Registration No. 333-_______
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
----------------
FORM S-3
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
----------------
LONG BEACH SECURITIES CORP.
(Exact name of registrant as specified in its charter)
Delaware
(State or Other Jurisdiction of Incorporation
or Organization)
33-0917586
(I.R.S. Employer Identification No.)
1100 Town & Country Road
Orange, California 92868
(714) 541-5378
(Address, Including Zip Code, and
Telephone Number, Including Area
Code, of Registrant's Principal
Executive Offices)
Jeffery A. Sorensen
LONG BEACH SECURITIES CORP.
1100 Town & Country Road
Orange, California 92868
(714) 541-5378
(Name, Address, Including Zip Code,
and Telephone Number, Including
Area Code, of Agent For Service)
----------------
Copies to:
Kathryn Cruze, Esq.
Thacher Proffitt & Wood
Two World Trade Center
New York, New York 10048
<PAGE>
Approximate date of commencement of proposed sale to the public: From
time to time after this Registration Statement becomes effective.
If the only securities being registered on this form are being offered
pursuant to dividend or interest
reinvestment plans, please check the following box. |_|
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, please check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of
the earlier effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. |_|
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CALCULATION OF REGISTRATION FEE
======================================================================================================================
Proposed Proposed
maximum maximum
Amount offering aggregate Amount of
Title of securities being price per offering registration
being registered registered(1) unit (1) price (1) fee (2)
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<S> <C> <C> <C> <C>
Mortgage Pass-Through Certificates
and Mortgage-Backed Notes, issued
in Series............................... $1,000,000.00 100% $1,000,000.00 $264.00 (3)
======================================================================================================================
</TABLE>
(1) Estimated solely for the purposes of calculating the registration fee on
the basis of the proposed maximum aggregate offering price.
(2) Calculated in reliance upon 457(o).
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that the Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission acting pursuant to said Section 8(a),
may determine.
<PAGE>
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CROSS REFERENCE SHEET FURNISHED PURSUANT TO RULE 404(a)
ITEMS AND CAPTIONS IN FORM S-3 LOCATION IN PROSPECTUSES
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1. Forepart of Registration Statement and Outside
Front Cover Page of Prospectus................................. Forepart of Registration
Statement and Outside Front
Cover Page of
Prospectuses**
2. Inside Front and Outside Back Cover Pages of
Prospectus..................................................... Inside Front Cover Page of
Prospectuses and Outside
Back Cover Page of
Prospectuses**
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges...................................... Summaries of Prospectus;
Special Considerations
4. Use of Proceeds................................................ Use of Proceeds**
5. Determination of Offering Price................................ *
6. Dilution....................................................... *
7. Selling Security Holders....................................... *
8. Plan of Distribution........................................... Method of Distribution**
9. Description of Securities to Be Registered..................... Outside Front Cover Page;
Summaries of Prospectus;
Description of the Trust
Funds; Description of the
Certificates**
10. Interests of Named Experts and Counsel......................... *
11. Material Changes............................................... Financial Information
12. Incorporation of Certain Information by Reference.............. Incorporation of Certain
Information by Reference
13. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities................. See page II-2
</TABLE>
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* Answer negative or item inapplicable.
** To be completed or provided from time to time by Prospectus Supplement.
<PAGE>
EXPLANATORY NOTE
This Registration Statement consists of (i) a basic
prospectus, (ii) an illustrative form of prospectus supplement for use in an
offering of Mortgage Pass-Through Certificates consisting of senior/subordinate
certificates ("Version 1"), (iii) an illustrative form of prospectus supplement
for use in an offering a series of Mortgage Pass-Through Certificates with
various combinations of credit support ("Version 2"), and (iv) an illustrative
form of prospectus supplement for use in an offering of Mortgage-Backed Notes
("Version 3").
Contents of Registration Statement
----------------------------------
Page
----
Forms of Prospectus Supplement:
Version 1: Form of Prospectus Supplement relating to
a typical Senior/Subordinate Series...................... S-1
Version 2: Form of Prospectus Supplement relating to
Certificates with various combinations
of Credit Support........................................ S-1
Version 3: Form of Prospectus Supplement relating to
an offering of Mortgage-Backed Notes..................... S-1
Basic Prospectus........................................................... 1
<PAGE>
The information in this prospectus supplement is not complete and may be
changed. We may not sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This prospectus
supplement is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
Subject to Completion, Dated July __, 2000
[Version 1]
Prospectus Supplement (to Prospectus dated , ____)
$_______________ (APPROXIMATE)
[__] FLOATING RATE MORTGAGE PASS-THROUGH CERTIFICATES, SERIES ____-
LONG BEACH SECURITIES CORP.
DEPOSITOR
[NAME OF MASTER SERVICER]
MASTER SERVICER
--------------------------------------------------------------------------------
YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-__ IN THIS
PROSPECTUS SUPPLEMENT AND PAGE __ IN THE PROSPECTUS.
This prospectus supplement, together with the accompanying prospectus will
constitute the complete prospectus.
--------------------------------------------------------------------------------
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OFFERED CERTIFICATES The trust created for the series _____-__ certificates will hold a pool of one-
to four-family, adjustable rate, residential first mortgage loans. The trust will
issue ______ classes of offered certificates. You can find a list of these
classes, together with their principal balances, pass-through rates and other
characteristics, on Page S-__ of this prospectus supplement. Credit
enhancement for the offered certificates will be provided by the Class A-2
Certificates and ______ classes of subordinated Class M Certificates. Each
class of Class M Certificates is subordinated to the senior certificates and any
Class M Certificates with a higher payment priority.
UNDERWRITING _______________________, as underwriter, will offer to the public the
Class A-1 Certificates, the Class A-2 Certificates, the Class M-1 Certificates,
the Class M-2 Certificates and the Class M-3 Certificates at varying prices to
be determined at the time of sale. The proceeds to the depositor from the sale
of the underwritten certificates will be approximately _____% of the
principal balance of the underwritten certificates plus accrued interest,
before deducting expenses. See "Method of Distribution".
</TABLE>
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE OFFERED CERTIFICATES OR DETERMINED
THAT THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
------------------------------
Underwriter
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS SUPPLEMENT AND
THE ACCOMPANYING PROSPECTUS
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION.
We provide information to you about the offered certificates in two separate
documents that progressively provide more detail:
o the accompanying prospectus, which provides general information, some
of which may not apply to this series of certificates; and
o this prospectus supplement, which describes the specific terms of this
series of certificates.
Long Beach Securities Corp.'s principal offices are located at 1100 Town &
Country Road, Orange, California 92868 and its phone number is (___) ________.
TABLE OF CONTENTS
PAGE
PROSPECTUS SUPPLEMENT
Summary of Prospectus Supplement............................................S-3
Risk Factors................................................................S-9
Use of Proceeds............................................................S-15
The Mortgage Pool..........................................................S-15
Yield on The Certificates..................................................S-25
Description of the Certificates............................................S-34
The Mortgage Loan Seller...................................................S-52
Pooling and Servicing Agreement............................................S-52
Federal Income Tax Consequences............................................S-59
Method of Distribution.....................................................S-61
Secondary Market...........................................................S-62
Legal Opinions.............................................................S-62
Legal Investment...........................................................S-63
ERISA Considerations.......................................................S-64
S-2
<PAGE>
SUMMARY OF PROSPECTUS SUPPLEMENT
THE FOLLOWING SUMMARY IS A VERY BROAD OVERVIEW OF THE CERTIFICATES
OFFERED BY THIS PROSPECTUS SUPPLEMENT AND DOES NOT CONTAIN ALL OF THE
INFORMATION THAT YOU SHOULD CONSIDER IN MAKING YOUR INVESTMENT DECISION. TO
UNDERSTAND ALL OF THE TERMS OF THE OFFERED CERTIFICATES, READ CAREFULLY THIS
ENTIRE PROSPECTUS SUPPLEMENT AND THE ENTIRE ACCOMPANYING PROSPECTUS.
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<S> <C>
Title of Series.............................[__] Floating Rate Mortgage Pass-Through Certificates,
Series ____-_.
Cut-off Date................................__________ __, ____.
Closing Date................................On or about __________ __, ____.
Depositor...................................Long Beach Securities Corp.. The depositor will deposit
the mortgage loans into the trust. The depositor's principal
offices are located at 1100 Town & Country Road, Orange,
California 92868 and its telephone number is (___)
______. SEE "THE DEPOSITOR" IN THE PROSPECTUS.
Mortgage Loan Seller........................__________________. SEE "THE MORTGAGE LOAN SELLER"
IN THIS PROSPECTUS SUPPLEMENT.
Master Servicer and Originator..............__________________. SEE "THE MORTGAGE POOL--UNDERWRITING STANDARDS OF
_________ AND REPRESENTATIONS CONCERNING THE MORTGAGE LOANS" AND
"POOLING AND SERVICING AGREEMENT--THE MASTER SERVICER" IN
THIS PROSPECTUS SUPPLEMENT.
Trustee.....................................__________________. SEE "POOLING AND SERVICING
AGREEMENT--THE TRUSTEE" IN THIS PROSPECTUS SUPPLEMENT.
Distribution Dates..........................Distributions on the offered certificates will be made on
the __ day of each month, or, if that day is not a business
day, on the next succeeding business day, beginning in
------ ----.
Offered Certificates........................Only the certificates listed in the immediately following
table are being offered by this prospectus supplement.
Each class of offered certificates and their pass-through
rates and certificate principal balances are set forth in the
immediately following table.
</TABLE>
S-3
<PAGE>
<TABLE>
<CAPTION>
INITIAL CERTIFICATE PASS-THROUGH INITIAL CERTIFICATE PASS-THROUGH
CLASS PRINCIPAL BALANCE RATE CLASS PRINCIPAL BALANCE RATE
--------------- ----------------------- ------------------ ------------- ---------------------- ----------------------
<S> <C> <C> <C> <C> <C>
A-1............ $_________ Variable M-2 . . . . $---------- Variable
A-2............ $_________ Variable M-3 . . . . $---------- ____%
M-1............ $_________ Variable
</TABLE>
The initial certificate principal balance of each class of certificates listed
in the immediately preceding table is approximate. The pass-through rate on each
class of certificates (other than the Class M-3 Certificates) is generally based
on one-month LIBOR plus an applicable spread, subject to a rate cap equal to the
weighted average of the net mortgage rates of the mortgage loans as described in
this prospectus supplement.
THE TRUST
The depositor will establish a trust with respect to the certificates, under the
pooling and servicing agreement dated as of __________ __, ____ among the
depositor, the master servicer and the trustee. There are _____ classes of
certificates representing the trust. SEE "DESCRIPTION OF THE CERTIFICATES" IN
THIS PROSPECTUS SUPPLEMENT.
The certificates represent in the aggregate the entire beneficial ownership
interest in the trust. Distributions of interest and principal on the offered
certificates will be made only from payments received in connection with the
mortgage loans described in the next section.
THE MORTGAGE LOANS
The trust will contain approximately _____ [conventional] [sub-prime]
[nonconforming], one- to four-family, adjustable-rate mortgage loans secured by
first liens on residential real properties. The mortgage loans have an aggregate
principal balance of approximately $__________ as of _________ __ ____.
The mortgage loans have original terms to maturity of not greater than [30]
years and the following characteristics as of
---------- --, ----.
Approximate range of _____% to _____%.
mortgage rates:
Approximate weighted ______%.
average mortgage rate:
Approximate range of _____% to _____%.
gross margins:
Approximate weighted _____%.
average gross margin:
Approximate range of _____% to _____%.
minimum mortgage
rates:
Approximate weighted _____%.
average minimum mortgage
rate:
Approximate range of _____% to _____%.
maximum mortgage
rates:
Approximate weighted _____%.
average maximum mortgage
rate:
Approximate weighted ___ years and ___
average remaining term months.
to stated maturity:
Approximate range of $__________ to
principal balances: $____________.
S-4
<PAGE>
Average principal $_____________.
balance:
Approximate range of _____% to _____%.
loan-to-value ratios:
Approximate weighted ______%.
average loan-to-value
ratio:
Approximate _____% to _____%.
weighted average
next adjustment date
The interest rate on each mortgage loan will adjust semi-annually on each
adjustment date to equal the sum of six- month LIBOR and the related gross
margin, subject to periodic and lifetime limitations, as described herein.
FOR ADDITIONAL INFORMATION REGARDING THE MORTGAGE LOANS, SEE "THE MORTGAGE POOL"
IN THIS PROSPECTUS SUPPLEMENT.
PRE-FUNDING ACCOUNT AND SUBSEQUENT MORTGAGE LOANS
On or before ________, the depositor will sell subsequent mortgage loans to be
included in the trust fund. On the closing date, the Depositor will pay to the
trustee approximately $__________ which will be held by the trustee in the
pre-funding account.
The amount on deposit in the pre-funding account will be reduced by the amount
used to purchase subsequent mortgage loans during the period from the closing
date up to and including ____________. Any amounts remaining in the pre-funding
account after ______________ will be distributed on the next distribution date
to the holders of the Class A-1 Certificates. SEE "THE MORTGAGE POOL--CONVEYANCE
OF SUBSEQUENT MORTGAGE LOANS AND THE PRE- FUNDING ACCOUNT" IN THIS PROSPECTUS
SUPPLEMENT.
INTEREST COVERAGE ACCOUNT
On the closing date, the depositor will pay to the trustee for deposit in the
interest coverage account, an amount as specified in the pooling and servicing
agreement. Funds on deposit in the interest coverage account will be applied by
the trustee to cover shortfalls in the amount of interest generated by the
assets of the trust fund attributable to the pre- funding feature during the
funding period. SEE "DESCRIPTION OF THE CERTIFICATES--INTEREST COVERAGE ACCOUNT"
IN THIS PROSPECTUS SUPPLEMENT.
THE CERTIFICATES
OFFERED CERTIFICATES. The offered certificates will have the characteristics
shown in the table appearing on page S-__ in this prospectus supplement. The
pass-through rate on the offered certificates (other than the Class M-3
Certificates) is variable and will be calculated for each distribution date as
described under the definition of pass-through rate contained in "Description of
the Certificates--Glossary of Terms" in this prospectus supplement.
The offered certificates will be sold by the depositor to the underwriter on the
closing date.
The offered certificates will initially be represented by one or more global
certificates registered in the name of CEDE & Co., as nominee of DTC in minimum
denominations of $[10,000] and integral multiples of $[1.00] in excess of the
minimum denominations. SEE "DESCRIPTION OF THE CERTIFICATES --REGISTRATION OF
THE BOOK-ENTRY CERTIFICATES" IN THIS PROSPECTUS SUPPLEMENT.
S-5
<PAGE>
CLASS CE CERTIFICATES. The Class CE Certificates are one of the ____ classes of
certificates representing the trust, but are not offered by this prospectus
supplement. The Class CE Certificates will have an initial certificate principal
balance of approximately $_______, which is equal to the initial
overcollateralization required by the pooling and servicing agreement. The Class
CE Certificates initially evidence an interest of approximately ___% in the
trust. The Class CE Certificates will be delivered to a wholly- owned bankruptcy
remote subsidiary of the depositor as partial consideration for the mortgage
loans.
CLASS P CERTIFICATES. The Class P certificates are one of the ___ classes of
each certificates representing the trust, but are not offered by this prospectus
supplement. The Class P Certificates will have an initial certificate principal
balance of $[100] and will not be entitled to distributions in respect of
interest. The Class P Certificates will be entitled to all prepayment charges
received in respect of the mortgage loans. The Class P Certificates will be
delivered to a wholly- owned bankruptcy remote subsidiary of the depositor as
partial consideration for the mortgage loans.
RESIDUAL CERTIFICATES. The Class R-I Certificates, the Class R-II Certificates
and the Class R-III Certificates are the classes of certificates representing
the residual interests in the trust, but are not offered by this prospectus
supplement. The Class R-I Certificates, the Class R-II Certificates and the
Class R-III Certificates will be delivered to a wholly-owned bankruptcy remote
subsidiary of the depositor as partial consideration for the mortgage loans.
CREDIT ENHANCEMENT
The credit enhancement provided for the benefit of the holders of the offered
certificates consists of subordination and overcollateralization.
SUBORDINATION. The rights of the holders of the Class A-2 Certificates, the
Class M Certificates and the Class CE Certificates to receive distributions will
be subordinated, to the extent described in this prospectus supplement, to the
rights of the holders of the Class A-1 Certificates.
The rights of the holders of the Class M Certificates and Class CE Certificates
will be subordinated to the rights of the holders of the Class A-2 Certificates.
In addition, the rights of the holders of the Class M Certificates with higher
numerical class designations will be subordinated to the rights of holders of
the certificates with lower numerical class designations, and the rights to the
holders of the Class CE Certificates will be subordinated to the rights to the
holders of the Class M Certificates to the extent described in this prospectus
supplement.
Subordination is intended to enhance the likelihood of regular distributions on
the more senior certificates in respect of interest and principal and to afford
the certificates protection against realized losses on the mortgage loans as
described in the next section. SEE "DESCRIPTION OF THE CERTIFICATES--ALLOCATION
OF LOSSES" IN THIS PROSPECTUS SUPPLEMENT.
OVERCOLLATERALIZATION. The sum of the aggregate principal balance of the initial
mortgage loans as of the cut-off date and the original pre-funded amount will
exceed the aggregate certificate principal balance of the offered certificates
and the Class P
S-6
<PAGE>
Certificates on the closing date by approximately $__________, which is equal to
the initial certificate principal balance of the Class CE Certificates. Such
amount represents approximately ____% of the sum of the aggregate principal
balance of the initial mortgage loans as of the cut-off date and the original
pre-funded amount, and is the initial amount of overcollateralization required
to be provided by the mortgage pool under the pooling and servicing agreement.
SEE "DESCRIPTION OF THE CERTIFICATES--OVERCOLLATERALIZATION PROVISIONS" IN THIS
PROSPECTUS SUPPLEMENT.
ALLOCATION OF LOSSES. If, on any distribution date, there is not sufficient
excess interest or overcollateralization to absorb realized losses on the
mortgage loans then realized losses on the mortgage loans will be allocated to
the Class A-2 Certificates and the Class M Certificates as described below. If
realized losses on the mortgage loans are allocated to the Class A-2
Certificates and the Class M Certificates, such losses will be allocated first,
to the Class M-3 Certificates, second, to the Class M-2 Certificates, third, to
the Class M-1 Certificates and fourth, to the Class A-2 Certificates. The
pooling and servicing agreement does not permit the allocation of realized
losses on the mortgage loans to the Class A-1 Certificates or the Class P
Certificates; however, investors in the Class A-1 Certificates should realize
that under certain loss scenarios there will not be enough principal and
interest on the mortgage loans to pay the Class A-1 Certificates all interest
and principal amounts to which such certificates are then entitled. Once
realized losses are allocated to the Class A-2 Certificates and the Class M
Certificates, their certificate principal balances will be permanently reduced
by the amount so allocated. SEE "DESCRIPTION OF THE
CERTIFICATES--OVERCOLLATERALIZATION PROVISIONS" AND --ALLOCATION OF LOSSES;
SUBORDINATION" IN THIS PROSPECTUS SUPPLEMENT.
P&I ADVANCES
The master servicer is required to advance delinquent payments of principal and
interest on the mortgage loans, as described in this prospectus supplement. The
master servicer is entitled to be reimbursed for these advances, and therefore
these advances are not a form of credit enhancement. SEE "DESCRIPTION OF THE
CERTIFICATES--P&I ADVANCES" IN THIS PROSPECTUS SUPPLEMENT AND "DISTRIBUTIONS ON
THE SECURITIES--ADVANCES BY MASTER SERVICER IN RESPECT OF DELINQUENCIES ON THE
TRUST FUND ASSETS" IN THE PROSPECTUS.
OPTIONAL TERMINATION
At its option, the majority holder of the Class CE Certificates (or if such
holder does not exercise such option, the master servicer) may purchase all of
the mortgage loans, together with any properties in respect of the mortgage
loans acquired on behalf of the trust, and thereby effect termination and early
retirement of the certificates, after the aggregate principal balance of the
mortgage loans, and properties acquired in respect of the mortgage loans,
remaining in the trust has been reduced to less than [10%] of the sum of the
aggregate principal balance of the mortgage loans as of __________ __, ____ and
the original pre-funded amount. SEE "POOLING AND SERVICING AGREEMENT--
TERMINATION" IN THIS PROSPECTUS SUPPLEMENT AND "DISTRIBUTIONS ON THE
SECURITIES-- TERMINATION OF THE TRUST FUND AND DISPOSITION OF TRUST FUND ASSETS"
IN THE PROSPECTUS.
S-7
<PAGE>
FEDERAL INCOME TAX CONSEQUENCES
Three separate elections will be made to treat designated portions of the trust
(exclusive of the pre-funding account and the interest coverage account) as real
estate mortgage investment conduits for federal income tax purposes. SEE
"FEDERAL INCOME TAX CONSEQUENCES--REMIC'S--CHARACTERIZATI ON OF INVESTMENTS IN
REMIC CERTIFICATES" IN THE PROSPECTUS.
FOR FURTHER INFORMATION REGARDING THE FEDERAL INCOME TAX CONSEQUENCES OF
INVESTING IN THE OFFERED CERTIFICATES, SEE "FEDERAL INCOME TAX CONSEQUENCES" IN
THIS PROSPECTUS SUPPLEMENT AND IN THE PROSPECTUS.
RATINGS
It is a condition to the issuance of the certificates that the offered
certificates receive the following ratings from [______________] and
[______________]:
OFFERED
CERTIFICATES [RA] [RA]
------------ ---- ----
Class A-1 AAA AAA
Class A-2 AAA AAA
Class M-1 AA AA
Class M-2 A A
Class M-3 BBB BBB
A security rating does not address the frequency of prepayments on the mortgage
loans or the corresponding effect on yield to investors. SEE "YIELD ON THE
CERTIFICATES" AND "RATINGS" IN THIS PROSPECTUS SUPPLEMENT AND "YIELD AND
MATURITY CONSIDERATIONS" IN THE PROSPECTUS.
LEGAL INVESTMENT
The Class A-1 Certificates, the Class A-2 Certificates and the Class M-1
Certificates will not constitute "mortgage related securities" for purposes of
the Secondary Mortgage Market Enhancement Act of 1984 until such time as the
balance of the pre- funding account is reduced to zero. At such time, the Class
A-1 Certificates, the Class A- 2 Certificates and the Class M-1 Certificates
will constitute "mortgage related securities" for purposes of SMMEA for so long
as they are rated not lower than the second highest rating category by one or
more nationally recognized statistical rating organizations and, as such, will
be legal investments for certain entities to the extent provided in SMMEA and
applicable state laws. The Class M-2 Certificates and the Class M-3 Certificates
will not constitute "mortgage related securities" for purposes of SMMEA. SEE
"LEGAL INVESTMENT" IN THIS PROSPECTUS SUPPLEMENT AND IN THE PROSPECTUS.
ERISA CONSIDERATIONS
The U.S. Department of Labor has issued an individual exemption to the
underwriter. This exemption will only apply to the Class A-1 Certificates,
provided that the conditions set forth under "Considerations for Benefit Plan
Investors" in the prospectus are satisfied.
ACCORDINGLY, THE OTHER CLASSES OF CERTIFICATES MAY NOT BE ACQUIRED BY OR ON
BEHALF OF A PLAN EXCEPT AS DESCRIBED IN THIS PROSPECTUS SUPPLEMENT. SEE "ERISA
CONSIDERATIONS" IN THIS PROSPECTUS SUPPLEMENT AND "CONSIDERATIONS FOR BENEFIT
PLAN INVESTORS" IN THE PROSPECTUS.
S-8
<PAGE>
RISK FACTORS
The offered certificates are not suitable investments for all investors. In
particular, you should not purchase the offered certificates unless you
understand and are able to bear the prepayment, credit, liquidity and market
risks associated with these securities.
You should carefully consider the following factors in connection with the
purchase of the offered certificates:
[APPROPRIATE RISK FACTORS AS NECESSARY]
[THE MORTGAGE LOANS WERE UNDERWRITTEN TO STANDARDS WHICH DO NOT CONFORM TO THE
STANDARDS OF FANNIE MAE OR FREDDIE MAC WHICH MAY RESULT IN LOSSES ON THE
MORTGAGE LOANS ALLOCATED TO YOUR CERTIFICATES.
The originator's underwriting standards are primarily intended to assess
the value of the mortgaged property and to evaluate the adequacy of the property
as collateral for the mortgage loan. The originator provides loans primarily to
borrowers who do not qualify for loans conforming to Fannie Mae and Freddie Mac
guidelines but who do have equity in their property. While the originator's
primary consideration in underwriting a mortgage loan is the value of the
mortgaged property, the originator also considers, among other things, a
mortgagor's credit history, repayment ability and debt service-to-income ratio,
as well as the type and use of the mortgaged property. The originator's
underwriting standards do not prohibit a mortgagor from obtaining secondary
financing at the time of origination of the originator's first lien, which
secondary financing would reduce the equity the mortgagor would otherwise have
in the related mortgaged property as indicated in the originator's loan-to-value
ratio determination.
As a result of the underwriting standards described in the immediately
preceding paragraph, the mortgage loans in the mortgage pool are likely to
experience rates of delinquency, foreclosure and bankruptcy that are higher, and
that may be substantially higher, than those experienced by mortgage loans
underwritten in a more traditional manner.
Furthermore, changes in the values of mortgaged properties may have a
greater effect on the delinquency, foreclosure, bankruptcy and loss experience
of the mortgage loans in the mortgage pool than on mortgage loans originated in
a more traditional manner. No assurance can be given that the values of the
related mortgaged properties have remained or will remain at the levels in
effect on the dates of origination of the related mortgage loans. SEE "THE
MORTGAGE POOL--UNDERWRITING STANDARDS OF __________ AND REPRESENTATIONS
CONCERNING THE MORTGAGE LOANS" IN THIS PROSPECTUS SUPPLEMENT].
[LIMITED SERVICING HISTORY AND PERFORMANCE DATA WITH RESPECT TO THE MASTER
SERVICER
The Master Servicer began directly servicing mortgage loans in
[_____________]. As a result, the Master Servicer has limited experience
servicing mortgage loans similar to the mortgage loans in the mortgage pool. The
Master Servicer's limited experience in servicing mortgage loans may result in
greater defaults and losses on the mortgage loans in the mortgage
S-9
<PAGE>
pool and result in accelerated prepayments on the Offered Certificates. You will
bear any reinvestment risk resulting from such accelerated prepayments.
Because the Master Servicer commenced its direct servicing operations in
November 1998, the Master Servicer does not have historical delinquency,
bankruptcy, foreclosure or default experience that may be referred to for
purposes of examining the Master Servicer's performance in servicing mortgage
loans similar to the mortgage loans in the mortgage pool, other than to the
limited extent as described under "POOLING AND SERVICING AGREEMENT--THE MASTER
SERVICER--COLLECTION PROCEDURES; DELINQUENCY AND LOSS EXPERIENCE" IN THIS
PROSPECTUS SUPPLEMENT. There can be no assurance that such experience is or will
be representative.]
[CERTAIN OF THE MORTGAGE LOAN ARE BALLOON LOANS, WHICH MAY PRESENT A GREATER
RISK OF LOSS WITH RESPECT TO SUCH MORTGAGE LOANS
Approximately ____% of the mortgage loans, by aggregate principal balance
as of the Cut-off Date, are mortgage loans with balloon payments. Because
borrowers of mortgage loans with balloon payments are required to make
substantial higher final payments upon maturity, it is possible that the default
risk associated with such mortgage loans is greater than that associated with
fully- amortizing mortgage loans.]
[APPROXIMATELY ____% OF THE MORTGAGE LOANS IN THE MORTGAGE POOL HAVE HIGH
LOAN-TO-VALUE RATIOS, SO THAT THE RELATED BORROWER HAS LITTLE OR NO EQUITY IN
THE RELATED MORTGAGED PROPERTY, WHICH MAY RESULT IN LOSSES WITH RESPECT TO THESE
MORTGAGE LOANS ALLOCATED TO YOUR CERTIFICATES.
Approximately _____% of the initial mortgage loans, by aggregate principal
balance as of _______ __, ____, had a loan-to-value ratio at origination in
excess of 80%. No initial mortgage loan in the mortgage pool with a
loan-to-value ratio at origination in excess of 80% will be covered by a primary
mortgage insurance policy. No initial mortgage loan will have a loan-to- value
ratio exceeding __% at origination. Mortgage loans with higher loan-to-value
ratios may present a greater risk of loss in that an overall decline in the
residential real estate market, a rise in interest rates over a period of time
and the condition of a mortgaged property, as well as other factors, may have
the effect of reducing the value of the mortgaged property from the appraised
value at the time the mortgage loan was originated. If there is a reduction in
value of the mortgaged property, the loan-to-value ratio may increase over what
it was at the time the mortgage loan was originated. This increase may reduce
the likelihood of liquidation or other proceeds being insufficient to satisfy
the mortgage loan and any losses, to the extent not covered by the credit
enhancement, may affect the yield to maturity or your certificates. Furthermore,
investors should note that the value of the mortgaged property may be
insufficient to cover the outstanding balance of the certificates. There can be
no assurance that the loan-to-value ratio of any mortgage loan determined at any
time after origination is less than or equal to its original loan-to-value
ratio.]
