from any alternative arrangements established in lieu
of any insurance, other than proceeds to be applied to the restoration of
the mortgaged property or released to the mortgagor in accordance with the
master servicer's normal servicing procedures. The deposit shall be net of
unreimbursed liquidation expenses, insured expenses incurred and
unreimbursed advances by the master servicer or by the sub-servicer and net
of the premiums paid for, or the proceeds of, credit life insurance
policies;
- - all proceeds of any mortgage loan purchased from the trust or, in the case
of a mortgage loan substitution, amounts representing a principal
adjustment;
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- - any amounts required to be deposited by the master servicer in connection
with losses realized on investments of funds held in the principal and
interest account;
- - any amounts required to be deposited in connection with the liquidation of
the trust property; and
- - any amounts required to be transferred from the distribution account to the
principal and interest account.
All deposits shall be made on a daily basis, but no later than two
business days following receipt of those amounts.
The portion of any payment received by the master servicer in respect
of a mortgage loan that is allocable to any interest strip retained by the
originator or other person will not be deposited into the principal and interest
account, but will be paid over to the parties entitled to those amounts.
In addition to the principal and interest account, the sponsor shall
cause to be established and the trustee will maintain, at the corporate trust
office of the trustee, in the name of the trust for the benefit of the holders
of each series of securities a distribution account to be used for the
disbursement of payments on each series of securities. The principal and
interest account and the distribution account each must be maintained with an
institution whose deposits are insured by the Bank Insurance Fund or the Savings
Association Insurance Fund of the FDIC, which is acceptable to the rating
agencies.
In addition, the trustee will cause all payments received by it from
any credit enhancement provider to be deposited in the distribution account not
later than the payment date.
All funds in the distribution account will be invested and reinvested
by the trustee for the benefit of the securityholders and any credit enhancement
provider, as directed by the master servicer, in designated eligible
investments. The principal and interest account may contain funds relating to
more than one series of securities as well as payments received on other
mortgage loans serviced or master serviced by it that have been deposited into
the principal and interest account. All funds in the principal and interest
account will be required to be held either uninvested, up to limits insured by
the FDIC or invested by the master servicer in the designated eligible
investments. The master servicer will be entitled to net investment proceeds on
the funds in the principal and interest account and the distribution account
held by the trustee.
WITHDRAWALS FROM THE PRINCIPAL AND INTEREST ACCOUNT
On a day preceding each payment date, the master servicer will withdraw
from the principal and interest account and remit to the trustee for deposit in
the distribution account;
- - the amount to be distributed to securityholders on that payment date;
- - any amounts required to be transferred to any reserve account established
for that series;
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- - any amounts required to be paid by the master servicer out of its own funds
due to the operation of a deductible clause in any blanket insurance
policies maintained by the master servicer to cover losses on the mortgage
loans;
- - any other amounts as specifically set forth in the agreements; and
- - the amount of any advances made by the master servicer.
In addition, the master servicer may from time to time make withdrawals
from the principal and interest account for the following purposes:
- - to reimburse itself or any sub-servicer for any accrued and unpaid
servicing fees and for reimbursable advances, out of late payments or
collections on the mortgage loan, including liquidation proceeds, mortgage
insurance proceeds and other amounts collected by the master servicer from
the mortgagor or otherwise relating to the mortgage loan;
- - to reimburse itself from any funds for any advances determined in good
faith not to be recoverable from the mortgage loan;
- - to withdraw investment earnings on amounts on deposit in the account;
- - to pay the sponsor or its assignee all amounts allocable to any interest
strip retained by the originator out of collections or payments which
represent interest on the mortgage loan;
- - to pay to the sponsor interest accrued and principal collected prior to the
cut-off date only if these amounts were previously deposited;
- - to withdraw amounts that have been deposited in error;
- - to clear and terminate the account in connection with the termination of
the trust; and
- - to invest in eligible investments as defined in the "Pre-Funding; Mandatory
Repayment" section.
DELINQUENCY ADVANCES AND SERVICING ADVANCES
In the event of a delinquency, the master servicer or any sub-servicer
will be required to deposit into the principal and interest account an advance
in an amount equal to delinquent interest, net of the servicing fees and any
interest strips retained by an originator. This advance is known as a
delinquency advance. Delinquency advances are only required if, in its good
faith business judgment, the master servicer believes that this amount will
ultimately be recovered from the mortgage loan. The master servicer may also be
required to advance delinquent payments of principal. The master servicer will
be permitted to fund its payment of delinquency advances from collections of
another mortgage loan deposited into the principal and interest account after
the remittance period. A delinquency advance later determined by the master
servicer not to be recoverable will be reimbursable from any amounts on deposit
in the principal and interest account prior to any distributions to the
securityholders. A sub-servicer will be
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permitted to fund its payment of delinquency advances as set forth in the
sub-servicing agreement.
A mortgage loan is delinquent if any payment due on the mortgage loan
is not made by the close of business on the day the payment is scheduled to be
due plus any applicable grace period.
If a full principal prepayment occurs, the master servicer or
sub-servicer will be required to deposit in the principal and interest account
an amount of interest equal to the difference between (1) 30 days' interest at
the mortgage loan's coupon rate, less the related servicing fees and the amount
of any interest strip retained by an originator, on the principal balance of the
mortgage loan as of the first day of the remittance period and (2) to the extent
not previously advanced, the interest paid by the mortgagor during that
remittance period, less the servicing fee and the amount of any interest strip
retained by an originator. This interest advance is known as compensating
interest. The master servicer is not required to pay compensating interest
during any remittance period in an amount in excess of the aggregate servicing
fees received by it for trust.
Neither delinquency advances nor compensating interest will be paid by
the master servicer or any sub-servicer for revolving home equity loans.
The master servicer or sub-servicer will also be obligated to make
servicing advances for any out-of-pocket costs and expenses, incurred in the
performance of its servicing obligations, including, but not limited to,
- - expenditures in connection with a foreclosed mortgage loan prior to the
liquidation thereof, including expenditures for real estate property taxes,
hazard insurance premiums and property restoration or preservation,
- - the cost of any enforcement or judicial proceedings, including foreclosures
and other legal actions and costs that potentially affect the existence,
validity, priority, enforceability or collectibility of the mortgage loan,
including collection agency fees and costs of pursuing or obtaining
personal judgments, garnishments, levies, attachment and similar actions,
- - the cost of the conservation, management, liquidation, sale or other
disposition of any mortgaged property acquired in satisfaction of the
mortgage loan, including reasonable fees paid to any independent contractor
in connection therewith, and
- - advances to keep liens current, unless the master servicer has determined
that the advance would not be recoverable.
No servicing advance will be required to be made by the master servicer
or sub-servicer, if in its good faith judgment it would not be recoverable from
the mortgage loan. Any nonrecoverable servicing advance made by the master
servicer or sub-servicer will be reimbursable from any amounts on deposit in the
principal and interest account prior to any distribution being made to
securityholders.
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If the master servicer or one of its affiliated sub-servicers exercises
its option to purchase the assets of a trust under a clean-up call, the master
servicer or sub-servicer will net from the purchase price all advances
previously made by it and not theretofore reimbursed.
REPORTS TO SECURITYHOLDERS
With each distribution to securityholders of a particular class of
securities the trustee will forward or cause to be forwarded to each holder a
statement or statements setting forth the information specifically described in
the prospectus supplement.
In addition, on each payment date the trustee will forward or cause to
be forwarded additional information concerning the trust, as of the close of
business on the last day of the remittance period, as more specifically
described in the prospectus supplement, which generally will include information
about the number and percentage of delinquent mortgage loans, the number of
mortgage loans in foreclosure, or the number of mortgagors in bankruptcy
proceedings and the number of real estate owned properties.
DESCRIPTION OF CREDIT ENHANCEMENT
Various forms of credit enhancement may be provided for one or more
classes of a series of securities or for the mortgage loans in the trust. Credit
enhancement may be in the form of:
- - one or more classes of subordinate securities which provide credit support
to one or more classes of senior securities,
- - a financial guaranty insurance policy, surety bond, reserve account, letter
of credit or other third party guarantees,
- - a cross support feature or overcollateralization, or
- - any combination of the foregoing.
Credit Enhancement may be provided in only a limited amount and may not
provide protection against all risks of loss. If losses occur that exceed the
amount covered by credit enhancement or are not covered by the credit
enhancement, holders of one or more classes of securities will bear their
allocable share of losses.
The following sections describe the material provisions of the various
types of credit enhancement.
FINANCIAL GUARANTY INSURANCE POLICIES
A financial guaranty insurance policy or surety bond may be obtained
and maintained for each class or series of securities. A description, including
financial information, of the issuer of any financial guaranty insurance policy
will be included in the prospectus supplement.
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A financial guaranty insurance policy will unconditionally and
irrevocably guarantee to securityholders that an amount equal to each full and
complete insured payment will be received by the trustee on behalf of
securityholders, for distribution by the trustee to each securityholder. The
insured payment will be defined in the prospectus supplement, and in most
instances will be equal to the minimum distribution of interest due to
securityholders.
Financial guaranty insurance policies may apply only to some classes,
or may apply at the mortgage loan level and only to specified mortgage loans.
Financial guaranty insurance policies may have limitations on the
financial guaranty insurer's duty to guarantee the obligations of the
originators to repurchase or substitute for any mortgage loans. Financial
guaranty insurance policies will not guarantee any specified rate of
prepayments. In addition, amounts payable under financial guaranty insurance
policies will generally not be available to cover interest shortfalls arising
from the application of the Soldier's and Sailors' Civil Relief Act, or from any
failure of the master servicer to fund compensating interest.
Subject to the terms of the agreements, the financial guaranty insurer
may be subrogated to the rights of each securityholder to receive payments under
the securities to the extent of any payment by the financial guaranty insurer
under the financial guaranty insurance policy.
CROSS SUPPORT AMONG CLASSES
A trust may contain groups of mortgage loans which provide support for
separate classes of securities. In this case, credit support would be in the
form of a cross support feature which allows distribution for one class of
securities to be made from excess amounts available from other groups of
mortgage loans within the same trust. The prospectus supplement for a series
that includes a cross support feature will describe the manner and conditions
for applying the cross support feature.
The credit enhancement provided by one or more forms of cross support
may apply concurrently to two or more separate trusts. The prospectus supplement
will identify the trusts benefiting from any cross support, the manner of
determining the amount and application of the cross support.
OVERCOLLATERALIZATION
Provisions of a trust may allow for the acceleration of the
amortization of one or more classes of securities relative to the amortization
of the group of mortgage loans. The accelerated amortization is achieved by the
application of excess interest to the payment of principal of one or more
classes of securities. This acceleration feature creates overcollateralization
which results from the excess of the aggregate principal balance of the group of
mortgage loans over the principal balance of the class of securities. This
acceleration may continue for the life of the security, or may be limited. In
the case of limited acceleration, once the required level of
overcollateralization is reached, this limited acceleration feature may cease.
The acceleration feature may be activated again if necessary to maintain the
required level of overcollateralization.
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SUBORDINATION OF CLASSES
The subordination of one or more classes of securities provides credit
support to the senior classes of the same securities. In a senior/subordinate
structure, the total amount available for distribution on each payment date, as
well as the method for allocating this amount among the various classes of
securities included in the series, will be as set forth in the prospectus
supplement. The amount available for contribution will be allocated first to the
senior securities up to the amounts determined as specified in the prospectus
supplement, prior to allocation of interest or principal to the subordinate
securities of the series. In the event of any realized losses on mortgage loans,
the rights of the subordinate securityholders to receive distributions will be
subordinate to the rights of the senior securityholders.
LETTER OF CREDIT
If any component of credit enhancement as to any series of securities
is to be provided by a letter of credit, the bank issuing the letter of credit
will deliver it to the trustee. The letter of credit may provide direct coverage
on the securities or support the sponsor's or any other person's obligation to
make payments to the trustee. The letter of credit bank, the amount available
under the letter of credit and the expiration date of the letter of credit will
be specified in the prospectus supplement. On or before each payment date,
either the letter of credit bank or the trustee may be required to make the
payments specified in the prospectus supplement after notification from the
trustee. The payments required to be made under the terms of the letter of
credit shall be deposited in the distribution account.
RESERVE ACCOUNTS
A trust may create a reserve account to hold any combination of cash,
one or more irrevocable letters of credit or one or more eligible investments in
specified amounts, amounts otherwise distributable to subordinate
securityholders or owners of the residual interest. The amounts held in a
reserve account will be applied to fund shortfalls in amounts due on the
securities in the manner and under the conditions specified in the prospectus
supplement. Reserve account monies may also be applied to reimburse the master
servicer for outstanding advances or may be used for other purposes.
DERIVATIVE CONTRACTS
A trust may hold an interest rate swap contract, an interest rate cap
agreement or similar contract providing limited protection against interest rate
risks. These derivate contracts may provide the trust with additional amounts
which will be available to pay interest on the securities, to build up
overcollateralization, or both.
REDUCTION OR SUBSTITUTION OF CREDIT ENHANCEMENT
In most cases, the amount available under any credit enhancement will
be subject to periodic reduction in accordance with a schedule or formula on a
nondiscretionary basis as the aggregate outstanding principal balance of the
mortgage loans declines. Additionally, credit support may be replaced, reduced
or terminated upon the written assurance from each applicable rating agency that
the then current rating of the series of securities will not be adversely
affected.
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In the event that the credit rating of the issuer of any applicable credit
enhancement is downgraded, the credit rating of the securities may be downgraded
to a corresponding level, and the sponsor will not be obligated to obtain
replacement credit support in order to restore the rating of the securities.
The sponsor may be permitted to replace one form of credit enhancement
with another form of credit enhancement, or credit enhancement of the same form
but from a different provider, but only if the then current rating of the series
of securities is maintained.
Where the credit support is in the form of a reserve account, a
permitted reduction in the amount of credit enhancement will result in a release
of all or a portion of the assets in the reserve account to any of the holders
of the residual interest in the trust, the sponsor, the master servicer, one or
more originators or the other person that is entitled to receive those amounts.
Any assets so released will not be available to fund distribution obligations in
future periods.
SERVICING PROCEDURES
COLLECTION AND OTHER SERVICING PROCEDURES
The master servicer will service the mortgage loans, either directly or
through sub-servicers, who may be affiliates of the master servicer, and will
receive a fee for its services. If any mortgage loans are serviced by the master
servicer through a sub-servicer, the master servicer will remain liable for its
servicing obligations as if the master servicer alone were servicing the
mortgage loans.
The master servicer's obligations will consist principally of its
contractual servicing obligations under the agreements, including its obligation
to enforce the obligations of sub-servicers and of originators. The master
servicer or sub-servicer may also be obligated to make advances of interest
payments in the event of delinquencies and interest shortfalls due to prepayment
of mortgage loans. The obligation of the master servicer to make delinquency
advances will be limited to the extent, in its good faith business judgment that
the delinquency advances would be ultimately recoverable from the mortgage
loans. See "Description of the Securities -- Delinquency Advances and Serving
Advances" for more information concerning the advancing obligation.
The master servicer acting directly or through one or more
sub-servicers is required to service and administer the mortgage loans in
accordance with the agreements and with reasonable care, and using that degree
of skill and attention that the master servicer exercises for comparable
mortgage loans that it services for itself or others.
The duties of the master servicer include collecting and posting all
payments, responding to inquiries of mortgagors or federal, state or local
government authorities, investigating delinquencies, reporting tax information
to mortgagors, accounting for collections, furnishing monthly and annual
statements to the trustee, and making advances to the extent described in the
agreements. The master servicer is required to follow its customary standards,
policies and procedures in performing its duties as master servicer.
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The master servicer is authorized and empowered to execute and deliver,
on behalf of itself, the securityholders, any credit enhancement provider, and
the trustee or any of them, any and all instruments of satisfaction or
cancellation, or of partial or full release or discharge and all other
comparable instruments;
The agreements will require the master servicer or sub-servicer to
follow the collection procedures it follows from time to time for mortgage loans
in its servicing portfolio that are comparable to the mortgage loans. The master
servicer or sub-servicer, however, is always required to follow collection
procedures that are consistent with or better than standard industry practices.
The master servicer may in its discretion:
- - consent to any modification of the terms of any mortgage note not expressly
prohibited by the agreements if the effect of the modification (1) will not
materially and adversely affect the security afforded by the mortgaged
property or the timing of receipt of any payments required thereunder
except for a modification or forbearance permitted by the agreements; and
(2) will not cause a trust which is a REMIC to fail to qualify as a REMIC.
- - waive any assumption fees, late payment charges, charges for checks
returned for insufficient funds, prepayment fees, if any, or the fees which
may be collected in the ordinary course of servicing the mortgage loans,
- - if a mortgagor is in default or about to be in default because of a
mortgagor's financial condition, arrange with the mortgagor a schedule for
the payment of delinquent payments due on the mortgage loan; in most
instances the master servicer will not be permitted to reschedule the
payment of delinquent payments more than one time in any twelve consecutive
months for any single mortgagor.