[APPROXIMATELY ____% OF THE INITIAL MORTGAGE LOANS IN THE MORTGAGE POOL ARE
DELINQUENT AS OF THE CUT-OFF DATE, WHICH MAY RESULT IN LOSSES WITH RESPECT TO
THESE MORTGAGE LOANS.
S-10
<PAGE>
Approximately ____% of the initial mortgage loans, by aggregate principal
balance as of _______ __, ____, were thirty days or more but less than sixty
days delinquent in their monthly payments as of ______ __, ____. Approximately
____% of the initial mortgage loans, by aggregate principal balance as of
_______ __, ____, were sixty days or more but less than ninety days delinquent
in their monthly payments as of the _______ __, ____. However, investors in the
mortgage loans should realize that approximately _____% of the initial mortgage
loans, by aggregate principal balance as of _______ __, ____, have a first
payment date occurring on or after _______ __, ____ and, therefore, these
mortgage loans could not have been delinquent as of
------- --, ----].
[APPROXIMATELY ____% OF THE MORTGAGE LOANS IN THE MORTGAGE POOL ARE CONCENTRATED
IN THE STATE OF [NAME OF STATE], WHICH MAY RESULT IN LOSSES WITH RESPECT TO
THESE MORTGAGE LOANS.
Approximately ___% of the initial mortgage loans are in the state of
[Name of State.] Investors should note that some geographic regions of the
United States from time to time will experience weaker regional economic
conditions and housing markets causing a decline in property values in those
areas, and consequently, will experience higher rates of loss and delinquency
than will be experienced on mortgage loans located in other geographic regions.
A region's economic condition and housing market may be directly, or indirectly,
adversely affected by a number of factors including natural disasters or civil
disturbances such as earthquakes, hurricanes, floods, eruptions or riots. The
economic impact of any of these types of events may also be felt in areas beyond
the region immediately affected by the disaster or disturbance. A concentration
of mortgage loans in the trust fund in a region experiencing a deterioration in
economic conditions or a decline in real estate values may expose your
certificates to losses in addition to those present for similar mortgage-backed
securities without this concentration. The depositor cannot assure you that the
values of the mortgaged properties have remained or will remain at the appraised
values on the dates of origination of the mortgage loans. Any deterioration of
economic conditions in [name of state] which adversely affects the ability of
borrowers to make payments on the mortgage loans may increase the likelihood of
delinquency and foreclosure of the mortgage loans that may result in losses
that, to the extent not covered by the [credit enhancement] will be allocated to
your certificates.]
[THE SUBSEQUENT MORTGAGE LOANS MAY HAVE DIFFERENT CHARACTERISTICS THAN THE
INITIAL MORTGAGE LOANS
The subsequent mortgage loans may have characteristics different from those
of the initial mortgage loans. However, each subsequent mortgage loan must
satisfy the eligibility criteria referred to in this prospectus supplement under
"The Mortgage Pool--Conveyance of Subsequent Mortgage Loans and the Pre-Funding
Account" at the time of its conveyance to the trust fund and be underwritten in
accordance with the criteria set forth under "The Mortgage Pool--Underwriting
Standards of ____________ and Representations concerning the Mortgage Loans" in
this prospectus supplement.]
S-11
<PAGE>
[THE CLASS A-1 CERTIFICATES MAY RECEIVE A PREPAYMENT OF PRINCIPAL AS A RESULT OF
EXCESS FUNDS IN THE PRE-FUNDING ACCOUNT
To the extent that amounts on deposit in the pre-funding account have not
been fully applied to the purchase of subsequent mortgage loans by the end of
the funding period, the holders of the Class A-1 Certificates will receive on
the distribution date immediately following the end of the funding period, any
amounts in the pre-funding account after giving effect to any purchase of
subsequent mortgage loans, as further described in this prospectus supplement.
Although no assurance can be given, the depositor intends that the principal
amount of subsequent mortgage loans sold to the trust fund will require the
application of substantially all amounts on deposit in the pre-funding account
and that there will be no material principal payment to the holders of the Class
A-1 Certificates on such distribution date.]
[YOUR CERTIFICATES WILL BE LIMITED OBLIGATIONS SOLELY OF THE TRUST FUND AND NOT
OF ANY OTHER PARTY.
The certificates will not represent an interest in or obligation of the
depositor, the master servicer, the mortgage loan seller, the trustee or any of
their respective affiliates. Neither the certificates nor the underlying
mortgage loans will be guaranteed or insured by any governmental agency or
instrumentality, or by the depositor, the master servicer, the trustee or any of
their respective affiliates. Proceeds of the assets included in the trust will
be the sole source of payments on the offered certificates, and there will be no
recourse to the depositor, the master servicer, the mortgage loan seller, the
trustee or any other entity in the event that these proceeds are insufficient or
otherwise unavailable to make all payments provided for under the offered
certificates].
[THE RATE AND TIMING OF PRINCIPAL DISTRIBUTIONS ON YOUR CERTIFICATES WILL BE
AFFECTED BY THE RATE OF PREPAYMENTS ON THE MORTGAGE LOANS.
The rate and timing of distributions allocable to principal on the offered
certificates will depend on the rate and timing of principal payments, including
prepayments and collections upon defaults, liquidations and repurchases, on the
mortgage loans and the allocation to pay principal on these certificates as
provided in this prospectus supplement. As is the case with mortgage
pass-through certificates, the offered certificates are subject to substantial
inherent cash-flow uncertainties because the mortgage loans may be prepaid at
any time. However, with respect to approximately _____% of the mortgage loans,
by aggregate principal balance as of ________ __, ____, a full and voluntary
prepayment may subject the related mortgagor to a prepayment charge. A
prepayment charge may or may not act as a deterrent to prepayment of the related
mortgage loan. SEE "THE MORTGAGE POOL" IN THIS PROSPECTUS SUPPLEMENT.
Distributions of principal will be made to the holders of the Class A-2
Certificates, the Class M-1 Certificates, the Class M-2 Certificates and the
Class M-3 Certificates according to the priorities described in this prospectus
supplement. The timing of commencement of principal distributions and the
weighted average life of each such class of certificates will be affected by the
rates of prepayment on the mortgage loans experienced both before and after the
commencement of principal distributions on such class.
S-12
<PAGE>
FOR FURTHER INFORMATION REGARDING THE EFFECT OF PRINCIPAL PREPAYMENTS ON
THE WEIGHTED AVERAGE LIVES OF THE OFFERED CERTIFICATES, SEE "YIELD ON THE
CERTIFICATES" IN THIS PROSPECTUS SUPPLEMENT, INCLUDING THE TABLE ENTITLED
"PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING AT THE FOLLOWING
PERCENTAGES OF THE PREPAYMENT ASSUMPTION".]
[THE RATE OF PREPAYMENTS ON THE MORTGAGE LOANS WILL VARY DEPENDING ON FUTURE
MARKET CONDITIONS WHICH COULD IMPACT THE RATE AND TIMING OF PRINCIPAL
DISTRIBUTIONS ON YOUR CERTIFICATES.
In most cases, when prevailing interest rates are increasing, prepayment
rates on mortgage loans tend to decrease. A decrease in the prepayment rates on
the mortgage loans will result in a reduced rate of return of principal to
investors in the offered certificates at a time when reinvestment at these
higher prevailing rates would be desirable. Conversely, when prevailing interest
rates are declining, prepayment rates on mortgage loans tend to increase. An
increase in the prepayment rates on the mortgage loans will result in a greater
rate of return of principal to investors in the offered certificates, at time
when reinvestment at comparable yields may not be possible.]
[THE YIELD ON YOUR CERTIFICATES WILL VARY DEPENDING ON THE RATE OF PREPAYMENTS.
The yield to maturity on the offered certificates will depend on:
o with respect to each class of offered certificates other than the Class
M-3 certificates, the applicable pass-through rate thereon from time to
time;
o the applicable purchase price; and
o the rate and timing of principal payments, including prepayments and
collections upon defaults, liquidations and repurchases, on the related
mortgage loans and the allocation to reduce the certificate principal
balance as well as other factors.
The yield to investors on the offered certificates will be adversely
affected by any allocation to the offered certificates of interest shortfalls on
the mortgage loans.
If the offered certificates are purchased at a premium and principal
distributions thereon occur at a rate faster than anticipated at the time of
purchase, the investor's actual yield to maturity will be lower than that
assumed at the time of purchase. Conversely, if the offered certificates are
purchased at a discount and principal distributions thereon occur at a rate
slower than that anticipated at the time of purchase, the investor's actual
yield to maturity will be lower than that originally assumed.
The proceeds to the depositor from the sale of the offered certificates
were determined based on a number of assumptions, including a prepayment
assumption of ____% of the standard prepayment assumption, and weighted average
lives corresponding to the prepayment assumption. No representation is made that
the mortgage loans will prepay at that rate or at any other rate, or that the
mortgage loans will prepay at the same rate. The yield assumptions for the
S-13
<PAGE>
offered certificates will vary as determined at the time of sale. SEE "YIELD ON
THE CERTIFICATES" IN THIS PROSPECTUS SUPPLEMENT].
[THE YIELD ON YOUR CERTIFICATES WILL BE AFFECTED BY THE SPECIFIC TERMS THAT
APPLY TO THAT CLASS, DISCUSSED IN THIS RISK FACTOR.
Because distributions of principal will be made to the holders of the Class
A-2 Certificates and the Class M Certificates according to the priorities
described in this prospectus supplement, the yield to maturity on such classes
of certificates will be sensitive to the rates of prepayment on the mortgage
loans experienced both before and after the commencement of principal
distributions on such classes. The yield to maturity on such classes of
certificates will also be extremely sensitive to losses due to defaults on the
mortgage loans (and the timing thereof), to the extent such losses are not
covered by excess cash flow otherwise payable to the Class CE Certificates and
(i) with respect to the Class A-2 Certificates, the Class M Certificates or (ii)
with respect to the Class M Certificates, a class of Class M Certificates with a
higher numerical class designation. Furthermore, as described in this prospectus
supplement, the timing of receipt of principal and interest by the Class A-2
Certificates and the Class M Certificates may be adversely affected by losses
even if such classes of certificates do not ultimately bear such loss.]
[VIOLATION OF CONSUMER PROTECTION LAWS MAY RESULT IN LOSSES ON THE MORTGAGE
LOANS AND YOUR CERTIFICATES.
Applicable state laws regulate interest rates and other charges, require
disclosure, and require licensing of the originator. In addition, other state
laws, public policy and principles of equity relating to the protection of
consumers, unfair and deceptive practices and debt collection practices may
apply to the origination, servicing and collection of the mortgage loans.
The mortgage loans are also subject to federal laws, including:
o the Federal Truth-in-Lending Act and Regulation Z promulgated
thereunder, which require disclosures to the borrowers regarding
the terms of the mortgage loans;
o the Equal Credit Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age,
race, color, sex, religion, marital status, national origin,
receipt of public assistance or the exercise of any right under
the Consumer Credit Protection Act, in the extension of credit;
o the Fair Credit Reporting Act, which regulates the use and
reporting of information related to the borrower's credit
experience;
o the Depository Institutions Deregulation and Monetary Control Act
of 1980, which preempts certain state usury laws; and
o the Alternative Mortgage Transaction Parity Act of 1982, which
preempts certain state lending laws which regulate alternative
mortgage transactions.
S-14
<PAGE>
Approximately ____% of the mortgage loans, by aggregate principal balance
as of _______ __, ____, will be subject to the Riegle Community Development and
Regulatory Improvement Act of 1994, or the Riegle Act, which incorporates the
Home Ownership and Equity Protection Act of 1994. The Riegle Act adds additional
provisions to Regulation Z, which is the implementing regulation of the Federal
Truth-in-Lending Act. These provisions impose additional disclosure and other
requirements on creditors with respect to non-purchase money mortgage loans with
high interest rates or high up-front fees and charges. In most cases, mortgage
loans covered by the Riegle Act have annual percentage rates over 10% greater
than the yield on treasury securities of comparable maturity and fees and points
which exceed the greater of 8% of the total loan amount or $441, which amount is
adjusted annually based on changes in the consumer price index for the year. The
provisions of the Riegle Act apply on a mandatory basis to all applicable
mortgage loans originated on or after October 1, 1995. These provisions can
impose specific statutory liabilities upon creditors who fail to comply with
their provisions and may affect the enforceability of the related loans. In
addition, any assignee of the creditor would, in most cases, be subject to all
claims and defenses that the consumer could assert against the creditor,
including, without limitation, the right to rescind the mortgage loan.
Depending on the provisions of the applicable law and the specific facts
and circumstances involved, violations of these federal or state laws, policies
and principles may limit the ability of the trust to collect all or part of the
principal of or interest on the mortgage loans, may entitle the borrower to a
refund of amounts previously paid and, in addition, could subject the originator
to damages and administrative enforcement.
The originator will represent that as of the closing date, each mortgage
loan is in compliance with applicable federal and state laws and regulations. In
the event of a breach of this representation, it will be obligated to cure the
breach or repurchase or replace the affected mortgage loan in the manner
described in the prospectus].
All capitalized terms used in this prospectus supplement will have the
meanings assigned to them under "Description of the Certificates--Glossary of
Terms" or in the prospectus under "Glossary."
USE OF PROCEEDS
The mortgage loan seller will sell the mortgage loans to the depositor and
the depositor will convey the mortgage loans to the trust fund in exchange for
and concurrently with the delivery of the certificates. Net proceeds from the
sale of the certificates will be applied by the depositor to the purchase of the
mortgage loans from the mortgage loan seller. These net proceeds will represent
the purchase price to be paid by the depositor to the mortgage loan seller for
the mortgage loans. The mortgage loans were previously purchased by the mortgage
loan seller either directly or indirectly from the originator.
S-15
<PAGE>
THE MORTGAGE POOL
GENERAL DESCRIPTION OF THE MORTGAGE LOANS
References to percentages of the mortgage loans in the mortgage pool unless
otherwise noted are calculated based on the aggregate principal balance of the
mortgage loans as of ___________ __, ____, which date will also be referred to
in this prospectus supplement as the cut-off date.
The mortgage pool will initially consist of approximately _____
conventional, one- to four- family, adjustable-rate, fully-amortizing mortgage
loans secured by first liens on residential real properties and having an
aggregate principal balance as of the cut-off date, of approximately
$___________, after application of scheduled payments due on or before the
cut-off date whether or not received and subject to a permitted variance of plus
or minus 5%. The mortgage loans in the mortgage pool have original terms to
maturity of not greater than [30] years.
The statistical information presented in this prospectus supplement
describes only the initial mortgage loans and does not include the mortgage
loans to be purchased by the trust after the closing date. References to
percentages of the mortgage loans, unless otherwise noted, are calculated based
on the aggregate principal balance of the initial mortgage loans as of the
cut-off date and do not include any subsequent mortgage loans.
Subsequent mortgage loans are intended to be purchased by the trust from
the depositor from time to time on or before _______________ from funds on
deposit in the pre-funding account. The subsequent mortgage loans, if available,
will be purchased by the depositor and sold by the depositor to the trust fund
for deposit in the mortgage pool. The pooling and servicing agreement will
provide that each mortgage loan in the mortgage pool must conform to certain
specified characteristics and, following the conveyance of the subsequent
mortgage loans, the mortgage pool must conform to certain specified
characteristics, as described below under "--Conveyance of Subsequent Mortgage
Loans and the Pre-Funding Account".
The mortgage loans are secured by first mortgages or deeds of trust or
other similar security instruments creating first liens on one- to four-family
residential properties. The mortgaged properties in the mortgage pool consist of
attached, attached or semi-attached, one- to four- family dwelling units,
townhouses, individual condominium units, individual units in planned unit
developments and manufactured housing. The mortgage loans to be included in the
mortgage pool will be acquired by the depositor from the mortgage loan seller.
The mortgage loan seller, in its capacity as master servicer, will act as the
master servicer for the mortgage loans originated by it under the pooling and
servicing agreement.
All of the mortgage loans in the mortgage pool have scheduled monthly
payments due on the first day of the month and that day will be referred to in
this prospectus supplement as the due date. Each mortgage loan in the mortgage
pool will contain a customary due-on-sale clause.
The mortgage loans have mortgage rates subject to a semiannual adjustment
after an initial three-year period on the day of the month specified in the
related mortgage note to equal the sum, rounded to the nearest 0.125%, of (1) a
per annum rate equal to the average of interbank offered
S-16
<PAGE>
rates for six-month U.S. dollar-denominated deposits in the London market based
on quotations of major banks as published in THE WALL STREET JOURNAL and as most
recently available as of the date specified in the related mortgage note, and
(2) a fixed percentage amount specified in the related mortgage note; provided,
however, that the mortgage rate will not increase or decrease on any adjustment
date after the initial adjustment date by more than 1%. All of the mortgage
loans provide that over the life of the mortgage loan the mortgage rate will in
no event be more than the fixed percentage set forth in the mortgage note.
Effective with the first payment due on a mortgage loan after each related
adjustment date, the monthly payment will be adjusted to an amount which will
fully amortize the outstanding principal balance of the mortgage loan over its
remaining term, and pay interest at the mortgage rate as so adjusted.
If the six-month LIBOR index ceases to be published or is otherwise
unavailable, the master servicer will select an alternative index for mortgage
loans on comparable properties, based upon comparable information, over which it
has no control and which is readily verifiable by mortgagors.
None of the mortgage loans permit the related mortgagor to convert the
adjustable mortgage rate thereon to a fixed mortgage rate.
Approximately _____% of the initial mortgage loans provide for payment by
the mortgagor of a prepayment charge in limited circumstances on prepayments.
Each mortgage loan in the mortgage pool that provides for the payment of a
prepayment charge provides for payment of a prepayment charge on partial or full
prepayments made within one year, five years or other designated period as
provided in the related mortgage note from the date of origination of the
particular mortgage loan. The amount of the prepayment charge is as provided in
the related mortgage note, and the prepayment charge will apply if, in any
twelve-month period during the first year, five years or other designated period
as provided in the related mortgage note from the date of origination of the
particular mortgage loan, the mortgagor prepays an aggregate amount exceeding
__% of the original principal balance of the particular mortgage loan. With
respect to _____% of these mortgage loans, the amount of the prepayment charge
will be equal to ___ months' advance interest calculated on the basis of the
mortgage rate in effect at the time of the prepayment on the amount prepaid in
excess of __% of the original principal balance of the mortgage loan for a
period of five years and one year, respectively. The Class P certificates will
be entitled to all prepayment charges received on the mortgage loans, and these
amounts will not be available for distribution on the certificates. Under those
circumstances described in the pooling and servicing agreement, the master
servicer may, in its discretion, waive the collection of any otherwise
applicable prepayment charge or reduce the amount of the prepayment charge
actually collected. Investors should conduct their own analysis as to the
effect, if any, that the prepayment charges and the decisions of the master
servicer with respect to the waiver of prepayment charges may have on the
prepayment performance of the mortgage loans. The depositor makes no
representation as to the effect that the prepayment charges, and the decisions
of the master servicer with respect to the waiver of the prepayment charges may
have on the prepayment performance of the mortgage loans.
The average principal balance of the initial mortgage loans at origination
was approximately $______. No initial mortgage loan had a principal balance at
origination of greater than
S-17
<PAGE>
approximately $_______ or less than approximately $______. The average principal
balance of the initial mortgage loans as of the cut-off date was approximately
$______. No initial mortgage loan had a principal balance as of the cut-off date
of greater than approximately $_______ or less than approximately $______.
As of the cut-off date, the initial mortgage loans had mortgage rates
ranging from approximately _____% per annum to approximately ______% per annum
and the weighted average mortgage rate was approximately _____% per annum. The
weighted average remaining term to stated maturity of the initial mortgage loans
will be approximately __ years and __ months as of the cut-off date. None of the
initial mortgage loans will have its first payment due prior to ________ ____ or
after _________ ____, or will have a remaining term to maturity of less than __
years and __ months or greater than __ years as of the cut-off date. The latest
maturity date of any initial mortgage loan in the mortgage pool is ________
____.
The weighted average loan-to-value ratio at origination of the initial
mortgage loans was approximately ______%. No loan-to-value ratio at origination
was greater than approximately _____% or less than approximately ____%.
The following information sets forth in tabular format certain
characteristics of the initial mortgage loans as of the cut-off date.
Principal Balances of the Initial Mortgage Loans as of the Cut-off Date:
Aggregate % of Aggregate
Principal Principal Balance
Number of Outstanding Outstanding as of the
Range ($) Loans as of Cut-off Date Cut-off Date
--------- -------- ------------------ ---------------------
Mortgage Rates of the Initial Mortgage Loans as of the Cut-off Date:
Aggregate % of Aggregate
Principal Principal Balance
Mortgage Number of Outstanding Outstanding as of the
Rate Loans as of Cut-off Date Cut-off Date
--------- -------- ------------------ ---------------------
Maximum Mortgage Rates of the Initial Mortgage Loans:
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<PAGE>
Aggregate % of Aggregate
Maximum Principal Principal Balance
Mortgage Number of Outstanding Outstanding as of the
Rate Loans as of Cut-off Date Cut-off Date
--------- -------- ------------------ ---------------------
Minimum Mortgage Rates of the Initial Mortgage Loans:
Aggregate % of Aggregate
Minimum Principal Principal Balance
Mortgage Number of Outstanding Outstanding as of the
Rate Loans as of Cut-off Date Cut-off Date
--------- -------- ------------------ ---------------------
Gross Margins of the Initial Mortgage Loans:
Aggregate % of Aggregate
Principal Principal Balance
Number of Outstanding Outstanding as of the
Gross Margin Loans as of Cut-off Date Cut-off Date
------------ -------- ------------------ ---------------------
Original Loan-to-Value Ratios of the Initial Mortgage Loans:
Aggregate % of Aggregate
Principal Principal Balance
Loan-to Number of Outstanding Outstanding as of the
Value Ratio (%) Loans as of Cut-off Date Cut-off Date
--------------- ---------- ------------------ ---------------------
Geographic Distribution of the Mortgaged Properties of the Initial Mortgage
Loans:
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<PAGE>
Aggregate % of Aggregate
Principal Principal Balance
Number of Outstanding Outstanding as of the
Location Loans as of Cut-off Date Cut-off Date
----------- ---------- ------------------ ---------------------
CONVEYANCE OF SUBSEQUENT MORTGAGE LOANS AND THE PRE-FUNDING ACCOUNT
Under and to the extent provided in the pooling and servicing, following
the initial issuance of the certificates, the trust fund will be obligated to
purchase from the depositor on or before _____________, subject to the
availability thereof, the subsequent mortgage loans. The subsequent mortgage
loans will be transferred to the trust fund pursuant to subsequent transfer
instruments between the depositor and the trust fund. In connection with the
purchase of subsequent mortgage loans on such dates of transfer, the trust fund
will be required to pay to the depositor from amounts on deposit in the
pre-funding account a cash purchase price of 100% of the principal balance
thereof. The depositor will designate the first day of the month in which the
related subsequent transfer date occurs as the cut-off date with respect to the
related subsequent mortgage loans. The amount paid from the pre-funding account
on each subsequent transfer date will not include accrued interest on the
related subsequent mortgage loans. Following each subsequent transfer date, the
aggregate principal balance of the mortgage loans in the mortgage pool will
increase by an amount equal to the aggregate principal balance of the related
subsequent mortgage loans so purchased and the amount in the pre-funding account
will decrease accordingly.
A pre-funding account will be established by the trustee and funded on the
closing date by the depositor with approximately $___________, subject to a
permitted variance, as described herein, equal to the aggregate principal
balance of any of the initial mortgage loans which are added or removed from the
trust fund, to provide the trust fund with sufficient funds to purchase
subsequent mortgage loans, provided that the original pre-funded amount will not
exceed 25% of the aggregate initial certificate principal balance of the
certificates. The original pre-funded amount will be reduced during the funding
period by the amount used to purchase subsequent mortgage loans for the mortgage
pool in accordance with the pooling and servicing agreement. During the period
from the closing date until the earliest of (i) the date on which the amount on
deposit in the pre-funding account is reduced to zero or (ii) _______________,
such amount will be maintained in the pre-funding account.
Any conveyance of subsequent mortgage loans on a subsequent transfer date
is subject to certain conditions including, but not limited to, the following:
o each subsequent mortgage loan must satisfy the representations and
warranties specified in the subsequent transfer instrument and the
pooling and servicing agreement;
S-20
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o the depositor will not select such subsequent mortgage loans in a
manner that it believes is adverse to the interests of the
certificateholders;
o the depositor will deliver opinions of counsel with respect to the
validity of the conveyance of such subsequent mortgage loans;
o each subsequent mortgage loan may not be 30 or more days contractually
delinquent as of the related subsequent cut-off date;
o the original term to maturity of such subsequent mortgage loan will
not be less than ___ months and will not exceed ___ months;
o each subsequent mortgage loan may not provide for negative
amortization;
o each subsequent mortgage loan will not have an loan-to-value ratio
greater than 90%;
o each subsequent mortgage loan will have, as of the subsequent cut-off
date, a weighted average term since origination not in excess of ____
months;
o no subsequent mortgage loan will have a mortgage rate less than ____%
or greater than ___%;
o each subsequent mortgage loan will have been serviced by the master
servicer since origination or purchase by the depositor;
o each subsequent mortgage loan will have a first payment date not later
than ___________; and
o each subsequent mortgage loan will be underwritten in accordance with
the criteria set forth under "-Underwriting Standards of __________
and Representations Concerning the Mortgage Loans".
In addition, following the purchase of all subsequent mortgage loans by the
trust fund, the mortgage loans (including the subsequent mortgage loans) will as
of the subsequent cut-off date:
o have a weighted average remaining term to stated maturity of not more
than ___ months and not less than ___ months;
o have a weighted average mortgage rate of not less than ____% and not
more than ____% by aggregate principal balance of the mortgage loans;
o have a weighted average loan-to-value ratio of not more than ___%;
o have no mortgage loan with a principal balance in excess of
$_________; and
o have a weighted average gross margin not less than ____%.
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<PAGE>
Notwithstanding the foregoing, any subsequent mortgage loan may be rejected
by either [RA] or [RA] if the inclusion of such subsequent mortgage loan would
adversely affect the ratings on any class of offered certificates.
UNDERWRITING STANDARDS OF ____________ AND REPRESENTATIONS CONCERNING THE
MORTGAGE LOANS
The mortgage loans will be acquired by the depositor from the mortgage loan
seller. All of the mortgage loans were originated or acquired by the mortgage
loan seller generally in accordance with the respective underwriting criteria
described below.
The information set forth below with regard to the mortgage loan seller's
underwriting standards has been provided to the depositor or compiled from
information provided to the depositor by the mortgage loan seller. None of the
depositor, the trustee, the underwriter or any of their respective affiliates
has made any independent investigation of such information or has made or will
make any representation as to the accuracy or completeness of such information.
The mortgage loans were originated generally in accordance with guidelines
(the "originator's underwriting guidelines") established by the mortgage loan
seller under the "Full Documentation", "Fast Trac" or "Stated Income"
residential loan programs (the "originator underwriting programs"). The
originator underwriting guidelines are primarily intended to evaluate the value
and adequacy of the mortgaged property as collateral and are also intended to
consider the mortgagor's credit standing and repayment ability. On a
case-by-case basis and only with the approval of two or more senior lending
officers, the mortgage loan seller may determine that, based upon compensating
factors, a prospective mortgagor not strictly qualifying under the underwriting
risk category guidelines described below warrants an underwriting exception.
Compensating factors may include, but are not limited to, low loan-to-value
ratio, low debt-to-income ratio, good credit history, stable employment and time
in residence at the applicant's current address. It is expected that a
substantial number of the mortgage loans to be included in the mortgage pool
will represent such underwriting exceptions.
Under the originator underwriting programs, during the underwriting
process, the mortgage loan seller or the originator for the mortgage loan seller
reviews and verifies the loan applicant's sources of income (except under the
Stated Income and Fast Trac residential loan programs), calculates the amount of
income from all such sources indicated on the loan application, reviews the
credit history of the applicant and calculates the debt-to-income ratio to
determine the applicant's ability to repay the loan, and reviews the mortgaged
property for compliance with the originator underwriting guidelines. The
originator underwriting guidelines are applied in accordance with a procedure
which complies with applicable federal and state laws and regulations and
requires (i) an appraisal of the mortgaged property which generally conforms to
Freddie Mac and Fannie Mae standards and (ii) a review of such appraisal, which
review may be conducted by a representative of the mortgage loan seller or a
staff appraiser and, depending upon the original principal balance and
loan-to-value ratio of the mortgaged property, may include a desk review of the
original appraisal or a drive-by review appraisal of the mortgaged property. The
originator underwriting guidelines permit loans with loan-to-value ratios at
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origination of up to 90%. The maximum allowable loan-to-value ratio varies based
upon the income documentation, property type, creditworthiness, debt
service-to-income ratio of the mortgagor and the overall risks associated with
the loan decision. Under the residential loan programs, the maximum combined
loan-to-value ratio, including any second deeds of trust subordinate to the
mortgage loan seller's first deed of trust, is generally 100% for owner occupied
mortgaged properties and 90% for non-owner occupied mortgaged properties.
All of the mortgage loans originated in the originator underwriting
programs are based on loan application packages submitted through mortgage
brokerage companies or the mortgage loan seller's retail branches, or are
purchased from approved originators pursuant to the originator underwriting
guidelines described herein. Loan application packages submitted through
mortgage brokerage companies, containing in each case relevant credit, property
and underwriting information on the loan request, are compiled by the applicable
mortgage brokerage company and submitted to the mortgage loan seller for
approval and funding. The mortgage brokerage companies receive a portion of the
loan origination fee charged to the mortgagor at the time the loan is made. No
single mortgage brokerage company accounts for more than 5%, measured by
outstanding principal balance, of the single-family mortgage loans originated by
the mortgage loan seller.
Each prospective mortgagor completes an application which includes
information with respect to the applicant's liabilities, income, credit history
and employment history, as well as certain other personal information. The
mortgage loan seller obtains a credit report on each applicant from a credit
reporting company. The applicant must generally provide to the mortgage loan
seller or the originator for the mortgage loan seller a letter explaining all
late payments on mortgage debt and, generally, consumer (i.e., non-mortgage)
debt. The report typically contains information relating to such matters as
credit history with local and national merchants and lenders, installment debt
payments and any record of defaults, bankruptcy, repossession, suits or
judgments. Under the Full Documentation residential loan program, self-employed
individuals are generally required to submit their most recent federal income
tax return. As part of its quality control system, the mortgage loan seller
reverifies information with respect to the foregoing matters that has been
provided by the mortgage brokerage company prior to funding a loan and
periodically audits files based on a random sample of closed loans. In the
course of its pre-funding audit, the mortgage loan seller reverifies the income
of each mortgagor or, for a self-employed individual, reviews the income
documentation obtained pursuant to the originator underwriting guidelines
(except under the Stated Income residential loan program). The mortgage loan
seller generally verifies the source of funds for the down payment.
Mortgaged properties that are to secure mortgage loans underwritten under
the originator underwriting programs are appraised by qualified independent
appraisers who are approved by the mortgage loan seller's internal valuation
managers. In most cases, below-average properties (including properties
requiring major deferred maintenance) are not acceptable as security for
mortgage loans in the originator underwriting programs. Each appraisal includes
a market data analysis based on recent sales of comparable homes in the area
and, where deemed appropriate, replacement cost analysis based on the current
cost of constructing a similar home. Every independent appraisal is reviewed by
a representative of the mortgage loan seller or a staff appraiser before the
loan is funded.
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The originator 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 originator underwriting programs generally have payment histories and debt
ratios which would not satisfy Fannie Mae and Freddie Mac underwriting
guidelines and may have a record of major derogatory credit items such as
outstanding judgments or prior bankruptcies. The originator underwriting
guidelines establish the maximum permitted loan-to-value ratio for each loan
type based upon these and other risk factors.
Under the Fast Trac and Stated Income residential loan programs, the
mortgagor's employment and income sources must be stated on the mortgagor's
application. The mortgagor's income as stated must be reasonable for the related
occupation and such determination as to reasonableness is subject to the loan
underwriter's discretion. However, the mortgagor's income as stated on the
application is not independently verified. Verification of employment is
required for salaried mortgagors only. Maximum loan-to-value ratios are
generally lower under the Fast Trac and Stated Income residential loan programs
than those permitted under the Full Documentation residential loan program.
Except as otherwise stated above, the same mortgage credit, consumer credit and
collateral property underwriting guidelines that apply to the Full Documentation
residential loan program apply to the Fast Trac and Stated Income residential
loan programs.
The mortgage loan seller requires that all mortgage loans in the originator
underwriting programs have title insurance and be secured by liens on real
property. The mortgage loan seller also requires that fire and extended coverage
casualty insurance be maintained on the secured property in an amount at least
equal to the principal balance of the mortgage loan or the replacement cost of
the property, whichever is less. The mortgage loan seller does not require that
mortgage loans in the originator underwriting programs be covered by a primary
mortgage insurance policy.
RISK CATEGORIES
Under the originator underwriting programs, various risk categories are
used to grade the likelihood that the mortgagor will satisfy the repayment
conditions of the mortgage loan. These risk categories establish the maximum
permitted loan-to-value ratio and loan amount, given the occupancy status of the
mortgaged property and the mortgagor's credit history and debt ratio. In
general, higher credit risk mortgage loans are graded in categories which permit
higher debt ratios and more (or more recent) major derogatory credit items such
as outstanding judgments or prior bankruptcies; however, the originator
underwriting programs establish lower maximum loan-to-value ratios and maximum
loan amounts for loans graded in such categories.
The originator underwriting guidelines have the following categories and
criteria for grading the potential likelihood that an applicant will satisfy the
repayment obligations of a mortgage loan:
CREDIT GRADE: "A." Under the "A" risk categories, the applicant generally
must have repaid installment or revolving debt according to its terms and have
demonstrated steady employment
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over the last two years. Certain non-consumer credit, collections or judgments
may be disregarded on a case-by-case basis. Any and all payments 60 days or more
late within the past 12 months may not represent more than 25% of the credit
reported during that period. Minor derogatory items are permitted on a
case-by-case basis as to non-mortgage credit when the majority of the consumer
credit is good. No bankruptcy filings may have occurred during the preceding two
years and no discharge or notice of default filings may have occurred during the
preceding three years. The mortgaged property must be in at least average
condition. A maximum loan-to-value ratio of 90% is permitted for owner occupied
purchase money and/or refinance mortgage loans on single family and condominium
properties, and a maximum loan-to-value ratio of 80% is permitted on an owner
occupied mortgaged property consisting of two- to four-units or second homes. A
maximum loan-to-value ratio of 80% is permitted for non-owner occupied purchase
money and/or refinance mortgage loans on single family and condominium
properties, and a maximum loan-to-value ratio of 70% is permitted on a non-owner
occupied mortgaged property consisting of two-to-four units. Generally, the debt
service-to-income ratio maximum may be 47%, but this may be allowed to be
increased to 55% based on the mortgagor's net disposable income and if the
loan-to-value ratio is less than or equal to 85%.
CREDIT GRADE: "A1." Under the "A1" risk sub-category, in addition to
the characteristics described under the "A" risk category above, no late
payments are permitted during the previous twelve months on an existing
mortgage loan, either on the property which is being made subject to the
mortgage loan seller's lien or any mortgage on any other property for which
the applicant is listed as borrower. In addition, the applicant must have a
credit score of 620 or higher and a debt service-to-income ratio of 45% or
less.
CREDIT GRADE "A2." Under the "A2" risk sub-category, in addition to the
characteristics described under the "A" risk category above, no late
payments are permitted during the previous twelve months on an existing
mortgage loan, either on the property which is being made subject to the
mortgage loan seller's lien or any mortgage on any other property for which
the applicant is listed as borrower.
CREDIT GRADE "A3." Under the "A3" risk sub-category, in addition to the
characteristics described under the "A" risk category above, no late
payments are permitted during the previous twelve months on an existing
mortgage loan on the property which is being made subject to the mortgage
loan seller's lien.
CREDIT GRADE "A4." Under the "A4" risk sub-category, in addition to the
characteristics described under the "A" risk category above, a maximum of
one 30-day late payment and no 60-day late payments during the previous
twelve months are permitted on an existing mortgage loan, on the property
which is being made subject to the mortgage loan seller's lien or any
mortgage on any other property for which the applicant is listed as
mortgagor.
CREDIT GRADE "A5." Under the "A5" risk sub-category, in addition to the
characteristics described under the "A" risk category above, a maximum of
two 30-day late payments and no 60-day late payments during the previous
twelve months are permitted on an existing
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mortgage loan, on the property which is being made subject to the mortgage
loan seller's lien or any mortgage on any other property for which the
applicant is listed as mortgagor.
CREDIT GRADE: "B". Under the "B" risk category, the applicant must have
generally repaid installment or revolving debt according to its terms and have
demonstrated steady employment over the last two years. Certain non-consumer
credit, collections or judgments may be disregarded on a case-by-case basis. Up
to four minor derogatory items that are late 90 days or more are permitted on a
case-by-case basis as to non-mortgage credit when the majority of the consumer
credit is deemed good. Any and all payments 60 days or more late within the past
12 months may not represent more than 35% of the credit reported during that
period. No bankruptcy filings may have occurred during the preceding two years
and no discharge or notice of default filings may have occurred during the
preceding three years. The mortgaged property must be in at least average
condition. A maximum loan-to-value ratio of 85% is permitted for owner occupied
purchase money and/or refinance mortgage loans on single family and condominium
properties, and a maximum loan-to-value ratio of 80% is permitted for non-owner
occupied purchase money and/or refinance mortgage loans on single family and
condominium properties, and a maximum loan-to-value ratio of 70% is permitted on
a non-owner occupied mortgaged property consisting of two- to four-units or
second homes. Generally, the debt service-to-income ratio must be 50% or less
but this may be increased to 55% based on the mortgagor's net disposable income
and/or loan-to-value ratio.
CREDIT GRADE "B1." Under the "B1" risk sub-category, in addition to the
characteristics described under the "B" risk category described above, no
late payments are permitted during the previous twelve months on an
existing mortgage loan, on the property which is being made subject to the
mortgage loan seller's lien or any mortgage on any other property for which
the applicant is listed as mortgagor.
CREDIT GRADE "B2." Under the "B2" risk sub-category, in addition to the
characteristics described under the "B" risk category described above, a
maximum of one 30-day late payment and no 60-day late payments are
permitted during the previous twelve months on an existing mortgage loan,
on the property which is being made subject to the mortgage loan seller's
lien or any mortgage on any other property for which the applicant is
listed as mortgagor.
CREDIT GRADE "B3." Under the "B3" risk sub-category, in addition to the
characteristics described under the "B" risk category described above, a
maximum of two 30-day late payments and no 60-day late payments are
permitted during the previous twelve months on an existing mortgage loan,
on the property which is being made subject to the mortgage loan seller's
lien or any mortgage on any other property for which the applicant is
listed as mortgagor.
CREDIT GRADE "B4." Under the "B4" risk sub-category, in addition to the
characteristics described under the "B" risk category described above, a
maximum of three 30-day late payments and generally no 60-day late payments
during the previous twelve months are permitted on an existing mortgage
loan, on the property which is being made subject to the
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mortgage loan seller's lien or any mortgage on any other property for which
the applicant is listed as mortgagor.
CREDIT GRADE: "B-". Under the "B-" risk category, the applicant must have
generally repaid installment or revolving debt according to its terms and have
demonstrated steady employment over the last two years. No payment delinquent
more than 30 days at the time of application is permitted on an existing
mortgage loan. Certain non-consumer credit, collections or judgments may be
disregarded on a case-by-case basis. Payments 60 days or more late within the
last 12 months may not represent more than 50% of the credit items reported
during that period. No bankruptcy filings may have occurred during the preceding
eighteen months and no discharge or notice of default filings may have occurred
during the preceding two years. The mortgaged property must be in at least
average condition. A maximum loan-to-value ratio of 80% is permitted for owner
occupied purchase money and/or refinance mortgage loans on single family and
condominium properties, and a maximum loan-to-value ratio of 75% is permitted on
an owner occupied mortgaged property consisting of two-to-four units or second
homes. A maximum loan-to-value ratio of 75% is permitted for non-owner occupied
purchase money and/or refinance mortgage loans on single family and condominium
properties, and a maximum loan-to-value ratio of 65% is permitted on a non-owner
occupied mortgaged property consisting of two-to-four units or second homes.
Generally, the debt service-to-income ratio must not exceed 55%.
CREDIT GRADE "B-1." Under the "B-1" risk sub-category, in addition to
the characteristics described under the "B-" risk category described above,
no late payments are permitted during the previous twelve months on an
existing mortgage loan, on the property which is being made subject to the
mortgage loan seller's lien or any mortgage on any other property for which
the applicant is listed as mortgagor.
CREDIT GRADE "B-2." Under the "B-2" risk sub-category, in addition to
the characteristics described under the "B-" risk category described above,
a maximum of one 30-day late payment and no 60-day late payments are
permitted during the previous twelve months on an existing mortgage loan,
on the property which is being made subject to the mortgage loan seller's
lien or any mortgage on any other property for which the applicant is
listed as mortgagor.
CREDIT GRADE "B-3." Under the "B-3" risk sub-category, in addition to
the characteristics described under the "B-" risk category described above,
a maximum of two 30-day late payments and no 60-day late payments are
permitted during the previous twelve months on an existing mortgage loan,
on the property which is being made subject to the mortgage loan seller's
lien or any mortgage on any other property for which the applicant is
listed as mortgagor.
CREDIT GRADE "B-4." Under the "B-4" risk sub-category, in addition to
the characteristics described under the "B-" risk category described above,
a maximum of three 30-day late payments and generally no 60-day late
payments during the previous twelve months ate permitted on an existing
mortgage loan, on the property which is being made subject to the
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mortgage loan seller's lien or any mortgage on any other property for which
the applicant is listed as mortgagor.
CREDIT GRADE "B-5." Under the "B-5" risk sub-category, in addition to
the characteristics described under the "B-" risk category described above,
a maximum of one 60-day late payment during the previous twelve months are
permitted on an existing mortgage loan, on the property which is being made
subject to the mortgage loan seller's lien or any mortgage on any other
property for which the applicant is listed as mortgagor.
CREDIT GRADE: "C". Under the "C" risk category, the applicant may have
experienced significant credit problems in the past. A maximum of two 60-day
late payments and one 90-day late payment, or three 60-day late payments and no
90-day late payments, within the last 12 months is permitted on an existing
mortgage loan. An existing mortgage loan is not required to be current at the
time the application is submitted. Consumer credit derogatory items will be
considered on a case-by-case basis. No bankruptcy, discharge or notice of
default filings may have occurred during the preceding twelve months. The
mortgaged property must be in at least average condition. A maximum
loan-to-value ratio of 75% is permitted for owner occupied purchase money and/or
refinance mortgage loans on single family and condominium properties, and a
maximum loan-to-value ratio of 70% is permitted on an owner occupied mortgaged
property consisting of two-to-four units or second homes. A maximum
loan-to-value ratio of 70% is permitted for non-owner occupied purchase money
and/or refinance mortgage loans on single family and condominium properties, and
a maximum loan-to-value ratio of 60% is permitted on a non-owner occupied
mortgaged property consisting of two-to-four units or second homes. Generally,
the debt service-to-income ratio must not exceed 55%; however, a debt
service-to-income ratio of 55% to 60% will be considered on a case-by-case
basis.
CREDIT GRADE:"D". Under the "D" risk category, the applicant may have
experienced significant credit problems in the past. The applicant may be in
bankruptcy or have received a notice of default or foreclosure, and in any such
case must provide a reasonable explanation as to why the problem no longer
exists. The mortgaged property must be in at least average condition. A maximum
loan-to-value ratio of 65% is permitted for owner occupied purchase money and/or
refinance mortgage loans on single family and condominium properties, and a
maximum loan-to-value ratio of 60% is permitted on an owner occupied mortgaged
property consisting of two-to-four units or second homes. A maximum
loan-to-value ratio of 65% is permitted for non-owner occupied purchase money
and/or refinance mortgage loans on single family and condominium properties, and
a maximum loan-to-value ratio of 50% is permitted on a non-owner occupied
mortgaged property consisting of two-to-four units or second homes. Generally,
the debt service-to-income ratio must not exceed 55%; however, a debt
service-to-income ratio of 55% to 60% will be considered on a case-by-case
basis.
The mortgage loan seller will make representations and warranties as of the
closing date with respect to the mortgage loans, and will be obligated to
replace, cure or repurchase any such mortgage loan in respect of which a
material breach of the representations and warranties it has made has occurred
(other than those breaches which have been cured). For a discussion of the
representations and warranties made and the repurchase obligation, see "The
Depositor's
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Mortgage Loan Purchase Program--Representations by or on behalf of Mortgage Loan
Sellers; Remedies for Breach of Representation" in the Prospectus.
ADDITIONAL INFORMATION CONCERNING THE MORTGAGE LOANS
The description in this prospectus supplement of the initial mortgage pool
and the initial mortgaged properties is based upon the mortgage pool as
constituted at the close of business on the cut-off date, as adjusted for the
scheduled principal payments due on or before the cut-off date. Prior to the
issuance of the certificates, mortgage loans may be removed from the mortgage
pool as a result of incomplete documentation or otherwise if the depositor deems
the removal necessary or desirable, and may be prepaid at any time. A limited
number of other mortgage loans may be included in the mortgage pool prior to the
issuance of the certificates unless including these mortgage loans would
materially alter the characteristics of the mortgage pool as described in this
prospectus supplement. The depositor believes that the information set forth in
this prospectus supplement will be representative of the characteristics of the
mortgage pool as it will be constituted at the time the certificates are issued,
although the range of mortgage rates and maturities and other characteristics of
the mortgage loans may vary.
The subsequent mortgage loans may have characteristics different from those
of the initial mortgage loans. However each subsequent mortgage loan must
satisfy the eligibility criteria referred to herein under "-Conveyance of
Subsequent Mortgage Loans and the Pre-Funding Account."
YIELD ON THE CERTIFICATES
DELAY IN DISTRIBUTIONS ON THE OFFERED CERTIFICATES
The effective yield to holders of the Class M-3 Certificates will be less
than the yields otherwise produced by the pass-through rate thereon and purchase
prices because:
o on the first distribution date, one month's interest is payable on
the offered certificates even though __ days will have elapsed from the date on
which interest begins to accrue thereon,
o on each succeeding distribution date the interest payable on the
offered certificates is the interest accrued during the month preceding the
month of the particular distribution date, which ends __ days prior to the
distribution date; and
o during each Interest Accrual Period, other than the first Interest
Accrual Period, interest accrues on a certificate principal balance that is less
than the certificate principal balance of such class actually outstanding for
the first __ days of the Interest Accrual Period.
SHORTFALLS IN COLLECTIONS OF INTEREST
When a principal prepayment in full is made on a mortgage loan, the
mortgagor is charged interest only for the period beginning with the date on
which the scheduled monthly payment was due for the preceding monthly payment up
to the date of the prepayment, instead of for a full
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month. When a partial principal prepayment is made on a mortgage loan, the
mortgagor is not charged interest on the amount of the prepayment for the month
in which the prepayment is made. In addition, the application of the Soldiers'
and Sailors' Civil Relief Act of 1940, as amended or the Relief Act, to any
mortgage loan will adversely affect, for an indeterminate period of time, the
ability of the master servicer to collect full amounts of interest on the
mortgage loans affected by application of the Relief Act. The master servicer is
obligated to pay from its own funds only those interest shortfalls attributable
to full and partial prepayments by the mortgagors on the mortgage loans master
serviced by it, but only to the extent of its aggregate servicing fee for the
related due period. The due period, with respect to any distribution date,
commences on the second day of the month immediately preceding the month in
which the distribution date occurs and ends on the first day of the month in
which the distribution date occurs. Accordingly, the effect of:
o any principal prepayments on the mortgage loans, to the extent that
Prepayment Interest Shortfalls exceed Compensating Interest or
o any shortfalls resulting from the application of the Relief Act, will
be to reduce the aggregate amount of interest collected that is available for
distribution to holders of the certificates.
Any of these shortfalls will be allocated among the certificates as
provided in this prospectus supplement under "Description of the
Certificates--Interest Distributions". See "Legal Aspects of Mortgage
Assets--Soldiers' and Sailors' Civil Relief Act of 1940" in the prospectus. See
"Pooling and Servicing Agreement--Servicing and Other Compensation and Payment
of Expenses" in this prospectus supplement.
GENERAL PREPAYMENT CONSIDERATIONS
The rate of principal payments on each class of offered certificates, the
aggregate amount of distributions on each class of offered certificates and the
yield to maturity of each class of offered certificates will be related to the
rate and timing of payments of principal on the mortgage loans and the amount,
if any, contributed from the pre-funding account at the end of the funding
period. The rate of principal payments on the mortgage loans in the mortgage
pool will in turn be affected by the amortization schedules of the mortgage
loans as they change from time to time to accommodate changes in the mortgage
rates and by the rate of principal prepayments on the mortgage loans, including
for this purpose payments resulting from refinancings, liquidations of the
mortgage loans due to defaults, casualties, condemnations and repurchases,
whether optional or required, by the depositor, the mortgage loan seller, the
originator, the master servicer or the majorityholder of the Class CE
Certificates. The mortgage loans may be prepaid by the mortgagors at any time;
however, with respect to approximately _____% of the mortgage loans, by
aggregate principal balance as of the cut-off date, a prepayment may subject the
related mortgagor to a prepayment charge.
Prepayments, liquidations and repurchases of the mortgage loans will result
in distributions in respect of principal to the holders of the class or classes
of offered certificates then entitled to receive distributions that otherwise
would be distributed over the remaining terms of these
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mortgage loans. Since the rates of payment of principal on the mortgage loans
will depend on future events and a variety of factors, no assurance can be given
as to the rate of principal prepayments. The extent to which the yield to
maturity of any class of offered certificates may vary from the anticipated
yield will depend upon the degree to which they are purchased at a discount or
premium and the degree to which the timing of payments on these certificates is
sensitive to prepayments on the mortgage loans. Further, an investor should
consider, in the case of any certificate purchased at a discount, the risk that
a slower than anticipated rate of principal payments on the mortgage loans could
result in an actual yield to the investor that is lower than the anticipated
yield. In the case of any certificate purchased at a premium, the risk that a
faster than anticipated rate of principal payments could result in an actual
yield to the investor that is lower than the anticipated yield. In most cases,
the earlier a prepayment of principal on the mortgage loans occurs, the greater
the effect on the investor's yield to maturity. As a result, the effect on an
investor's yield of principal payments occurring at a rate higher or lower than
the rate anticipated by the investor during the period immediately following the
issuance of the certificates would not be fully offset by a subsequent like
reduction or increase in the rate of principal payments. See "Yield
Considerations" and "Maturity and Prepayment Considerations" in this prospectus
supplement and "Yield and Maturity Considerations" in the prospectus.
It is highly unlikely that the mortgage loans will prepay at any constant
rate until maturity or that all of the mortgage loans will prepay at the same
rate. Moreover, the timing of prepayments on the mortgage loans may
significantly affect the actual yield to maturity on the offered certificates,
even if the average rate of principal payments experienced over time is
consistent with an investor's expectation.
Because principal distributions are paid to certain classes of offered
certificates before other classes, holders of classes of offered certificates
having a later priority of payment bear a greater risk of losses than holders of
classes having earlier priorities for distribution of principal. This is because
the certificates having later priority will represent an increasing percentage
interest in the trust fund before principal distributions are made on these
certificates. Prior to a certain date, as described herein, all principal
payments on the mortgage loans will be allocated to the Class A-1 Certificates.
Thereafter, during certain periods subject to certain delinquency triggers
described herein, all principal payments on the mortgage loans will be allocated
to the offered certificates in the priorities described under "Description of
the Certificates-Principal Distributions on the Offered Certificates" in the
prospectus supplement.
The rate of payments, including prepayments, on pools of mortgage loans is
influenced by a variety of economic, geographic, social and other factors. If
prevailing mortgage rates fall significantly below the mortgage rates on the
mortgage loans in the mortgage pool, the rate of prepayment and refinancing
would be expected to increase. Conversely, if prevailing mortgage rates rise
significantly above the mortgage rates on the mortgage loans in the mortgage
pool, the rate of prepayment on the mortgage loans would be expected to
decrease. Other factors affecting prepayment of mortgage loans include changes
in mortgagors' housing needs, job transfers, unemployment, mortgagors' net
equity in the mortgaged properties and servicing decisions. There can be no
certainty as to the rate of prepayments on the mortgage loans in the mortgage
pool during any period or over the life of the certificates. See "Yield and
Maturity Considerations" in the prospectus.
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Defaults on mortgage loans are expected to occur with greater frequency in
their early years. In addition, default rates in most cases are higher for
mortgage loans used to refinance an existing mortgage loan. In the event of a
mortgagor's default on a mortgage loan in the mortgage pool, there can be no
assurance that recourse beyond the specific mortgaged property pledged as
security for repayment will be available. See "The Mortgage Pool--Underwriting
Standards of __________ and Representations Concerning the Mortgage Loans" in
this prospectus supplement.
Furthermore, to the extent that the original pre-funded amount has not been
fully applied to the purchase of subsequent mortgage loans by the end of the
funding period, the holders of the Class A-1 Certificates will receive on the
distribution date immediately following the end of the funding period a
prepayment of principal in an amount equal to the lesser of (i) any amounts
remaining in the pre-funding account and (ii) the outstanding certificate
principal balance of the Class A-1 Certificates. Although no assurance can be
given, it is anticipated by the depositor that the principal amount of
subsequent mortgage loans sold to the trust fund will require the application of
substantially all amounts on deposit in the pre-funding account and that there
will be no material amount of principal prepaid to the holders of the Class A-1
Certificates. However, it is unlikely that the depositor will be able to deliver
subsequent mortgage loans with an aggregate principal balance identical to the
pre-funded amount.
SPECIAL YIELD CONSIDERATIONS
The mortgage rates on the mortgage loans adjust semi-annually based upon
the six-month LIBOR index, after an initial period of approximately three years,
whereas the pass-through rate on the offered certificates (other than the Class
M-3 Certificates) adjusts monthly and may be based upon one-month LIBOR as
described under "Description of the Certificates--Calculation of One-Month
LIBOR" herein. One-month LIBOR and the six-month LIBOR index applicable to the
mortgage loans may respond differently to economic and market factors, and there
is not necessarily a correlation between them. It is possible, for example, that
if both one-month LIBOR and the six-month LIBOR index rise during the same
period, one-month LIBOR may rise more rapidly than the six-month LIBOR index or
may rise higher than the six-month LIBOR index. Thus, the interest due on the
mortgage loans during any due period, net of the expenses of the trust fund, may
not equal the amount of interest that would accrue at one-month LIBOR plus the
applicable spread on the offered certificates during the related Interest
Accrual Period. In such an event the rate payable to the holders of the offered
certificates (other than the Class M-3 Certificates) will be the Net WAC
Pass-Through Rate, this would adversely affect the yield to maturity on such
certificates, and the holders of such Certificates WILL NOT be entitled to
interest in excess of the Net WAC Pass-Through Rate on any future distribution
date. In addition, the Net WAC Pass-Through Rate will be reduced by the
prepayment of mortgage loans with high mortgage rates.
All of the mortgage loans are adjustable-rate mortgage loans. As is the
case with conventional fixed-rate mortgage loans, adjustable-rate mortgage loans
may be subject to a greater rate of principal prepayments in a declining
interest rate environment. For example, if prevailing interest rates were to
fall significantly, adjustable-rate mortgage loans could be subject to higher
prepayment rates than if prevailing interest rates were to remain constant
because the
S-32
<PAGE>
availability of fixed-rate mortgage loans at competitive interest rates may
encourage mortgagors to refinance their adjustable-rate mortgage loans to "lock
in" lower fixed interest rates. The rate of payments (including prepayments) on
pools of mortgage loans is influenced by a variety of economic, geographic,
social and other factors, including changes in mortgagors' housing needs, job
transfers, unemployment, mortgagors' net equity in the mortgaged properties and
servicing decisions. No assurances can be given as to the rate of prepayments on
the mortgage loans in stable or changing interest rate environments and the
seller makes no representations as to the particular factors that will affect
the prepayment of the mortgage loans.
In addition, amounts otherwise distributable to holders of the Class A-2
Certificates and the Class M Certificates may be made available to protect the
holders of the Class A-1 Certificates against interruptions in distributions due
to certain mortgagor delinquencies, to the extent not covered by P&I Advances.
Such delinquencies may affect the yield to investors on the Class A-2
Certificates and the Class M Certificates and, even if subsequently cured, will
affect the timing of the receipt of distributions by the holders of the Class
A-2 Certificates and the Class M Certificates. The rate of delinquencies or
losses will also affect the rate of principal payments on the Class A-2
Certificates and each Class of Class M certificates. See "Description of the
Certificates--Principal Distributions on the Offered Certificates" herein.