When a mortgaged property has been or is about to be transferred by the
mortgagor, the master servicer will be required, to the extent it has knowledge
of the prospective transfer, to exercise its rights to accelerate the maturity
of the mortgage loan under any due-on-sale clause contained in the mortgage or
note. The master servicer will not, however, be required to exercise this right
if the due-on-sale clause, in the reasonable belief of the master servicer, is
not enforceable under applicable law or if the master servicer reasonably
believes that to permit an assumption of the mortgage loan would not materially
and adversely affect the interests of securityholders, any credit enhancement
provider, or jeopardize coverage under any primary insurance policy or
applicable credit enhancement arrangements. In this event, the master servicer
will be required to enter into an assumption and modification agreement with the
person to whom the mortgaged property has been or is about to be transferred.
Under the assumption agreement, the transferee becomes liable under the mortgage
note and, unless prohibited by applicable law or the agreements, the original
mortgagor remains liable. If the foregoing is not permitted under applicable
law, the master servicer or sub-servicer will be authorized to enter into a
substitution of liability agreement with the transferee, under which the
original mortgagor is released from liability and the transferee is substituted
as mortgagor and becomes liable under the mortgage note. The assumed loan must
conform in all respects to the requirements and representations and warranties
of the agreement and may require the consent of any credit enhancement provider.
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Any fee collected by the master servicer or sub-servicer for entering
into an assumption or substitution of liability agreement will be retained by
the master servicer or sub-servicer as additional servicing compensation. See
"Legal Aspects of Mortgage Loans -- Enforceability of Mortgage Loan Provisions".
The master servicer or sub-servicer will generally have the right to
approve applications of mortgagors seeking consent for partial releases of
mortgages, removal, demolition or division of mortgaged properties.
No application for consent may be approved by the master servicer
unless:
- - the provisions of the mortgage note and mortgage have been complied with;
- - the credit profile of the mortgage loan after any release is generally
consistent with the sponsor's guidelines then applicable to the mortgage
loan; and
- - the lien priority of the mortgage is not reduced.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
The master servicer will be required to foreclose upon or otherwise
comparably effect the ownership of mortgaged properties relating to defaulted
mortgage loans as to which no satisfactory arrangements can be made for
collection of delinquent payments and which the Master Servicer has not acquired
as an REO property on behalf of the trust. In connection with this foreclosure
or other conversion, the master servicer shall exercise the rights and powers
vested in it, and use the same degree of care and skill in their exercise or use
that prudent mortgage lenders would exercise or use under the circumstances in
the conduct of their own affairs, including, but not limited to, making
servicing advances for the payment of taxes, amounts due on senior liens, and
insurance premiums. The master servicer will be required to sell any foreclosure
property within three years of its acquisition by the trust. The master servicer
generally will be permitted to charge-off a mortgage loan, and to cease further
collection and foreclosure activity on a mortgage loan if it reasonably
determines that further activity would not increase collections or recoveries to
be received by the trust. In the case of revolving home equity mortgage loans,
the master servicer's policy is to charge off mortgage loans, in most instances,
after they have become 180 day delinquent. In addition, any required advancing
may be permitted to cease at this point.
For trusts treated as REMICs, the master servicer will be required to
manage, conserve, protect and operate each foreclosure property for the
securityholders solely for the purpose of its prompt disposition and sale as
foreclosure property within the meaning of Section 860G(a)(8) of the Internal
Revenue Code or to prevent the receipt by the trust of any income from
non-permitted assets within the meaning of Section 860F(a)(2)(B) of the Internal
Revenue Code or any net income from foreclosure property which is subject to
taxation under the REMIC provisions.
The master servicer will, either itself or through an agent protect and
conserve any foreclosure property in the same manner and to the extent as is
customary in the locality where
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the foreclosure property is located and may, incident to its conservation and
protection of the interests of the securityholders, rent the same, or any part
thereof, as the master servicer deems to be in the best interest of the
securityholders for the period prior to the sale of the foreclosure property.
The master servicer will take into account the existence of any
hazardous substances, hazardous wastes or solid wastes, as these terms are
defined in the Comprehensive Environmental Response Compensation and Liability
Act, the Resource Conservation and Recovery Act of 1976, or other federal, state
or local environmental legislation, on a mortgaged property in determining
whether to foreclose upon or acquire ownership of the mortgaged property.
If, upon the final liquidation of a defaulted mortgage loan or a
foreclosure property a loss is realized that is not covered by any applicable
form of credit enhancement or other insurance, the securityholders will bear the
loss. However, if a gain results from the final liquidation of a foreclosure
property that is not required by law to be remitted to the mortgagor, the master
servicer will generally be entitled to retain the gain as additional servicing
compensation. For a description of the master servicer's obligations to maintain
and make claims under applicable forms of credit enhancement and insurance
relating to the mortgage loans, see "Description of Credit Enhancement."
HAZARD INSURANCE POLICIES
The terms of the mortgage loans require each mortgagor to maintain a
hazard insurance policy for the mortgage loan. If a high LTV mortgage loan is in
a junior lien position, the sponsor requires that a hazard insurance policy
exists at the time the high LTV mortgage loan is originated; however, the master
servicer may not track hazard insurance after origination. Additionally, the
master servicer will cause to be maintained for each mortgage loan, except for
certain high LTV and condominium mortgage loans, a hazard insurance policy with
a generally acceptable carrier that provides for fire and extended coverage
relating to the mortgage loan in an amount not less than the least of the
outstanding principal balance of the mortgage loan, the minimum amount required
to compensate for damage or loss on a replacement cost basis and the full
insurable value of the premises. The master servicer may obtain a blanket policy
to satisfy the requirement for hazard insurance.
If a mortgage loan at the time of origination relates to a mortgaged
property in an area identified in the federal register by the Federal Emergency
Management Agency as having special flood hazards, the master servicer will
maintain with respect thereto a flood insurance policy in a form meeting the
requirements of the then current guidelines of the Federal Insurance
Administration with a generally acceptable carrier. The flood insurance policy
should provide for recovery by the master servicer on behalf of the trust of
insurance proceeds relating to the mortgage loan of not less than the least of
the outstanding principal balance of the mortgage loan, the minimum amount
required to compensate for damage or loss on a replacement cost basis and the
maximum amount of insurance that is available under the Flood Disaster
Protection Act of 1973. The master servicer will be required to indemnify the
trust out of the master servicer's own funds for any loss to the trust resulting
from the master servicer's failure to
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maintain the flood insurance if the mortgage loan is not covered by the master
servicer's blanket policy.
In the event that the master servicer obtains and maintains a blanket
policy insuring against fire with extended coverage and against flood hazards on
all of the mortgage loans, then, to the extent the policy names the master
servicer as loss payee and provides coverage in an amount equal to the aggregate
unpaid principal balance on the mortgage loans without co-insurance, and
otherwise complies with specified requirements, the master servicer shall be
deemed conclusively to have satisfied its obligations to maintain fire, flood
and hazard insurance coverage. The blanket policy may contain a deductible
clause, in which case the master servicer will be required, in the event that
there shall not have been maintained on the mortgaged property a complying
policy, and there shall have been a loss that would have been covered by the
policy, to deposit in the principal and interest account from the master
servicer's own funds the difference, if any, between the amount that would have
been payable under a separate policy and the amount paid under the blanket
policy.
THE SPONSOR
The sponsor, Advanta Conduit Receivables, Inc., was incorporated in the
State of Nevada in March, 1994. It is a direct subsidiary of Advanta Mortgage
Conduit Services, Inc., and an affiliate of Advanta Mortgage Corp. USA. The
sponsor was formed as a special purpose finance subsidiary to facilitate the
issuance of these securities.
The sponsor maintains its principal office at 10790 Rancho Bernardo
Road, San Diego, California 92127. Its telephone number is (858) 676-3099.
THE MASTER SERVICER
Advanta Mortgage Corp. USA or its affiliates will act as the master
servicer for a series of securities. Advanta Mortgage Corp. USA is a Delaware
corporation incorporated in 1983. It is a nationwide servicer of first and
junior lien loans. Advanta Mortgage Corp. USA has centralized servicing
functions located in San Diego, California.
Advanta Mortgage Corp. USA was acquired by Advanta Corp., a Delaware
corporation in September, 1986 and is an indirect subsidiary of Advanta Corp.
The master servicer is an affiliate of Advanta National Bank, a national banking
association domiciled in Delaware and Advanta Bank Corp., a Utah industrial loan
corporation, and the parent of Advanta Mortgage Corp. Midatlantic, Advanta
Mortgage Corp. Midatlantic II, Advanta Mortgage Corp. Midwest, Advanta Mortgage
Corp. Northeast, Advanta Finance Corp. and Advanta Mortgage Conduit Services,
Inc.
AVAILABLE INFORMATION; INCORPORATION OF INFORMATION BY REFERENCE
The sponsor has filed a registration statement under the Securities Act
of 1933, with the Securities and Exchange Commission with respect to these
securities. This prospectus contains,
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and the prospectus supplement for each series of securities will contain, a
summary of the material terms of the securities, but neither contains nor will
contain all of the information contained in the registration statement of which
this prospectus is a part. For further information, we suggest that you read the
registration statement and any amendments thereof and exhibits to the
registration statement. You may obtain a copy of the registration statement from
the Public Reference Section of the Securities and Exchange Commission, 450
Fifth Street, N.W., Washington, D.C. 20549 upon payment of the prescribed
charges, or you may examine the registration statement free of charge at the
Securities and Exchange Commission's offices, 450 Fifth Street, N.W.,
Washington, D.C. 20549 or at the regional offices of the Securities and Exchange
Commission located at Room 1400, 75 Park Place, New York, New York 10007 and
Northwestern Atrium Center, 500 West Madison Street, Suite 400, Chicago,
Illinois 60661-2511. In addition, the Securities and Exchange Commission
maintains a site on the World Wide Web containing reports, proxy and information
statements and other items. The address is http://www.sec.gov.
We suggest that, in making your investment decision, you rely only on
the information contained in this document and the prospectus supplement. We
have not authorized anyone to provide any information that is different. This
prospectus and any prospectus supplement do not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the securities offered
by this prospectus and that prospectus supplement nor an offer of the securities
to any person in any state or other jurisdiction in which the offer would be
unlawful.
This prospectus incorporates by reference all documents and reports
filed for a series under Section 13(a), 13(c), 14 or 15(d) of the Securities
Exchange Act after the date of this prospectus and prior to the termination of
the offering for that series. Information in this prospectus, the accompanying
prospectus supplement or any document that is subsequently incorporated by
reference may modify or supercede information incorporated by reference in this
prospectus. The modified or superceded information will be a part of this
prospectus only in its modified or superceded form.
The sponsor will provide or cause to be provided without charge to each
person to whom this prospectus is delivered in connection with the offering of
one or more classes of securities, a list identifying all filings for that
series under Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act
since the trust's latest fiscal year covered by its annual report on Form 10-K
and a copy of any or all documents or reports incorporated by reference in this
prospectus for that series, excluding any exhibits to those documents or
reports.
We include cross references in this prospectus to captions where you
can find further discussions. The table of contents located on page 2 of this
prospectus provides the pages on which these captions appear.
You can obtain from the sponsor, free of charge, a copy of the
financial information incorporated by reference by making an oral or written
request to Advanta Conduit Receivables, Inc., Attention: General Counsel, Welsh
& McKean Roads, Spring House, Pennsylvania 19477, (215) 657-4000.
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THE AGREEMENTS
Each series of securities will be issued under one or more agreements
which will establish the trust, pool the mortgage loans, provide for the
servicing of the mortgage loans and issue the securities. The following
paragraphs describe the material provisions common to the agreements but are
subject to the more detailed discussion in the prospectus supplement.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
Each servicer, whether the master servicer or any sub-servicer, will
retain a servicing fee in connection with its servicing activities equal to the
percentage per annum specified in the prospectus supplement. The servicing fee
is payable monthly and is based on the outstanding principal amount of the
mortgage loans.
In addition to the servicing fee, the master servicer will be entitled
to retain additional servicing compensation in the form of prepayment charges,
release fees, bad check charges, assumption fees, modification fees, late
payment charges, any other servicing type fees, net liquidation proceeds not
required to be deposited in the principal and interest account and similar
items.
The master servicer will pay or cause to be paid some of the ongoing
expenses associated with each trust and incurred by it in connection with its
servicing responsibilities including, without limitation:
- - the fees and disbursements of the trustee, any firm of independent,
nationally recognized certified public accountants, the custodian appointed
by the trustee, the security registrar, any paying agent,
- - expenses incurred in enforcing the obligations of sub-servicers and
originators and
- - any fee or other amount payable in respect of any alternative credit
enhancement arrangements.
The master servicer may be entitled to reimbursement of expenses
incurred in enforcing the obligations of sub-servicers and originators under
some limited circumstances. In addition, the master servicer will be entitled to
reimbursements for some of the expenses incurred by it in connection with
liquidated mortgage loans and in connection with the restoration of mortgaged
properties, the right of reimbursement being prior to the rights of
securityholders to receive any liquidation proceeds, including insurance
proceeds.
EVIDENCE AS TO COMPLIANCE
The agreements will require the master servicer to deliver annually to
the trustee and any credit enhancement provider:
- - an annual officers' certificate to the effect that the master servicer has
fulfilled its obligations under the agreements throughout the preceding
calendar year, and
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- - a letter or letters of a firm of independent, nationally recognized
certified public accountants reasonably acceptable to the credit
enhancement provider, if applicable, stating that it has examined a sample
of the documents and records of the master servicer and that, based on the
examination, it is of the opinion that the servicing has been conducted in
compliance with the agreements except for immaterial exceptions and any
other exceptions set forth in the letter.
Copies of the annual accountants' statement and the annual officer's
certificate may be obtained by securityholders without charge upon written
request to the master servicer.
REMOVAL AND RESIGNATION OF THE MASTER SERVICER
The master servicer may not resign from its obligations and duties,
except in connection with a permitted transfer of servicing, unless the duties
and obligations are no longer permissible under applicable law or are in
material conflict by reason of applicable law with any other activities of a
type and nature presently carried on by it. No resignation of the master
servicer will become effective until the trustee or a successor master servicer
has assumed the master servicer's obligations and duties.
The trustee, the securityholders or any credit enhancement provider,
will have the right to remove the master servicer upon the occurrence of any of
the following
- - events of insolvency, readjustment of debt, marshalling of assets and
liabilities or similar proceedings regarding the master servicer and
actions by the master servicer indicating its insolvency or inability to
pay its obligations;
- - the failure of the master servicer to perform any one or more of its
material obligations under the agreements as to which the master servicer
shall continue in default with respect thereto for a period, after notice
of this failure; or
- - the failure of the master servicer to cure any breach of any of its
representations and warranties set forth in the agreements which materially
and adversely affects the interests of the securityholders or any credit
enhancement provider, for a period, after the master servicer's discovery
or receipt of notice.
The agreements may also provide that the credit enhancement provider
may remove the master servicer upon the occurrence of any of these events,
subject to the applicable cure periods:
- - on any payment date, if the total available funds are less than the amount
of any required distribution then due on the credit enhanced securities,
unless the master servicer can demonstrate to the reasonable satisfaction
of the credit enhancement provider that the event was due to circumstances
beyond the control of the master servicer;
- - the failure by the master servicer to make any required advance, or to pay
any required compensating interest; or
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- - the failure of the master servicer to perform one or more of its material
obligations under the agreements.
AMENDMENTS TO THE AGREEMENTS
The trustee, the sponsor and the master servicer may amend the
agreements, for the purposes of (1) curing any ambiguity, or correcting or
supplementing any provision of the agreements which may be inconsistent with any
other provision of the agreements, (2) allowing transfers, or complying with the
requirements of the Internal Revenue Code or (3) adding to the trust property,
or further perfecting the trustee's interests in the trust property, with the
prior consent of the trustee or any credit enhancement provider, but without the
giving of notice to or the receipt of the consent of the securityholders under
the agreements. No amendment adopted without securityholder consent will, as
evidenced by an opinion of counsel delivered to the trustee, materially and
adversely affect the interests of any securityholder.
The agreements may also be amended by the trustee, the sponsor and the
master servicer with the prior written consent of any credit enhancement
provider, and not less than a majority of the securityholders represented by
each class of securities then outstanding or, if the amendment does not affect
all classes, then just the affected classes, for the purpose of (1) adding or
changing any provisions, (2) eliminating any of the provisions of the agreements
or (3) modifying in any manner the rights of the securityholders. No amendment
can change the amount of, or delay the timing of, payments which are required to
be distributed to any securityholders without the consent of the
Securityholders. In addition, no amendment can change the percentages of
securityholders which are required to consent to amendments, without the
unanimous consent of the holders of all the effected class or classes of
securities then outstanding.
RETIREMENT OF SECURITIES; REDEMPTION
Each trust will terminate upon the earlier of:
- - the payment to the securityholders and any credit enhancement provider of
all amounts due to them;
- - receipt by the trust of the final payment or other liquidation of the last
mortgage loan in the trust, or following the disposition of all property
acquired in respect of any mortgage loan remaining in the trust; and
- - any time when a liquidation of the trust is effected.
In no event, will any trust continue beyond the expiration of 21 years
from the death of the survivor of persons named in the agreements. Written
notice of termination of a trust will be given to each securityholder of that
series, and the final distribution will be made only upon surrender and
cancellation of the securities at an office or agency designated by the trustee
of that trust. If the securityholders are permitted to terminate the trust
under the applicable agreements, a penalty may be imposed upon the
securityholders based upon the fee that would be foregone by the master
servicer because of the termination.
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Each trust may also allow for an early redemption or clean-up call. The
clean-up call may occur at the option of the master servicer or any of its
affiliated sub-servicers or, if applicable, the credit enhancement provider, and
will result in the early redemption of the securities at a price at least equal
to the outstanding principal balance of the securities plus accrued interest.
The holders of any interest only security may not receive any payment in
connection with a clean-up call. The exercise of these rights may cause the
securities to prepay earlier than expected on any date the aggregate principal
balance of the mortgage loans or the securities, as applicable, for a given
series is less than a specified percentage of the initial balance.
THE TRUSTEE
The trustee under the agreements will be named in the prospectus
supplement. The trustee will have no obligation to exercise any of the rights or
powers vested in it by the agreements at the request or direction of any of the
securityholders, unless the securityholders shall have offered to the trustee
reasonable security or indemnity against the costs, expenses and liabilities
which might be incurred by it in compliance with the request or direction.
The trustee may execute any of the trusts or powers granted by the
agreements or perform any duties thereunder either directly or by or through
agents or attorneys. The trustee will not be responsible for any misconduct or
negligence on the part of any agent or attorney appointed and supervised with
due care by it.
The trustee will not be liable for any action it takes or omits to take
in good faith which it reasonably believes to be authorized by an authorized
officer of any person or within its rights or powers under the agreements.
Each agreement will permit the removal of the trustee if the upon the
occurrence and continuance of events listed in the agreement , including the
failure of the trustee to satisfy the relevant eligibility requirements, the
trustee's becoming insolvent or the trustee breaches any representation or
warranty made by it.
If an event permitting the removal of the trustee occurs and is
continuing, then, the sponsor, the securityholders, acting on the terms of the
agreements, or any credit enhancement provider may, whether or not the trustee
has resigned, appoint a successor trustee.
The trustee will be liable under the agreements only to the extent of
the obligations specifically imposed upon and undertaken by it. Neither the
trustee nor any of the directors, officers, employees or agents will be under
any liability on any security or to the sponsor, the master servicer or any
securityholder for any action taken or for refraining from the taking of any
action in good faith under the agreements, or for errors in judgment. The
trustee, however, will not be protected against any liability it incurs by
reason of negligent action, negligent failure to act or willful misconduct in
the performance of its duties or by reason of reckless disregard of its duties.
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LEGAL ASPECTS OF MORTGAGE LOANS
The following discussion contains summaries of the material legal
aspects of mortgage loans that are general in nature. These legal aspects are
governed in part by state laws, which may be different in the various states.
Consequently, these summaries are not complete, do not reflect the laws of any
particular state and do not encompass the laws of all states in which the
mortgaged properties may be located.
The mortgage loans will be represented by a mortgage note and an
accompanying mortgage. According to the mortgage note, the mortgagor is
personally liable to repay the indebtedness evidenced by the mortgage loan. The
mortgage secures the indebtedness by a lien on the mortgaged property.
ENFORCEMENT OF THE MORTGAGE NOTE
In some states, the lender on a note secured by a lien on real property
has the option of bringing a personal action against the borrower on the debt
without first exhausting all remedies against the mortgaged property, such as
foreclosure. In some of these states the lender, after it has received a
personal judgment, may be deemed to have elected a remedy and may be precluded
from exercising remedies against the mortgaged property. Consequently, the
practical effect of the election requirement, in those states permitting this
election, is that lenders will usually proceed against the property first rather
than bringing a personal action against the borrower on the note.
Some states have imposed statutory prohibitions that limit the remedies
of a beneficiary under a deed of trust or a mortgagee under a mortgage for
example:
- - statutes that limit the right of the beneficiary or mortgagee, to obtain a
deficiency judgment against the borrower following foreclosure; a
deficiency judgment is a personal judgment against the former borrower
equal in most cases to the difference between the amount due to the lender
and the net amount realized upon the public sale of the real property;
- - other statutes require the beneficiary or mortgagee to exhaust all remedies
against the mortgaged property in an attempt to satisfy the full debt
before bringing a personal action against the borrower;
- - statutory provisions limit any deficiency judgment against the former
borrower following a foreclosure to the excess of the outstanding debt over
the fair value of the property at the time of the public sale.
The purpose of these statutes is generally to prevent a beneficiary or mortgagee
from obtaining a large deficiency judgment against the former borrower as a
result of low or no bids at the judicial sale.
In addition to laws limiting or prohibiting deficiency judgments,
numerous other federal and state statutory provisions, including the federal
bankruptcy laws and state laws affording relief to debtors, may interfere with
or affect the ability of a trust to realize upon collateral or
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enforce a deficiency judgment. For example, a federal bankruptcy law may permit
a debtor through his or her Chapter 11 or Chapter 13 rehabilitative plan to cure
a monetary default in respect of a mortgage loan on a debtor's residence by
paying arrearages within a reasonable time period and reinstating the original
mortgage loan payment schedule even though the lender accelerated the mortgage
loan and final judgment of foreclosure had been entered in state court prior to
the filing of the debtor's bankruptcy petition, if no sale of the residence had
yet occurred. Some courts with federal bankruptcy jurisdiction have approved
plans, based on the particular facts of the reorganization case, that effected
the curing of a mortgage loan default by paying arrearages over a number of
years.
Courts with federal bankruptcy jurisdiction also have held that the
terms of a mortgage loan secured by property of the debtor may be modified.
These courts have allowed modifications that include reducing the amount of each
monthly payment, changing the rate of interest, altering the repayment schedule,
forgiving all or a portion of the debt and reducing the lender's security
interest to the value of the residence, thus leaving the lender a general
unsecured creditor for the difference between the value of the residence and the
outstanding balance of the loan.
A number of states have imposed general equitable principles upon
judicial foreclosure. These equitable principles are generally designed to
relieve the borrower from the legal effect of the borrower's default under the
loan documents. Examples of judicial remedies that have been fashioned include
judicial requirements that the lender undertake affirmative and expensive
actions to determine the causes for the borrower's default and the likelihood
that the borrower will be able to reinstate the loan. In some cases, lenders
have been required to reinstate loans or recast payment schedules in order to
accommodate borrowers who are suffering from temporary financial disabilities.
In other cases, the courts have limited the right of the lender to foreclose if
the default under the loan is not monetary, such as the borrower failing to
adequately maintain the property or the borrower executing a second deed of
trust affecting the property.
Tax liens arising under the Internal Revenue Code may be prior to the
lien of a mortgage or deed of trust. In addition, substantive requirements are
imposed upon mortgage lenders in connection with the origination and the
servicing of mortgage loans by numerous federal and some state consumer
protection laws. These laws include, by example, the federal Truth-in-Lending
Act, Real Estate Settlement Procedures Act, Equal Credit Opportunity Act, Fair
Credit Billing Act, Fair Credit Reporting Act and other statutes and state laws,
such as the California Fair Debt Collection Practices Act. These laws and
regulations impose specific statutory liabilities upon lenders who originate
mortgage loans and fail to comply with the provisions of the law. In some cases,
this liability may affect assignees of the mortgage loans.
DEEDS OF TRUST OR MORTGAGES
The mortgage loans will be secured by either deeds of trust or
mortgages, depending upon the prevailing practice in the state in which the
mortgaged property subject to a mortgage loan is located. In some states, a
mortgage creates a lien upon the real property encumbered by the mortgage. In
other states, the mortgage conveys legal title to the property to the mortgagee
subject to the payment of the indebtedness. The mortgage is not prior to the
lien for real estate taxes and assessments and other charges imposed under
governmental police powers. Priority
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between mortgages depends on their terms in some cases or on the terms of
separate subordination or intercreditor agreements, and generally on the order
of recordation of the mortgage in the appropriate recording office. There are
two parties to a mortgage, the mortgagor, who is the borrower and homeowner, and
the mortgagee, who is the lender. Under the mortgage instrument, the mortgagor
delivers to the mortgagee a note or bond and the mortgage. In the case of a land
trust, there are three parties because title to the property is held by a land
trustee under a land trust agreement of which the borrower is the beneficiary;
at origination of a mortgage loan, the borrower executes a separate undertaking
to make payments on the mortgage note. Although a deed of trust is similar to a
mortgage, a deed of trust has three parties; the borrower and homeowner called
the trustor, a lender called the beneficiary, and a third-party grantee called
the trustee. Under a deed of trust, the borrower grants the property,
irrevocably until the debt is paid, in trust, generally with a power of sale, to
the trustee to secure payment of the obligation. The trustee's authority under a
deed of trust and the mortgagee's authority under a mortgage are governed by
law, the express provisions of the deed of trust or mortgage, and, in some
cases, the directions of the beneficiary.
COOPERATIVE LOANS
If specified in the prospectus supplement of a series of securities,
the mortgage loans may consist of cooperative loans evidenced by cooperative
notes secured by security interests in shares issued by cooperatives and in any
leases or occupancy agreements allowing the mortgagor the right to occupy
specific the cooperative unit. The security agreement will create a lien upon,
or grant a title interest in, the property which it covers, the priority of
which will depend on the terms of the particular security agreement as well as
the order of recordation of the agreement in the appropriate recording office.
These liens or title interests are not prior to the lien for real estate taxes
and assessments and other charges imposed under governmental police powers.
Each cooperative owns or leases the real property and owns or leases
the building and all separate units. The cooperative is directly responsible for
property management and, in most cases, payment of real estate taxes, other
governmental impositions and hazard and liability insurance. If there is a
blanket mortgage or blanket lease on the cooperative apartment building or
underlying land, the cooperative, as mortgagor or lessee also is responsible for
meeting these mortgage or rental obligations. If the cooperative is unable to
meet the payment obligations under a blanket mortgage, the mortgagee holding a
blanket mortgage could foreclose on that mortgage and terminate all subordinate
proprietary leases and occupancy agreements. Similarly, if the cooperative is
unable to meet the payment obligations under a land lease, the holder of the
landlord's interest under the land lease could terminate it and all subordinate
proprietary leases and occupancy agreements. A foreclosure by the holder of a
blanket mortgage or the termination of the underlying lease could eliminate or
significantly diminish the value of any collateral held by the lender who
financed the purchase by an individual tenant-stockholder of cooperative shares
or, in the case of the mortgage loans, the collateral securing the cooperative
loans.
FORECLOSURE OF MORTGAGE LOANS
Foreclosure of a deed of trust is generally accomplished by a non
judicial trustee's sale under the deed of trust and state laws which authorize
the trustee to sell the property upon default by the borrower under the terms of
the note or deed of trust. Beside the non judicial remedy, a
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deed of trust may be judicially foreclosed. In addition to any notice
requirements contained in a deed of trust, in some states, the trustee must
record a notice of default and within a period of time send a copy to the
trustor and to any person who has recorded a request for a copy of notice of
default and notice of sale. In addition, the trustee must provide notice in some
states to any other individual having an interest of record in the real
property, including any junior lienholders. If the deed of trust is not
reinstated within a specified period, a notice of sale must be posted in a
public place and, in most states, published for a specific period of time in one
or more local newspapers. In addition, some state laws require that a copy of
the notice of sale be posted on the property and sent to all parties having an
interest of record in the real property.
Foreclosure of a mortgage is generally accomplished by judicial action.
Typically, the action is initiated by the service of legal pleadings upon all
parties having an interest of record in the real property. Delays in completion
of the foreclosure may occasionally result from difficulties in locating
necessary parties. Judicial foreclosure proceedings are often not contested by
any of the applicable parties. If the mortgagee's right to foreclose is
contested, the legal proceedings necessary to resolve the issue can be time
consuming.
In some states, the trustor has the right to reinstate the loan at any
time following default until shortly before the trustee's sale. In these states,
the borrower, or any other person having a junior encumbrance on the real
estate, may, during a reinstatement period, cure the default by paying the
entire amount in arrears plus the costs and expenses incurred in enforcing the
obligation.
In the case of foreclosure under either a mortgage or a deed of trust,
the sale by the referee or other designated officer or by the trustee is a
public sale. However, because of the difficulty a potential buyer at the sale
would have in determining the exact status of title and because the physical
condition of the property may have deteriorated during the foreclosure
proceedings, it is uncommon for a third party to purchase the property at a
foreclosure sale unless there is a great deal of economic incentive for the new
purchaser. It is more common for the lender to purchase the property from the
trustee or referee for an amount that is less than or equal to the sum of the
unpaid principal amount of the mortgage loan, plus accrued and unpaid interest
and the expense of foreclosure. Typically, state law controls the amount of
foreclosure costs and expenses, including attorneys' fees, which may be
recovered by a lender.
Subject to the right of the borrower in some states to remain in
possession during the redemption period, the lender will assume the burdens of
ownership, including obtaining hazard insurance and making repairs at its own
expense as are necessary to render the property suitable for sale. The lender
will commonly obtain the services of a real estate broker and pay the broker's
commission in connection with the sale of the property. Depending upon market
conditions, the ultimate proceeds of the sale of the property may not equal the
lender's investment in the property and, in some states, the lender may be
entitled to a deficiency judgment. Any loss may be reduced by the receipt of any
mortgage insurance proceeds.
FORECLOSURE ON COOPERATIVE LOANS
If a cooperative loan must be foreclosed on, the cooperative will
usually recognize the lender's lien against proceeds from a sale of the
cooperative apartment, subject, however, to the
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cooperative's right to sums due or sums that have become liens on the shares
relating to the proprietary lease or occupancy agreement. The total amount owed
to the cooperative by the borrower could reduce the amount realized upon a sale
of the cooperative mortgage loan below the outstanding principal balance of the
cooperative mortgage loan plus accrued and unpaid interest.
The documentation governing cooperative loans generally also provide
that, in the event of a foreclosure, the lender must obtain the approval or
consent of the cooperative before transferring the cooperative shares to a new
buyer. Typically, the lender is not limited in any rights it may have to
dispossess the tenant stockholder.
RIGHTS OF REDEMPTION
In some states, after the foreclosure of a mortgage, the mortgagor and
foreclosed junior lienors are given a statutory period to redeem the property
from the foreclosure sale. In some states, redemption may occur only upon
payment of the entire principal balance plus accrued interest and expenses of
foreclosure. In other states, redemption may be authorized if the former
borrower pays only a portion of the sums due. The effect of a statutory right of
redemption is to diminish the ability of the lender to sell the foreclosed
property. The rights of redemption would defeat the title of any purchaser
subsequent to foreclosure or sale under a deed of trust. Consequently, the
practical effect of the redemption right is to force the lender to maintain the
property and pay the expenses of ownership until the redemption period has
expired. In some states, there is no right to redeem property after a trustee's
sale under a deed of trust.
ENVIRONMENTAL LEGISLATION
A number of states impose a statutory lien for associated costs on
property that is the subject of a cleanup action by the state on account of
hazardous wastes or hazardous substances released or disposed of on the
property. This lien may have priority over all subsequent liens on the property
and, in some states, will have priority over prior recorded liens including the
lien of a mortgage. In some states this lien will not have priority over prior
recorded liens of a deed of trust. In addition, under federal environmental
legislation and under state law in a number of states, a secured party which
takes a deed in lieu of foreclosure or acquires a mortgaged property at a
foreclosure sale or assumes active control over the operation or management of a
property may be liable for the costs of cleaning up a contaminated site.
Although these costs could be substantial, it is unclear whether they would be
imposed on a lender such as a trust, secured by residential real property. In
the event that a trust acquired a mortgaged property through foreclosure or
otherwise, and cleanup costs were incurred in respect of the mortgaged property,
the holders of the securities might realize a loss if these costs were required
to be paid by the trust.
ENFORCEABILITY OF MORTGAGE LOANS PROVISIONS
Generally all of the mortgage loans contain due-on-sale clauses. These
clauses permit the lender to accelerate the maturity of the loan if the borrower
sells, transfers or conveys the property. The enforceability of these clauses
has been the subject of legislation or litigation in many states including
California, and in some cases the enforceability of these clauses was
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limited or denied. However, federal law preempts state constitutional, statutory
and case law that prohibits the enforcement of due-on-sale clauses and permits
lenders to enforce these clauses in accordance with their terms, subject to
limited exceptions. This federal law encourages lenders to permit assumption of
loans at the original rate of interest or at some other rate less than the
average of the original rate and the market rate.
This federal law also provides for specific instances in which a
mortgage lender may not exercise a due-on-sale clause, notwithstanding the fact
that a transfer of the property may have occurred. These include intra-family
transfers, transfers by operation of law, leases of fewer than three years and
the creation of a junior encumbrance. Regulations also prohibit the imposition
of a prepayment penalty upon the acceleration of a loan under a due-on-sale
clause.
The inability to enforce a due-on-sale clause may result in a mortgage
loan bearing a coupon rate below the current market rate being assumed by a new
home buyer rather than being paid off, that may have an impact upon the average
life of the mortgage loans and the number of mortgage loans that may be
outstanding until maturity.
Upon foreclosure, courts have imposed general equitable principles.