WEIGHTED AVERAGE LIFE
Weighted average life refers to the amount of time that will elapse from
the date of issuance of a security until each dollar of principal of the
security will be repaid to the investor. The weighted average life of the
offered certificates of each class will be influenced by the rate at which
principal on the mortgage loans is paid, which may be in the form of scheduled
payments or prepayments, including repurchases and prepayments of principal by
the mortgagor as well as amounts received by virtue of condemnation, insurance
or foreclosure with respect to the mortgage loans, and the timing of these
payments.
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The model used in this prospectus supplement
assumes a prepayment rate for the mortgage loans of ___% CPR. No representation
is made that the mortgage loans in the mortgage pool will prepay at this rate or
any other rate. To assume __% CPR or any other CPR percentage is to assume that
the stated percentage of the outstanding principal balance of the pool is
prepaid over the course of a year.
The tables following the next paragraph indicate the percentage of the
initial certificate principal balance of the indicated classes of certificates
that would be outstanding after each of the dates shown at various constant
percentages of the prepayment model and the corresponding weighted average life
of each class of certificates. The table is based on the following assumptions:
o the mortgage pool consists of ____ mortgage loans with the
characteristics set forth in the table immediately following these
bullet points entitled "Assumed Mortgage Loan Characteristics",
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<PAGE>
o distributions on the certificates are received, in cash, on the __ day
of each month, commencing in ________ ____,
o the mortgage loans prepay at the constant percentages of the
prepayment model indicated,
o no defaults or delinquencies occur in the payment by mortgagors of
principal and interest on the mortgage loans and no shortfalls due to
the application of the Relief Act are incurred,
o none of the depositor, the mortgage loan seller, the originator, the
majorityholder of the Class CE certificates, the master servicer or
any other person purchases from the trust fund any mortgage loan based
on any obligation or option under the pooling and servicing agreement,
except as indicated in the second sentence following the table
entitled "Percent of Initial Certificate Principal Balance Outstanding
at the Specified Percentage of the Prepayment Model",
o scheduled monthly payments on the mortgage loans are received on the
first day of each month commencing in ________ ____, and are computed
prior to giving effect to any prepayments received in the prior month,
o prepayments representing payment in full of individual mortgage loans
are received on the last day of each month commencing in _______ ____,
and include 30 days' interest on the mortgage loan,
o the scheduled monthly payment for each mortgage loan is calculated
based on its principal balance, mortgage rate and remaining term to
maturity so that the mortgage loan will amortize in amounts sufficient
to repay the remaining principal balance of the mortgage loan by its
remaining term to maturity,
o the certificates are purchased on _______ __, ____;
o the six-month LIBOR index remains constant at ____% per annum and the
mortgage rate on each mortgage loan is adjusted on the due date
immediately following the next adjustment date and in subsequent
adjustable dates necessary to equal the six-month LIBOR index plus the
applicable gross margin, subject to the applicable periodic rate cap
each as set forth in the related mortgage note;
o one-month LIBOR remains constant at ____% per annum;
o the monthly payment on each mortgage loan is adjusted on the due date
immediately following the next adjustment date (and on subsequent
adjustment dates if necessary) to equal a fully amortizing monthly
payment;
o the subsequent mortgage loan are purchased on ____________ resulting
in no mandatory prepayment from the pre-funding account on the
distribution date immediately following the end of the funding period;
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<PAGE>
o the initial mortgage loans and the subsequent mortgage loans are
included in the mortgage pool as of the cut-off date; and
o the servicing fee rate is ____% per annum and the trustee's fee rate
is _____% per annum.
ASSUMED MORTGAGE LOAN CHARACTERISTICS
<TABLE>
<CAPTION>
PRINCIPAL
BALANCE ORIGINAL TERM REMAINING TERM NEXT RATE MAXIMUM MINIMUM PERIODIC
AS OF THE MORTGAGE TO MATURITY TO MATURITY ADJUSTMENT GROSS MORTGAGE MORTGAGE RATE
CUT-OFF DATE RATE (MONTHS) (MONTHS) DATE MARGIN (%) RATE(%) RATE(%) CAP(%)
------------ ---- -------- -------- ---- ---------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
$ % % % % %
$ % % % % %
% % % % %
$
</TABLE>
There will be discrepancies between the characteristics of the actual
mortgage loans (after the purchase of subsequent mortgage loans) and the
characteristics assumed in preparing the table immediately following this
paragraph. Any discrepancy may have an effect upon the percentages of the
initial certificate principal balances outstanding and the weighted average
lives of the classes of certificates set forth in the table. In addition, to the
extent that the actual mortgage loans included in the mortgage pool have
characteristics that differ from those assumed in preparing the table
immediately following this paragraph and since it is not likely that the level
of the six-month LIBOR index or one-month LIBOR will remain constant as assumed,
the classes of certificates may mature earlier or later than indicated by the
table immediately following this paragraph. Based on the foregoing assumptions,
the table immediately following this paragraph indicates the weighted average
life of each class of the offered certificates and sets forth the percentage of
the initial certificate principal balance of each class of certificates that
would be outstanding after each of the dates shown, at various percentages of
the prepayment model. Neither the prepayment model used in this prospectus
supplement nor any other prepayment model or assumption purports to be a
historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of mortgage loans, including the
mortgage loans included in the trust fund. Variations in the prepayment
experience and the balance of the mortgage loans that prepay may increase or
decrease the percentages of initial certificate principal balance and weighted
average lives shown in the following table. These variations may occur even if
the average prepayment experience of all of the mortgage loans equals any of the
specified percentages of the prepayment model.
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<PAGE>
<TABLE>
<CAPTION>
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING AT THE
SPECIFIED PERCENTAGES OF THE PREPAYMENT MODEL
CLASS A-1 CERTIFICATES CLASS A-2 CERTIFICATES
DISTRIBUTION DATE 0% 15% 28% 35% 45% 0% 15%% 28% 35% 45%
----------------- -- --- --- --- --- -- ---- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
................................
................................
................................
Weighted Average Life
in Years......................
Weighted Average Life
in Years......................
</TABLE>
The weighted average life of a certificate is determined by (a)
multiplying the amount of each distribution of principal by the number of
years from the date of issuance of the certificate to the related
distribution date, (b) adding the results and (c) dividing the sum by the
initial certificate principal balance of the certificate. The last row of
weighted average lives is calculated using the calculation set forth in the
prior sentence but assumes that the majorityholder of the Class CE
Certificates or master servicer exercises its option to purchase the
mortgage loans on the earliest possible distribution date on which it is
permitted to exercise this option. See "Pooling and Servicing
Agreement--Termination" in this prospectus supplement.
<TABLE>
<CAPTION>
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING AT THE
SPECIFIED PERCENTAGES OF THE PREPAYMENT MODEL
CLASS M-1 CERTIFICATES CLASS M-2 CERTIFICATES CLASS M-3 CERTIFICATES
DISTRIBUTION DATE 0% 15% 28% 35% 45% 0% 15%% 28% 35% 45% 0% 15% 28% 35% 45%
----------------- -- --- --- --- --- -- ---- --- --- --- -- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
............................
............................
............................
Weighted Average Life
in Years..................
Weighted Average Life
in Years..................
</TABLE>
The weighted average life of a certificate is determined by (a)
multiplying the amount of each distribution of principal by the number of
years from the date of issuance of the certificate to the related
distribution date, (b) adding the results and (c) dividing the sum by the
initial certificate principal balance of the certificate. The last row of
weighted average lives is calculated using the calculation set forth in the
prior sentence but assumes that the majorityholder of the Class CE
Certificates or master servicer exercises its option to purchase the
mortgage loans on the earliest possible distribution date on which it is
permitted to exercise this option. See "Pooling and Servicing
Agreement--Termination" in this prospectus supplement.
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<PAGE>
There is no assurance that prepayments of the mortgage loans will conform
to any of the levels of the prepayment model indicated in the immediately
preceding table or to any other level, or that the actual weighted average life
of any class of certificates will conform to any of the weighted average lives
set forth in the immediately preceding table. Furthermore, the information
contained in the table with respect to the weighted average life of each
specified class of certificates is not necessarily indicative of the weighted
average life of each class that might be calculated or projected under different
or varying prepayment assumptions.
The characteristics of the mortgage loans included in the mortgage pool
will differ from those assumed in preparing the immediately preceding table. In
addition, it is unlikely that any mortgage loan will prepay at any constant
percentage of the prepayment model until maturity or that all of the mortgage
loans included in the mortgage pool will prepay at the same rate. The timing of
changes in the rate of prepayments may significantly affect the actual yield to
maturity to investors, even if the average rate of principal prepayments is
consistent with the expectations of investors.
YIELD SENSITIVITY OF THE CLASS A-2 CERTIFICATES AND THE CLASS M CERTIFICATES
If the certificate principal balances of the Class CE Certificates, Class
M-3 Certificates, Class M-2 Certificates and Class M-1 Certificates have been
reduced to zero, the yield to maturity on the Class A-2 Certificates will become
extremely sensitive to losses on the mortgage loans that are covered by
subordination and the timing of losses on the mortgage loans, because the entire
amount of these losses will be allocated to the Class A-2 Certificates. If the
certificate principal balances of the Class CE Certificates, Class M-3
Certificates and Class M-2 certificates have been reduced to zero, the yield to
maturity on the Class M-1 Certificates will become extremely sensitive to losses
on the mortgage loans that are covered by subordination and the timing of losses
on the mortgage loans, because the entire amount of these losses will be
allocated to the Class M-1 Certificates. If the certificate principal balances
of the Class CE Certificates and Class M-3 Certificates have been reduced to
zero, the yield to maturity on the Class M-2 Certificates will become extremely
sensitive to losses on the mortgage loans that are covered by subordination and
the timing of losses on the mortgage loans, because the entire amount of these
losses will be allocated to the Class M-2 Certificates. If the certificate
principal balance of the Class CE Certificates has been reduced to zero, the
yield to maturity on the Class M-3 Certificates will become extremely sensitive
to losses on the mortgage loans that are covered by subordination and the timing
of losses on the mortgage loans because the entire amount of these loans will be
allocated to the Class M-3 Certificates. The initial undivided interest in the
trust fund evidenced by the Class A-2 Certificates, the Class M-1 Certificates,
the Class M-2 Certificates, the Class M-3 certificates and the Class CE
certificates is approximately ____%, approximately ____%, approximately ____%,
approximately ____% and approximately ____%, respectively. Investors in the
Class A-2 Certificates and the Class M Certificates should fully consider the
risk that Realized Losses on the mortgage loans could result in the failure of
these investors to fully recover their investments. In addition once Realized
Losses have been allocated to the Class A-2 Certificates and the Class M
Certificates, such amounts with respect to such certificates will no longer
accrue interest, will not be reinstated thereafter and no amounts in respect
thereof will be distributable to the holders of the Class A-2 Certificates and
the Class M
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<PAGE>
Certificates. For additional considerations relating to the yield on the Class
A-2 and Class M Certificates, see "Yield and Maturity Considerations" in the
prospectus.
Unless the certificate principal balance of the Class A-1 Certificates has
been reduced to zero, the Class A-2 Certificates and the Class M Certificates
will not be entitled to any principal distributions until the Stepdown Date or
during any period in which a Trigger Event is in effect and unless the
certificate principal balance of the Class A-2 Certificates has been reduced to
zero, the Class M Certificates will not be entitled to any principal
distributions until the Stepdown Date or during any period in which a Trigger
Event is in effect. As a result, the weighted average lives of the Class A-2
Certificates and the Class M Certificates will be longer than would otherwise be
the case if distributions of principal were allocated on a PRO RATA basis among
the Class A Certificates and the Class M Certificates. As a result of the longer
weighted average lives of the Class A-2 Certificates and the Class M
Certificates, the holders of such certificates have a greater risk of suffering
a loss on their investments. Further, because a Trigger Event is based on
delinquencies and not losses, it is possible for (i) the Class A-2 Certificates
and the Class M Certificates to receive no principal distributions (unless the
certificate principal balance of the Class A-1 Certificates has been reduced to
zero) and (ii) the Class M Certificates to receive no principal distributions
(unless the certificate principal balance of the Class A-1 Certificates and the
Class A-2 Certificates has been reduced to zero) on and after the Stepdown Date
even if no losses have occurred on the mortgage pool. For additional
considerations relating to the yield on the Class A-2 Certificates and the Class
M Certificates, see "Yield and Maturity Considerations" in the prospectus.
DESCRIPTION OF THE CERTIFICATES
GENERAL DESCRIPTION OF THE CERTIFICATES
The certificates will consist of ________ classes of certificates,
designated as:
o the Class A-1 Certificates and the Class A-2 Certificates which will also
be referred to in this prospectus supplement as the Class A Certificates;
o the Class M-1 Certificates, the Class M-2 Certificates and the Class M-3
Certificates, which will also be referred to in this prospectus supplement as
the Class M Certificates;
o the Class CE Certificates;
o the Class P Certificates, and
o the Class R-I Certificates, the Class R-II Certificates and the Class
R-III Certificates which will also be referred to in this prospectus supplement
as the Residual Certificates.
Only the Class A Certificates and the Class M Certificates are offered by
this prospectus supplement. The Class CE Certificates, the Class P Certificates
and the Residual Certificates which are not being offered hereby, will be
delivered on the closing date to a wholly-owned bankruptcy remote subsidiary of
the originator as partial consideration for the mortgage loans.
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<PAGE>
The certificates represent in the aggregate the entire beneficial ownership
interest in a trust fund consisting primarily of a segregated pool of
conventional, one- to four-family, adjustable- rate, fully-amortizing, first
lien mortgage loans having original terms to maturity of not greater than 30
years, and funds deposited by the depositor in the pre-funding account and the
interest coverage account and an aggregate principal balance as of _______ __,
____, which date shall also be referred to in this prospectus supplement as the
cut-off date, after application of scheduled payments due whether or not
received, of approximately $___________, subject to a permitted variance as
described in this prospectus supplement under "The Mortgage Pool".
Each class of the offered certificates will have the approximate initial
certificate principal balance as set forth in the summary of this prospectus
supplement and will have the Pass- Through Rate determined as provided under
"Summary of Prospectus Supplement--Pass- Through Rate" and "--Interest
Distributions" in this prospectus supplement.
The Class A Certificates and the Class M Certificates will be issued,
maintained and transferred on the book-entry records of the Depository Trust
Company, or DTC, and its participants and in that capacity, will be referred to
in this prospectus supplement as the book- entry certificates. The book-entry
certificates will be issued in minimum denominations of $_____ and integral
multiples of $____ in excess of the minimum denominations.
The depositor has been informed by DTC that DTC's nominee will be CEDE &
Co. No person acquiring an interest in any class of the book-entry certificates
will be entitled to receive a certificate representing that person's interest,
except as set forth in the section of this prospectus supplement entitled
"--Definitive Certificates". Unless and until a certificate is issued in fully
registered certificated form, a definitive certificate, under the limited
circumstances described in this prospectus supplement, all references to actions
by certificateholders with respect to the book-entry certificates shall refer to
actions taken by DTC upon instructions from its participants, and all references
in this prospectus supplement to distributions, notices, reports and statements
to certificateholders with respect to the book-entry certificates shall refer to
distributions, notices, reports and statements to DTC CEDE & Co., as the
registered holder of the book-entry certificates, for distribution to
certificate owners in accordance with DTC procedures. See "--Registration of the
Book-Entry Certificates" and "--Definitive Certificates" in this prospectus
supplement.
No service charge will be imposed for any registration of transfer or
exchange, but the trustee may require payment of a sum sufficient to cover any
tax or other governmental charge imposed in connection with any registration of
this kind.
All distributions to holders of the certificates, other than the final
distribution on any class of certificates, will be made on each distribution
date by or on behalf of the trustee to the persons in whose names the
certificates are registered at the close of business on the related record date.
The record date for each distribution date is:
o with respect to any book-entry certificates, the close of business on the
business day immediately preceding the distribution date or
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<PAGE>
o with respect to any other class of certificates, including any definitive
certificates, the close of business on the last business day of the month
preceding the month in which the distribution date occurs.
Distributions will be made either by check mailed to the address of each
the certificateholder as it appears in the certificate register or upon written
request to the trustee at least five business days prior to the relevant Record
Date by any holder of certificates having an aggregate initial certificate
principal balance that is in excess of the lesser of:
o $5,000,000 or
o two-thirds of the initial aggregate certificate principal balance or
Notional Amount, as applicable, of that class of certificates
by wire transfer in immediately available funds to the account of the
certificateholder specified in the request. The final distribution on any class
of certificates will be made in like manner, but only upon presentment and
surrender of these certificates at the corporate trust office of the trustee or
another location specified in the notice to certificateholders of the final
distribution.
REGISTRATION OF THE BOOK-ENTRY CERTIFICATES
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 New York Uniform Commercial Code, and a
clearing agency registered under the provisions of Section 17A of the Securities
Exchange Act of 1934, as amended. DTC was created to hold securities for its
participating organizations and to facilitate the clearance and settlement of
securities transactions between its participants through electronic book
entries, thereby eliminating the need for physical movement of certificates.
Participants include securities brokers and dealers, including the underwriter
of the certificates offered by this prospectus supplement, banks, trust
companies and clearing corporations. Indirect access to the DTC system is also
available to others such as banks, brokers, dealers, and trust companies that
clear through or maintain a custodial relationship with a participant, either
directly or indirectly.
Certificate owners that are not participants or indirect participants but
desire to purchase, sell or otherwise transfer ownership of, or other interests
in, the book-entry certificates may do so only through participants and indirect
participants. In addition, certificate owners will receive all distributions of
principal of and interest on the book-entry certificates from the trustee
through DTC and DTC participants. The trustee will forward payments to DTC in
same day funds and DTC will forward these payments to participants in next day
funds settled through the New York Clearing House. Each participant will be
responsible for disbursing these payments to indirect participants or to
certificate owners. Unless and until definitive certificates are issued, it is
anticipated that the only certificateholder of the book-entry certificates will
be CEDE & Co., as nominee of DTC. Certificate owners will not be recognized by
the trustee as certificateholders, as the term is used in the pooling and
servicing agreement and certificate owners will be permitted to exercise the
rights of certificateholders only indirectly through DTC and its participants.
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<PAGE>
Under the rules, regulations and procedures creating and affecting DTC and
its operations, DTC is required to make book-entry transfers of the book-entry
certificates among participants and to receive and transmit distributions of
principal of, and interest on, the book-entry certificates. Participants and
indirect participants with which certificate owners have accounts with respect
to the book-entry certificates similarly are required to make book-entry
transfers and receive and transmit payments on behalf of their respective
certificate owners. Accordingly, although certificate owners will not possess
definitive certificates, the rules, regulations and procedures creating and
affecting DTC and its operations provide a mechanism by which certificate owners
through their participants and indirect participants will receive payments and
will be able to transfer their interest.
Because DTC can only act on behalf of participants, who in turn act on
behalf of indirect participants and on behalf of banks, the ability of a
certificate owner to pledge book-entry certificates to persons or entities that
do not participate in the DTC system, or to otherwise act with respect to these
certificates, may be limited due to the absence of physical certificates for the
book-entry certificates. In addition, under a book-entry format, certificate
owners may experience delays in their receipt of payments since distributions
will be made by the trustee to CEDE & Co., as nominee for DTC.
Under the rules, regulations and procedures creating and affecting DTC and
its operations , DTC will take action permitted to be taken by a
certificateholder under the pooling and servicing agreement only at the
direction of one or more participants to whose DTC account the book-entry
certificates are credited. Additionally, under the rules, regulations and
procedures creating and affecting DTC and its operations, DTC will take actions
with respect to specified voting rights only at the direction of and on behalf
of participants whose holdings of book-entry certificates evidence these
specified voting rights. DTC may take conflicting actions with respect to voting
rights, to the extent that participants whose holdings of book-entry
certificates evidencing these voting rights, authorize divergent action.
However, DTC's ability to perform properly its services is also dependent
upon other parties, including but not limited to, issuers and their agents, as
well as third party vendors from whom DTC licenses software and hardware, and
third party vendors on which DTC relies for information or the provision of
services, including telecommunication and electrical utility service providers,
among others.
According to DTC, the foregoing information with respect to DTC has been
provided to its participants and other members of the financial community for
informational purposes only and is not intended to serve as a representation,
warranty or contract modification of any kind.
The depositor, the master servicer and the trustee will have no liability
for any actions taken by DTC or its nominee including, without limitation any
aspect of the records relating to or payments made on account of beneficial
ownership interests in the book-entry certificates held by CEDE & Co., as
nominee for DTC, or for maintaining, supervising or reviewing any records
relating to beneficial ownership interests.
DEFINITIVE CERTIFICATES
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<PAGE>
Definitive certificates will be issued to certificate owners or their
nominees, respectively, rather than to DTC or its nominee, only if:
o the depositor advises the trustee in writing that DTC is no longer
willing or able to discharge properly its responsibilities as clearing agency
with respect to the book-entry certificates and the depositor is unable to
locate a qualified successor,
o the depositor, at its option, elects to terminate the book-entry
system through DTC, or
o after the occurrence of an event of default, certificate owners
representing in the aggregate not less than 51% of the Voting Rights of the
book-entry certificates advise the trustee and DTC through participants, in
writing, that the continuation of a book-entry system through DTC, or a
successor to DTC, is no longer in the certificate owners' best interest.
Upon the occurrence of any event described in the immediately preceding
paragraph, the trustee is required to notify all certificate owners through
participants of the availability of definitive certificates. Upon surrender by
DTC of the definitive certificates representing the book-entry certificates and
receipt of instructions for re-registration, the trustee will reissue the
book-entry certificates as definitive certificates issued in the respective
principal amounts owned by individual certificate owners, and thereafter the
trustee will recognize the holders of definitive certificates as
certificateholders under the pooling and servicing agreement. Definitive
certificates will be issued in minimum denominations of $______, except that any
beneficial ownership represented by a book-entry certificate in an amount less
than $______ immediately prior to the issuance of a definitive certificate shall
be issued in a minimum denomination equal to the amount of this beneficial
ownership.
GLOSSARY OF TERMS
The following terms are given the meanings shown below to help describe the
cash flows on the certificates:
AVAILABLE DISTRIBUTION AMOUNT: The Available Distribution Amount for any
distribution date is equal to the sum, net of amounts reimbursable therefrom to
the master servicer or the trustee, of (i) the aggregate amount of scheduled
monthly payments on the mortgage loans due on the related due date and received
on or prior to the related determination date, after deduction of the servicing
fee and the trustee fee, (ii) certain unscheduled payments in respect of the
mortgage loans, including prepayments, insurance proceeds, liquidation proceeds
and proceeds from repurchases of and substitutions for the mortgage loans
occurring during the preceding calendar month, (iii) all P&I Advances with
respect to the mortgage loans received for such distribution date, (iv) with
respect to the distribution date immediately following the end of the funding
period, any amounts remaining in the pre-funding account after giving effect to
any purchase of subsequent mortgage loans and (v) with respect to each
distribution date during the funding period and on the distribution date
immediately following the end of the funding period, any amounts withdrawn by
the trustee from the Interest Coverage Account for distribution on the
certificates. The holders of the Class P Certificates will be entitled to all
prepayment charges received on the mortgage loans and such amounts will not be
available for distribution to the offered certificates.
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<PAGE>
BANKRUPTCY LOSS: A Bankruptcy Loss is a Deficient Valuation or a Debt
Service Reduction.
CERTIFICATE PRINCIPAL BALANCE: The certificate principal balance of a
certificate outstanding at any time represents the then maximum amount that the
holder thereof is entitled to receive as distributions allocable to principal
from the cash flow on the mortgage loans and the other assets in the trust fund.
The certificate principal balance of any class of offered certificates as of any
date of determination is equal to the initial certificate principal balance
thereof reduced by the aggregate of (a) all amounts allocable to principal
previously distributed with respect to such certificate and (b) any reductions
in the certificate principal balance thereof deemed to have occurred in
connection with allocations of Realized Losses in the manner described herein.
The certificate principal balance of the Class CE Certificates as of any date of
determination is equal to the excess, if any, of (a) the then aggregate
principal balance of the mortgage loans over (b) the then aggregate certificate
principal balance of the offered certificates and the Class P Certificates.
CLASS A-1 INTEREST DISTRIBUTION AMOUNT: The Class A-1 Interest Distribution
Amount on any distribution date is equal to the Interest Distribution Amounts
for such distribution date for the Class A-1 Certificates and the Interest Carry
Forward Amount, if any, for that Distribution Date for the Class A-1
Certificates.
CLASS A-1 PRINCIPAL DISTRIBUTION AMOUNT: The Class A-1 Principal
Distribution Amount for any distribution date on or after the Stepdown Date and
on which a Trigger Event is not in effect, is an amount equal to the excess of
(x) the Certificate Principal Balance of the Class A-1 Certificates immediately
prior to such distribution date over (y) the lesser of (A) the product of (i)
approximately _____% and (ii) the aggregate principal balance of the mortgage
loans as of the last day of the related Due Period and (B) the aggregate
principal balance of the mortgage loans as of the last day of the related Due
Period minus approximately $_________.
CLASS A-2 INTEREST DISTRIBUTION AMOUNT: The Class A-2 Interest Distribution
Amount on any distribution date is equal to the Interest Distribution Amounts
for such distribution date for the Class A-2 Certificates and the Interest Carry
Forward Amount, if any, for that distribution date for the Class A-2
Certificates.
CLASS A-2 PRINCIPAL DISTRIBUTION AMOUNT: The Class A-2 Principal
Distribution Amount for any distribution date on or after the Stepdown Date and
on which a Trigger Event is not in effect, is an amount equal to the excess of
(x) the sum of (i) the Certificate Principal Balance of the Class A-1
Certificates (after taking into account the payment of the Class A-1 Principal
Distribution Amount on such distribution date) and (ii) the Certificate
Principal Balance of the Class A-2 Certificates immediately prior to such
distribution date over (y) the lesser of (A) the product of (i) approximately
_____% and (ii) the aggregate principal balance of the mortgage loans as of the
last day of the related Due Period and (B) the aggregate principal balance of
the mortgage loans as of the last day of the related Due Period minus
approximately $_________.
CLASS M-1 PRINCIPAL DISTRIBUTION AMOUNT: The Class M-1 Principal
Distribution Amount for any distribution date on or after the Stepdown Date and
on which a Trigger Event is not in effect, is an amount equal to the excess of
(x) the sum of (i) the Certificate Principal Balance of the Class A-1
Certificates (after taking into account the payment of the Class A-1 Principal
Distribution Amount on such distribution date), (ii) the Certificate Principal
Balance of the Class
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A-2 Certificates (after taking into account the payment of the Class A-2
Principal Distribution Amount on such distribution date) and (iii) the
Certificate Principal Balance of the Class M-1 Certificates immediately prior to
such distribution date over (y) the lesser of (A) the product of (i)
approximately _____% and (ii) the aggregate principal balance of the mortgage
loans as of the last day of the related Due Period and (B) the aggregate
principal balance of the mortgage loans as of the last day of the related Due
Period minus approximately $_________.
CLASS M-2 PRINCIPAL DISTRIBUTION AMOUNT: The Class M-2 Principal
Distribution Amount for any distribution date on or after the Stepdown Date and
on which a Trigger Event is not in effect, is an amount equal to the excess of
(x) the sum of (i) the Certificate Principal Balance of the Class A-1
Certificates (after taking into account the payment of the Class A-1 Principal
Distribution Amount on such distribution date), (ii) the Certificate Principal
Balance of the Class A-2 Certificates (after taking into account the payment of
the Class A-2 Principal Distribution Amount on such distribution date), (iii)
the Certificate Principal Balance of the Class M-1 Certificates (after taking
into account the payment of the Class M-1 Principal Distribution Amount on such
distribution date) and (iv) the Certificate Principal Balance of the Class M-2
Certificates immediately prior to such Distribution Date over (y) the lesser of
(A) the product of (i) approximately _____% and (ii) the aggregate principal
balance of the mortgage loans as of the last day of the related Due Period and
(B) the aggregate principal balance of the mortgage loans as of the last day of
the related Due Period minus approximately $_________.
CLASS M-3 PRINCIPAL DISTRIBUTION AMOUNT: The Class M-3 Principal
Distribution Amount for any distribution date on or after the Stepdown Date and
on which a Trigger Event is not in effect, is an amount equal to the excess of
(x) the sum of (i) the Certificate Principal Balance of the Class A-1
Certificates (after taking into account the payment of the Class A-1 Principal
Distribution Amount on such distribution date), (ii) the Certificate Principal
Balance of the Class A-2 Certificates (after taking into account the payment of
the Class A-2 Principal Distribution Amount on such distribution date), (iii)
the Certificate Principal Balance of the Class M-1 Certificates (after taking
into account the payment of the Class M-1 Principal Distribution Amount on such
distribution date), (iv) the Certificate Principal Balance of the Class M-2
Certificates (after taking into account the payment of the Class M-2 Principal
Distribution Amount on such distribution date) and (v) the Certificate Principal
Balance of the Class M-3 Certificates immediately prior to such distribution
date over (y) the lesser of (A) the product of (i) approximately _____% and (ii)
the aggregate principal balance of the mortgage loans as of the last day of the
related Due Period and (B) the aggregate principal balance of the mortgage loans
as of the last day of the related Due Period minus approximately $_________.