These equitable principles generally are designed to relieve the borrower from
the legal effect of his defaults under the loan documents. Examples of judicial
remedies that have been fashioned include judicial requirements that the lender
undertake affirmative and expensive actions to determine the causes for the
borrower's default and the likelihood that the borrower will be able to
reinstate the loan. In some cases, courts have substituted their judgment for
the lender's judgment and have required that lenders reinstate loans or recast
payment schedules in order to accommodate borrowers who are suffering from
temporary financial disability. In other cases, courts have limited the right of
the lender to foreclose if the default under the mortgage instrument is not
monetary, such as the borrower failing to adequately maintain the property or
the borrower executing a second mortgage or deed of trust affecting the
property. Finally, some courts have been faced with the issue of whether or not
federal or state constitutional provisions reflecting due process concerns for
adequate notice require that borrowers under deeds of trust or mortgages receive
notices in addition to the statutorily prescribed minimum. For the most part,
these cases have upheld the notice provisions as being reasonable or have found
that the sale by a trustee under a deed of trust, or under a mortgage having a
power of sale, does not involve sufficient state action to afford constitutional
protections to the borrower.
CALIFORNIA DEEDS OF TRUST
Most institutional lenders in California use a form of deed of trust
that confers on the beneficiary the right both to receive all proceeds collected
under any hazard insurance policy and all awards made in connection with any
condemnation proceedings, and to apply these proceeds and awards to any debt
secured by the deed of trust, in the order specified by the beneficiary.
California law prohibits the beneficiary from applying insurance and
condemnation proceeds to the debt secured by the deed of trust unless the
beneficiary's security has been impaired by the casualty or condemnation. If the
security has been impaired, California law permits these proceeds to be applied
to the extent of the impairment. In the event improvements on the property are
damaged or destroyed by fire or other casualty, or if the property is taken by
condemnation, and the beneficiary's security is impaired, the beneficiary under
the first deed of
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trust will have the prior right to collect any insurance proceeds and any damage
award from the condemnation. Proceeds in excess of the amount of debt secured by
a first deed of trust will, in most cases, be applied to the indebtedness of a
junior deed of trust.
Another provision typically found in California deeds of trust
obligates the mortgagor to pay all taxes and assessments on the property, to
provide and maintain fire insurance on the property, and to maintain and repair
the property. Upon a failure of the mortgagor to perform any of these
obligations, the beneficiary is given the right under the deed of trust to
perform those obligations, and the mortgagor agrees to reimburse the beneficiary
for any sums expended by the beneficiary on behalf of the mortgagor. All sums
expended by the beneficiary become part of the indebtedness secured by the deed
of trust.
APPLICABILITY OF USURY LAWS
Federal law provides that state usury limitations do not apply to some
types of residential first mortgage loans. The federal law authorized any state
to reimpose interest rate limits by adopting, before April 1, 1983, a law or
constitutional provision which expressly rejects application of the federal law.
In addition, even where this federal law is not rejected, any state is
authorized by the law to adopt a provision limiting discount points or other
charges on mortgage loans covered by the law. A number of states have taken
action to reimpose interest rate limits or to limit discount points or other
charges.
The sponsor will represent that each mortgage loan was originated in
compliance with applicable state laws in effect at the time of origination,
including usury laws, in all material respects. However, the coupon rates on the
mortgage loans will be subject to applicable usury laws as in effect from time
to time.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940,
members of all branches of the military on active duty, including draftees and
reservists on active duty:
- - are entitled to have interest rates reduced and capped at 6% per annum on
obligations, including mortgage loans, incurred prior to the commencement
of active duty and for the duration of active duty,
- - may be entitled to a stay of proceedings on any kind of foreclosure or
repossession action in the case of defaults on the obligations entered into
prior to active duty for the duration of active duty and
- - may have the maturity of the obligations incurred prior to active duty
extended, the payments lowered and the payment schedule readjusted for a
period of time after the completion of active duty.
These benefits are subject to challenge by creditors and if, in the
opinion of the court, the ability of a person to comply with the obligations is
not materially impaired by active duty, the court may apply equitable
principles. If a mortgagor's obligation to repay amounts otherwise due on a
mortgage loan is relieved by the Soldiers' and Sailors' Civil Relief Act,
neither the trust, the
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master servicer, the sponsor, any credit enhancement provider nor the trustee
will be required to advance the amounts that would otherwise be due. Any loss
resulting from the Soldiers' and Sailors' Civil Relief Act may reduce the
amounts available to be paid to the securityholders. In the event that the
Soldiers' and Sailors' Civil Relief Act or similar legislation or regulations
apply to any mortgage loan which goes into default, there may be delays in
payment and losses on the securities. Any interest shortfalls, deferrals or
forgiveness of payments on the mortgage loans resulting from similar legislation
or regulations may result in delays in payments or losses to securityholders of
the series.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following discussion describes the material federal income tax
consequences to the original purchasers of the securities of the purchase,
ownership and disposition of the securities. The opinion of [counsel], special
tax counsel to the sponsor, does not purport to deal with all federal tax
considerations applicable to all categories of investors. The tax consequences
to holders subject to special rules, including insurance companies, tax-exempt
organizations, financial institutions or broker dealers, taxpayers subject to
the alternative minimum tax, and holders that will hold the securities as other
than capital assets, are not discussed. In particular, this discussion applies
only to investors that purchase securities directly from the sponsor and hold
the securities as capital assets. The discussion is based upon laws,
regulations, rulings and decisions now in effect, all of which are subject
to change. Investors may wish to consult their own tax advisors in determining
the federal, state, local and any other tax consequences to them of the
purchase, ownership and disposition of the securities. As used in this section
and the "ERISA Considerations" section, code means the Internal Revenue Code of
1986 and IRS means the Internal Revenue Service.
We will file an unqualified tax opinion for a series with the
Securities and Exchange Commission on Form 8-K prior to the sale of the
securities.
The following discussion addresses securities of five general types:
- - grantor trust securities,
- - REMIC securities,
- - debt securities,
- - partnership interests, and
- - FASIT securities.
The prospectus supplement for each series of securities will indicate
whether a REMIC or FASIT election or elections will be made for the trust and,
if a REMIC or FASIT election is to be made, will identify all regular interests
and residual interests in the REMIC or all regular interests, high-yield
interests or ownership interests in the FASIT.
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The Taxpayer Relief Act of 1997 adds provisions to the code that
require the recognition of gain upon the constructive sale of an appreciated
financial position. A constructive sale of an appreciated financial position
occurs if a taxpayer enters into transactions involving a financial instrument
that have the effect of substantially eliminating the taxpayer's risk of loss
and opportunity for gain. These provisions apply only to classes of securities
that do not have a principal balance.
GRANTOR TRUST SECURITIES
If a series of securities is being issued by a grantor trust,
[counsel], special tax counsel to the sponsor, will deliver its opinion to the
sponsor that the trust will be classified as a grantor trust and not as a
partnership or an association taxable as a corporation. Accordingly, each
beneficial owner of a grantor trust security will generally be treated as the
owner of an interest in the loans included in the grantor trust.
For purposes of the following discussion, a grantor trust security
representing an undivided equitable ownership interest in the principal of the
mortgage loans together with interest at a pass-through rate, will be referred
to as a grantor trust fractional interest security. A grantor trust security
representing ownership of all or a portion of the difference between interest
paid on the mortgage loans and interest paid on grantor trust fractional
interest securities will be referred to as a grantor trust strip security.
SPECIAL TAX ATTRIBUTES
[counsel], special tax counsel to the sponsor, will deliver its opinion
to the sponsor that (a) grantor trust fractional interest securities will
represent interests in (1) loans . . . secured by an interest in real property
within the meaning of section 7701(a)(19)(C)(v) of the code; and (2)
obligations, including any participation or certificate of beneficial ownership,
which . . . are principally secured by an interest in real property within the
meaning of section 860G(a)(3)(A) of the code; and (b) interest on grantor trust
fractional interest securities will be considered interest on obligations
secured by mortgages on real property or on interests in real property within
the meaning of section 856(c)(3)(B) of the code. In addition, the grantor trust
strip securities will be obligations, including any participation or certificate
of beneficial ownership therein . . . principally secured by an interest in real
property within the meaning of section 860G(a)(3)(A) of the code.
TAXATION OF BENEFICIAL OWNERS OF GRANTOR TRUST SECURITIES
Beneficial owners of grantor trust fractional interest securities
generally will be required to report on their federal income tax returns their
respective shares of the income from the loans, including amounts used to pay
reasonable servicing fees and other expenses but excluding amounts payable to
beneficial owners of any corresponding grantor trust strip securities, and, will
be entitled to deduct their shares of any reasonable servicing fees and other
expenses. If a beneficial owner acquires a grantor trust fractional interest
security for an amount that differs from its outstanding principal amount, the
amount includible in income on a grantor trust fractional interest security may
differ from the amount of interest distributable. Individuals holding a grantor
trust fractional interest security directly or through pass-through entities
will be
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allowed a deduction for reasonable servicing fees and expenses only to the
extent that the aggregate of the beneficial owner's miscellaneous itemized
deductions exceeds 2% of the beneficial owner's adjusted gross income. Further,
beneficial owners, other than corporations, subject to the alternative minimum
tax may not deduct miscellaneous itemized deductions in determining alternative
minimum taxable income.
Beneficial owners of grantor trust strip securities generally will be
required to treat the securities as stripped coupons under section 1286 of the
code. Accordingly, the beneficial owner will be required to treat the excess of
the total amount of payments on the security over the amount paid for the
security as original issue discount and to include the discount in income as it
accrues over the life of the security.
Grantor trust fractional interest securities may also be subject to the
coupon stripping rules if a class of grantor trust strip securities is issued as
part of the same series of securities. The consequences of the application of
the coupon stripping rules would appear to be that any discount arising upon the
purchase of the security, and perhaps all stated interest, would be classified
as original issue discount and includible in the beneficial owner's income as it
accrues, regardless of the beneficial owner's method of accounting. The coupon
stripping rules will not apply, however, if (1) the pass-through rate is no more
than 100 basis points lower than the gross rate of interest payable on the
underlying loans and (2) the difference between the outstanding principal
balance on the security and the amount paid for the security is less than 0.25%
of the principal balance times the weighted average remaining maturity of the
security. See " -- Discount and Premium."
Sales of Grantor Trust Securities
Any gain or loss recognized on the sale of a grantor trust security,
which equal to the difference between the amount realized on the sale and the
adjusted basis of the grantor trust security, will be capital gain or loss,
except to the extent of accrued and unrecognized market discount, which will be
treated as ordinary income, and in the case of banks and other financial
institutions except as provided under section 582(c) of the code. The adjusted
basis of a grantor trust security will generally equal its cost, increased by
any income reported by the seller, including original issue discount and market
discount income, and reduced, but not below zero, by any previously reported
losses, any amortized premium and by any distributions of principal.
Grantor Trust Reporting
The trustee will furnish to each beneficial owner of a grantor trust
fractional interest security with each distribution a statement detailing the
amount of the distribution allocable to principal on the underlying loans and to
interest, based on the interest rate on the security. In addition, within a
reasonable time after the end of each calendar year, based on information
provided by the servicer, the trustee will furnish to each beneficial owner
during the year the customary factual information that the servicer deems
necessary or desirable to enable beneficial owners of grantor trust securities
to prepare their tax returns and will furnish comparable information to the IRS
as and when required to do so by law.
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REMIC SECURITIES
If described in a prospectus supplement, an election will be made to
treat a trust as a REMIC under the code. Qualification as a REMIC requires
ongoing compliance with a number of conditions. If a series of securities is
being issued by a REMIC, [counsel], special tax counsel to the
sponsor, will deliver its opinion to the sponsor that, assuming compliance with
the agreements, the trust will be treated as a REMIC for federal income tax
purposes. The securities of each class will be designated as regular interests
in the REMIC trust except that a separate class will be designated as the
residual interest in the REMIC trust. The prospectus supplement for each series
of securities will state whether the securities of each class will constitute a
REMIC regular interest or a REMIC residual interest.
A REMIC trust will not be subject to federal income tax except with
respect to income from prohibited transactions and in other instances.
Generally, the total income from the loans in a REMIC trust will be taxable to
the beneficial owners of the securities of that series. See " -- Taxes on a
REMIC Trust."
The REMIC regulations issued by the Treasury Department on December 23,
1992 provide some guidance regarding the federal income tax consequences
associated with the purchase, ownership and disposition of REMIC securities.
While certain material provisions of the REMIC regulations are discussed below,
investors may wish to consult their own tax advisors regarding the possible
application of the REMIC regulations in their specific circumstances.
SPECIAL TAX ATTRIBUTES
REMIC regular interests and REMIC residual interests will be regular or
residual interests in a REMIC within the meaning of section 7701(a)(19)(C)(xi)
of the code and real estate assets within the meaning of section 856(c)(5)(A) of
the code. If at any time during a calendar year less than 95% of the assets of a
REMIC trust consist of qualified mortgages within the meaning of section
860G(a)(3) of the code then the portion of the REMIC regular interests and REMIC
residual interests that are qualifying assets under those sections during the
calendar year may be limited to the portion of the assets of the REMIC trust
that are qualified mortgages. Similarly, income on the REMIC regular interests
and REMIC residual interests will be treated as interest on obligations secured
by mortgages on real property within the meaning of section 856(c)(3)(B) of the
code, subject to the same limitation as set forth in the preceding sentence. For
purposes of applying this limitation, a REMIC trust should be treated as owning
the assets represented by the qualified mortgages. The assets of the trust will
include, in addition to the loans, payments on the loans held pending
distribution on the REMIC regular interests and REMIC residual interests and any
reinvestment income. REMIC regular interests and REMIC residual interests held
by a financial institution to which section 585, 586 or 593 of the code applies
will be treated as evidences of indebtedness for purposes of section 582(c)(1)
of the code. REMIC regular interests will also be qualified mortgages suitable
for investment by other REMICs and FASITs.
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TAXATION OF BENEFICIAL OWNERS OF REMIC REGULAR INTERESTS
Except as indicated below in this federal income tax discussion, the
REMIC regular interests will be treated for federal income tax purposes as debt
instruments issued by the REMIC trust on the date the securities are first sold
to the public and not as ownership interests in the REMIC trust or its assets.
beneficial owners of REMIC regular interests that otherwise report income under
a cash method of accounting will be required to report income with respect to
the securities under an accrual method. For additional tax consequences relating
to REMIC regular interests purchased at a discount or with premium, see "
- --Discount and Premium."
TAXATION OF BENEFICIAL OWNERS OF REMIC RESIDUAL INTERESTS
Daily Portions.
Except as indicated below, a beneficial owner of a REMIC residual
interest for a REMIC trust generally will be required to report its daily
portion of the taxable income or net loss of the REMIC trust for each day during
a calendar quarter that the beneficial owner owned the REMIC residual interest.
For this purpose, the daily portion shall be determined by allocating to each
day in the calendar quarter its ratable portion of the taxable income or net
loss of the REMIC trust for the quarter and by allocating the amount so
allocated among the residual beneficial owners, on this day, in accordance with
their percentage interests on this day. Any amount included in the gross income
or allowed as a loss of any residual beneficial owner by virtue of this
paragraph will be treated as ordinary income or loss.
The requirement that each beneficial owner of a REMIC residual interest
report its daily portion of the taxable income or net loss of the REMIC trust
will continue until there are no securities of any class outstanding, even
though the beneficial owner of the REMIC residual interest may have received
full payment of the stated interest and principal on its REMIC residual
interest.
The trustee will provide to beneficial owners of REMIC residual
interests of each series of securities (1) the information as is necessary to
enable them to prepare their federal income tax returns and (2) any reports
regarding the Securities of a series that may be required under the Code.
Taxable Income or Net Loss of a REMIC Trust.
The taxable income or net loss of a REMIC trust will be the income from
the qualified mortgages it holds and any reinvestment earnings less deductions
allowed to the REMIC trust. This taxable income or net loss for a given calendar
quarter will be determined in the same manner as for an individual having the
calendar year as the taxable year and using the accrual method of accounting,
with the following four modifications. The first modification is that a
deduction will be allowed for accruals of interest, including any original issue
discount, but without regard to the investment interest limitation in section
163(d) of the code, on the REMIC regular interests, but not the REMIC residual
interests, even though REMIC regular interests are for non-tax purposes
evidences of beneficial ownership rather than indebtedness of a REMIC trust.
Second, market discount or premium equal to the difference between the total
stated principal balances of the qualified mortgages and the basis to the REMIC
trust generally will be
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included in income, in the case of discount, or deductible, in the case of
premium, by the REMIC trust as it accrues under a constant yield method, taking
into account the prepayment assumption specified in the prospectus supplement.
The basis to a REMIC trust in the qualified mortgages is the aggregate of the
issue prices of all the REMIC regular interests and REMIC residual interests in
the REMIC trust on the settlement date. If, however, a substantial amount of a
class of REMIC regular interests or REMIC residual interests has not been sold
to the public, then the fair market value of all the REMIC regular interests or
REMIC residual interests in that class as of the date of the prospectus
supplement should be substituted for the issue price. See " --Discount and
Premium -- Original Issue Discount."
The third modification is that no item of income, gain, loss or
deduction allocable to a prohibited transaction will be taken into account.
Fourth, a REMIC trust generally may not deduct any item that would not be
allowed in calculating the taxable income of a partnership by virtue of section
703(a)(2) of the code. Finally, the limitation on miscellaneous itemized
deductions imposed on individuals by section 67 of the code will not be applied
at the REMIC trust level to any servicing and guaranty fees. In addition, under
the REMIC regulations, any expenses that are incurred in connection with the
formation of a REMIC trust and the issuance of the REMIC regular interests and
REMIC residual interests are not treated as expenses of the REMIC trust for
which a deduction is allowed. If the deductions allowed to a REMIC trust exceed
its gross income for a calendar quarter, this excess will be a net loss for the
REMIC trust for that calendar quarter. The REMIC regulations also provide that
any gain or loss to a REMIC trust from the disposition of any asset, including a
qualified mortgage or permitted investment, as defined in section 860G(a)(5) of
the code, will be treated as ordinary gain or loss. See " -- Taxes on a REMIC
Trust -- Prohibited Transactions" and " -- Pass-Through of Servicing and
Guaranty Fees to Individuals."
A beneficial owner of a REMIC residual interest may be required to
recognize taxable income without being entitled to receive a corresponding
amount of cash. This could occur, for example, if the qualified mortgages are
considered to be purchased by the REMIC trust at a discount, some or all of the
REMIC regular interests are issued at a discount, and the discount included as a
result of a prepayment on a loan that is used to pay principal on the REMIC
regular interests exceeds the REMIC trust's deduction for unaccrued original
issue discount relating to the REMIC regular interests. Taxable income may also
be greater in earlier years because interest expense deductions, expressed as a
percentage of the outstanding principal amount of the REMIC regular interests,
may increase over time as the earlier classes of REMIC regular interests are
paid, although the interest income on any given loan expressed as a percentage
of the outstanding principal amount of that loan will remain constant over time.
BASIS RULES AND DISTRIBUTIONS.
A beneficial owner of a REMIC residual interest has an initial basis in
its security equal to the amount paid for the REMIC residual interest. This
basis is increased by amounts included in the income of the beneficial owner and
decreased by distributions and by any net loss taken into account on the REMIC
residual interest. A distribution on a REMIC residual interest to a beneficial
owner is not included in gross income to the extent it does not exceed the
beneficial owner's basis in the REMIC residual interest, adjusted as described
above, and, to the extent it
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exceeds the adjusted basis of the REMIC residual interest, shall be treated as
gain from the sale of the REMIC residual interest.
A beneficial owner of a REMIC residual interest is not allowed to take
into account any net loss for any calendar quarter if the net loss exceeds the
beneficial owner's adjusted basis in its REMIC residual interest as of the close
of the calendar quarter, determined without regard to the net loss. Any loss
disallowed by reason of this limitation may be carried forward indefinitely to
future calendar quarters and, subject to the same limitation, may be used only
to offset income from the REMIC residual interest.
EXCESS INCLUSIONS.
Excess inclusions on a REMIC residual interest are subject to special
tax rules. Beneficial owner of a REMIC residual interest, the excess inclusion
for any calendar quarter is defined as the excess, if any, of the daily portions
of taxable income over the sum of the daily accruals for each day during the
quarter that the REMIC residual interest was held by the beneficial owner. The
daily accruals are determined by allocating to each day during a calendar
quarter its ratable portion of the product of the adjusted issue price of the
REMIC residual interest at the beginning of the calendar quarter and 120% of the
federal long-term rate in effect on the settlement date, based on quarterly
compounding, and properly adjusted for the length of the quarter. For this
purpose, the adjusted issue price of a REMIC residual interest as of the
beginning of any calendar quarter is equal to the issue price of the REMIC
residual interest, increased by the amount of daily accruals for all prior
quarters and decreased by any distributions made on the REMIC residual interest
before the beginning of the quarter. The issue price of a REMIC residual
interest is the initial offering price to the public, excluding bond houses and
brokers, at which a substantial number of the REMIC residual interests was sold.
The federal long-term rate is a blend of current yields on Treasury securities
having a maturity of more than nine years, computed and published monthly by the
IRS.
In general, beneficial owners of REMIC residual interests with excess
inclusion income cannot offset the income by losses from other activities. For
beneficial owners that are subject to tax only on unrelated business taxable
income, as defined in section 511 of the code, an excess inclusion of the
beneficial owner is treated as unrelated business taxable income. The REMIC
regulations indicate that if a beneficial owner of a REMIC residual interest is
a member of an affiliated group filing a consolidated income tax return, the
taxable income of the affiliated group cannot be less than the sum of the excess
inclusions attributable to all residual interests in REMICS held by members of
the affiliated group. For a discussion of the effect of excess inclusions on
foreign investors that own REMIC residual interests, see " -- Foreign
Investors."
The Treasury Department also has the authority to issue regulations
that would treat all taxable income of a REMIC trust as excess inclusions if the
REMIC residual interest does not have significant value. Although the Treasury
Department did not exercise this authority in the REMIC regulations, future
regulations may contain that rule. If that rule were adopted, it is unclear how
significant value would be determined for these purposes. If no rule is
applicable, excess inclusions should be calculated as discussed above.
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In the case of any REMIC residual interests that are held by a real
estate investment trust, the aggregate excess inclusions on REMIC residual
interests reduced, but not below zero, by the real estate investment trust
taxable income, within the meaning of section 857(b)(2) of the code, excluding
any net capital gain, will be allocated among the shareholders of the REIT in
proportion to the dividends received by the shareholders from the REIT, and any
allocated amounts will be treated as an excess inclusion on a REMIC residual
interest as if held directly by the shareholder. Similar rules will apply in the
case of regulated investment companies, common trust funds and some cooperatives
that hold a REMIC residual interest.
PASS-THROUGH OF SERVICING AND GUARANTY FEES TO INDIVIDUALS.
A beneficial owner of a REMIC residual interest who is an individual
will be required to include in income a share of any servicing and guaranty
fees. A deduction for these fees will be allowed to a beneficial owner only to
the extent that the fees, along with of the beneficial owner's other
miscellaneous itemized deductions exceed 2% of the beneficial owner's adjusted
gross income. In addition, a beneficial owner of a REMIC residual interest may
not be able to deduct any portion of the fees in computing the beneficial
owner's alternative minimum tax liability. A beneficial owner's share of the
fees will generally be determined by (1) allocating the amount of the expenses
for each calendar quarter on a pro rata basis to each day in the calendar
quarter, and (2) allocating the daily amount among the beneficial owners in
proportion to their respective holdings on this day.
TAXES ON A REMIC TRUST
Prohibited Transactions.
The code imposes a tax on a REMIC equal to 100% of the net income
derived from prohibited transactions. In general, a prohibited transaction means
the disposition of a qualified mortgage other than under specified exceptions,
the receipt of investment income from a source other than a loan or other
permitted investments, the receipt of compensation for services, or the
disposition of an asset purchased with the payments on the qualified mortgages
for temporary investment pending distribution on the regular and residual
interests.
Contributions to a REMIC after the Startup Day.
The code imposes a tax on a REMIC equal to 100% of the value of any
property contributed to the REMIC after the startup day, which is usually the
same day that settlement occurs. Exceptions are provided for cash contributions
to a REMIC (1) during the three month period beginning on the startup day, (2)
made to a qualified reserve fund by a beneficial owner of a residual interest,
(3) in the nature of a guarantee, (4) made to facilitate a qualified liquidation
or clean-up call, and (5) as otherwise permitted by treasury regulations.
Net Income from Foreclosure Property.
The Code imposes a tax on a REMIC equal to the highest corporate rate
on net income from foreclosure property. The terms foreclosure property, which
includes property acquired by deed in lieu of foreclosure, and net income from
foreclosure property are defined by reference to the rules applicable to real
estate investment trusts. Generally, foreclosure property would be
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treated as such for a period of three years, with possible extensions. Net
income from foreclosure property generally means gain from the sale of
foreclosure property that is inventory property and gross income from
foreclosure property other than qualifying rents and other qualifying income for
a real estate investment trust.
SALES OF REMIC SECURITIES
If a regular or residual interest is sold, the seller will recognize
gain or loss equal to the difference between the amount realized in the sale and
its adjusted basis, except in the case of multiple sales of REMIC residual
interests within six months, and sales of noneconomic residual interests. The
adjusted basis of a REMIC regular interest generally will equal the cost of the
security to the seller, increased by any original issue discount or market
discount included in the seller's gross income from the security and reduced by
distributions on the security previously received by the seller of amounts
included in the stated redemption price at maturity and by any premium that has
reduced the seller's interest income from the security. Except as described in
the following paragraph or under section 582(c) of the code, this gain or loss
will be capital gain or loss if the security is held as a capital asset,
generally, property held for investment, within the meaning of section 1221 of
the code.
Gain from the sale of a REMIC regular interest that might otherwise be
capital gain will be treated as ordinary income to the extent that the gain does
not exceed the excess, if any, of (1) the amount that would have been includible
in the income of the beneficial owner of a REMIC regular interest had income
accrued at a rate equal to 110% of the applicable federal rate, generally, an
average of current yields on Treasury securities, as of the date of purchase
over (2) the amount actually includible in the beneficial owner's income. In
addition, gain recognized on this sale by a beneficial owner of a REMIC regular
interest who purchased a security at a market discount would also be taxable as
ordinary income in an amount not exceeding the portion of the discount that
accrued during the period the security was held by the beneficial owner, reduced
by any market discount includible in income under the rules described under " --
Discount and Premium."
If a beneficial owner of a REMIC residual interest sells its REMIC
residual interest at a loss, the loss will not be recognized if, within six
months before or after the sale of the REMIC residual interest, the beneficial
owner purchases another residual interest in any REMIC or any interest in a
taxable mortgage pool, as defined in section 7701(i) of the Code, comparable to
a residual interest in a REMIC. This disallowed loss would be allowed upon the
sale of the other residual interest, or comparable interest, if the rule
referred to in the preceding sentence does not apply to that sale. While this
rule may be modified by Treasury regulations, no regulations have yet been
published.
Transfers of REMIC Residual Securities.
Section 860E(e) of the Code imposes a substantial tax, payable by the
transferor, or, if a transfer is through a broker, nominee, or other middleman
as the transferee's agent, payable by that agent, upon any transfer of a REMIC
residual interest to a disqualified organization and upon a pass-through entity,
including regulated investment companies, real estate investment trusts, common
trust funds, partnerships, trusts, estates, some cooperatives, and nominees,
that
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owns a REMIC residual interest if the pass-through entity has a disqualified
organization as a record-holder. A transfer includes any transfer of record or
beneficial ownership.
The term disqualified organization includes the United States, any
state or political subdivision thereof, any foreign government, any
international organization, or any agency or instrumentality of the foregoing,
other than some taxable instrumentalities, any cooperative organization
furnishing electric energy or providing telephone service to persons in rural
areas, or any organization, other than a farmers' cooperative, that is exempt
from federal income tax, unless the organization is subject to the tax on
unrelated business income. Moreover, an entity will not qualify as a REMIC
unless there are reasonable arrangements designed to ensure that (1) residual
interests in the entity are not held by disqualified organizations and (2)
information necessary for the application of the tax will be made available.
Restrictions on the transfer of a REMIC residual interest are described in the
agreements, and will be discussed more fully in the prospectus supplement
relating to the offering of any REMIC residual interest. In addition, a
pass-through entity, including a nominee, that holds a REMIC residual interest
may be subject to additional taxes if a disqualified organization is an owner of
the pass-through entity. A transferor of a REMIC residual interest, or an agent
of a transferee of a REMIC residual interest will be relieved of this tax
liability if (1) the transferee furnishes to the transferor, or the transferee's
agent, an affidavit that the transferee is not a disqualified organization, and
(2) the transferor, or the transferee's agent, does not have actual knowledge
that the affidavit is false at the time of the transfer. Similarly, this tax
will not be imposed on a pass-through entity in which a disqualified
organization is an owner if (1) the owner furnishes to the pass-through entity
an affidavit that it is not a disqualified organization, and (2) during the
period, the pass-through entity has no actual knowledge that the affidavit is
false.
The Taxpayer Relief Act of 1997 adds provisions to the Code that will
apply to an electing large partnership. If an electing large partnership holds a
residual interest, all interests in the electing large partnership are treated
as held by disqualified organizations for purposes of the tax imposed upon a
pass-through entity by section 860E(e) of the Code. An exception to this tax,
otherwise available to a pass-through entity that receives affidavits from its
owners and that does not know the affidavits are false, is not available to an
electing large partnership.
Under the REMIC regulations, a transfer of a noneconomic residual
interest to a U.S. person will be disregarded for all federal tax purposes
unless no significant purpose of the transfer is to impede the assessment or
collection of tax. A REMIC residual interest would be treated as constituting a
noneconomic residual interest unless, at the time of the transfer, (1) the
present value of the expected future distributions on the REMIC residual
interest is no less than the product of the present value of the anticipated
excess inclusions and the highest corporate rate of tax for the year in which
the transfer occurs, and (2) the transferor reasonably expects that the
transferee will receive distributions from the applicable REMIC trust in an
amount sufficient to satisfy the liability for income tax on any excess
inclusions at or after the time when the liability accrues. Anticipated excess
inclusions are the excess inclusions that are anticipated to be allocated to
each calendar quarter, or portion thereof, following the transfer of a REMIC
residual interest, determined as of the date the security is transferred and
based on events that have occurred as of that date and on the prepayment
assumption. See " -- Discount and Premium" and " -- Taxation of beneficial
owners of REMIC Residual Interests -- Excess Inclusions;" and" -- Foreign
Investors -- Grantor Trust Securities and REMIC regular interests".
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The REMIC regulations provide that a significant purpose to impede the
assessment or collection of tax exists if, at the time of the transfer, a
transferor of a REMIC residual interest has improper knowledge, which means that
the transferor, either knew, or should have known, that the transferee would be
unwilling or unable to pay taxes due on its share of the taxable income of the
REMIC trust. A transferor is presumed not to have improper knowledge if (1) the
transferor conducts, at the time of a transfer, a reasonable investigation of
the financial condition of the transferee and, as a result of the investigation,
the transferor finds that the transferee has historically paid its debts as they
come due and finds no significant evidence to indicate that the transferee will
not continue to pay its debts as they come due in the future; and (2) the
transferee makes representations to the transferor in its affidavit relating to
disqualified organizations. Transferors of a REMIC residual interest may wish to
consult with their own tax advisors for further information regarding these
transfers.
Reporting and Other Administrative Matters.
For purposes of the administrative provisions of the code, each REMIC
trust will be treated as a partnership and the beneficial owners of REMIC
residual interests will be treated as partners. The trustee will prepare, sign
and file federal income tax returns for each REMIC trust, which returns are
subject to audit by the IRS. Moreover, within a reasonable time after the end of
each calendar year, the trustee will furnish to each beneficial owner that
received a distribution during the year a statement describing the portions of
any distributions that constitute interest distributions, original issue
discount, and any other information as is required by Treasury regulations and,
for owners of REMIC residual interests, information necessary to compute the
daily portions of the taxable income or net loss of the REMIC trust for each day
during the year. The trustee may also act as the tax matters partner for each
REMIC trust, either in its capacity as a beneficial owner of a REMIC residual
interest or in a fiduciary capacity. Each beneficial owner of a REMIC residual
interest, by the acceptance of its REMIC residual interest, agrees that the
trustee will act as its fiduciary in the performance of any duties required of
it in the event that it is the tax matters partner.
Each beneficial owner of a REMIC residual interest is required to treat
items on its return consistently with the treatment on the return of the REMIC
trust, unless the beneficial owner either files a statement identifying the
inconsistency or establishes that the inconsistency resulted from incorrect
information received from the REMIC trust. The IRS may assert a deficiency
resulting from a failure to comply with the consistency requirement without
instituting an administrative proceeding at the REMIC trust level.
TERMINATION
In general, no special tax consequences will apply to a beneficial
owner of a REMIC regular interest upon the termination of a REMIC trust by
virtue of the final payment or liquidation of the last loan remaining in the
trust estate. If a beneficial owner of a REMIC residual interest's adjusted
basis in its REMIC residual interest at the time the termination occurs exceeds
the amount of cash distributed to the beneficial owner in liquidation of its
interest, although the matter is not entirely free from doubt, it would appear
that the beneficial owner of the REMIC residual interest is entitled to a loss
equal to the amount of the excess.
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DEBT SECURITIES
For each series of debt securities, [counsel], special tax counsel to
the sponsor, will deliver its opinion to the sponsor that the securities will be
classified as debt of the sponsor secured by the mortgage loans. Consequently,
debt securities will not be treated as ownership interests in the loans or the
trust. Beneficial owners will be required to report income received on debt
securities in accordance with their normal method of accounting. It is the
opinion of the special tax counsel to the sponsor that a trust issuing debt
securities will not be treated as an association separately taxable as a
corporation, a publicly traded partnership or a taxable mortgage pool. For
additional tax consequences relating to debt securities purchased at a discount
or with premium, see " -- Discount and Premium."