COMPENSATORY INTEREST: With respect to any principal prepayments, any
payments made by the master servicer from its own funds to cover Prepayment
Interest Shortfalls.
CREDIT ENHANCEMENT PERCENTAGE: The Credit Enhancement Percentage for any
Distribution Date is the percentage obtained by dividing (x) the aggregate
Certificate Principal Balance of the Class A-2 Certificates, the Class CE
Certificates and the Class M Certificates by (y) the aggregate principal balance
of the mortgage loans, calculated after taking into account distributions of
principal on the mortgage loans and distributions of principal to the holders of
the certificates then entitled to distributions of principal on such
distribution date.
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DEBT SERVICE REDUCTION: A Debt Service Reduction is any reduction in the
amount which a mortgagor is obligated to pay on a monthly basis with respect to
a mortgage loan as a result of any proceeding initiated under the United States
Bankruptcy Code, other than a reduction attributable to a Deficient Valuation.
DEFICIENT VALUATION: A Deficient Valuation is a valuation by a court of
competent jurisdiction of the mortgaged property in an amount less than the then
outstanding indebtedness under the mortgage loan, which valuation results from a
proceeding initiated under the United States Bankruptcy Code.
DUE PERIOD: The Due Period with respect to any distribution date commences
on the second day of the month immediately preceding the month in which such
distribution date occurs and ends on the first day of the month in which such
distribution date occurs.
EXPENSE ADJUSTED MORTGAGE RATE: The Expense Adjusted Mortgage Rate on any
mortgage loan is equal to the then applicable mortgage rate thereon minus the
sum of (i) the trustee fee rate and (ii) the servicing fee rate. For any
distribution date, the trustee fee rate is equal to _____% per annum and the
servicing fee rate is equal to ____% per annum.
INTEREST ACCRUAL PERIOD: The Interest Accrual Period for any distribution
date and the offered certificates (other than the Class M-3 Certificates) is the
period commencing on the distribution date of the month immediately preceding
the month in which such distribution date occurs (or, in the case of the first
period, commencing on the closing date) and ending on the day preceding such
distribution date, and all distributions of interest on the offered certificates
will be based on a 360-day year and the actual number of days in the applicable
Interest Accrual Period. The INTEREST ACCRUAL PERIOD for any distribution date
and the Class M-3 Certificates is the one- month period preceding the month in
which such distribution date occurs, and all distributions of interest on the
Class M-3 Certificates will be based on a 360-day year consisting of twelve 30-
day months.
INTEREST CARRY FORWARD AMOUNT: The Interest Carry Forward Amount with
respect to the offered certificates and any distribution date is equal to the
amount, if any, by which the Interest Distribution Amount for such class of
certificates for the immediately preceding distribution date exceeded the actual
amount distributed on such certificates in respect of interest on such
immediately preceding distribution date, together with any Interest Carry
Forward Amount with respect to such certificates remaining unpaid from the
previous distribution date plus interest accrued thereon at the related
Pass-Through Rate on such certificates for the most recently ended Interest
Accrual Period. The Interest Carry Forward Amount with respect to the Class A-1
Certificates or the Class A-2 Certificates, if any, is distributed as part of
the Class A-1 Interest Distribution Amount or the Class A-2 Interest
Distribution Amount, as applicable, on each distribution date. The Interest
Carry Forward Amount with respect to the Class M Certificates, if any, may be
carried forward to succeeding distribution dates and, subject to available
funds, will be distributed in the manner set forth in "--Overcollateralization
Provisions" herein.
INTEREST DISTRIBUTION AMOUNT: The Interest Distribution Amount for the
offered certificates of any class on any distribution date is equal to interest
accrued during the related Interest Accrual Period on the Certificate Principal
Balance of that class immediately prior to such
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distribution date at the then applicable Pass-Through Rate for such class, and
reduced (to not less than zero), in the case of each such class, by the
allocable share, if any, for such class of Prepayment Interest Shortfalls to the
extent not covered by Compensating Interest paid by the master servicer,
shortfalls resulting from the application of the Relief Act and certain other
interest shortfalls not covered by the subordination provided by more
subordinate classes of certificates. On any distribution date, any shortfalls
resulting from application of the Relief Act and any Prepayment Interest
Shortfalls to the extent not covered by Compensating Interest paid by the master
servicer will be allocated first, to the interest distribution amount with
respect to the Class CE Certificates, and thereafter, to the Interest
Distribution Amounts with respect to the Offered Certificates on a PRO RATA
basis based on the respective amounts of interest accrued on such Certificates
for such Distribution Date. The Holders of the Offered Certificates will be
entitled to reimbursement for any such interest shortfalls, subject to available
funds, in the priorities described under "--Overcollateralization Provisions"
herein.
INTEREST REMITTANCE AMOUNT: The Interest Remittance Amount for any
distribution date is that portion of the Available Distribution Amount for such
distribution date that represents interest received or advanced on the mortgage
loans.
NET MONTHLY EXCESS CASHFLOW: The Net Monthly Excess Cashflow for any
distribution date is equal to the sum of (a) any Overcollateralization Reduction
Amount and (b) the excess of (x) the Available Distribution Amount for such
Distribution Date over (y) the sum for such distribution date of the aggregate
of the Interest Distribution Amounts payable to the holders of the offered
certificates and the sum of the amounts described in clauses (b)(i) through
(iii) of the definition of Principal Distribution Amount.
NET WAC PASS-THROUGH RATE: The Net WAC Pass-Through Rate for any
distribution date is a rate per annum equal to the weighted average of the
Expense Adjusted Mortgage Rates on the then outstanding mortgage loans, weighted
based on their Scheduled Principal Balances as of the first day of the calendar
month preceding the month in which the distribution date occurs multiplied by a
fraction, the numerator of which is 30 and the denominator of which is the
actual number of days elapsed in the related Interest Accrual Period. If for any
distribution date the Pass-Through Rate for any class of the offered
certificates (other than the Class M-3 Certificates) is limited to the Net WAC
Pass-Through Rate for such distribution date, the holders of such Certificates
WILL NOT be entitled to recover the resulting basis risk shortfall on any future
distribution date.
OVERCOLLATERALIZED AMOUNT: The Overcollateralized Amount with respect to
any distribution date, is the excess, if any, of (a) the sum of the aggregate
principal balance of the mortgage loans immediately following such distribution
date and the amount of any funds in the pre-funding account over (b) the sum of
the aggregate Certificate Principal Balances of the offered certificates and the
Class P Certificates, after taking into account the payment of the amounts
described in clauses (b)(i) through (iv) of the definition of Principal
Distribution Amount on such distribution date.
OVERCOLLATERALIZATION INCREASE AMOUNT: The Overcollateralization Increase
Amount with respect to the offered certificates and any distribution date, is
any amount of Net Monthly Excess
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Cashflow actually applied as an accelerated payment of principal to the extent
the Required Overcollateralized Amount exceeds the Overcollateralized Amount as
of such distribution date.
OVERCOLLATERALIZED REDUCTION AMOUNT: The Overcollateralized Reduction
Amount with respect to the offered certificates and any distribution date, is
the amount by which the Overcollateralized Amount exceeds the Required
Overcollateralized Amount after taking into account all other distributions to
be made on such distribution date, which amount shall be distributed as Net
Monthly Excess Cashflow pursuant to the priorities set forth under
"Overcollateralization Provisions" in this prospectus supplement.
PASS-THROUGH RATE: The Pass-Through Rate for each class of certificates,
other than the Class M-3 Certificates will be a rate per annum equal to the
lesser of (i) one-month LIBOR plus ____% in the case of each distribution date
through and including the distribution date on which the aggregate principal
balance of the mortgage loans (and properties acquired in respect thereof)
remaining in the trust fund is reduced to less than 10% of the sum of the
aggregate principal balance of the initial mortgage loans as of the cut-off date
and the original pre-funded amount, or one-month LIBOR plus ____%, in the case
of any distribution date thereafter and (ii) the Net WAC Pass-Through Rate for
such Distribution Date. The Pass-Through Rate for the Class M-3 Certificates is
____% per annum.
PREPAYMENT INTEREST SHORTFALLS: With respect to any principal prepayments
of the mortgage loans, any resulting interest shortfall.
PREPAYMENT PERIOD: The Prepayment Period with respect to any distribution
date is the calendar month immediately preceding the month in which such
distribution date occurs.
PRINCIPAL DISTRIBUTION AMOUNT: The Principal Distribution Amount for any
Distribution Date will be the lesser of:
(a) the excess of the Available Distribution Amount over the aggregate
of the Interest Distribution Amounts for the offered certificates; and
(b) THE SUM OF:
(i) the principal portion of all scheduled monthly payments on
the mortgage loans due during the related Due Period, whether or
not received on or prior to the related Determination Date;
(ii) the principal portion of all proceeds received in respect
of the repurchase of a mortgage loan (or, in the case of a
substitution, certain amounts representing a principal adjustment)
as required by the pooling and servicing agreement during the
related Prepayment Period;
(iii) the principal portion of all other unscheduled
collections, including insurance proceeds, liquidation proceeds
and all full and partial principal prepayments, received during
the related Prepayment Period, to the extent applied as recoveries
of principal on the mortgage loans, and with respect to the
distribution date immediately following
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the end of the funding period, any amounts remaining in the
pre-funding account after giving effect to the purchase of any
subsequent mortgage loans;
(iv) the principal portion of any Realized Losses incurred on
any mortgage loans in the calendar month preceding such
distribution date to the extent covered by Net Monthly Excess
Cashflow for such distribution date; and
(v) the amount of any Overcollateralization Increase Amount
for such distribution date;
MINUS
(vi) the amount of any Overcollateralization Reduction Amount
for such distribution date.
REALIZED LOSS: A Realized Loss is any Bankruptcy Loss or the amount of loss
realized with respect to any defaulted mortgage loan that is finally liquidated
through foreclosure sale, disposition of the related mortgaged property (if
acquired on behalf of the certificateholders by deed in lieu of foreclosure) or
otherwise. The amount of loss realized, if any, will equal the portion of the
unpaid principal balance remaining, if any, plus interest thereon through the
last day of the month in which such mortgage loan was finally liquidated, after
application of all amounts recovered (net of amounts reimbursable to the master
servicer for P&I Advances, servicing advances and other related expenses,
including attorney's fees) towards interest and principal owing on the mortgage
loan.
REQUIRED OVERCOLLATERALIZED AMOUNT: The Required Overcollateralized Amount
is the overcollaterized amount required at any time as set forth in the pooling
and servicing agreement.
SCHEDULED PRINCIPAL BALANCE: The Scheduled Principal Balance of any
mortgage loan as of any date of determination is equal to the principal balance
thereof as of the cut-off date (after application of all scheduled principal
payments due on or before the cut-off date, whether or not received), reduced by
(x) the principal portion of all monthly payments due on or before the date of
determination, whether or not received, (y) all amounts allocable to unscheduled
principal that were received prior to the calendar month in which the date of
determination occurs and (z) any Bankruptcy Loss (as defined herein) occurring
out of a Deficient Valuation (as defined herein) that was incurred prior to the
calendar month in which the date of determination occurs.
STEPDOWN DATE: The Stepdown Date for any distribution date is the later to
occur of (x) the distribution date occurring in _____________ and (y) the first
distribution date on which the Credit Enhancement Percentage (calculated for
this purpose only after taking into account distributions of principal on the
mortgage loans, but prior to any distribution of principal to the holders of the
certificates then entitled to distributions of principal on such distribution
date) is greater than or equal to approximately _____%.
TRIGGER EVENT: A Trigger Event is in effect with respect to any
distribution date, if the percentage obtained by dividing (x) the principal
amount of mortgage loans delinquent 60 days or more by (y) the aggregate
principal balance of the mortgage loans, in each case, as of the last
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day of the previous calendar month, exceeds the lesser of (i) __% of the Credit
Enhancement Percentage (calculated for this purpose only with the aggregate
Certificate Principal Balance of the Class CE Certificates and the Class M
Certificates) and (ii) approximately _____%.
INTEREST DISTRIBUTIONS
Distributions on each distribution date will be made to the extent of the
Interest Remittance Amount for the distribution date.
Distributions in respect of interest will be made in the following order of
priority:
FIRST, to the holders of the Class A-1 Certificates, the Class A-1 Interest
Distribution Amount;
SECOND, to the holders of the Class A-2 Certificates, the Class A-2
Interest Distribution Amount;
THIRD, to the holders of the Class M-1 Certificates, the Interest
Distribution Amount allocable to such certificates;
FOURTH, to the holders of the Class M-2 Certificates, the Interest
Distribution Amount allocable to such certificates; and
FIFTH, to the holders of the Class M-3 Certificates, the Interest
Distribution Amount allocable to such certificates.
CALCULATION OF ONE-MONTH LIBOR
On the second business day preceding the beginning of each accrual period,
the trustee will determine one-month LIBOR for such accrual period with respect
to each class of the offered certificates (other than the Class M-3
Certificates). One-month LIBOR will be the rate for deposits in United States
dollars for a term equal to the relevant accrual period which appears in the
Telerate Page 3750 as of 11:00 a.m., London time, on such date. The first
accrual period shall begin on the closing date. If such rate does not appear on
Telerate Page 3750, the rate for that day will be determined on the basis of the
rates at which deposits in United States dollars are offered by the Reference
Banks at approximately 11:00 a.m., London time, on that day to banks in the
London interbank market for a term equal to the relevant accrual period. The
trustee will request the principal London office of each of the Reference Banks
to provide a quotation of its rate. If at least two such quotations are
provided, the rate for that day will be the arithmetic mean of the quotations
(rounded upwards if necessary to the nearest whole multiple of 0.0625%). If
fewer than two quotations are provided as requested, the rate for that day will
be the higher of (x) one-month LIBOR as determined on the previous interest
determination date and (y) the Reserve Interest Rate. The Reserve Interest Rate
shall be either (i) the arithmetic mean (rounded upwards if necessary to the
nearest whole multiple of 0.0625%) of the rates quoted by major banks in New
York City, selected by the trustee, at approximately 11:00 a.m., New York City
time, on that day for loans in United States dollars to leading European banks
for a term equal to the relevant accrual period or (ii) in the event that the
trustee can determine no such arithmetic mean, the
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lowest rate quoted by major banks in New York City on that day for loans in
United States dollars to leading European banks for a term equal to the relevant
accrual period.
Telerate Page 3750 means the display page currently so designated on the
Dow Jones Telerate Service (or such other page as may replace the page on that
service for the purpose of displaying comparable rates or prices) and Reference
Banks means leading banks selected by the trustee and engaged in transactions in
Eurodollar deposits in the international Eurocurrency market which are not
controlling, controlled by, or under common control with, the depositor, the
originator or the mortgage loan seller.
The establishment of one-month LIBOR on each interest determination date by
the trustee and the trustee's calculation of the rate of interest applicable to
the offered certificates (other than the Class M-3 Certificates) for the related
accrual period shall (in the absence of manifest error) be final and binding.
PRINCIPAL DISTRIBUTIONS ON THE OFFERED CERTIFICATES
On each distribution date (a) prior to the Stepdown Date or (b) on which a
Trigger Event is in effect, the Principal Distribution Amount shall be
distributed: first, to the Class A-1 Certificates, until the Certificate
Principal Balance thereof has been reduced to zero; second, to the Class A-2
Certificates until the Certificate Principal Balance thereof has been reduced to
zero; third, to the Class M-1 Certificates, until the Certificate Principal
Balance thereof has been reduced to zero; fourth, to the Class M-2 Certificates,
until the Certificate Principal Balance thereof has been reduced to zero; and
fifth, to the Class M-3 Certificates, until the Certificate Principal Balance
thereof has been reduced to zero.
On each distribution date (a) on or after the Stepdown Date and (b) on
which a Trigger Event is not in effect, the holders of each class of offered
certificates shall be entitled to receive distributions in respect of principal
to the extent of the Principal Distribution Amount in the following amounts and
order of priority:
FIRST, the lesser of (x) the Principal Distribution Amount and (y) the
Class A-1 Principal Distribution Amount, shall be distributed to the
holders of the Class A-1 Certificates, until the Certificate Principal
Balance thereof has been reduced to zero;
SECOND, the lesser of (x) the excess of (i) the Principal Distribution
Amount over (ii) the sum of the amounts distributed to the holders of the
Class A-1 Certificates pursuant to clause first above and (y) the Class A-2
Principal Distribution Amount, shall be distributed to the holders of the
Class A-2 Certificates, until the Certificate Principal Balance thereof has
been reduced to zero
THIRD, the lesser of (x) the excess of (i) the Principal Distribution
Amount over (ii) the sum of the amounts distributed to the holders of the
Class A-1 Certificates pursuant to clause first above and to the holders of
the Class A-2 Certificates pursuant to clause second above and (y) the
Class M-1 Principal Distribution Amount, shall be distributed to the
holders of the Class M-1 Certificates, until the Certificate Principal
Balance thereof has been reduced to zero; and
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FOURTH, the lesser of (x) the excess of (i) the Principal Distribution
Amount over (ii) the sum of the amounts distributed to the holders of the
Class A-1 Certificates pursuant to clause first above, to the holders of
the Class A-2 Certificates pursuant to clause second above and to the
holders of the Class M-1 Certificates pursuant to clause third above and
(y) the Class M-2 Principal Distribution Amount, shall be distributed to
the holders of the Class M-2 Certificates, until the Certificate Principal
Balance thereof has been reduced to zero.
FIFTH, the lesser of (x) the excess of (i) the Principal Distribution
Amount over (ii) the sum of the amounts distributed to the holders of the
Class A-1 Certificates pursuant to clause first above, to the holders of
the Class A-2 Certificates pursuant to clause second above, to the holders
of the Class M-1 Certificates pursuant to clause third above and to the
holders of the Class M-2 Certificates pursuant to clause fourth above and
(y) the Class M-3 Principal Distribution Amount, shall be distributed to
the holders of the Class M-3 Certificates, until the Certificate Principal
Balance thereof has been reduced to zero.
The allocation of distributions in respect of principal to the Class A-1
Certificates on each Distribution Date (a) prior to the Stepdown Date or (b) on
which a Trigger Event has occurred, will have the effect of accelerating the
amortization of the Class A-1 Certificates while, in the absence of Realized
Losses, increasing the respective percentage interest in the principal balance
of the mortgage loans evidenced by the Class A-2 Certificates, the Class M
Certificates and the Class CE Certificates. Increasing the respective percentage
interest in the trust fund of the Class A-2 Certificates, the Class M
Certificates and the Class CE Certificates relative to that of the Class A-1
Certificates is intended to preserve the availability of the subordination
provided by the Class A-2 Certificates, the Class M Certificates and the Class
CE Certificates.
CREDIT ENHANCEMENT
The Credit Enhancement provided for the benefit of the holders of the Class
A-1 Certificates consists of subordination, as described below, and
overcollateralization, as described under "--Overcollateralization Provisions"
herein.
The rights of the holders of the Class A-2 Certificates, the Class M
Certificates and the Class CE Certificates to receive distributions will be
subordinated, to the extent described herein, to the rights of the holders of
the Class A-1 Certificates. This subordination is intended to enhance the
likelihood of regular receipt by the holders of the Class A-1 Certificates of
the full amount of their scheduled monthly payments of interest and principal
and to afford such holders protection against Realized Losses.
The protection afforded to the holders of the Class A-1 Certificates by
means of the subordination of the Class A-2 Certificates, the Class M
Certificates and the Class CE Certificates will be accomplished by (i) the
preferential right of the holders of the Class A-1 Certificates to receive on
any distribution date, prior to distribution to the holders of the Class A- 2
Certificates, the Class M Certificates and the Class CE Certificates,
distributions in respect of interest and principal, subject to available funds
and (ii) if necessary, the right of the holders of the Class A-1 Certificates to
receive future distributions of amounts that would otherwise be payable to the
holders of the Class A-2 Certificates, the Class M Certificates and the Class CE
Certificates.
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In addition, the rights of the holders of the Class M Certificates and the
Class CE Certificates to receive distributions in respect of the mortgage loans
will be subordinated to the rights of the holders of the Class A-2 Certificates.
Furthermore, the rights of the holders of the Class M Certificates with lower
numerical class designations will be senior to the rights of holders of the
Class M Certificates with higher numerical class designations, and the rights of
the holders of the Class M Certificates to receive distributions in respect of
the mortgage loans will be senior to the rights of the holders of the Class CE
Certificates, in each case to the extent described herein. This subordination is
intended to enhance the likelihood of regular receipt by the holders of more
senior certificates of distributions in respect of interest and principal and to
afford such holders protection against Realized Losses.
OVERCOLLATERALIZATION PROVISIONS
The weighted average Expense Adjusted Mortgage Rate for the mortgage loans
is generally expected to be higher than the weighted average of the Pass-Through
Rates on the offered certificates, thus generating excess interest collections
which, in the absence of Realized Losses, will not be necessary to fund interest
distributions on the offered certificates. The pooling and servicing requires
that, on each distribution date, the Net Monthly Excess Cashflow, if any, be
applied on such distribution date as an accelerated payment of principal on the
class or classes of offered certificates then entitled to receive distributions
in respect of principal, but only to the limited extent hereafter described.
With respect to any distribution date, any Net Monthly Excess Cashflow (or,
in the case of clause first below, the Net Monthly Excess Cashflow exclusive of
any Overcollateralization Reduction Amount) shall be paid as follows:
FIRST, to the holders of the class or classes of certificates then entitled
to receive distributions in respect of principal, in an amount equal to the
principal portion of any Realized Losses incurred on the mortgage loans;
SECOND, to the holders of the class or classes of Certificates then
entitled to receive distributions in respect of principal, in an amount
equal to the Overcollateralization Increase Amount;
THIRD, to the holders of the Class M-1 Certificates, in an amount equal to
the Interest Carry Forward Amount allocable to such certificates;
FOURTH, to the holders of the Class M-2 Certificates, in an amount equal to
the Interest Carry Forward Amount allocable to such certificates;
FIFTH, to the holders of the Class M-3 Certificates, in an amount equal to
the Interest Carry Forward Amount allocable to such certificates;
SIXTH, to the holders of the Class A-1 Certificates, in an amount equal to
such certificates' allocated share of any Prepayment Interest Shortfalls on
the mortgage loans to the extent not covered by Compensating Interest paid
by the master servicer and any shortfalls resulting from the application of
the Relief Act with respect to the mortgage loans;
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SEVENTH, to the holders of the Class A-2 Certificates, in an amount equal
to such certificates' allocated share of any Prepayment Interest Shortfalls
on the mortgage loans to the extent not covered by Compensating Interest
paid by the master servicer and any shortfalls resulting from the
application of the Relief Act with respect to the mortgage loans;
EIGHTH, to the holders of the Class M-1 Certificates, in an amount equal to
such certificates' allocated share of any Prepayment Interest Shortfalls on
the mortgage loans to the extent not covered by Compensating Interest paid
by the master servicer and any shortfalls resulting from the application of
the Relief Act with respect to the mortgage loans;
NINTH, to the holders of the Class M-2 Certificates, in an amount equal to
such certificates' allocated share of any Prepayment Interest Shortfalls on
the mortgage loans to the extent not covered by Compensating Interest paid
by the master servicer and any shortfalls resulting from the application of
the Relief Act with respect to the Mortgage Loans;
TENTH, to the holders of the Class M-3 Certificates, in an amount equal to
such certificates' allocated share of any Prepayment Interest Shortfalls on
the mortgage loans to the extent not covered by Compensating Interest paid
by the master servicer and any shortfalls resulting from the application of
the Relief Act with respect to the mortgage loans;
ELEVENTH, to the holders of the Class CE Certificates as provided in the
pooling and servicing; and
TWELFTH, to the holders of the Residual Certificates, any remaining
amounts; provided that if such distribution date is the distribution date
immediately following the expiration of the latest prepayment charge term
or any distribution date thereafter, then any such remaining amounts will
be distributed FIRST, to the holders of the Class P Certificates, until the
Certificate Principal Balance thereof has been reduced to zero; and SECOND,
to the holders of the Residual Certificates.
As of the closing date, the sum of the aggregate principal balance of the
initial mortgage loans as of the cut-off date and the original pre-funded amount
will exceed the sum of the aggregate certificate principal balances of the
offered certificates and the Class P Certificates by an amount equal to
approximately $__________, which is equal to the initial certificate principal
balance of the Class CE Certificates. Such amount represents approximately ____%
of the sum of the aggregate principal balance of the initial mortgage loans as
of the cut-off date and the original pre-funded amount, which is the initial
amount of overcollateralization required to be provided by the mortgage pool
under the pooling and servicing. Under the pooling and servicing, the
Overcollateralized Amount is required to be maintained at the Required
Overcollateralized Amount. In the event that Realized Losses are incurred on the
mortgage loans, such Realized Losses may result in an overcollateralization
deficiency since such Realized Losses will reduce the principal balance of the
mortgage loans without a corresponding reduction to the aggregate certificate
principal balances of the offered certificates. In such event, the pooling and
servicing requires the payment from Net Monthly Excess Cashflow, subject to
available funds, of an amount equal to such overcollateralization deficiency,
which shall constitute a principal distribution on the offered certificates in
reduction of the certificate principal balances thereof.
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This has the effect of accelerating the amortization of the offered certificates
relative to the amortization of the mortgage loans, and of increasing the
Overcollateralized Amount.
On and after the Stepdown Date and provided that a Trigger Event is not in
effect, the Required Overcollateralized Amount may be permitted to decrease
("step down") below the initial $__________ level to a level equal to
approximately ____% of the then current aggregate outstanding principal balance
of the mortgage loans (after giving effect to principal payments to be
distributed on such distribution date), subject to a floor of approximately
$_________. In the event that the Required Overcollateralized Amount is
permitted to step down on any distribution date, the pooling and servicing
provides that a portion of the principal which would otherwise be distributed to
the holders of the offered certificates on such distribution date shall be
distributed to the holders of the Class CE Certificates pursuant to the
priorities set forth above. With respect to each such distribution date, the
Principal Distribution Amount will be reduced by an amount equal to the
Overcollateralized Reduction Amount. This has the effect of decelerating the
amortization of the offered certificates relative to the amortization of the
mortgage loans, and of reducing the Overcollateralized Amount. However, if on
any distribution date a Trigger Event is in effect, the Required
Overcollateralized Amount will not be permitted to step down on such
distribution date.
ALLOCATION OF LOSSES; SUBORDINATION
Any Realized Losses on the mortgage loans will be allocated on any
distribution date, first, to Net Monthly Excess Cashflow, second, to the Class
CE Certificates, third, to the Class M-3 Certificates, fourth, to the Class M-2
Certificates, fifth, to the Class M-1 Certificates and sixth, to the Class A-2
Certificates. The pooling and servicing does not permit the allocation of
Realized Losses to the Class A-1 Certificates or the Class P Certificates.
Investors in the Class A-1 Certificates should note that although Realized
Losses cannot be allocated to the Class A-1 Certificates, under certain loss
scenarios there will not be enough principal and interest on the mortgage loans
to pay the Class A-1 Certificates all interest and principal amounts to which
they are then entitled.
Once Realized Losses have been allocated to the Class A-2 Certificates and
the Class M Certificates, such amounts with respect to such certificates will no
longer accrue interest nor will such amounts be reinstated thereafter (even if
Net Monthly Excess Cashflow and/or the Overcollateralized Amount are greater
than zero on any subsequent distribution dates).
Any allocation of a Realized Loss to a certificate will be made by reducing
the certificate principal balance thereof by the amount so allocated as of the
distribution date in the month following the calendar month in which such
Realized Loss was incurred. Notwithstanding anything to the contrary described
herein, in no event will the certificate principal balance of any certificate be
reduced more than once in respect of any particular amount both (i) allocable to
such certificate in respect of Realized Losses and (ii) payable as principal to
the holder of such certificate from Net Monthly Excess Cashflow.
MANDATORY PREPAYMENTS ON CLASS A-1 CERTIFICATES
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The Class A-1 Certificates will be prepaid on the distribution date
immediately following the end of the funding period to the extent of any amounts
remaining on deposit in the pre-funding account on such distribution date.
Although no assurance can be given, it is anticipated by the depositor that the
principal amount of subsequent mortgage loans sold to the trust fund will
require the application of substantially all of the original pre-funded amount
and that there will be no material amount of principal prepaid to the holders of
the Class A-1 Certificates from the pre-funding account. It is unlikely,
however, that the depositor will be able to deliver subsequent mortgage loans
with an aggregate principal balance identical to the related original pre-funded
amount. Accordingly, a small amount of principal is likely to be prepaid on the
Class A-1 Certificates on the distribution date immediately following the end of
the funding period.
INTEREST COVERAGE ACCOUNT
The depositor will establish for the benefit of the holders of the
certificates an interest coverage account. On the closing date, the depositor
will deposit in the interest coverage account a cash amount as specified in the
pooling and servicing agreement. On each distribution date during the funding
period and on the distribution date immediately following, funds on deposit in
the interest coverage account will be applied by the trustee to cover shortfalls
in the amount of interest generated by the assets of the trust fund attributable
to the pre-funding feature. Such shortfall will exist during the funding period
because the interest accruing on the aggregate principal balance of the mortgage
loans during such period will be less than the amount of interest which would
have accrued on the mortgage loans if the subsequent mortgage loans were
included in the trust fund as of the closing date. On the first distribution
date following the termination of the funding period (after the distribution on
the certificates to be made on such distribution date), funds on deposit in the
interest coverage account, net of any investment income earned on such funds by
the master servicer, will be released by the trustee to the depositor or its
designee.
P&I ADVANCES
Subject to the limitations described in the next paragraph, the master
servicer will be obligated to advance or cause to be advanced on or before each
distribution date its own funds, or funds in the certificate account that are
not included in the Available Distribution Amount for that distribution date.
The amount of the master servicer's advance will be equal to the aggregate of
all payments of principal and interest, net of the servicing fee, that were due
during the related due period on the mortgage loans master serviced by it and
that were delinquent on the related determination date, plus amounts
representing assumed payments not covered by any current net income on the
mortgaged properties acquired by foreclosure or deed in lieu of foreclosure. The
determination date with respect to any distribution date is on the 1st day of
the month in which the distribution date occurs or, if the 1st day is not a
business day, on the immediately preceding business day.
P&I Advances are required to be made only to the extent they are deemed by
the master servicer to be recoverable from related late collections, insurance
proceeds or liquidation proceeds. The purpose of making P&I Advances is to
maintain a regular cash flow to the certificateholders, rather than to guarantee
or insure against losses. The master servicer will not be required to make any
P&I Advances with respect to reductions in the amount of the monthly
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payments on the mortgage loans due to bankruptcy proceedings or the application
of the Relief Act.
All P&I Advances will be reimbursable to the master servicer from late
collections, insurance proceeds and liquidation proceeds from the mortgage loan
as to which the unreimbursed P&I Advance was made. In addition, any P&I Advances
previously made in respect of any mortgage loan that are deemed by the master
servicer to be nonrecoverable from related late collections, insurance proceeds
or liquidation proceeds may be reimbursed to the master servicer out of any
funds in the certificate account prior to the distributions on the certificates.
In the event the master servicer fails in its obligation to make any P&I
Advance, the trustee will be obligated to make any P&I Advance, to the extent
required in the pooling and servicing agreement.
RESTRICTIONS ON TRANSFER OF THE CLASS A-2 CERTIFICATES AND THE CLASS M
CERTIFICATES
Since the Class A-2 Certificates and the Class M Certificates are
subordinate to the Class A-1 Certificates, any Plan purchasing such Class A-2
Certificates or Class M Certificates will be deemed to have represented that
certain conditions have been satisfied in connection with such purchase. See
"ERISA Considerations" in this prospectus supplement.
THE MORTGAGE LOAN SELLER
____________________________, a ______________ company, obtained the
mortgage loans from the originator. The mortgage loan seller will transfer the
mortgage loans to the depositor pursuant to a mortgage loan purchase agreement,
dated as of ________________, among the mortgage loan seller, the originator and
the depositor.
POOLING AND SERVICING AGREEMENT
GENERAL DESCRIPTION OF THE POOLING AND SERVICING AGREEMENT
The certificates will be issued under the pooling and servicing agreement,
a form of which is filed as an exhibit to the registration statement. A current
report on Form 8-K relating to the certificates containing a copy of the pooling
and servicing agreement as executed will be filed by the depositor with the
Securities and Exchange Commission within fifteen days of the initial issuance
of the certificates. The trust fund created under the pooling and servicing
agreement will consist of:
o all of the depositor's right, title and interest in and to the
mortgage loans, the related mortgage notes, mortgages and other related
documents,
o all payments on or collections in respect of the mortgage loans due
after the cut-off date, together with any proceeds of the mortgage loans,
o any mortgaged properties acquired on behalf of certificateholders by
foreclosure or by deed in lieu of foreclosure, and any revenues received on the
mortgaged properties,
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o the rights of the trustee under all insurance policies required to
be maintained under the pooling and servicing agreement,
o the rights of the depositor under the mortgage loan purchase
agreement among the depositor, the mortgage loan seller and the originator,
other than rights of the depositor to indemnification by the originator, and
o all of the depositor's right, title and interest in and to the
subsequent mortgage loans and the rights of the depositor under any related
subsequent transfer instrument.
Reference is made to the prospectus for important information in addition
to that set forth in this prospectus supplement regarding the trust fund, the
terms and conditions of the pooling and servicing agreement and the offered
certificates. The offered certificates will be transferable and exchangeable at
the corporate trust offices of the trustee, located in Minneapolis, Minnesota.
The depositor will provide to a prospective or actual certificateholder without
charge, on written request, a copy, without exhibits, of the pooling and
servicing agreement. Requests should be addressed to the
_______________________________.
ASSIGNMENT OF THE MORTGAGE LOANS
The depositor will deliver to the trustee or to a custodian with respect to
each mortgage loan:
o the mortgage note endorsed without recourse to the trustee to
reflect the transfer of the mortgage loan,
o the original mortgage with evidence of recording indicated on the
mortgage and
o an assignment of the mortgage in recordable form to the trustee,
reflecting the transfer of the mortgage loan. These assignments of mortgage
loans are required to be recorded by or on behalf of the depositor in the
appropriate offices for real property records except for mortgages held under
the MERS(R) System and except in the state of California or in other states
where, in the opinion of counsel acceptable to the trustee, recording of the
assignment is not required to protect the trustee's interest in the mortgage
loan against the claim of any subsequent transferee or any successor to or
creditor of the depositor, the master servicer, the mortgage loan seller or the
originator. If the depositor uses the MERS(R) System with respect to any
mortgage loan, it will deliver evidence that the mortgage is held for the
trustee through the MERS(R) System instead of an assignment of the mortgage in
recordable form.
THE MASTER SERVICER
The information set forth in the following paragraphs has been provided by
the master servicer. None of the depositor, the underwriter, the trustee or any
of their respective affiliates has made or will make any representation as to
the accuracy or completeness of such information.
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[Name of master servicer], a _______________ [corporation], is engaged in
the business of originating, purchasing and selling sub-prime mortgage loans
secured by one- to four-family residences. [Name of master servicer]'s business
was begun in ___________.
Pursuant to the pooling and servicing agreement, [name of master servicer]
will serve as the master servicer for the mortgage loans sold indirectly by it
to the depositor. The master servicer is approved as a seller/servicer for
Fannie Mae and Freddie Mac and as a non-supervised mortgagee by the U.S.
Department of Housing and Urban Development. As of _________, the master
servicer had ___ offices, consisting of __ loan origination centers located in
_________ and ___ loan origination centers located throughout the rest of the
United States.
LENDING ACTIVITIES AND LOAN SALES. The master servicer originates real
estate loans through its network of offices and loan origination centers. The
master servicer also participates in secondary market activities by originating
and selling mortgage loans while continuing to service the majority of the loans
sold. In other cases the master servicer's whole loan sale agreements provide
for the transfer of servicing rights.
The master servicer's primary lending activity is funding loans to enable
mortgagors to purchase or refinance residential real property, which loans are
secured by first or second liens on the related real property. The master
servicer's single-family real estate loans are predominantly "conventional"
mortgage loans, meaning that they are not insured by the Federal Housing
Administration or partially guaranteed by the U.S. Department of Veterans
Affairs.
The following table summarizes the master servicer's one- to four-family
residential mortgage loan origination and sales activity for the periods shown
below. Sales activity may include sales of mortgage loans purchased by the
master servicer from other loan originators.
-----------------------------------------------
1995 1996 1997 1998 1999
(DOLLARS IN THOUSANDS)
-----------------------------------------------
Originations and
$ $ $ $ $
Purchases..
Sales................ $ $ $ $ $
LOAN SERVICING. The master servicer services all of the mortgage loans it
originates that are retained in its portfolio and continues to service at least
a majority of the loans that have been sold to investors. Servicing includes
collecting and remitting loan payments, accounting for principal and interest,
contacting delinquent mortgagors, and supervising foreclosure in the event of
unremedied defaults. The master servicer's servicing activities are audited
periodically by applicable regulatory authorities. Certain financial records of
the master servicer relating to its
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loan servicing activities are reviewed annually as part of the audit of the
master servicer's financial statements conducted by its independent accountants.
COLLECTION PROCEDURES; DELINQUENCY AND LOSS EXPERIENCE.
When a mortgagor fails to make a required payment on a residential mortgage
loan, the master servicer attempts to cause the deficiency to be cured by
corresponding with the mortgagor. In most cases, deficiencies are cured
promptly. Pursuant to the master servicer's customary procedures for residential
mortgage loans serviced by it for its own account, the master servicer generally
mails a notice of intent to foreclose to the mortgagor after the loan is
delinquent two payments and, within one month thereafter, if the loan remains
delinquent, typically institutes appropriate legal action to foreclose on the
property securing the loan. If foreclosed, the property is sold at public or
private sale and may be purchased by the master servicer. In California, real
estate lenders are generally unable as a practical matter to obtain a deficiency
judgment against the mortgagor on a loan secured by single-family real estate.
LOAN SERVICING PORTFOLIO
The following table sets forth the delinquency and loss experience at the
dates indicated for residential (one- to four-family) first lien loans serviced
directly by the master servicer that were originated or purchased by the master
servicer:
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<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
--------------------------- ------------------------------
(Dollars in Thousands)
Total Outstanding Principal
<S> <C> <C>
Balance...................................... $ $
Number of Loans................................
DELINQUENCY
Period of Delinquency:
31-60 Days
Principal Balance...................... $ $
Number of Loans........................
Delinquency as a Percentage
of Total Outstanding
Principal Balance.................... % %
Delinquency as a Percentage
of Number of Loans................... % %
61-90 Days
Principal Balance...................... $ $
Number of Loans........................
Delinquency as a Percentage
of Total Outstanding
Principal Balance.................... % %
Delinquency as a Percentage
of Number of Loans................... % %
91 Days or More
Principal Balance...................... $ $
Number of Loans........................
Delinquency as a Percentage
of Total Outstanding
Principal Balance.................... % %
Delinquency as a Percentage
of Number of Loans................... % %
Total Delinquencies:
Principal Balance...................... $ $
Number of Loans........................
Delinquency as a Percentage
of Total Outstanding
Principal Balance.................... % %
Delinquency as a Percentage
of Number of Loans................... % %
FORECLOSURES PENDING(1)
Principal Balance...................... $ $
Number of Loans........................
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Foreclosures Pending as a
Percentage of Total
Outstanding Principal
Balance.............................. % %
Foreclosures Pending as a
Percentage of Number of
Loans................................ % %
NET LOAN LOSSES for the
Period(2).................................... $ $
NET LOAN LOSSES as a
Percentage of Total Outstanding
Principal Balance............................ % %
</TABLE>
(1) Includes mortgage loans which are in foreclosure but as to which title to
the mortgaged property has not been acquired, at the end of the period
indicated. Foreclosures pending are included in the delinquencies set forth
above.
(2) Net Loan Losses is calculated for all loans as the aggregate of the net
loan loss for all such loans liquidated during the period indicated. The
net loan loss for any such loan is equal to the difference between (a) the
principal balance plus accrued interest through the date of liquidation
plus all liquidation expenses related to such loan and (b) all amounts
received in connection with the liquidation of such loan. The majority of
residential loans serviced by the master servicer have been conveyed to
REMIC trust funds.
As of ________ __, ____, ____ one- to four-family residential properties
relating to loans in the master servicer's servicing portfolio had been acquired
through foreclosure or deed in lieu of foreclosure and were not liquidated.
There can be no assurance that the delinquency and loss experience of the
mortgage loans will correspond to the loss experience of the master servicer's
mortgage portfolio set forth in the foregoing table. The statistics shown above
represent the delinquency and loss experience for the master servicer's total
servicing portfolio only for the periods presented, whereas the aggregate
delinquency and loss experience on the mortgage loans will depend on the results
obtained over the life of the trust fund. The master servicer's portfolio
includes mortgage loans with payment and other characteristics which are not
representative of the payment and other characteristics of the mortgage loans. A
substantial number of the mortgage loans may also have been originated based on
originator underwriting guidelines that are less stringent than those generally
applicable to the servicing portfolio reflected in the foregoing table. 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 (which may or may not affect real property values)
may affect the timely payment by mortgagors of scheduled payments of principal
and interest on the mortgage loans and, accordingly, the actual rates of
delinquencies, foreclosures and losses with respect to the mortgage loans.
The delinquency and loss experience percentages set forth above in the
immediately preceding table are calculated on the basis of the total mortgage
loans serviced as of the end of
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the periods indicated. However, because the total outstanding principal balance
of residential loans serviced by the master servicer has increased from $_____
at __________ __, ____ to $____________ at _________ __, ____, the total
outstanding principal balance of originated loans serviced as of the end of any
indicated period includes many loans that will not have been outstanding long
enough to give rise to some or all of the indicated periods of delinquency. In
the absence of such substantial and continual additions of newly originated
loans to the total amount of loans serviced, the percentages indicated above
would be higher and could be substantially higher. The actual delinquency
percentages with respect to the mortgage loans may be expected to be
substantially higher than the delinquency percentages indicated above because
the composition of the mortgage loans will not change.
THE TRUSTEE
___________________, a national banking association, will act as trustee
for the certificates under the pooling and servicing agreement. The trustee's
offices for notices under the pooling and servicing agreement are located at .
The principal compensation to be paid to the trustee, or the trustee's fee,
in respect of its obligations under the pooling and servicing agreement will be
equal to accrued interest at the trustee's fee rate of ______% per annum on the
stated principal balance of each mortgage loan. The pooling and servicing
agreement will provide that the trustee and any director, officer, employee or
agent of the trustee will be indemnified by the trust fund and will be held
harmless against any loss, liability or expense, incurred by the trustee in
connection with any pending or threatened claim or legal action arising out of
or in connection with the acceptance or administration of its obligations and
duties under the pooling and servicing agreement, other than any loss, liability
or expense:
o resulting from a breach of the master servicer's obligations and
duties under the pooling and servicing agreement,
o that constitutes a specific liability of trustee under the pooling and
servicing agreement or
o incurred by reason of willful misfeasance, bad faith or negligence in
the performance of the trustee's duties under the pooling and servicing
agreement or as a result of a breach, or by reason of reckless disregard, of the
trustee's obligations and duties under the pooling and servicing agreement.
In addition the pooling and servicing agreement will provide that the
trustee and any director, officer, employee or agent of the trustee will be
reimbursed from the trust fund for all costs associated with the transfer of
servicing in the event of a master servicer event of default.
This indemnification will not include expenses, disbursements and advances
incurred or made by the trustee, including the compensation and the expenses and
disbursements of its agents and counsel, in the ordinary course of the trustee's
performance in accordance with the provisions of the pooling and servicing
agreement.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The principal compensation to be paid to the master servicer, or the
servicing fee, in respect of its servicing activities for the certificates will
be equal to accrued interest at the servicing fee
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rate of ____% per annum with respect to each mortgage loan master serviced by it
for each calendar month on the same principal balance on which interest on the
mortgage loan accrues for the calendar month. As additional servicing
compensation, the master servicer is entitled to retain all ancillary income
including assumption fees, NSF fees, reconveyance and late payment charges (with
the exception of prepayment charges to be distributed to the holders of the
Class P Certificates) to the extent collected from mortgagors, together with any
interest or other income earned on funds held in the certificate account and any
escrow accounts in respect of mortgage loans master serviced by it. The master
servicer is obligated to offset any Prepayment Interest Shortfall in respect of
mortgage loans master serviced by it on any distribution date with Compensating
Interest to the extent of its aggregate servicing fee for the distribution date.
The master servicer is obligated to pay insurance premiums and ongoing expenses
associated with the mortgage pool in respect of mortgage loans master serviced
by it and incurred by the master servicer in connection with its
responsibilities under the pooling and servicing agreement. The master servicer
is entitled to reimbursement for these expenses as provided in the pooling and
servicing agreement. See "Distributions on the Securities--Retained Interest;
Servicing or Administration Compensation and Payment of Expenses" in the
prospectus for information regarding expenses payable by the master servicer and
"Federal Income Tax Consequences" in this prospectus supplement regarding taxes
payable by the master servicer.
VOTING RIGHTS
At all times, __% of all voting rights will be allocated among the holders
of the offered certificates in proportion to the then outstanding certificate
principal balances of their respective certificates, 1% of all voting rights
will be allocated among the holders of the Class P Certificates and 1/3 of 1% of
all voting rights will be allocated among the holders of each class of the
Residual Certificates in proportion to the percentage interests in each class
evidenced by their respective certificates.
TERMINATION
The majority holder of the Class CE Certificates (or if such holder does
not exercise such option, the master servicer) will have the right to purchase
the mortgage loans and any properties acquired in respect of the mortgage loans
on any distribution date, once the aggregate principal balance of the mortgage
loans and properties at the time of purchase is reduced to less than __% of the
sum of the aggregate principal balance of the mortgage loans as of the cut-off
date plus the original pre-funded amount. If the majority Class CE
certificateholder or the master servicer elects to exercise this option, the
election will effect the termination of the trust fund and the early retirement
of the certificates. In the event the majority Class CE certificateholder or the
master servicer exercises this option, notwithstanding the terms of the
prospectus, the purchase price payable in connection with the termination will
be equal to the greater of par or the fair market value of the mortgage loans,
plus accrued interest for each mortgage loan at the related mortgage rate to but
not including the first day of the month in which the repurchase price is
distributed. The portion of the purchase price allocable to the certificates of
each class will be, to the extent of available funds:
o in the case of the certificates of any class 100% of the then
outstanding certificate principal balance of the class, PLUS
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o in the case of the certificates of any class, one month's interest on
the then outstanding certificate principal balance of the class at the then
applicable Pass-Through Rate for the class plus any previously accrued but
unpaid interest on the class.
The holders of the Residual Certificates shall pledge any amount received
in a termination in excess of par to the holders of the Class CE Certificates.
In no event will the trust created by the pooling and servicing agreement
continue beyond the expiration of 21 years from the death of the survivor of the
persons named in the pooling and servicing agreement. For further information
regarding the circumstances under which the obligations created by the pooling
and servicing agreement will terminate in respect of the certificates see,
"Description of the Securities--Termination" in the prospectus.
FEDERAL INCOME TAX CONSEQUENCES
Three separate elections will be made to treat designated portions of the
trust fund (exclusive of the pre-funding account and the interest coverage
account) as real estate mortgage investment conduits or REMICs, designated as
REMIC I, REMIC II and REMIC III, for federal income tax purposes. Prior to the
sale of the offered certificates, Thacher Proffitt & Wood, counsel to the
depositor, will deliver its opinion to the effect that, assuming compliance with
all provisions of the pooling and servicing agreement, for federal income tax
purposes, the REMICs will qualify as REMICs under Sections 860A through 860G of
the Internal Revenue Code of 1986.
For federal income tax purposes:
o the Class R-I Certificates will be the sole class of residual
interests in REMIC I,
o separate non-certificated regular interests in REMIC I will be issued
and will be the regular interests in REMIC I,
o the Class R-II Certificates will be the sole class of residual
interests in REMIC II,
o separate non-certificated regular interests in REMIC II will be issued
and will be the regular interests in REMIC II,
o the Class R-III Certificates will be the sole class of residual
interests in REMIC III, and
o the offered certificates, the Class CE Certificates and the Class P
Certificates will be the regular interests in, and will be treated as debt
instruments of, REMIC III. See "Federal Income Tax
Consequences--REMICs--Classification of REMICs" in the prospectus.
For federal income tax reporting purposes, the offered certificates (other
than the Class M-3 Certificates) will not, and the Class M-3 Certificates will,
be treated as having been issued with original issue discount. The prepayment
assumption that will be used in determining the rate of accrual of original
issue discount, premium and market discount, if any, for federal income tax
purposes will be based on the assumption that, subsequent to the date of any
determination, the mortgage loans will prepay at a rate equal to ____% of CPR.
No representation is made that the mortgage loans will prepay at that rate or at
any other rate. See "Federal Income Tax Consequences--REMICs--Taxation of Owners
of REMIC Regular Certificates--Original Issue Discount" in the prospectus.
The IRS has issued regulations, referred to in this prospectus supplement
as the OID Regulations, under Sections 1271 to 1275 of the Code addressing the
treatment of debt
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instruments issued with original issue discount. Purchasers of the offered
certificates should be aware that the OID Regulations do not adequately address
certain issues relevant to, or are not applicable to, prepayable securities such
as the offered certificates. In addition, there is considerable uncertainty
concerning the application of the OID Regulations to REMIC regular certificates
that provide for payments based on an adjustable rate such as the offered
certificates (other than the Class M-3 Certificates). Because of the uncertainty
concerning the application of Section 1272(a)(6) of the Code to such
certificates and because the rules of the OID Regulations relating to debt
instruments having an adjustable rate of interest are limited in their
application in ways that could preclude their application to such certificates
even in the absence of Section 1272(a)(6) of the Code, the IRS could assert that
the Class A Certificates, the Class M-1 Certificates and the Class M-2
Certificates should be treated as issued with original issue discount or should
be governed by the rules applicable to debt instruments having contingent
payments or by some other method not yet set forth in regulations. Prospective
purchasers of the offered certificates are advised to consult their tax advisors
concerning the tax treatment of such certificates.
The OID Regulations may permit the holder of a debt instrument to recognize
original issue discount under a method that differs from that of the issuer.
Accordingly, it is possible that holders of offered certificates issued with
original issue discount may be able to select a method for recognizing original
issue discount that differs from that used in preparing reports to
certificateholders and the IRS. Prospective purchasers of offered certificates
issued with original issue discount are advised to consult their tax advisors
concerning the tax treatment of the certificates in this regard.
It appears that a reasonable method of reporting original issue discount
with respect to the Class A Certificates, the Class M-1 Certificates and the
Class M-2 Certificates, if such certificates are required to be treated as
issued with original issue discount, generally would be to report all income
with respect to such certificates as original issue discount for each period,
computing such original issue discount (i) by assuming that the value of the
applicable index will remain constant for purposes of determining the original
yield to maturity of, and projecting future distributions on such certificates,
thereby treating such certificates as fixed rate instruments to which the
original issue discount computation rules described in the prospectus can be
applied, and (ii) by accounting for any positive or negative variation in the
actual value of the applicable index in any period from its assumed value as a
current adjustment to original issue discount with respect to such period. See
"Federal Income Tax Consequences-- REMICs--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount" in the prospectus.
Some classes of certificates may be treated for federal income tax purposes
as having been issued with a premium. Certificateholders may elect to amortize
this premium under a constant yield method in which case the amortizable premium
will be allocated among the interest payments on these certificates and will be
applied as an offset against these interest payments. See "Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Regular Certificates--Premium"
in the prospectus.
The offered certificates will be treated as assets described in Section
7701(a)(19)(C) of the Code and real estate assets under Section 856(c)(4)(A) of
the Code, in the same proportion that the assets in the related trust fund would
be so treated. In addition, interest on the offered
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<PAGE>
certificates will be treated as interest on obligations secured by mortgages on
real property under Section 856(c)(3)(B) of the Code, generally to the extent
that the offered certificates are treated as real estate assets under Section
856(c)(4)(A) of the Code. Amounts held in the pre-funding account and interest
coverage account may not be treated as assets described in the foregoing
sections of the Code. The offered certificates also will be treated as qualified
mortgages under Section 860G(a)(3) of the Code. See "Federal Income Tax
Consequences--REMICs--Characterization of Investments in REMIC Certificates" in
the prospectus.
It is not anticipated that the REMICs will engage in any transactions that
would subject the REMICs to the prohibited transactions tax as defined in
Section 860F(a)(2) of the Code, the contributions tax as defined in Section
860G(d) of the Code or the tax on net income from foreclosure property as
defined in Section 860G(c) of the Code. However, in the event that any tax is
imposed on REMIC I, REMIC II or REMIC III, this tax will be borne:
o by the trustee, if the trustee has breached its obligations with
respect to REMIC compliance under the pooling and servicing agreement,
o by the master servicer, if the master servicer has breached its
obligations with respect to REMIC compliance under the pooling and servicing
agreement and
o otherwise by the trust fund, with a resulting reduction in amounts
otherwise distributable to holders of the related offered certificates. See
"Description of the Securities" and "Federal Income Tax Consequences--REMICs" in
the prospectus.
The responsibility for filing annual federal information returns and other
reports will be borne by the trustee or the master servicer. See "Federal Income
Tax Consequences--REMICs--Reporting and Other Administrative Matters" in the
prospectus.
For further information regarding the federal income tax consequences of
investing in the offered certificates, see "Federal Income Tax
Consequences--REMICs" in the prospectus.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the underwriting
agreement, dated _________ __, ____, the depositor has agreed to sell, and
______________, the underwriter, has agreed to purchase the offered
certificates. The underwriter is obligated to purchase all offered certificates
of the respective classes offered by this prospectus supplement if it purchases
any.
Distribution of the offered certificates will be made from time to time in
negotiated transactions or otherwise at varying prices to be determined at the
time of sale. Proceeds to the depositor from the sale of the offered
certificates, before deducting expenses payable by the depositor, will be
approximately _________% of the aggregate initial certificate principal balance
of the offered certificates, plus accrued interest in the case of the Class M-3
Certificates. In connection with the purchase and sale of the offered
certificates, the underwriter may be deemed to have received compensation from
the depositor in the form of underwriting discounts.
The offered certificates are offered subject to receipt and acceptance by
the underwriter, to prior sale and to the underwriter's right to reject any
order in whole or in part and to withdraw, cancel or modify the offer without
notice. It is expected that delivery of the offered certificates
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<PAGE>
will be made through the facilities of DTC, Cedel and the Euroclear system on or
about the closing date. The offered certificates will be offered in Europe and
the United States.
The underwriting agreement provides that the depositor will indemnify the
underwriter against those civil liabilities set forth in the underwriting
agreement, including liabilities under the Securities Act of 1933, as amended,
or will contribute to payments the underwriter may be required to make in
respect of these liabilities.
SECONDARY MARKET
There is currently no secondary market for the offered certificates and
there can be no assurance that a secondary market for the offered certificates
will develop or, if it does develop, that it will continue. The underwriter
intends to establish a market in the offered certificates but is not obligated
to do so. There can be no assurance that any additional information regarding
the offered certificates will be available through any other source. In
addition, the depositor is not aware of any source through which price
information about the offered certificates will be available on an ongoing
basis. The limited nature of the information regarding the offered certificates
may adversely affect the liquidity of the offered certificates, even if a
secondary market for the offered certificates becomes available. The primary
source of information available to investors concerning the offered certificates
will be the monthly statements discussed in the prospectus under "Distributions
on the Securities--Form of Reports to Securityholders", which will include
information as to the outstanding principal balance of the offered certificates
and the status of the applicable form of credit enhancement.
LEGAL OPINIONS
Legal matters relating to the offered certificates will be passed upon for
the depositor by Thacher Proffitt & Wood, New York, New York and for the
underwriter by
--------------------.
RATINGS
It is a condition to the issuance of the certificates that the Class A
Certificates be rated "AAA" by _________________ and "AAA" by ____________, that
the Class M-1 Certificates be rated at least "AA" by _________ and at least "AA"
by _______, that the Class M-2 Certificates be rated at least "A" by _________
and at least "A" by ________, and that the Class M-3 Certificates be rated at
least "BBB" by __________ and at least "BBB" by
__________________.
The ratings of _________ and ________ assigned to mortgage pass-through
certificates address the likelihood of the receipt by certificateholders of all
distributions to which these certificateholders are entitled. The rating process
addresses structural and legal aspects associated with the certificates,
including the nature of the underlying mortgage loans. The ratings assigned to
mortgage pass-through certificates do not represent any assessment of the
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likelihood that principal prepayments will be made by the mortgagors or the
degree to which prepayments will differ from that originally anticipated. The
ratings do not address the possibility that certificateholders might suffer a
lower than anticipated yield due to non-credit events.
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 the assigning rating
organization. Each security rating should be evaluated independently of any
other security rating. In the event that the ratings initially assigned to the
offered certificates are subsequently lowered for any reason, no person or
entity is obligated to provide any additional credit support or credit
enhancement with respect to the offered certificates.