SPECIAL TAX ATTRIBUTES
As described above, grantor trust securities will possess special tax
attributes by virtue of their being ownership interests in the mortgage loans.
Similarly, REMIC regular and residual interests will possess similar attributes
by virtue of the REMIC provisions of the Code. In general, debt securities will
not possess these special tax attributes. Investors to whom such attributes are
important may wish to consult their own tax advisors regarding investment in
debt securities.
SALE OR EXCHANGE OF DEBT SECURITIES
If a beneficial owner of a debt security sells or exchanges the
security, the beneficial owner will recognize gain or loss equal to the
difference, if any, between the amount received and the beneficial owner's
adjusted basis in the security. The adjusted basis in the security generally
will equal its initial cost, increased by any original issue discount or market
discount previously included in the seller's gross income from the security and
reduced by the payments previously received on the security, other than payments
of qualified stated interest, and by any amortized premium.
In general, except for certain financial institutions subject to
section 582(c) of the code, any gain or loss on the sale or exchange of a debt
security recognized by an investor who holds the security as a capital asset
within the meaning of section 1221 of the code, will be capital gain or loss and
will be long-term or short-term depending on whether the security has been held
for more than one year. See " --Discount and Premium -- Market Discount."
DEBT SECURITIES REPORTING
The trustee will furnish to each beneficial owner of a debt security
with each distribution a statement setting forth the amount of the distribution
allocable to principal on the underlying loans and to interest at the interest
rate. In addition, within a reasonable time after the end of each calendar year,
based on information provided by the servicer, the trustee will furnish to each
beneficial owner during the year the customary factual information that the
master servicer deems necessary or desirable to enable beneficial owners of debt
securities to prepare their tax returns and will furnish comparable information
to the IRS as and when required to do so by law.
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PARTNERSHIP INTERESTS
For each series of partnership interests, [counsel], special
tax counsel to the sponsor, will deliver its opinion to the sponsor that the
trust will be treated as a partnership and not an association taxable as a
corporation for federal income tax purposes. Accordingly, each beneficial owner
a partnership interest will generally be treated as the owner of an interest in
the loans.
SPECIAL TAX ATTRIBUTES
As described above, REMIC securities will possess special tax
attributes by virtue of the REMIC provisions of the Code. In general,
partnership interests will not possess these special tax attributes. Investors
to whom the special attributes are important may wish to consult their own tax
advisors regarding investment in partnership interests.
TAXATION OF BENEFICIAL OWNERS OF PARTNERSHIP INTERESTS
If the trust is treated as a partnership for federal income tax
purposes, the trust will not be subject to federal income tax. Instead, each
beneficial owner of a partnership interest will be required to separately take
into account its allocable share of income, gains, losses, deductions, credits
and other tax items of the trust. These partnership allocations are made in
accordance with the code, Treasury regulations and the partnership agreement.
The trust's assets will be the assets of the partnership. The trust's
income will consist primarily of interest and finance charges earned on the
underlying loans. The trust's deductions will consist primarily of interest
accruing on any indebtedness issued by the trust, servicing and other fees, and
losses or deductions upon collection or disposition of the trust's assets.
In some instances, the trust could have an obligation to make payments
of withholding tax on behalf of a beneficial owner of a partnership interest.
See " -- Backup Withholding" and " -- Foreign Investors" below.
Substantially all of the taxable income allocated to a beneficial owner
of a partnership interest that is a pension, profit sharing or employee benefit
plan or other tax-exempt entity, including an individual retirement account,
will constitute unrelated business taxable income generally taxable to a holder
under the code.
Under Section 708 of the code, the trust will be deemed to terminate
for federal income tax purposes if 50% or more of the capital and profits
interests in the trust are sold or exchanged within a 12-month period. Under
Treasury regulations issued on May 9, 1997 if this termination occurs, the trust
is deemed to contribute all of its assets and liabilities to a newly formed
partnership in exchange for a partnership interest. Immediately thereafter, the
terminated partnership distributes interests in the new partnership to the
purchasing partner and remaining partners in proportion to their interests in
liquidation of the terminated partnership.
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Sale or Exchange of Partnership Interests
In most cases, capital gain or loss will be recognized on a sale or
exchange of partnership interests in an amount equal to the difference between
the amount realized and the seller's tax basis in the partnership interests
sold. A beneficial owner's tax basis in a partnership interest will generally
equal the beneficial owner's cost increased by the beneficial owner's share of
trust income and decreased by any distributions received on this partnership
interest. In addition, both the tax basis in the partnership interest and the
amount realized on a sale of a partnership interest would take into account the
beneficial owner's share of any indebtedness of the trust. A beneficial owner
acquiring partnership interests at different prices may be required to maintain
a single aggregate adjusted tax basis in the partnership interest, and upon sale
or other disposition of some of the partnership interests, allocate a portion of
the aggregate tax basis to the partnership interests sold, rather than
maintaining a separate tax basis in each partnership interest for purposes of
computing gain or loss on a sale of that partnership interest.
Any gain on the sale of a partnership interest attributable to the
beneficial owner's share of unrecognized accrued market discount on the assets
of the trust would generally be treated as ordinary income to the holder and
would give rise to special tax reporting requirements. If a beneficial owner of
a partnership interest is required to recognize an aggregate amount of income
over the life of the partnership interest that exceeds the aggregate cash
distributions with respect thereto, this excess will generally give rise to a
capital loss upon the retirement of the partnership interest. If a beneficial
owner sells its partnership interest at a profit or loss, the transferee will
have a higher or lower basis in the partnership interests than the transferor
had. The tax basis of the trust's assets will not be adjusted to reflect that
higher or lower basis unless the trust files an election under Section 754 of
the code.
Partnership Reporting
The trustee is required to (1) keep complete and accurate books of the
trust, (2) file IRS form 1065, a partnership information return, with the IRS
for each taxable year of the trust and (3) report each beneficial owner's
allocable share of items of trust income and expense to beneficial owners and
the IRS on Schedule K-1. The trust will provide the Schedule K-1 information to
nominees that fail to provide the trust with the information statement described
in the next paragraph and the nominees will be required to forward the
information to the beneficial owners of the partnership interests. Generally,
beneficial owners of a partnership interest must file tax returns that are
consistent with the information return filed by the trust or be subject to
penalties unless the beneficial owner of a partnership interest notifies the IRS
of all inconsistencies.
Under Section 6031 of the code, any person that holds partnership
interests as a nominee at any time during a calendar year is required to furnish
the trust with a statement containing information on the nominee, the beneficial
owners and the partnership interests so held. This information includes (1) the
name, address and taxpayer identification number of the nominee and (2) as to
each beneficial owner (x) the name, address and identification number of the
person, (y) whether the person is a United States person, a tax-exempt entity or
a foreign government, an international organization, or any wholly owned agency
or instrumentality of either of the foregoing, and (z) information on
partnership interests that were held, bought or
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sold on behalf of the person throughout the year. In addition, brokers and
financial institutions that hold partnership interests through a nominee are
required to furnish directly to the trust information as to themselves and their
ownership of partnership interests. A clearing agency registered under Section
17A of the Securities Exchange Act is not required to furnish any information
statement to the trust. Nominees, brokers and financial institutions that fail
to provide the trust with the information described above may be subject to
penalties.
The code provides for administrative examination of a partnership as if
the partnership were a separate and distinct taxpayer. Generally, the statute of
limitations for partnership items does not expire before three years after the
date the partnership information return is filed. Any adverse determination
following an audit of the return of the trust by the appropriate taxing
authorities could result in an adjustment of the returns of the beneficial owner
of a partnership interests, and, under some circumstances, a beneficial owner of
a partnership interest may be precluded from separately litigating a proposed
adjustment to the items of the trust. An adjustment could also result in an
audit of the beneficial owner of a partnership interest's returns and
adjustments of items not connected with the trust.
FASIT SECURITIES
If described in a prospectus supplement, an election will be made to
treat the trust as a FASIT within the meaning of Code Section 860L(a).
Qualification as a FASIT requires ongoing compliance with a number conditions.
If a FASIT election is made, [counsel], special tax counsel to the sponsor, will
deliver its opinion to the sponsor that, assuming compliance with the
agreements, the trust will be treated as a FASIT for federal income tax
purposes. It is the opinion of the special tax counsel to the sponsor that a
trust issuing FASIT securities will not be treated as an association separately
taxable as a corporation, a publicly traded partnership or a taxable mortgage
pool. The securities of each class will be designated as regular interests or
high-yield regular interests in the FASIT trust except that one separate class
will be designated as the ownership interest in the FASIT trust. The prospectus
supplement for each series of securities will state whether securities of each
class will be a regular interest, a high-yield regular interest or an ownership
interest.
Special Tax Attributes
FASIT securities held by a real estate investment trust will constitute
real estate assets within the meaning of code sections 856(c)(5)(A) and
856(c)(6) and interest on the FASIT regular securities will be considered
interest on obligations secured by mortgages on real property or on interests in
real property within the meaning of code section 856(c)(3)(B) in the same
proportion that, for both purposes, the assets of the FASIT trust and the income
on those assets would be so treated. FASIT regular securities held by a domestic
building and loan association will be treated as regular interest[s] in a FASIT
under code section 7701(a)(19)(C)(xi), but only in the proportion that the FASIT
trust holds loans . . . secured by an interest in real property which is . . .
residential real property within the meaning of code section 7701(a)(19)(C)(v).
If at all times 95% or more of the assets of the FASIT trust or the income
qualify for the foregoing treatments, the FASIT regular securities will qualify
for the corresponding status in their entirety. For purposes of code section
856(c)(5)(A), payments of principal and interest on a loan that are reinvested
pending distribution to holders of FASIT regular securities should qualify for
this treatment. FASIT regular securities held by a regulated investment company
will not constitute government securities within the meaning of Code
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Section 851(b)(4)(A)(i). FASIT regular securities held by some financial
institutions will constitute an evidence of indebtedness within the meaning of
code section 582(c)(1).
Taxation of Beneficial Owners of FASIT Regular Interests
A FASIT trust will not be subject to federal income tax except with
respect to income from prohibited transactions and in other instances. The FASIT
regular interests generally will be treated for federal income tax purposes as
newly-originated debt instruments. In general, interest, original issue discount
and market discount on a FASIT regular interest will be treated as ordinary
income to the beneficial owner, and principal payments, other than principal
payments that do not exceed accrued market discount, on an FASIT regular
interest will be treated as a return of capital to the extent of the beneficial
owner's basis. Beneficial owners must use the accrual method of accounting on
their FASIT regular interests, regardless of the method of accounting otherwise
used by the beneficial owners. See " --Discount and Premium" below.
In order for the FASIT trust to qualify as a FASIT, there must be
ongoing compliance with the requirements set forth in the code. The FASIT must
fulfill an asset test, which requires that substantially all the assets of the
FASIT, after an initial three month period must consist of cash or cash
equivalents, debt instruments, other than debt instruments issued by the owner
of the FASIT or a related party, and hedges, and contracts to acquire the same,
foreclosure property and regular interests in another FASIT or in a REMIC. Based
on identical statutory language applicable to REMICs, it appears that the
substantially all requirement should be met if at all times the aggregate
adjusted basis of the nonqualified assets is less than one percent of the
aggregate adjusted basis of all the FASIT's assets. The FASIT provisions of the
code also require the FASIT ownership interest and some of the high-yield
regular interests to be held only by fully taxable domestic corporations.
In addition to the foregoing requirements, the various interests in a
FASIT also must meet a number of requirements. All of the interests in a FASIT
must be either one or more classes of regular interests or a single class of
ownership interest. A regular interest is an interest in a FASIT that is issued
on or after the startup day with fixed terms, is designated as a regular
interest, and:
(1) unconditionally entitles the holder to receive a specified
principal amount, or other similar amount,
(2) provides that interest payments, or other similar amounts,
if any, at or before maturity either are payable based on a fixed rate
or a qualified variable rate,
(3) has a stated maturity of not longer than 30 years,
(4) has an issue price not greater than 125% of its stated
principal amount, and
(5) has a yield to maturity not greater than five percentage
points higher than the applicable federal rate.
A regular interest that is described in the preceding sentence except
that if fails to meet one or more of requirements (1), (2), (3), (4) or (5) is a
high-yield regular interest. A high-yield
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regular interest that fails requirement (2) must consist of a specified,
nonvarying portion of the interest payments on the permitted assets, by
reference to the REMIC rules. An ownership interest is an interest in a FASIT
other than a regular interest that is issued on the startup day, is designated
an ownership interest and is held by a single, fully-taxable, domestic
corporation. An interest in a FASIT may be treated as a regular interest even if
payments of principal on that interest are subordinated to payments on other
regular interests or the ownership interest in the FASIT, and are dependent on
the absence of defaults or delinquencies on permitted assets lower than
reasonably expected returns on permitted assets, unanticipated expenses incurred
by the FASIT or prepayment interest shortfalls.
If an entity fails to comply with one or more of the ongoing
requirements of the Code for status as a FASIT during any taxable year, the Code
provides that the entity or applicable potion thereof will not be treated as a
FASIT thereafter. In this event, any entity that holds mortgage loans and is the
obligor on debt obligations with two or more maturities, may be treated as a
separate association taxable as a corporation, and the FASIT regular securities
may be treated as equity interests. The legislative history to the FASIT
provisions indicates, however, that an entity can continue to be a FASIT if loss
of its status was inadvertent, it takes prompt steps to requalify and other
requirements mandated Treasury regulations are met. Loss of FASIT status results
in retirement of all regular interests and their reissuance. If the resulting
instruments would be treated as equity under general tax principles,
cancellation of debt income may result.
DISCOUNT AND PREMIUM
A security purchased for an amount other than its outstanding principal
amount will be subject to the rules governing original issue discount, market
discount or premium. In addition, all grantor trust strip securities and grantor
trust fractional interest securities will be treated as having original issue
discount by virtue of the coupon stripping rules in section 1286 of the code. In
very general terms, (1) original issue discount is treated as a form of interest
and must be included in a beneficial owner's income as it accrues using a
constant yield method; (2) market discount is treated as ordinary income and
must be included in a beneficial owner's income as principal payments are made
on the security or upon a sale of a security; and (3) if a beneficial owner
elects, premium may be amortized over the life of the security and offset
against inclusions of interest income. These tax consequences are discussed in
greater detail below.
Original Issue Discount
In general, a security will be considered to be issued with original
issue discount equal to the excess, if any, of its stated redemption price at
maturity over its issue price The issue price of a security is the initial
offering price to the public, excluding bond houses and brokers, at which a
substantial number of the securities was sold. The issue price also includes any
accrued interest attributable to the period between the beginning of the first
remittance period and the settlement date. The stated redemption price at
maturity of a security that has a notional principal amount or receives
principal only or that is or may be an accrual security is equal to the sum of
all distributions to be made under the security. The stated redemption price at
maturity of any other security is its stated principal amount, plus an amount
equal to the excess, if any, of the interest payable on the first payment date
over the interest that accrues for the period from
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the settlement date to the first payment date. The trustee will supply, required
information the original issue discount accruing on the securities.
Original issue discount will be treated as zero if the discount is less
than 0.25% of the stated redemption price at maturity multiplied by its weighted
average life. The weighted average life of a security is apparently computed for
this purpose as the sum, for all distributions included in the stated redemption
price at maturity of the amounts determined by multiplying (1) the number of
complete years, rounding down for partial years, from the settlement date until
the date each distribution is expected to be made under the assumption that the
mortgage loans prepay at the rate specified in the prospectus supplement by (2)
a fraction, the numerator of which is the amount of the distribution and the
denominator of which is the security's stated redemption price at maturity. If
original issue discount is treated as zero under this rule, the actual amount of
original issue discount must be allocated to the principal distributions on the
security and, when each the distribution is received, gain equal to the discount
allocated to the distribution will be recognized.
Section 1272(a)(6) of the code contains special original issue discount
rules directly applicable to REMIC securities and debt securities. The Taxpayer
Relief Act of 1997 extends application of section 1272(a)(6) to the grantor
trust securities for tax years beginning after August 5, 1997. Under these
rules, described in greater detail below, (1) the amount and rate of accrual of
original issue discount on each series of securities will be based on the
prepayment assumption, and in the case of a security having a variable rate of
interest, an assumption that the value of the index upon which the variable rate
is based remains equal to the value of that rate on the settlement date, and (2)
adjustments will be made in the amount of discount accruing in each taxable year
in which the actual prepayment rate differs from the prepayment assumption.
Section 1272(a)(6)(B)(iii) of the code requires that the prepayment
assumption used to calculate original issue discount be determined in the manner
prescribed in Treasury regulations. To date, no regulations have been
promulgated. The legislative history of this code provision indicates that the
assumed prepayment rate must be the rate used by the parties in pricing the
particular transaction. The sponsor anticipates that the prepayment assumption
for each series of securities will be consistent with this standard. The sponsor
makes no representation, however, that the mortgage loans for a given series
will prepay at the rate reflected in the prepayment assumption for that series
or at any other rate. We suggest that each investor make its own decision as to
the appropriate prepayment assumption to be used in deciding whether or not to
purchase any of the securities.
Each securityholder must include in gross income the sum of the daily
portions of original issue discount on its security for each day during its
taxable year it held the security. For this purpose, in the case of an original
beneficial owner, the daily portions of original issue discount will be
determined as follows. A calculation will first be made of the portion of the
original issue discount that accrued during each accrual period. The trustee
will supply, at the time and in the manner required by the IRS, to
securityholders, brokers and middlemen information with respect to the original
issue discount accruing on the securities. The trustee will report original
issue discount based on accrual periods of one month, each beginning on a
payment date, or, in the case of the first period, the settlement date, and
ending on the day before the next payment date.
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Under section 1272(a)(6) of the code, the portion of original issue
discount treated as accruing for any accrual period will equal the excess, if
any, of (1) the sum of the present values of all the distributions remaining to
be made on the security, if any, as of the end of the accrual period and the
distribution made on the security during the accrual period of amounts included
in the stated redemption price at maturity, over (2) the adjusted issue price of
the security at the beginning of the accrual period. The present value of the
remaining distributions referred to in the preceding sentence will be calculated
based on:
(1) the yield to maturity of the security, calculated as of
the settlement date, giving effect to the prepayment assumption,
(2) events, including actual prepayments, that have occurred
prior to the end of the accrual period,
(3) the prepayment assumption, and
(4) in the case of a security calling for a variable rate of
interest, an assumption that the value of the index upon which the
variable rate is based remains the same as its value on the settlement
date over the entire life of the security.
The adjusted issue price of a security at any time will equal the issue
price of the security, increased by the aggregate amount of previously accrued
original issue discount on the security, and reduced by the amount of any
distributions made on the security as of that time of amounts included in the
stated redemption price at maturity. The original issue discount accruing during
any accrual period will then be allocated ratably to each day during the period
to determine the daily portion of original issue discount.
In the case of grantor trust strip securities and some REMIC
securities, the calculation described in the preceding paragraph may produce a
negative amount of original issue discount for one or more accrual periods. No
definitive guidance has been issued regarding the treatment of the negative
amounts. The legislative history to section 1272(a)(6) indicates that the
negative amounts may be used to offset subsequent positive accruals but may not
offset prior accruals and may not be allowed as a deduction item in a taxable
year in which negative accruals exceed positive accruals. beneficial owners of
the securities may wish to consult their own tax advisors concerning the
treatment of the negative accruals.
A subsequent purchaser of a security that purchases the security at a
cost less than its remaining stated redemption price at maturity also will be
required to include in gross income for each day it holds the security, the
daily portion of original issue discount on the security, but reduced, if the
cost of the security to the purchaser exceeds its adjusted issue price, by an
amount equal to the product of the daily portion and a constant fraction, the
numerator of which is the excess and the denominator of which is the sum of the
daily portions of original issue discount on the security for all days on or
after the day of purchase.
Market Discount
A beneficial owner that purchases a security at a market discount, that
is, at a purchase price less than the remaining stated redemption price at
maturity of the security, or, in the case of
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a security with original issue discount, its adjusted issue price, will be
required to allocate each principal distribution first to accrued market
discount on the security, and recognize ordinary income to the extent the
distribution does not exceed the aggregate amount of accrued market discount on
the security not previously included in income. If securities have unaccrued
original issue discount, the market discount must be included in income in
addition to any original issue discount. A beneficial owner that incurs or
continues indebtedness to acquire a security at a market discount may also be
required to defer the deduction of all or a portion of the interest on the
indebtedness until the corresponding amount of market discount is included in
income. In general terms, market discount on a security may be treated as
accruing either (1) under a constant yield method or (2) in proportion to
remaining accruals of original issue discount, if any, or if none, in proportion
to remaining distributions of interest on the security, in any case taking into
account the prepayment assumption. The trustee will make available, as required
by the IRS, to beneficial owners of securities information necessary to compute
the accrual of market discount.
Market discount on a security will be considered to be zero if the
discount is less than 0.25% of the remaining stated redemption price at maturity
of the security multiplied by its weighted average remaining life. Weighted
average remaining life presumably would be calculated in a manner similar to
weighted average life, taking into account payments, including prepayments,
prior to the date of acquisition of the security by the subsequent purchaser. If
market discount on a security is treated as zero under this rule, the actual
amount of market discount must be allocated to the remaining principal
distributions on the security and, when each distribution is received, gain
equal to the discount allocated to the distribution will be recognized.
Securities Purchased at a Premium
A purchaser of a security that purchases the security at a cost greater
than its remaining stated redemption price at maturity will be considered to
have purchased the security at a premium. A purchaser need not include in income
any remaining original issue discount and may elect, under section 171(c)(2) of
the code, to treat the premium as amortizable bond premium. If a beneficial
owner makes this election, the amount of any interest payment that must be
included in the beneficial owner's income for each period ending on a payment
date will be reduced by the portion of the premium allocable to the period based
on the security's yield to maturity. The legislative history of the Tax Reform
Act of 1986 states that the premium amortization should be made under principles
analogous to those governing the accrual of market discount. If the election is
made by the beneficial owner, the election will also apply to all fully taxable
bonds, the interest on which is not excludible from gross income, held by the
beneficial owner at the beginning of the first taxable year to which the
election applies and to all the fully taxable bonds thereafter acquired by it,
and is irrevocable without the consent of the IRS. If this election is not made,
a beneficial owner must include the full amount of each interest payment in
income as it accrues, and the premium must be allocated to the principal
distributions on the security and, when each distribution is received, a loss
equal to the premium allocated to the distribution will be recognized. Any tax
benefit from the premium not previously recognized will be taken into account in
computing gain or loss upon the sale or disposition of the security.
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Some securities may provide for only nominal distributions of principal
in comparison to the distributions of interest. It is possible that the IRS or
the Treasury Department may issue guidance excluding the securities from the
rules generally applicable to debt instruments issued at a premium. In
particular, it is possible that this security will be treated as having original
issue discount equal to the excess of the total payments to be received thereon
over its issue price. In this case, section 1272(a)(6) of the code would govern
the accrual of original issue discount, but a beneficial owner would recognize
substantially the same income in any given period as would be recognized if an
election were made under section 171(c)(2) of the code. Unless and until the
Treasury Department or the IRS publishes specific guidance relating to the tax
treatment of the securities, the trustee intends to furnish tax information to
beneficial owners of the securities in accordance with the rules described in
the preceding paragraph.
Special Election
For any security acquired on or after April 4, 1994, a beneficial owner
may elect to include in gross income all interest that accrues on the security
by using a constant yield method. For purposes of the election, the term
interest includes stated interest, acquisition discount, original issue
discount, de minimis original issue discount, market discount, de minimis market
discount and unstated interest as adjusted by any amortizable bond premium or
acquisition premium. A beneficial owner may wish to consult its own tax advisor
regarding the time and manner of making and the scope of the election and the
implementation of the constant yield method.
BACKUP WITHHOLDING
Distributions of interest and principal, as well as distributions of
proceeds from the sale of securities, may be subject to the backup withholding
tax under section 3406 of the code at a rate of 31% if recipients of the
distributions fail to furnish to the payor required information, including their
taxpayer identification numbers, or otherwise fail to establish an exemption
from the tax. Any amounts deducted and withheld from a distribution to a
recipient would be allowed as a credit against the recipient's federal income
tax. Furthermore, penalties may be imposed by the IRS on a recipient of
distributions that is required to supply information but that does not do so in
the proper manner.
The IRS recently issued final withholding regulations, which change a
number of the rules relating to the presumptions currently available relating to
information reporting and backup withholding. The withholding regulations would
provide alternative methods of satisfying the beneficial ownership certification
requirement. The withholding regulations are effective January 1, 2001, although
valid withholding certificates that are held on December 31, 2000 remain valid
until the earlier of December 31, 2001 or the date of expiration of the
certificate under the rules as currently in effect.
FOREIGN INVESTORS
The withholding regulations would require, in the case of securities
held by a foreign partnership, that the certification described above be
provided by the partners rather than by the foreign partnership and the
partnership provide required information, including a United States
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taxpayer identification number. A look-through rule would apply in the case of
tiered partnerships. Non-U.S. persons may wish to consult their own tax advisors
regarding the application to them of the withholding regulations.
Grantor Trust Securities and REMIC Regular Interests
Distributions made on a grantor trust security or a REMIC regular
interest to, or on behalf of, a beneficial owner that is not a U.S. person
generally will be exempt from U.S. federal income and withholding taxes. A U.S.
person means a citizen or resident of the United States, a corporation,
partnership or other entity created or organized in or under the laws of the
United States or any political subdivision thereof, an estate that is subject to
U.S. federal income tax regardless of the source of its income, or a trust if a
court within the United States can exercise primary supervision over its
administration and at least one United States fiduciary has the authority to
control all substantial decisions of the trust. This exemption is applicable if
- - the beneficial owner is not subject to U.S. tax as a result of a connection
to the United States other than ownership of the security,
- - the beneficial owner signs a statement under penalties of perjury that
certifies that the beneficial owner is not a U.S. person, and provides the
name and address of the beneficial owner, and
- - the last U.S. person in the chain of payment to the beneficial owner
receives the statement from the beneficial owner or a financial institution
holding on its behalf and does not have actual knowledge that the statement
is false.
The IRS might take the position that this exemption does not apply to a
beneficial owner that also owns 10% or more of the REMIC residual interests of
any REMIC trust, or to a beneficial owner that is a controlled foreign
corporation described in section 881(c)(3)(C) of the code.
REMIC Residual Securities
Amounts distributed to a beneficial owner of a REMIC residual interest
that is a not a U.S. person generally will be treated as interest for purposes
of applying the 30%, or lower treaty rate, withholding tax on income that is not
effectively connected with a U.S. trade or business. Temporary Treasury
Regulations clarify that amounts not constituting excess inclusions that are
distributed on a REMIC residual interest to a beneficial owner that is not a
U.S. person generally will be exempt from U.S. federal income and withholding
tax, subject to the same conditions applicable to distributions on grantor trust
securities and REMIC regular interests, as described above, but only to the
extent that the mortgage loans underlying the REMIC trust that issued the REMIC
residual interest were issued after July 18, 1984. REMIC income that constitutes
an excess inclusion is not entitled to any exemption from the withholding tax or
a reduced treaty rate for withholding. See " -- REMIC Securities -- Taxation of
beneficial owners of REMIC Residual Securities -- Excess Inclusions."
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Partnership Interests
A trust may be considered to be engaged in a trade or business in the
United States for purposes of non-U.S. persons subject to federal withholding
taxes. If the trust is considered to be engaged in a trade or business in the
United States for these purposes and the trust is treated as a partnership, the
income of the trust distributable to a non-U.S. person would be subject to
federal withholding tax. Also, in these cases, a non-U.S. beneficial owner of a
partnership interest that is a corporation may be subject to the branch profits
tax. If the trust is notified that a beneficial owner of a partnership interest
is a foreign person, the trust may withhold as if it were engaged in a trade or
business in the United States in order to protect the trust from possible
adverse consequences of a failure to withhold. A foreign holder generally would
be entitled to file with the IRS a claim for refund for withheld taxes, taking
the position that no taxes were due because the trust was not in a U.S. trade or
business.
FASIT Regular Interests
High-yield FASIT regular interests may not be sold to or beneficially
owned by non-U.S. persons. Any purported transfer will be null and void and,
upon the trustee's discovery of any purported transfer in violation of this
requirement, the last preceding owner of the high-yield FASIT regular interests
will be restored to ownership. The last preceding owner will, in any event, be
taxable on all income on the high-yield FASIT regular securities for federal
income tax purposes. The agreements will provide that, as a condition to
transfer of a high-yield FASIT regular security, the proposed transferee must
furnish an affidavit as to its status as a U.S. person and otherwise as a
permitted transferee.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences, we suggest that
potential investors consider the state and local income tax consequences of the
acquisition, ownership, and disposition of the securities. State and local
income tax law may differ substantially from the corresponding federal law, and
this discussion does not purport to describe any aspect of the income tax laws
of any state or locality. Therefore, potential investors may wish to consult
their own tax advisors the various state and local tax consequences of an
investment in the securities.
The federal income tax discussions are included for general information
only and may not be applicable depending upon an investor's particular tax
situation. Prospective purchasers may wish to consult their tax advisers the tax
consequences to them of the purchase, ownership and disposition of the
securities, including the tax consequences under state, local, foreign and other
tax laws and the possible effects of changes in federal or other tax laws.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, commonly referred
to as ERISA and the code prohibit a pension, profit sharing or other employee
benefit plan and some individual retirement arrangements from engaging in a
number of transactions involving plan
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assets with persons that are parties in interest or disqualified persons with
respect to the plan, unless a statutory or administrative exemption applies to
the transaction. ERISA and the code also prohibit some actions involving
conflicts of interest by persons who are fiduciaries of plans or arrangements. A
violation of these rules may generate excise tax and other liabilities under
ERISA and the code for these persons. In addition, investments by plans are
subject to ERISA's general fiduciary requirements, including the requirement of
investment prudence and diversification and the requirement that a plan's
investments be made in accordance with the documents governing the plan.
Employee benefit plans that are governmental plans and church plans are not
subject to ERISA or these sections of the code. Accordingly, assets of those
plans may be invested in securities without regard to the ERISA considerations,
subject to the provisions of other applicable federal, state and local law. Any
of these types of plans which are qualified and exempt from taxation under
section 401(a) and 501(a) of the code, however, are subject to the prohibited
transaction rules set forth in Section 503 of the code.
Some of the transactions involving a trust might constitute prohibited
transactions under ERISA and the code for a plan, including an individual
retirement arrangement, that purchased securities if the assets of the trust
were deemed to be assets of the plan. Under a regulation issued by the United
States Department of Labor, the assets of the trust would be treated as assets
of a plan for the purposes of ERISA and the code only if the plan acquired an
equity interest in the trust and none of the exceptions contained in the
regulation were applicable. An equity interest is defined under the regulation
as an interest other than an instrument which is treated as indebtedness under
applicable local law and which has no substantial equity features. In addition,
the United States Supreme Court has ruled that assets held in an insurance
company's general account may be deemed to be plan assets for ERISA purposes
under certain circumstances. Therefore, in the absence of an exemption, the
purchase, sale or holding of a security by a plan, including some individual
retirement arrangements, subject to ERISA or the code might result in prohibited
transactions and the imposition of excise taxes and civil penalties.
CERTIFICATES
The Department of Labor has issued to various underwriters individual
prohibited transaction exemptions, which generally exempt from the application
of the prohibited transaction provisions of Section 406(a), Section 406(b)(1),
Section 406(b)(2) and Section 407(a) of ERISA and the excise taxes imposed
pursuant to Sections 4975(a) and (b) of the code, a number of transactions
concerning the initial purchase, the holding and the subsequent resale by plans
of asset-backed securities meet the conditions and requirements of these
underwriter exemptions. These underwriter exemptions will only be available for
securities that are certificates.
Among the conditions that must be satisfied in order for these
underwriter exemptions to apply to offered certificates are the following:
- - the acquisition of the certificates by a plan is on terms, including the
price for the certificates, that are at least as favorable to the plan as
they would be in an arm's-length transaction with an unrelated party;
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- - the rights and interests evidenced by the certificates acquired by the plan
are not subordinated to the rights and interests evidenced by other
certificates of the trust;
- - the certificates acquired by the plan have received a rating at the time of
the acquisition that is one of the three highest generic rating categories
from Standard & Poor's, Moody's Investors Service, Duff & Phelps Credit
Rating Co. or Fitch IBCA, Inc.;
- - the trustee is not an affiliate of any other member of the restricted group
defined below;
- - the sum of all payments made to and retained by the underwriters in
connection with the distribution of the certificates represents not more
than reasonable compensation for underwriting the certificates; the sum of
all payments made to and retained by the originators and the sponsor
pursuant to the assignment of the obligations to the trust estate
represents not more than the fair market value of these obligations; the
sum of all payments made to and retained by any servicer represents not
more than reasonable compensation for the person's services under the
agreements and reimbursement of the person's reasonable expenses in
connection therewith;
- - the plan investing in the certificates is an accredited investor as defined
in Rule 501(a)(1) of Regulation D of the Commission under the Securities
Act; and
- - if all of the obligations used to fund the trust have not been transferred
to the trust on the closing date, additional obligations of the types
specified in the prospectus supplement or the agreements having an
aggregate value equal to no more than 25% of the total principal amount of
the certificates being offered by the trust may be transferred to the
trust, in exchange for amounts credited to the account funding the
additional obligations, within a funding period of no longer than 90 days
or 3 months following the closing date.
The trust must also meet the following requirements:
- - the corpus of the trust estate must consist solely of assets of the type
that have been included in other investment pools;
- - certificates in the other investment pools must have been rated in one of
the three highest rating categories of a rating agency for at least one
year prior to the plan's acquisition of certificates; and
- - certificates evidencing interests in the other investment pools must have
been purchased by investors other than plans for at least one year prior to
the plan's acquisition of certificates.