The depositor has not requested that any rating agency rate any class of
the offered certificates other than as stated in the immediately preceding
paragraph. However, there can be no assurance as to whether any other rating
agency will rate any class of the offered certificates, or, if it does, what
rating would be assigned by that rating agency. A rating on any class of the
offered certificates by another rating agency, if assigned at all, may be lower
than the ratings assigned to the classes of the offered certificates as stated
in the first paragraph of this section.
LEGAL INVESTMENT
The Class A Certificates and the Class M-1 Certificates will not constitute
mortgage related securities for purposes of the SMMEA until such time as the
balance of the pre-funding account is reduced to zero. At such time, the Class A
Certificates and the Class M-1 Certificates will constitute mortgage related
securities for purposes of SMMEA for so long as they are rated not lower than
the second highest rating category by a rating agency, as defined in the
prospectus, and, therefore, will be legal investments for some entities to the
extent provided in SMMEA. SMMEA, however, provides for state limitation on the
authority of these entities to invest in mortgage related securities provided
that restrictive legislation was enacted prior to October 3, 1991. There are ten
states that have enacted legislation which overrides the preemption provisions
of SMMEA. The Class M-2 Certificates and the Class M-3 Certificates will not
constitute mortgage related securities for purposes of SMMEA.
The depositor makes no representations as to the proper characterization of
any class of offered certificates for legal investment or other purposes, or as
to the ability of particular investors to purchase any class of offered
certificates under applicable legal investment restrictions. These uncertainties
may adversely affect the liquidity of any class of offered certificates.
Accordingly, all institutions whose investment activities are subject to legal
investment laws and regulations, regulatory capital requirements or review by
regulatory authorities should consult with their legal advisors in determining
whether and to what extent any class of offered certificates constitutes a legal
investment or is subject to investment, capital or other restrictions. On
December 1, 1998, the OTS issued Thrift Bulletin 13a entitled "Management of
Interest Rate Risk, Investment Securities and Derivative Activities", which is
applicable to thrift institutions regulated by the OTS. TB 13a should be
reviewed by any thrift institution prior to investing in the offered
certificates.
See "Legal Investment" in the prospectus.
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ERISA CONSIDERATIONS
A fiduciary of any employee benefit plan or any other plan or arrangement
subject to ERISA or Section 4975 of the Code, each referred to in this
prospectus supplement as a Plan, or any person investing Plan Assets of any Plan
should carefully review with its legal advisors whether the purchase, sale or
holding of certificates will give rise to a prohibited transaction under ERISA
or Section 4975 of the Code.
The U.S. Department of Labor has issued an individual exemption, Prohibited
Transaction Exemption 91-23, or the exemption, as described under
"Considerations for Benefit Plan Investors" in the prospectus, to the
underwriter. The exemption exempts from the application of the prohibited
transaction provisions of Section 406 of ERISA and the excise taxes imposed on
these prohibited transactions by Section 4975(a) and (b) of the Code and Section
502(i) of ERISA, transactions relating to the purchase, sale and holding of
pass-through certificates underwritten by the underwriter such as the Class A-1
Certificates, and the servicing and operation of asset pools such as the
mortgage pool. To obtain the benefit of the exemption, however, the conditions
set forth under "Considerations for Benefit Plan Investors" in the prospectus
must be satisfied. The purchase of the Class A-1 Certificates by, on behalf of
or with the Plan Assets of any Plan may qualify for exemptive relief under the
exemption. However, the exemption contains a number of conditions which must be
met for the exemption to apply, as described in the prospectus, including the
requirement that any Plan must be an accredited investor as defined in Rule
501(a)(1) of Regulation D of the Securities and Exchange Commission under the
Securities Act of 1933, as amended. Additional conditions, as described in the
prospectus, must be met for the exemption to apply to certificates evidencing
interests in a trust fund including a pre-funding account. A fiduciary of a Plan
contemplating purchasing a Class A-1 Certificate must make its own determination
that the conditions set forth in the exemption will be satisfied with respect to
the Class A-1 Certificates.
Because the characteristics of the Class A-2 Certificates and the Class M
Certificates will not meet the requirements of Prohibited Transaction Class
Exemption, or PTCE, 83-1, as described in the prospectus, or the exemption, the
purchase, sale or holding of the Class A-2 Certificates or the Class M
Certificates by, on behalf of or with Plan Assets of any Plan may result in
prohibited transactions or the imposition of excise taxes or civil penalties.
Therefore, the pooling and servicing agreement provides that transfers of Class
A-2 Certificates or Class M Certificates to a Plan, a trustee or other person
acting on behalf of any Plan or to any person using Plan Assets to effect this
acquisition will not be registered by the trustee unless the purchaser of these
certificates provides the depositor, the trustee and the master servicer with
either:
o an opinion of counsel satisfactory to the depositor, the trustee and
the master servicer, which opinion will not be at the expense of the depositor,
the master servicer, the trustee or the trust fund, to the effect that the
purchase of these certificates is permissible under applicable law, will not
constitute or result in any non-exempt prohibited transaction under ERISA or
Section 4975 of the Code and will not subject the depositor, the master
servicer, the trustee or the trust fund to any obligation in addition to those
undertaken in the pooling and servicing agreement OR
o a certification of facts, which in the case of the Class A-2
Certificates, the Class M-1 Certificates, the Class M-2 Certificates and the
Class M-3 Certificates, the purchaser will be
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<PAGE>
deemed to have represented the certification of facts, substantially to the
effect that the purchase of offered certificates by or on behalf of a Plan is
permissible under applicable law, will not constitute or result on a non-exempt
prohibited transaction under ERISA or Section 4975 of the Code, will not subject
the depositor, the trustee or the master servicer to any obligation in addition
to those undertaken in the pooling and servicing agreement and the following
conditions are met:
o the transferee is an insurance company and:
o the source of funds used to purchase the offered certificates
is an insurance company general account, as that term is defined in PTCE 95-60,
o the conditions set forth in Sections I and III of PTCE 95-60
have been satisfied and
o there is no Plan with respect to which the amount of the
general account's reserves and liabilities for contracts held by or on behalf of
the Plan and all other Plans maintained by the same employer, or any affiliate
thereof, as defined in PTCE 95-60, or by the same employee organization, exceeds
10% of the total of all reserves and liabilities of the general account, as
determined under PTCE 95-60, as of the date of the acquisition of the
certificates;
o the transferee is an insurance company and:
o the source of funds used to purchase the certificates is an
insurance company general account,
o the requirements of Sections 401(c) of ERISA and the
regulations to be promulgated thereunder have been satisfied and will continue
to be satisfied and
o the insurance company represents that it understands that the
operation of the general account after December 31, 1998 may affect its ability
to continue to hold the certificates after the date which is 18 months after the
401(c) Regulations become final and that unless a class exemption or an
exception under Section 401(c) of ERISA is then available for the continued
holding of the certificates, it will dispose of the certificates prior to the
date which is 18 months after the 401(c) Regulations become final;
o the transferee is an insurance company and:
o the source of funds used to purchase the certificates is an
insurance company pooled separate account, as that term is defined in PTCE 90-1,
o the conditions set forth in PTCE 90-1 have been satisfied and
o there is no Plan, together with all other Plans maintained by
the same employer, or any affiliate thereof, as defined in PTCE 90-1, or by the
same employee organization, with assets which exceed 10% of the total of all
assets in such pooled separate account, as determined under PTCE 90-1, as of the
date of the acquisition of the certificates;
o the transferee is a bank and:
o the source of funds used to purchase the certificates is a
collective investment fund, as defined in PTCE 91-38,
o the conditions set forth in PTCE 91-38 have been satisfied and
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<PAGE>
o there is no Plan, the interests of which, together with the
interests of any other Plans maintained by the same employer or employee
organization, in the collective investment fund exceed 10% of the total of all
assets in the collective investment fund, as determined under PTCE 91-38, as of
the date of acquisition of the certificates;
o the transferee is a qualified professional asset manager described in
PTCE 84-14 and the conditions set forth in PTCE 84-14 have been satisfied and
will continue to be satisfied; or
o the transferee is an in-house asset manager described in PTCE 96-23
and the conditions set forth in PTCE 96-23 have been satisfied and will continue
to be satisfied. The Class A-2 Certificates and the Class M Certificates will
contain a legend describing these restrictions on transfer.
Before purchasing a Class A-1 Certificate, a fiduciary of a Plan should
itself confirm that the Class A-1 Certificates constitute certificates for
purposes of the exemption and that the specific conditions of the exemption and
the other requirements set forth in the exemption would be satisfied. In
addition, before purchasing a Class A-2 Certificate or Class M Certificate, a
fiduciary of a Plan should itself confirm that the conditions to the purchase
described in this section would be satisfied. Any Plan fiduciary that proposes
to cause a Plan to purchase a certificate should consult with its counsel with
respect to the potential applicability to this investment of the fiduciary
responsibility and prohibited transaction provisions of ERISA and the Code to
the proposed investment. For further information regarding the ERISA
considerations of investing in the Certificates, see "Considerations For Benefit
Plan Investors" in the prospectus.
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<PAGE>
$____________ (APPROXIMATE)
LONG BEACH SECURITIES CORP.
DEPOSITOR
[__] FLOATING-RATE MORTGAGE PASS-THROUGH CERTIFICATES
SERIES ____-__
PROSPECTUS SUPPLEMENT
DATED _________ ___, ____
MASTER SERVICER
UNDERWRITER
YOU SHOULD 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 CERTIFICATES OFFERED BY THIS PROSPECTUS SUPPLEMENT 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 certificates offered by this prospectus supplement
and with respect to their unsold allotments or subscriptions.
In addition, all dealers selling the offered certificates, whether or not
participating in this offering, may be required to deliver a prospectus
supplement and prospectus until _______ ___, ____.
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<PAGE>
The information in this prospectus supplement is not complete and may be
changed. We may not sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This prospectus
supplement is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
Subject to Completion, Dated July __, 2000
[Version 2]
Prospectus Supplement (to Prospectus dated , ____)
$_______________ (APPROXIMATE)
[__] FLOATING RATE MORTGAGE PASS-THROUGH CERTIFICATES, SERIES ____-
LONG BEACH SECURITIES CORP.
DEPOSITOR
MASTER SERVICER
--------------------------------------------------------------------------------
YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-__ IN THIS
PROSPECTUS SUPPLEMENT AND PAGE __ IN THE PROSPECTUS.
This prospectus supplement, together with the accompanying prospectus will
constitute the complete prospectus.
--------------------------------------------------------------------------------
OFFERED CERTIFICATES The trust created for the series _____-__
certificates will hold a pool of one- to four-family,
adjustable rate, residential first mortgage loans.
The trust will issue ______ classes of offered
certificates. You can find a list of these classes,
together with their principal balances, pass-through
rates and other characteristics, on Page S-__ of this
prospectus supplement. Credit enhancement for all of
the offered certificates will be provided by a
certificate insurance policy and
overcollateralization.
UNDERWRITING _______________________, as underwriter, will offer
to the public the Class A-1 Certificates and the
Class A-2 Certificates at varying prices to be
determined at the time of sale. The proceeds to the
depositor from the sale of the underwritten
certificates will be approximately _____% of the
principal balance of the underwritten certificates
plus accrued interest, before deducting expenses. See
"Method of Distribution".
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE OFFERED CERTIFICATES OR DETERMINED
THAT THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
------------------------------
Underwriter
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS SUPPLEMENT AND
THE ACCOMPANYING PROSPECTUS
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION.
We provide information to you about the offered certificates in two separate
documents that progressively provide more detail:
o the accompanying prospectus, which provides general information, some
of which may not apply to this series of certificates; and
o this prospectus supplement, which describes the specific terms of this
series of certificates.
Long Beach Securities Corp.'s principal offices are located at 1100 Town &
Country Road, Orange, California 92868 and its phone number is (___) ________.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
----
PROSPECTUS SUPPLEMENT
<S> <C>
Summary of Prospectus Supplement........................................................................................S-3
Risk Factors...........................................................................................................S-10
Use of Proceeds........................................................................................................S-16
The Mortgage Pool......................................................................................................S-16
Yield on the Certificates..............................................................................................S-27
Description of the Certificates........................................................................................S-34
The Mortgage Loan Seller...............................................................................................S-53
Pooling and Servicing Agreement........................................................................................S-53
The Insurer............................................................................................................S-61
Federal Income Tax Consequences........................................................................................S-63
Method of Distribution.................................................................................................S-65
Secondary Market.......................................................................................................S-65
Legal Opinions.........................................................................................................S-66
Experts................................................................................................................S-66
Legal Investment.......................................................................................................S-67
ERISA Considerations...................................................................................................S-67
</TABLE>
S-2
<PAGE>
SUMMARY OF PROSPECTUS SUPPLEMENT
THE FOLLOWING SUMMARY IS A VERY BROAD OVERVIEW OF THE CERTIFICATES
OFFERED BY THIS PROSPECTUS SUPPLEMENT AND DOES NOT CONTAIN ALL OF THE
INFORMATION THAT YOU SHOULD CONSIDER IN MAKING YOUR INVESTMENT DECISION. TO
UNDERSTAND ALL OF THE TERMS OF THE OFFERED CERTIFICATES, READ CAREFULLY THIS
ENTIRE PROSPECTUS SUPPLEMENT AND THE ENTIRE ACCOMPANYING PROSPECTUS.
Title of Series........................[__] Floating Rate Mortgage Pass-Through
Certificates, Series ____-_.
Cut-off Date...........................__________ __, ____.
Closing Date...........................On or about __________ __, ____.
Depositor..............................Long Beach Securities Corp.. The
depositor will deposit the mortgage loans
into the trust. The depositor's principal
offices are located at 1100 Town &
Country Road, Orange, California 92868
and its telephone number is (___)
________. SEE "THE DEPOSITOR" IN THE
PROSPECTUS.
Mortgage Loan Seller...................__________________________________. SEE
"THE MORTGAGE LOAN SELLER" IN THIS
PROSPECTUS SUPPLEMENT.
Master Servicer and Originator.........SEE "THE MORTGAGE POOL--UNDERWRITING
STANDARDS OF _________ AND
REPRESENTATIONS CONCERNING THE MORTGAGE
LOANS" AND "POOLING AND SERVICING
AGREEMENT--THE ORIGINATOR AND MASTER
SERVICER" IN THIS PROSPECTUS SUPPLEMENT.
Trustee................................__________________. SEE "POOLING AND
SERVICING AGREEMENT--THE TRUSTEE" IN THIS
PROSPECTUS SUPPLEMENT.
Insurer................................__________________. SEE "THE INSURER" IN
THIS PROSPECTUS SUPPLEMENT.
Distribution Dates.....................Distributions on the offered certificates
will be made on the __ day of each month,
or, if that day is not a business day, on
the next succeeding business day,
beginning in ------ ----.
Offered Certificates...................Only the certificates listed in the
immediately following table are being
offered by this prospectus supplement.
Each class of offered certificates and
their pass-through rates and certificate
principal balances are set forth in the
immediately following table.
S-3
<PAGE>
<TABLE>
<CAPTION>
======================================================================================================================
INITIAL CERTIFICATE PASS-THROUGH INITIAL CERTIFICATE PASS-THROUGH
CLASS PRINCIPAL BALANCE RATE CLASS PRINCIPAL BALANCE RATE
--------------- ----------------------- ------------------ ------------- ---------------------- ----------------------
<S> <C> <C> <C> <C> <C>
A-1............ $_________ Variable A-2 . . . . $---------- Variable
=============== ======================= ================== ============= ====================== ======================
</TABLE>
The initial certificate principal balance of each class of certificates listed
in the immediately preceding table is approximate. The pass-through rate on each
class of certificates is generally based on one-month LIBOR plus an applicable
spread, subject to a rate cap equal to the weighted average of the net mortgage
rates of the mortgage loans as described in this prospectus supplement.
THE TRUST
The depositor will establish a trust with respect to the certificates, under the
pooling and servicing agreement dated as of __________ __, ____ among the
depositor, the master servicer and the trustee. There are _____ classes of
certificates representing the trust. SEE "DESCRIPTION OF THE CERTIFICATES" IN
THIS PROSPECTUS SUPPLEMENT.
The certificates represent in the aggregate the entire beneficial ownership
interest in the trust. Distributions of interest and principal on the offered
certificates will be made only from payments received in connection with the
mortgage loans described in the next section and payments under the certificate
insurance policy.
THE MORTGAGE LOANS
The trust will contain approximately _____ [conventional] [sub-prime]
[nonconforming], one- to four-family, adjustable-rate mortgage loans secured by
first liens on residential real properties. The mortgage loans have an aggregate
principal balance of approximately $__________ as of _________ __ ____.
The mortgage loans have original terms to maturity of not greater than [30]
years and the following characteristics as of __________ __, ____.
Approximate range of _____% to _____%.
mortgage rates:
Approximate weighted ______%.
average mortgage rate:
Approximate range of _____% to _____%.
gross margins:
Approximate weighted _____%.
average gross margin:
Approximate range of _____% to _____%.
minimum mortgage
rates:
Approximate weighted _____%.
average minimum
mortgage rate:
Approximate range of _____% to _____%.
maximum mortgage
rates:
Approximate weighted _____%.
average maximum
mortgage rate:
Approximate weighted ___ years and ___
average remaining term months.
to stated maturity:
Approximate range of $__________ to
principal balances: $____________.
Average principal $_____________.
balance:
Approximate range of _____% to _____%.
loan-to-value ratios:
Approximate weighted ______%.
average loan-to-value
ratio:
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<PAGE>
Approximate _____% to _____%.
weighted average
next adjustment date
The interest rate on each mortgage loan will adjust semi-annually on each
adjustment date to equal the sum of six- month LIBOR and the related gross
margin, subject to periodic and lifetime limitations, as described herein.
FOR ADDITIONAL INFORMATION REGARDING THE MORTGAGE LOANS, SEE "THE MORTGAGE POOL"
IN THIS PROSPECTUS SUPPLEMENT.
PRE-FUNDING ACCOUNT AND SUBSEQUENT
MORTGAGE LOANS
On or before ________, the depositor will sell subsequent mortgage loans to be
included in the trust fund. On the closing date, the Depositor will pay to the
trustee approximately $__________ which will be held by the trustee in the
pre-funding account.
The amount on deposit in the pre-funding account will be reduced by the amount
used to purchase subsequent mortgage loans during the period from the closing
date up to and including ____________. Any amounts remaining in the pre-funding
account after ______________ will be distributed on the next distribution date
to the holders of the Class A-1 Certificates. SEE "THE MORTGAGE POOL--CONVEYANCE
OF SUBSEQUENT MORTGAGE LOANS AND THE PRE- FUNDING ACCOUNT" IN THIS PROSPECTUS
SUPPLEMENT.
INTEREST COVERAGE ACCOUNT
On the closing date, the depositor will pay to the trustee for deposit in the
interest coverage account, an amount as specified in the pooling and servicing
agreement. Funds on deposit in the interest coverage account will be applied by
the trustee to cover shortfalls in the amount of interest generated by the
assets of the trust fund attributable to the pre-funding feature during the
funding period. SEE "DESCRIPTION OF THE CERTIFICATES--INTEREST COVERAGE ACCOUNT"
IN THIS PROSPECTUS SUPPLEMENT.
THE CERTIFICATES
OFFERED CERTIFICATES. The offered certificates will have the characteristics
shown in the table appearing on page S-__ in this prospectus supplement. The
pass-through rate on the offered certificates is variable and will be calculated
for each distribution date as described under the definition of pass-through
rate contained in "Description of the Certificates--Glossary of Terms" in this
prospectus supplement.
The offered certificates will be sold by the depositor to the underwriter on the
closing date.
The offered certificates will initially be represented by one or more global
certificates registered in the name of CEDE & Co., as nominee of DTC in minimum
denominations of $[10,000] and integral multiples of $[1.00] in excess of the
minimum denominations. SEE "DESCRIPTION OF THE CERTIFICATES --REGISTRATION OF
THE BOOK-ENTRY CERTIFICATES" IN THIS PROSPECTUS SUPPLEMENT.
CLASS CE CERTIFICATES. The Class CE Certificates are one of the ____ classes of
certificates representing the trust, but are not offered by this prospectus
supplement. The Class CE Certificates will have an initial certificate principal
balance of approximately $_______, which is equal to the initial
overcollateralization required by the pooling and servicing agreement. The Class
CE
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Certificates initially evidence an interest of approximately ___% in the trust.
The Class CE Certificates will be delivered to a wholly-owned bankruptcy remote
subsidiary of the depositor as partial consideration for the mortgage loans.
CLASS P CERTIFICATES. The Class P certificates are one of the ___ classes of
certificates representing the trust, but are not offered by this prospectus
supplement. The Class P Certificates will have an initial certificate principal
balance of $[100] and will not be entitled to distributions in respect of
interest. The Class P Certificates will be entitled to all prepayment charges
received in respect of the mortgage loans. The Class P Certificates will be
delivered to a wholly- owned bankruptcy remote subsidiary of the depositor as
partial consideration for the mortgage loans.
RESIDUAL CERTIFICATES. The Class R-I Certificates, the Class R-II Certificates
and the Class R-III Certificates are the classes of certificates representing
the residual interests in the trust, but are not offered by this prospectus
supplement. The Class R-I Certificates, the Class R-II Certificates and the
Class R-III Certificates will be delivered to a wholly-owned bankruptcy remote
subsidiary of the depositor as partial consideration for the mortgage loans.
CREDIT ENHANCEMENT
The credit enhancement provided for the benefit of the holders of the offered
certificates consists of the certificate insurance policy and
overcollateralization each as described in the next section and under
"DESCRIPTION OF THE CERTIFICATES--OVERCOLLATERALIZATION PROVISIONS" and
"--CREDIT ENHANCEMENT" IN THIS PROSPECTUS SUPPLEMENT."
OVERCOLLATERALIZATION. The sum of the aggregate principal balance of the initial
mortgage loans as of the cut-off date and the original pre-funded amount will
exceed the aggregate certificate principal balance of the offered certificates
and the Class P Certificates on the closing date by approximately $__________,
which is equal to the initial certificate principal balance of the Class CE
Certificates. Such amount represents approximately ____% of the sum of the
aggregate principal balance of the initial mortgage loans as of the cut-off date
and the original pre-funded amount, and is the initial amount of
overcollateralization required to be provided by the mortgage pool under the
pooling and servicing agreement.
CERTIFICATE INSURANCE POLICY. The offered certificates will be entitled to the
benefit of the certificate insurance policy to be issued by _____________. The
insurer will issue the certificate insurance policy as a means of providing
additional credit enhancement to the offered certificates. The certificate
insurance policy will irrevocably and unconditionally guarantee payment for the
benefit of the holders of the offered certificates of an amount that will cover:
o interest shortfalls, except for the shortfalls described in
this prospectus supplement, allocated to the offered
certificates,
o the amount by which the outstanding principal amount of the
offered certificates EXCEEDS the sum of the principal amount
of the mortgage loans and
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the amounts, if any, on deposit in the prefu nding acco unt
and
o without duplication of the amount specified in the immediately
preceding paragraph, the outstanding principal amount of the
offered certificates to the extent unpaid on the final
distribution date or the earlier termination of the trust
under the terms of the pooling and servicing agreement. SEE
"DESCRIPTION OF THE CERTIFICATES--FINANCIAL GUARANTY INSURANCE
POLICY" IN THIS PROSPECTUS SUPPLEMENT.
ALLOCATION OF LOSSES. If, on any distribution date, there is not sufficient
excess interest or overcollateralization to absorb realized losses on the
mortgage loans then realized losses on the mortgage loans will be allocated to
the offered certificates. The pooling and servicing agreement does not permit
the allocation of realized losses on the mortgage loans to the Class P
Certificates. Subject to the terms of the certificate insurance policy, all
realized losses allocated to the offered certificates will be covered by the
certificate insurance policy. SEE "DESCRIPTION OF THE CERTIFICATES--ALLOCATION
OF LOSSES; SUBORDINATION" AND "--FINANCIAL GUARANTY INSURANCE POLICY" IN THIS
PROSPECTUS SUPPLEMENT.
P&I ADVANCES
The master servicer is required to advance delinquent payments of principal and
interest on the mortgage loans, as described in this prospectus supplement. The
master servicer is entitled to be reimbursed for these advances, and therefore
these advances are not a form of credit enhancement. SEE "DESCRIPTION OF THE
CERTIFICATES--P&I ADVANCES" IN THIS PROSPECTUS SUPPLEMENT AND "DISTRIBUTIONS ON
THE SECURITIES--ADVANCES BY MASTER SERVICER IN RESPECT OF DELINQUENCIES ON THE
TRUST FUND ASSETS" IN THE PROSPECTUS.
OPTIONAL TERMINATION
At its option, the majority holder of the Class CE Certificates, or if such
holder does not exercise such option, the master servicer or the insurer, may
purchase all of the mortgage loans, together with any properties in respect of
the mortgage loans acquired on behalf of the trust, and thereby effect
termination and early retirement of the certificates, after the aggregate
principal balance of the mortgage loans, and properties acquired in respect of
the mortgage loans, remaining in the trust has been reduced to less than [10%]
or ___%, as further provided in this prospectus supplement, of the sum of the
aggregate principal balance of the mortgage loans as of __________ __, ____ and
the original pre- funded amount. SEE "POOLING AND SERVICING AGREEMENT--
TERMINATION" IN THIS PROSPECTUS SUPPLEMENT AND "DISTRIBUTIONS ON THE
SECURITIES-- TERMINATION OF THE TRUST FUND AND DISPOSITION OF TRUST FUND ASSETS"
IN THE PROSPECTUS.
FEDERAL INCOME TAX CONSEQUENCES
Three separate elections will be made to treat designated portions of the trust
(exclusive of the pre-funding account and the interest coverage account) as real
estate mortgage investment conduits for federal income tax purposes. SEE
"FEDERAL INCOME TAX CONSEQUENCES--REMIC'S--CHARACTERIZATION
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OF INVESTMENTS IN REMIC CERTIFICATES" IN THE PROSPECTUS.
FOR FURTHER INFORMATION REGARDING THE FEDERAL INCOME TAX CONSEQUENCES OF
INVESTING IN THE OFFERED CERTIFICATES, SEE "FEDERAL INCOME TAX CONSEQUENCES" IN
THIS PROSPECTUS SUPPLEMENT AND IN THE PROSPECTUS.
RATINGS
It is a condition to the issuance of the certificates that the offered
certificates receive a rating of "AAA" from ___________ and _____________.
The ratings on the offered certificates are based in part on the ratings of the
claims- paying ability to the insurer by _______ and _____________. A security
rating does not address the frequency of prepayments on the mortgage loans or
the corresponding effect on yield to investors. SEE "YIELD ON THE CERTIFICATES"
AND "RATINGS" IN THIS PROSPECTUS SUPPLEMENT AND "YIELD AND MATURITY
CONSIDERATIONS" IN THE PROSPECTUS.
LEGAL INVESTMENT
The offered certificates will not constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984 until such
time as the balance of the pre-funding account is reduced to zero. At such time,
the offered certificates will constitute "mortgage related securities" for
purposes of SMMEA for so long as they are rated not lower than the second
highest rating category by one or more nationally recognized statistical rating
organizations and, as such, will be legal investments for certain entities to
the extent provided in SMMEA and applicable state laws. SEE "LEGAL INVESTMENT"
IN THIS PROSPECTUS SUPPLEMENT AND IN THE PROSPECTUS.
ERISA CONSIDERATIONS
The U.S. Department of Labor has issued an individual exemption to the
underwriter. This exemption applies to the offered certificates, provided that
the conditions set forth under "Considerations for Benefit Plan Investors" in
the prospectus are satisfied. SEE "ERISA CONSIDERATIONS" IN THIS PROSPECTUS
SUPPLEMENT AND "CONSIDERATIONS FOR BENEFIT PLAN INVESTORS" IN THE PROSPECTUS.
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<PAGE>
RISK FACTORS
The offered certificates are not suitable investments for all investors. In
particular, you should not purchase the offered certificates unless you
understand and are able to bear the prepayment, credit, liquidity and market
risks associated with these securities.
You should carefully consider the following factors in connection with the
purchase of the offered certificates:
[APPROPRIATE RISK FACTORS AS NECESSARY]
[THE MORTGAGE LOANS WERE UNDERWRITTEN TO STANDARDS WHICH DO NOT CONFORM TO THE
STANDARDS OF FANNIE MAE OR FREDDIE MAC WHICH MAY RESULT IN LOSSES ON THE
MORTGAGE LOANS ALLOCATED TO YOUR CERTIFICATES.