Moreover, these underwriter exemptions provide relief from some of the
self-dealing/conflict of interest prohibited transactions that may occur when
the plan fiduciary causes a plan to acquire certificates in a trust in which the
fiduciary, or its affiliate, is an obligor on the receivables held in the trust;
if, among other requirements:
- - in the case of an acquisition in connection with the initial issuance of
certificates, at least fifty percent of each class of certificates in which
plans have invested is acquired by persons
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independent of the restricted group and at least fifty percent of the
aggregate interest in the trust is acquired by persons independent of the
restricted group;
- - the fiduciary, or its affiliate, is an obligor under five percent or less
of the fair market value of the obligations contained in the trust;
- - the plan's investment in certificates of any class does not exceed
twenty-five percent of all of the certificates of that class outstanding at
the time of the acquisition;
- - immediately after the acquisition, no more than twenty-five percent of the
assets of the plan for which the person is a fiduciary are invested in
certificates representing an interest in one or more trusts containing
assets sold or serviced by the same entity.
These underwriter exemptions do not apply to plans sponsored by the
restricted group, which means the sponsor, the underwriters, the trustee, the
master servicer, any other servicer, any credit enhancement provider, any
obligor under mortgage loans included in the trust constituting more than five
percent of the aggregate unamortized principal balance of the assets in the
trust, or any affiliate of these parties.
In addition to these underwriter exemptions, the Department of Labor
has issued an exemption for some transactions involving the sale or exchange of
residential mortgage pool pass-through certificates by plans and for
transactions in connection with the servicing and operation of the mortgage
pool.
NOTES
The underwriter exemptions will not be available for securities which
are notes. However, under the plan assets regulation, if the notes are treated
as indebtedness without substantial equity features, the trust's assets would
not be deemed assets of a plan. If the notes are treated as having substantial
equity features, the purchase, holding and resale of the notes could result in a
transaction that is prohibited under ERISA or the code. Even if the notes were
treated as debt for purposes of the plan assets regulation, the acquisition or
holding of the notes by or on behalf of a plan could give rise to a prohibited
transaction if the acquisition or holding were deemed to be a loan to a party in
interest of the plan. Exemptions from the prohibited transaction rules could be
applicable to the purchase and holding of notes by a plan, depending on the type
and circumstances of the plan fiduciary making the decision to acquire the
notes. Included among these exemptions are:
- - PTCE 84-14, regarding transactions effected by qualified professional asset
managers;
- - PTCE 90-1, regarding transactions entered into by insurance company pooled
separate accounts;
- - PTCE 91-38, regarding transactions entered into by bank collective
investment funds; PTCE 95-60,
- - regarding transactions entered into by insurance company general accounts;
and
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- - PTCE 96-23, regarding transactions effected by in-house asset managers.
Each purchaser and each transferee of a note that is treated as debt for
purposes of the plan assets regulation may be required to represent and
warrant that its purchase and holding of the note will be covered by one of
these exemptions or by another Department of Labor exemption.
CONSULTATION WITH COUNSEL
The prospectus supplement for each series of securities will provide
further information which plans may wish to consider before purchasing the
securities. A plan fiduciary considering the purchase of securities may wish to
consult its tax and legal advisors regarding whether the assets of the trust
would be considered plan assets, the possibility of exemptive relief from the
prohibited transaction rules and other ERISA issues and their potential
consequences. Moreover, we suggest that each plan fiduciary determine for itself
whether under the general fiduciary standards of investment prudence and
diversification, an investment in the securities is appropriate for the plan,
taking into account the overall investment policy of the plan and the
composition of the plan's investment portfolio.
REPORTS
Each trust will be required to file reports with the Commission under
the requirements of the Securities Exchange Act. The sponsor intends to cause
each trust to suspend filing the reports if and when the reports are no longer
required under the Securities Exchange Act.
In connection with each distribution made to the holders of a series,
the trustee will furnish the securityholders with statements which will describe
the amount of the distribution, its allocation to principal and to interest, and
information regarding the performance of the mortgage loans. The master servicer
will furnish the trustee periodic compliance statements and, an annual statement
from a firm of independent public accountants concerning the accountants' the
examination of documents and records relating to the servicing of the mortgage
loans in the trust. Copies of the monthly and annual statements will be sent to
securityholders if requested and addressed to Advanta Conduit Receivables, Inc.,
10790 Rancho Bernardo Road, San Diego, California 92127, (858)676-3099.
INVESTMENT MATTERS
The prospectus supplement will state whether a series of Securities
will constitute mortgage related securities for purposes of the Secondary
Mortgage Market Enhancement Act of 1984, commonly referred to as SMMEA.
Investors whose investment authority is subject to legal restrictions may wish
to consult with their own legal advisors to determine whether and to what extent
the securities constitute legal investments for them.
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USE OF PROCEEDS
Substantially all of the net proceeds to be received from the sale of
securities will be used by the sponsor to finance the purchase of mortgage
loans, or to repay short-term financings utilized to fund the purchase of the
mortgage loans general corporate purposes. The sponsor expects that it will sell
securities similar to these securities from time to time. The timing and amount
of any additional sales will be dependent upon a number of factors, including
the volume of mortgage loans originated and purchased by the sponsor, prevailing
interest rates, availability of funds and general market conditions.
METHODS OF DISTRIBUTION
The prospectus supplement relating to each series of securities will
set forth the specific terms of the offering of the series of securities, the
names of the underwriters, the proceeds to the sponsor or its affiliates from
the sale and, if applicable, the initial public offering prices, the discounts
and commissions to the underwriters and any discounts and concessions allowed or
reallowed to dealers.
LEGAL MATTERS
Legal matters in connection with the securities will be passed upon for
the sponsor by Dewey Ballantine LLP, New York, New York, by the general counsel
of the sponsor or other counsel identified in the prospectus supplement.
FINANCIAL INFORMATION
The sponsor has determined that its financial statements are not
material to this offering. Any prospective investor who desires to review
financial information of the sponsor may request a copy of the Sponsor's most
recent financial statements from the sponsor.
A new trust will be formed to own the trust property for that trust,
and to issue each series of securities. Each trust will have no assets or
obligations prior to the issuance of the securities and will not engage in any
activities other than those described in this prospectus and in the prospectus
supplement. Accordingly, no financial statements of a trust will be included in
this prospectus or in any prospectus supplement, unless the trust is a business
trust.
A prospectus supplement and a Current Report on Form 8-K, which will be
incorporated by reference to the registration statement, will contain any
required financial statements of the credit enhancement provider.
ADDITIONAL INFORMATION
This prospectus, together with the prospectus supplement for each
series of securities, contains a summary of the material terms of the applicable
exhibits to the registration statement
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and the agreements under which the securities will be issued. Copies of the
exhibits are on file at the offices of the Securities and Exchange Commission in
Washington, D.C., and may be obtained at rates prescribed by the Commission upon
request to the Commission or may be inspected, without charge, at the
Commission's offices.
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ANNEX I
CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in limited circumstances, the securities will be available only
in book-entry form. Investors in the securities may hold the securities through
any of DTC, Cedelbank or Euroclear. The securities will be tradeable as home
market instruments in both the European and U.S. domestic markets. Initial
settlement and all secondary trades will settle in same-day funds.
Secondary market trading between investors through Cedelbank and
Euroclear will be conducted in the ordinary way in accordance with the normal
rules and operating procedures of Cedelbank and Euroclear and in accordance with
conventional eurobond practice, which is seven calendar day settlement.
Secondary market trading between investors through DTC will be
conducted according to DTC's rules and procedures applicable to U.S. corporate
debt obligations.
Secondary cross-market trading between Cedelbank or Euroclear and DTC
participants holding securities will be effected on a delivery-against-payment
basis through the respective Depositaries of Cedelbank and Euroclear and as DTC
participants.
Non-U.S. holders of global securities will be subject to U.S.
withholding taxes unless the holders meet a number of requirements and deliver
appropriate U.S. tax documents to the securities clearing organizations or their
participants.
INITIAL SETTLEMENT
All securities will be held in book-entry form by DTC in the name of
Cede & Co. as nominee of DTC. Investors' interests in the securities will be
represented through financial institutions acting on their behalf as direct and
indirect participants in DTC. As a result, Cedelbank and Euroclear will hold
positions on behalf of their participants through their relevant depository
which in turn will hold these positions in their accounts as DTC participants.
Investors electing to hold their securities through DTC will follow DTC
settlement practices. Investor securities custody accounts will be credited with
their holdings against payment in same-day funds on the settlement date.
Investors electing to hold their securities through Cedelbank or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary security and no
lock-up or restricted period. Securities will be credited to the securities
custody accounts on the settlement date against payment in same-day funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important
to establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
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Trading between DTC Participants. Secondary market trading between DTC
participants will be settled using the procedures applicable to asset-back
securities issues in same-day funds.
Trading between Cedelbank or Euroclear Participants. Secondary market
trading between Cedelbank participants or Euroclear participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
Trading between DTC, Seller and Cedelbank or Euroclear Participants.
When securities are to be transferred from the account of a DTC participant to
the account of a Cedelbank participant or a Euroclear participant, the purchaser
will send instructions to Cedelbank or Euroclear through a Cedelbank participant
or Euroclear participant at least one business day prior to settlement.
Cedelbank or Euroclear will instruct the relevant depository, as the case may
be, to receive the securities against payment. Payment will include interest
accrued on the securities from and including the last coupon payment date to and
excluding the settlement date, on the basis of the actual number of days in the
accrual period and a year assumed to consist of 360 days. For transactions
settling on the 31st of the month, payment will include interest accrued to and
excluding the first day of the following month. Payment will then be made by the
relevant depository to the DTC participant's account against delivery of the
securities. After settlement has been completed, the securities will be credited
to the respective clearing system and by the clearing system, in accordance with
its usual procedures, to the Cedelbank participant's or Euroclear participant's
account. The securities credit will appear the next day, European time and the
cash debt will be back-valued to, and the interest on the global securities will
accrue from, the value date, which would be the preceding day when settlement
occurred in New York. If settlement is not completed on the intended value date
and the trade fails, the Cedelbank or Euroclear cash debt will be valued instead
as of the actual settlement date.
Cedelbank participants and Euroclear participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within Cedelbank or Euroclear. Under
this approach, they may take on credit exposure to Cedelbank or Euroclear until
the securities are credited to their account one day later.
As an alternative, if Cedelbank or Euroclear has extended a line of
credit to them, Cedelbank participants or Euroclear participants can elect not
to preposition funds and allow that credit line to be drawn upon to finance
settlement. Under this procedure, Cedelbank participants or Euroclear
participants purchasing securities would incur overdraft charges for one day,
assuming they cleared the overdraft when the securities were credited to their
accounts. However, interest on the securities would accrue from the value date.
Therefore, in many cases the investment income on the global securities earned
during that one-day period may substantially reduce or offset the amount of the
overdraft charges, although the result will depend on each Cedelbank
participant's or Euroclear participant's particular cost of funds.
Since the settlement is taking place during New York business hours,
DTC participants can employ their usual procedures for crediting global
securities to the respective European depository for the benefit of Cedelbank
participants or Euroclear participants. The sale proceeds
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will be available to the DTC seller on the settlement date. Thus, to the DTC
participants a cross-market transaction will settle no differently than a trade
between two DTC participants.
Trading between Cedelbank or Euroclear Seller and DTC Purchaser. Due to
time zone differences in their favor, Cedelbank participants and Euroclear
participants may employ their customary procedures for transactions in which
securities are to be transferred by the respective clearing system, through the
respective depository, to a DTC participant. The seller will send instructions
to Cedelbank or Euroclear through a Cedelbank participant or Euroclear
participant at least one business day prior to settlement. In these cases
Cedelbank or Euroclear will instruct the respective depository, as appropriate,
to credit the securities to the DTC participant's account against payment.
Payment will include interest accrued on the securities from and including the
last interest payment to and excluding the settlement date on the basis of the
actual number of days in the accrual period and a year assumed to consist of 360
days. For transactions settling on the 31st of the month, payment will include
interest accrued to and excluding the first day of the following month. The
payment will then be reflected in the account of Cedelbank participant or
Euroclear participant the following day, and receipt of the cash proceeds in the
Cedelbank participant's or Euroclear participant's account would be back-valued
to the value date, which would be the preceding day, when settlement occurred in
New York. In the event that the Cedelbank participant or Euroclear participant
has a line of credit with its respective clearing system and elects to be in
debt in anticipation of receipt of the sale proceeds in its account, the
back-valuation will extinguish any overdraft incurred over that one-day period.
If settlement is not completed on the intended value date and the trade fails,
receipt of the cash proceeds in the Cedelbank participant's or Euroclear
participant's account would instead be valued as of the actual settlement date.
Finally, day traders that use Cedelbank or Euroclear and that purchase
global securities from DTC participants for delivery to Cedelbank participants
or Euroclear participants may wish to note that these trades would automatically
fail on the sale side unless affirmative action is taken. At least three
techniques should be readily available to eliminate this potential problem:
- - borrowing through Cedelbank or Euroclear for one day, until the purchase
side of the trade is reflected in their Cedelbank or Euroclear accounts in
accordance with the clearing system's customary procedures;
- - borrowing the securities in the U.S. from a DTC participant no later than
one day prior to settlement, which would give the securities sufficient
time to be reflected in their Cedelbank or Euroclear account in order to
settle the sale side of the trade; or
- - staggering the value dates for the buy and sell sides of the trade so that
the value date for the purchase from the DTC participant is at least one
day prior to the value date for the sale to the Cedelbank participant or
Euroclear participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of securities holding securities through Cedelbank
or Euroclear, or through DTC if the holder has an address outside the U.S., will
be subject to the 30% U.S.
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withholding tax that generally applies to payments of interest, including
original issue discount, on registered debt issued by U.S. persons, unless:
(1) each clearing system, bank or other financial institution
that holds customers' securities in the ordinary course of its trade or
business in the chain of intermediaries between the beneficial owner
and the U.S. entity required to withhold tax complies with applicable
certification requirements and
(2) the beneficial owner takes one of the 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 the change.
- - Exemption for Non-U.S. Persons with effectively connected income - Form
4224. A non-U.S. person as defined below, including a non-U.S. corporation
or bank with a U.S. branch, for which the interest income is effectively
connected with its conduct of a trade or business in the United States, can
obtain an exemption from the withholding tax by filing Form 4224 Exemption
from Withholding of Tax on Income Effectively Connected with the Conduct of
a Trade or Business in the United States.
- - Exemption or reduced rate for non-U.S. Persons resident in treaty countries
- Form 1001. Non-U.S. persons residing in a country that has a tax treaty
with the United States can obtain an exemption or reduced tax rate,
depending on the treaty terms, by filing Form 1001, "Ownership, Exemption
or Reduced Rate Certificate". If the treaty provides only for a reduced
rate, withholding tax will be imposed at that rate unless the filer
alternatively files Form W-8. Form 1001 may be filed by securityholders or
their 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 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.
On April 22, 1996, the IRS proposed regulations relating to
withholding, backup withholding and information reporting that, if adopted in
their current form would, among other things, unify current certification
procedures and forms and clarify reliance standards. The regulations are
proposed to be effective for payments made after December 31, 2000 but provide
that securities issued on or before the date that is 60 days after the proposed
regulations are made final will continue to be valid until they expire. Proposed
regulations, however, are subject to change prior to their adoption in final
form.
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<PAGE> 152
A U.S. person is:
(1) a citizen or resident of the United States,
(2) a corporation, partnership or other entity organized in or
under the laws of the United States or any political subdivision
thereof,
(3) an estate that is subject to U.S. federal income tax
regardless of the source of its income or
(4) a trust if a court within the United States can exercise
primary supervision over its administration and at least one United
States fiduciary has the authority to control all substantial decisions
of the trust.
A non-U.S. person is any person who is not a U.S. person.
This summary does not deal with all aspects of U.S. federal
income tax withholding that may be relevant to foreign holders of the
securities. Investors are advised to consult their own tax advisors for
specific tax advice concerning their holding and disposing of the
securities.
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<PAGE> 153
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$525,000,000
(APPROXIMATE)
ADVANTA MORTGAGE LOAN TRUST 1999-3
MORTGAGE LOAN ASSET-BACKED CERTIFICATES, SERIES 1999-3
[ADVANTA LOGO]
ADVANTA MORTGAGE CORP. USA
MASTER SERVICER
[ADVANTA LOGO]
ADVANTA CONDUIT RECEIVABLES, INC.
SPONSOR
-------------------------
PROSPECTUS SUPPLEMENT
-------------------------
UNDERWRITERS OF THE CLASS A-1, A-2, A-3, A-4, A-5
AND A-6 CERTIFICATES
BEAR, STEARNS & CO. INC.
SALOMON SMITH BARNEY
-------------------------
UNDERWRITERS OF THE CLASS A-7 CERTIFICATES
BEAR, STEARNS & CO. INC.
PRUDENTIAL SECURITIES
SALOMON SMITH BARNEY
-------------------------
August 17, 1999
We suggest that you rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We have
not authorized anyone to provide you with different information.
We are not offering the securities offered hereby in any state where the offer
is not permitted.
Dealers will be required to deliver a prospectus supplement and prospectus when
acting as underwriters of the securities offered hereby and with respect to
their unsold allotments or subscriptions. In addition, all dealers selling the
securities, whether or not participating in this offering, may be required to
deliver a prospectus supplement and prospectus until November 15, 1999.
- --------------------------------------------------------------------------------
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