The originator's underwriting standards are primarily intended to assess
the value of the mortgaged property and to evaluate the adequacy of the property
as collateral for the mortgage loan. The originator provides loans primarily to
borrowers who do not qualify for loans conforming to Fannie Mae and Freddie Mac
guidelines but who do have equity in their property. While the originator's
primary consideration in underwriting a mortgage loan is the value of the
mortgaged property, the originator also considers, among other things, a
mortgagor's credit history, repayment ability and debt service-to-income ratio,
as well as the type and use of the mortgaged property. The originator's
underwriting standards do not prohibit a mortgagor from obtaining secondary
financing at the time of origination of the originator's first lien, which
secondary financing would reduce the equity the mortgagor would otherwise have
in the related mortgaged property as indicated in the originator's loan-to-value
ratio determination.
As a result of the underwriting standards described in the immediately
preceding paragraph, the mortgage loans in the mortgage pool are likely to
experience rates of delinquency, foreclosure and bankruptcy that are higher, and
that may be substantially higher, than those experienced by mortgage loans
underwritten in a more traditional manner.
Furthermore, changes in the values of mortgaged properties may have a
greater effect on the delinquency, foreclosure, bankruptcy and loss experience
of the mortgage loans in the mortgage pool than on mortgage loans originated in
a more traditional manner. No assurance can be given that the values of the
related mortgaged properties have remained or will remain at the levels in
effect on the dates of origination of the related mortgage loans. SEE "THE
MORTGAGE POOL--UNDERWRITING STANDARDS OF __________ AND REPRESENTATIONS
CONCERNING THE MORTGAGE LOANS" IN THIS PROSPECTUS SUPPLEMENT].
[LIMITED SERVICING HISTORY AND PERFORMANCE DATA WITH RESPECT TO THE MASTER
SERVICER
The Master Servicer began directly servicing mortgage loans in
[___________]. As a result, the Master Servicer has limited experience servicing
mortgage loans similar to the mortgage loans in the mortgage pool. The Master
Servicer's limited experience in servicing mortgage loans may result in greater
defaults and losses on the mortgage loans in the mortgage pool and
S-9
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result in accelerated prepayments on the Offered Certificates. You will bear any
reinvestment risk resulting from such accelerated prepayments.
Because the Master Servicer commenced its direct servicing operations in
November 1998, the Master Servicer does not have historical delinquency,
bankruptcy, foreclosure or default experience that may be referred to for
purposes of examining the Master Servicer's performance in servicing mortgage
loans similar to the mortgage loans in the mortgage pool, other than to the
limited extent as described under "Pooling and Servicing Agreement--The Master
Servicer--Collection Procedures; Delinquency and Loss Experience" in this
prospectus supplement. There can be no assurance that such experience is or will
be representative.]
[CERTAIN OF THE MORTGAGE LOAN ARE BALLOON LOANS, WHICH MAY PRESENT A GREATER
RISK OF LOSS WITH RESPECT TO SUCH MORTGAGE LOANS
Approximately ____% of the mortgage loans, by aggregate principal balance
as of the Cut-off Date, are mortgage loans with balloon payments. Because
borrowers of mortgage loans with balloon payments are required to make
substantial higher final payments upon maturity, it is possible that the default
risk associated with such mortgage loans is greater than that associated with
fully- amortizing mortgage loans.]
[APPROXIMATELY ____% OF THE MORTGAGE LOANS IN THE MORTGAGE POOL HAVE HIGH
LOAN-TO-VALUE RATIOS, SO THAT THE RELATED BORROWER HAS LITTLE OR NO EQUITY IN
THE RELATED MORTGAGED PROPERTY, WHICH MAY RESULT IN LOSSES WITH RESPECT TO THESE
MORTGAGE LOANS ALLOCATED TO YOUR CERTIFICATES.
Approximately _____% of the initial mortgage loans, by aggregate principal
balance as of _______ __, ____, had a loan-to-value ratio at origination in
excess of 80%. No initial mortgage loan in the mortgage pool with a
loan-to-value ratio at origination in excess of 80% will be covered by a primary
mortgage insurance policy. No initial mortgage loan will have a loan-to- value
ratio exceeding __% at origination. Mortgage loans with higher loan-to-value
ratios may present a greater risk of loss in that an overall decline in the
residential real estate market, a rise in interest rates over a period of time
and the condition of a mortgaged property, as well as other factors, may have
the effect of reducing the value of the mortgaged property from the appraised
value at the time the mortgage loan was originated. If there is a reduction in
value of the mortgaged property, the loan-to-value ratio may increase over what
it was at the time the mortgage loan was originated. This increase may reduce
the likelihood of liquidation or other proceeds being insufficient to satisfy
the mortgage loan and any losses, to the extent not covered by the credit
enhancement, may affect the yield to maturity or your certificates. Furthermore,
investors should note that the value of the mortgaged property may be
insufficient to cover the outstanding balance of the certificates. There can be
no assurance that the loan-to-value ratio of any mortgage loan determined at any
time after origination is less than or equal to its original loan-to-value
ratio.]
[APPROXIMATELY ____% OF THE INITIAL MORTGAGE LOANS IN THE MORTGAGE POOL ARE
DELINQUENT AS OF THE CUT-OFF DATE, WHICH MAY RESULT IN LOSSES WITH RESPECT TO
THESE MORTGAGE LOANS.
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<PAGE>
Approximately ____% of the initial mortgage loans, by aggregate principal
balance as of _______ __, ____, were thirty days or more but less than sixty
days delinquent in their monthly payments as of ______ __, ____. Approximately
____% of the initial mortgage loans, by aggregate principal balance as of
_______ __, ____, were sixty days or more but less than ninety days delinquent
in their monthly payments as of the _______ __, ____. However, investors in the
mortgage loans should realize that approximately _____% of the initial mortgage
loans, by aggregate principal balance as of _______ __, ____, have a first
payment date occurring on or after _______ __, ____ and, therefore, these
mortgage loans could not have been delinquent as of
------- --, ----].
[APPROXIMATELY ____% OF THE MORTGAGE LOANS IN THE MORTGAGE POOL ARE CONCENTRATED
IN THE STATE OF [NAME OF STATE], WHICH MAY RESULT IN LOSSES WITH RESPECT TO
THESE MORTGAGE LOANS.
Approximately ___% of the initial mortgage loans are in the state of
[Name of State.] Investors should note that some geographic regions of the
United States from time to time will experience weaker regional economic
conditions and housing markets causing a decline in property values in those
areas, and consequently, will experience higher rates of loss and delinquency
than will be experienced on mortgage loans located in other geographic regions.
A region's economic condition and housing market may be directly, or indirectly,
adversely affected by a number of factors including natural disasters or civil
disturbances such as earthquakes, hurricanes, floods, eruptions or riots. The
economic impact of any of these types of events may also be felt in areas beyond
the region immediately affected by the disaster or disturbance. A concentration
of mortgage loans in the trust fund in a region experiencing a deterioration in
economic conditions or a decline in real estate values may expose your
certificates to losses in addition to those present for similar mortgage-backed
securities without this concentration. The depositor cannot assure you that the
values of the mortgaged properties have remained or will remain at the appraised
values on the dates of origination of the mortgage loans. Any deterioration of
economic conditions in [name of state] which adversely affects the ability of
borrowers to make payments on the mortgage loans may increase the likelihood of
delinquency and foreclosure of the mortgage loans that may result in losses
that, to the extent not covered by the [credit enhancement] will be allocated to
your certificates.]
[THE SUBSEQUENT MORTGAGE LOANS MAY HAVE DIFFERENT CHARACTERISTICS THAN THE
INITIAL MORTGAGE LOANS
The subsequent mortgage loans may have characteristics different from those
of the initial mortgage loans. However, each subsequent mortgage loan must
satisfy the eligibility criteria referred to in this prospectus supplement under
"The Mortgage Pool--Conveyance of Subsequent Mortgage Loans and the Pre-Funding
Account" at the time of its conveyance to the trust fund and be underwritten in
accordance with the criteria set forth under "The Mortgage Pool--Underwriting
Standards of ____________ and Representations concerning the Mortgage Loans" in
this prospectus supplement.]
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<PAGE>
[THE CLASS A-1 CERTIFICATES MAY RECEIVE A PREPAYMENT OF PRINCIPAL AS A RESULT OF
EXCESS FUNDS IN THE PRE-FUNDING ACCOUNT
To the extent that amounts on deposit in the pre-funding account have not
been fully applied to the purchase of subsequent mortgage loans by the end of
the funding period, the holders of the Class A-1 Certificates will receive on
the distribution date immediately following the end of the funding period, any
amounts in the pre-funding account after giving effect to any purchase of
subsequent mortgage loans, as further described in this prospectus supplement.
Although no assurance can be given, the depositor intends that the principal
amount of subsequent mortgage loans sold to the trust fund will require the
application of substantially all amounts on deposit in the pre-funding account
and that there will be no material principal payment to the holders of the Class
A-1 Certificates on such distribution date.]
[YOUR CERTIFICATES WILL BE LIMITED OBLIGATIONS SOLELY OF THE TRUST FUND AND NOT
OF ANY OTHER PARTY.
The certificates will not represent an interest in or obligation of the
depositor, the master servicer, the mortgage loan seller, the trustee or any of
their respective affiliates. Neither the certificates nor the underlying
mortgage loans will be guaranteed or insured by any governmental agency or
instrumentality, or by the depositor, the master servicer, the trustee or any of
their respective affiliates. The offered certificates are covered by the
certificate insurance policy, as and to the extent described under the caption
"Description of the Certificates--Financial Guaranty Insurance Policy" in this
prospectus supplement. Proceeds of the assets included in the trust and proceeds
of the certificate insurance policy will be the sole source of payments on the
offered certificates, and there will be no recourse to the depositor, the master
servicer, the mortgage loan seller, the trustee or any other entity in the event
that these proceeds are insufficient or otherwise unavailable to make all
payments provided for under the offered certificates].
[THE RATE AND TIMING OF PRINCIPAL DISTRIBUTIONS ON YOUR CERTIFICATES WILL BE
AFFECTED BY THE RATE OF PREPAYMENTS ON THE MORTGAGE LOANS.
The rate and timing of distributions allocable to principal on the offered
certificates will depend on the rate and timing of principal payments, including
prepayments and collections upon defaults, liquidations and repurchases, on the
mortgage loans and the allocation to pay principal on these certificates as
provided in this prospectus supplement. As is the case with mortgage
pass-through certificates, the offered certificates are subject to substantial
inherent cash-flow uncertainties because the mortgage loans may be prepaid at
any time. However, with respect to approximately _____% of the mortgage loans,
by aggregate principal balance as of ________ __, ____, a full and voluntary
prepayment may subject the related mortgagor to a prepayment charge. A
prepayment charge may or may not act as a deterrent to prepayment of the related
mortgage loan. SEE "THE MORTGAGE POOL" IN THIS PROSPECTUS SUPPLEMENT.
[THE RATE OF PREPAYMENTS ON THE MORTGAGE LOANS WILL VARY DEPENDING ON FUTURE
MARKET CONDITIONS WHICH COULD IMPACT THE RATE AND TIMING OF PRINCIPAL
DISTRIBUTIONS ON YOUR CERTIFICATES.
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<PAGE>
In most cases, when prevailing interest rates are increasing, prepayment
rates on mortgage loans tend to decrease. A decrease in the prepayment rates on
the mortgage loans will result in a reduced rate of return of principal to
investors in the offered certificates at a time when reinvestment at these
higher prevailing rates would be desirable. Conversely, when prevailing interest
rates are declining, prepayment rates on mortgage loans tend to increase. An
increase in the prepayment rates on the mortgage loans will result in a greater
rate of return of principal to investors in the offered certificates, at time
when reinvestment at comparable yields may not be possible.
Except as otherwise described in this prospectus supplement, distributions
of principal will be made to the classes of offered certificates according to
the priorities described in this prospectus supplement, rather than on a PRO
RATA basis among these classes. The timing of commencement of principal
distributions and the weighted average life of each class of certificates will
be affected by the rates of prepayment on the mortgage loans experienced both
before and after the commencement of principal distributions on that class.
FOR FURTHER INFORMATION REGARDING THE EFFECT OF PRINCIPAL PREPAYMENTS ON
THE WEIGHTED AVERAGE LIVES OF THE OFFERED CERTIFICATES, SEE "YIELD ON THE
CERTIFICATES" IN THIS PROSPECTUS SUPPLEMENT, INCLUDING THE TABLE ENTITLED
"PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING AT THE FOLLOWING
PERCENTAGES OF THE PREPAYMENT ASSUMPTION".]
[THE YIELD ON YOUR CERTIFICATES WILL VARY DEPENDING ON THE RATE OF PREPAYMENTS.
The yield to maturity on the offered certificates will depend on:
o with respect to each class of offered certificates, the applicable
pass-through rate thereon from time to time;
o the applicable purchase price; and
o the rate and timing of principal payments, including prepayments and
collections upon defaults, liquidations and repurchases, on the related
mortgage loans, payments by the insurer and the allocation of those
payments to reduce the certificate principal balance as well as other
factors.
The yield to investors on the offered certificates will be adversely
affected by any allocation to the offered certificates of interest shortfalls on
the mortgage loans not covered by the insurer.
If the offered certificates are purchased at a premium and principal
distributions thereon occur at a rate faster than anticipated at the time of
purchase, the investor's actual yield to maturity will be lower than that
assumed at the time of purchase. Conversely, if the offered certificates are
purchased at a discount and principal distributions thereon occur at a rate
slower than that anticipated at the time of purchase, the investor's actual
yield to maturity will be lower than that originally assumed.
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<PAGE>
The proceeds to the depositor from the sale of the offered certificates
were determined based on a number of assumptions, including a prepayment
assumption of ____% of the standard prepayment assumption, and weighted average
lives corresponding to the prepayment assumption. No representation is made that
the mortgage loans will prepay at that rate or at any other rate, or that the
mortgage loans will prepay at the same rate. The yield assumptions for the
offered certificates will vary as determined at the time of sale. SEE "YIELD ON
THE CERTIFICATES" IN THIS PROSPECTUS SUPPLEMENT].
[THE YIELD ON YOUR CERTIFICATES WILL BE AFFECTED BY THE SPECIFIC TERMS THAT
APPLY TO THAT CLASS, DISCUSSED IN THIS RISK FACTOR.
The multiple class structure of the offered certificates causes the yield
of some classes to be particularly sensitive to changes in the rates of
prepayments of the mortgage loans. Because distributions of principal will be
made to the classes of offered certificates according to the priorities
described in this prospectus supplement, the yield to maturity on these classes
of certificates will be sensitive to the rates of prepayment on the mortgage
loans experienced both before and after the commencement of principal
distributions on that class.
In particular, the Class ___ Certificates do not receive, unless the
certificate principal balances of the other classes of offered certificates have
been reduced to zero, any portion of principal payments prior to the
distribution date in _______ ____. In addition, the Class ___ Certificates will
receive, unless the certificate principal balances of the other classes of
offered certificates have been reduced to zero, a disproportionately small or
large portion of the amount of principal then payable to the offered
certificates thereafter. Therefore, the weighted average life of the Class ___
Certificates will be longer or shorter than would otherwise be the case. The
effect on the market value of the Class ___ Certificates of changes in market
interest rates or market yields for similar securities may be greater or lesser
than for the other classes of offered certificates entitled to principal
distributions].
[VIOLATION OF CONSUMER PROTECTION LAWS MAY RESULT IN LOSSES ON THE MORTGAGE
LOANS AND YOUR CERTIFICATES.
Applicable state laws regulate interest rates and other charges, require
disclosure, and require licensing of the originator. In addition, other state
laws, public policy and principles of equity relating to the protection of
consumers, unfair and deceptive practices and debt collection practices may
apply to the origination, servicing and collection of the mortgage loans.
The mortgage loans are also subject to federal laws, including:
o the Federal Truth-in-Lending Act and Regulation Z promulgated
thereunder, which require disclosures to the borrowers regarding
the terms of the mortgage loans;
o the Equal Credit Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age,
race, color, sex, religion, marital status, national origin,
receipt of public assistance or the exercise of any right under
the Consumer Credit Protection Act, in the extension of credit;
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<PAGE>
o the Fair Credit Reporting Act, which regulates the use and
reporting of information related to the borrower's credit
experience;
o the Depository Institutions Deregulation and Monetary Control Act
of 1980, which preempts certain state usury laws; and
o the Alternative Mortgage Transaction Parity Act of 1982, which
preempts certain state lending laws which regulate alternative
mortgage transactions.
Approximately ____% of the mortgage loans, by aggregate principal balance
as of _______ __, ____, will be subject to the Riegle Community Development and
Regulatory Improvement Act of 1994, or the Riegle Act, which incorporates the
Home Ownership and Equity Protection Act of 1994. The Riegle Act adds additional
provisions to Regulation Z, which is the implementing regulation of the Federal
Truth-in-Lending Act. These provisions impose additional disclosure and other
requirements on creditors with respect to non-purchase money mortgage loans with
high interest rates or high up-front fees and charges. In most cases, mortgage
loans covered by the Riegle Act have annual percentage rates over 10% greater
than the yield on treasury securities of comparable maturity and fees and points
which exceed the greater of 8% of the total loan amount or $441, which amount is
adjusted annually based on changes in the consumer price index for the year. The
provisions of the Riegle Act apply on a mandatory basis to all applicable
mortgage loans originated on or after October 1, 1995. These provisions can
impose specific statutory liabilities upon creditors who fail to comply with
their provisions and may affect the enforceability of the related loans. In
addition, any assignee of the creditor would, in most cases, be subject to all
claims and defenses that the consumer could assert against the creditor,
including, without limitation, the right to rescind the mortgage loan.
Depending on the provisions of the applicable law and the specific facts
and circumstances involved, violations of these federal or state laws, policies
and principles may limit the ability of the trust to collect all or part of the
principal of or interest on the mortgage loans, may entitle the borrower to a
refund of amounts previously paid and, in addition, could subject the originator
to damages and administrative enforcement.
The originator will represent that as of the closing date, each mortgage
loan is in compliance with applicable federal and state laws and regulations. In
the event of a breach of this representation, it will be obligated to cure the
breach or repurchase or replace the affected mortgage loan in the manner
described in the prospectus].
[IF THE INSURER FAILS TO MEET ITS OBLIGATIONS UNDER THE POLICY, YOU MAY
EXPERIENCE A LOSS ON YOUR INVESTMENT
If the protection created by the overcollateralization is insufficient and
the insurer is unable to meet its obligations under the certificate insurance
policy, then you could experience a loss on your investment. In addition, any
reduction in a rating of the claims-paying ability of the insurer may result in
a reduction in the rating of the offered certificates].
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<PAGE>
All capitalized terms used in this prospectus supplement will have the
meanings assigned to them under "Description of the Certificates--Glossary of
Terms" or in the prospectus under "Glossary."
USE OF PROCEEDS
The mortgage loan seller will sell the mortgage loans to the depositor and
the depositor will convey the mortgage loans to the trust fund in exchange for
and concurrently with the delivery of the certificates. Net proceeds from the
sale of the certificates will be applied by the depositor to the purchase of the
mortgage loans from the mortgage loan seller. These net proceeds will represent
the purchase price to be paid by the depositor to the mortgage loan seller for
the mortgage loans. The mortgage loans were previously purchased by the mortgage
loan seller either directly or indirectly from the originator.
THE MORTGAGE POOL
GENERAL DESCRIPTION OF THE MORTGAGE LOANS
References to percentages of the mortgage loans in the mortgage pool unless
otherwise noted are calculated based on the aggregate principal balance of the
mortgage loans as of ___________ __, ____, which date will also be referred to
in this prospectus supplement as the cut-off date.
The mortgage pool will initially consist of approximately _____
conventional, one- to four- family, adjustable-rate, fully-amortizing mortgage
loans secured by first liens on residential real properties and having an
aggregate principal balance as of the cut-off date, of approximately
$___________, after application of scheduled payments due on or before the
cut-off date whether or not received and subject to a permitted variance of plus
or minus 5%. The mortgage loans in the mortgage pool have original terms to
maturity of not greater than [30] years.
The statistical information presented in this prospectus supplement
describes only the initial mortgage loans and does not include the mortgage
loans to be purchased by the trust after the Closing Date. References to
percentages of the mortgage loans, unless otherwise noted, are calculated based
on the aggregate principal balance of the initial mortgage loans as of the
cut-off date and do not include any subsequent mortgage loans.
Subsequent mortgage loans are intended to be purchased by the trust from
the depositor from time to time on or before _______________ from funds on
deposit in the pre-funding account. The subsequent mortgage loans, if available,
will be purchased by the depositor and sold by the depositor to the trust fund
for deposit in the mortgage pool. The pooling and servicing agreement will
provide that each mortgage loan in the mortgage pool must conform to certain
specified characteristics and, following the conveyance of the subsequent
mortgage loans, the mortgage pool must conform to certain specified
characteristics, as described below under "--Conveyance of Subsequent Mortgage
Loans and the Pre-Funding Account".
The mortgage loans are secured by first mortgages or deeds of trust or
other similar security instruments creating first liens on one- to four-family
residential properties. The mortgaged
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<PAGE>
properties in the mortgage pool consist of attached, attached or semi-attached,
one- to four- family dwelling units, townhouses, individual condominium units,
individual units in planned unit developments and manufactured housing. The
mortgage loans to be included in the mortgage pool will be acquired by the
depositor from the mortgage loan seller. The mortgage loan seller, in its
capacity as master servicer, will act as the master servicer for the mortgage
loans originated by it under the pooling and servicing agreement.
All of the mortgage loans in the mortgage pool have scheduled monthly
payments due on the first day of the month and that day will be referred to in
this prospectus supplement as the due date. Each mortgage loan in the mortgage
pool will contain a customary due-on-sale clause.
The mortgage loans have mortgage rates subject to a semiannual adjustment
after an initial three-year period on the day of the month specified in the
related mortgage note to equal the sum, rounded to the nearest 0.125%, of (1) a
per annum rate equal to the average of interbank offered rates for six-month
U.S. dollar-denominated deposits in the London market based on quotations of
major banks as published in THE WALL STREET JOURNAL and as most recently
available as of the date specified in the related mortgage note, and (2) a fixed
percentage amount specified in the related mortgage note; provided, however,
that the mortgage rate will not increase or decrease on any adjustment date by
more than 1%. All of the mortgage loans provide that over the life of the
mortgage loan the mortgage rate will in no event be more than the fixed
percentage set forth in the mortgage note. Effective with the first payment due
on a mortgage loan after each related adjustment date, the monthly payment will
be adjusted to an amount which will fully amortize the outstanding principal
balance of the mortgage loan over its remaining term, and pay interest at the
mortgage rate as so adjusted.
If the six-month LIBOR index ceases to be published or is otherwise
unavailable, the master servicer will select an alternative index for mortgage
loans on comparable properties, based upon comparable information, over which it
has no control and which is readily verifiable by mortgagors.
None of the mortgage loans permit the related mortgagor to convert the
adjustable mortgage rate thereon to a fixed mortgage rate.
Approximately _____% of the initial mortgage loans provide for payment by
the mortgagor of a prepayment charge in limited circumstances on prepayments.
Each mortgage loan in the mortgage pool that provides for the payment of a
prepayment charge provides for payment of a prepayment charge on partial or full
prepayments made within one year, five years or other designated period as
provided in the related mortgage note from the date of origination of the
particular mortgage loan. The amount of the prepayment charge is as provided in
the related mortgage note, and the prepayment charge will apply if, in any
twelve-month period during the first year, five years or other designated period
as provided in the related mortgage note from the date of origination of the
particular mortgage loan, the mortgagor prepays an aggregate amount exceeding
__% of the original principal balance of the particular mortgage loan. With
respect to _____% of these mortgage loans, the amount of the prepayment charge
will be equal to ___ months' advance interest calculated on the basis of the
mortgage rate in effect at the time of the prepayment on the amount prepaid in
excess of __% of the original principal balance of the
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mortgage loan for a period of five years and one year, respectively. The Class P
certificates will be entitled to all prepayment charges received on the mortgage
loans, and these amounts will not be available for distribution on the
certificates. Under those circumstances described in the pooling and servicing
agreement, the master servicer may, in its discretion, waive the collection of
any otherwise applicable prepayment charge or reduce the amount of the
prepayment charge actually collected. Investors should conduct their own
analysis to the effect, if any, that the prepayment charges and the decisions of
the master servicer with respect to the waiver of prepayment charges may have on
the prepayment performance of the mortgage loans. The depositor makes no
representation as to the effect that the prepayment charges, and the decisions
of the master servicer with respect to the waiver of the prepayment charges, may
have on the prepayment performance of the mortgage loans.
The average principal balance of the initial mortgage loans at origination
was approximately $______. No initial mortgage loan had a principal balance at
origination of greater than approximately $_______ or less than approximately
$______. The average principal balance of the initial mortgage loans as of the
cut-off date was approximately $______. No initial mortgage loan had a principal
balance as of the cut-off date of greater than approximately $_______ or less
than approximately $______.
As of the cut-off date, the initial mortgage loans had mortgage rates
ranging from approximately _____% per annum to approximately ______% per annum
and the weighted average mortgage rate was approximately _____% per annum. The
weighted average remaining term to stated maturity of the initial mortgage loans
will be approximately __ years and __ months as of the cut-off date. None of the
initial mortgage loans will have its first payment due prior to ________ ____ or
after _________ ____, or will have a remaining term to maturity of less than __
years and __ months or greater than __ years as of the cut-off date. The latest
maturity date of any initial mortgage loan in the mortgage pool is ________
____.
The weighted average loan-to-value ratio at origination of the initial
mortgage loans was approximately ______%. No loan-to-value ratio at origination
was greater than approximately _____% or less than approximately ____%.
The following information sets forth in tabular format certain
characteristics of the initial mortgage loans as of the cut-off date.
Principal Balances of the Initial Mortgage Loans as of the Cut-off Date:
<TABLE>
<CAPTION>
Aggregate % of Aggregate
Principal Principal Balance
Number of Outstanding Outstanding as of the
Range ($) Loans as of Cut off Date Cut off Date
--------- ----- ------------------ ------------
<S> <C> <C> <C>
</TABLE>
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<PAGE>
Mortgage Rates of the Initial Mortgage Loans as of the Cut-off Date:
<TABLE>
<CAPTION>
Aggregate % of Aggregate
Principal Principal Balance
Mortgage Number of Outstanding Outstanding as of the
Rate Loans as of Cut off Date Cut off Date
---- ----- ------------------ ------------
<S> <C> <C> <C>
</TABLE>
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<PAGE>
Maximum Mortgage Rates of the Initial Mortgage Loans:
<TABLE>
<CAPTION>
Aggregate % of Aggregate
Maximum Principal Principal Balance
Mortgage Number of Outstanding Outstanding as of the
Rate Loans as of Cut off Date Cut off Date
---- ----- ------------------ ------------
<S> <C> <C> <C>
</TABLE>
Minimum Mortgage Rates of the Initial Mortgage Loans:
<TABLE>
<CAPTION>
Aggregate % of Aggregate
Principal Principal Balance
Minimum Number of Outstanding Outstanding as of the
Mortgage Rate Loans as of Cut off Date Cut off Date
------------- ----- ------------------ ------------
<S> <C> <C> <C>
</TABLE>
Gross Margins of the Initial Mortgage Loans:
<TABLE>
<CAPTION>
Aggregate % of Aggregate
Principal Principal Balance
Number of Outstanding Outstanding as of the
Gross Margin Loans as of Cut off Date Cut off Date
------------ ----- ------------------ ------------
<S> <C> <C> <C>
</TABLE>
Original Loan-to-Value Ratios of the Initial Mortgage Loans:
<TABLE>
<CAPTION>
Aggregate % of Aggregate
Principal Principal Balance
Loan to Number of Outstanding Outstanding as of the
Value Ratio (%) Loans as of Cut off Date Cut off Date
--------------- ----- ------------------ ------------
<S> <C> <C> <C> <C> <C> <C>
</TABLE>
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<PAGE>
Geographic Distribution of the Mortgaged Properties of the Initial Mortgage
Loans:
<TABLE>
<CAPTION>
Aggregate % of Aggregate
Principal Principal Balance
Number of Outstanding Outstanding as of the
Location Loans as of Cut off Date Cut off Date
-------- ----- ------------------ ------------
<S> <C> <C> <C>
</TABLE>
CONVEYANCE OF SUBSEQUENT MORTGAGE LOANS AND THE PRE-FUNDING ACCOUNT
Under and to the extent provided in the pooling and servicing, following
the initial issuance of the certificates, the trust fund will be obligated to
purchase from the depositor on or before _____________, subject to the
availability thereof, the subsequent mortgage loans. The subsequent mortgage
loans will be transferred to the trust fund pursuant to subsequent transfer
instruments between the depositor and the trust fund. In connection with the
purchase of subsequent mortgage loans on such dates of transfer, the trust fund
will be required to pay to the depositor from amounts on deposit in the
pre-funding account a cash purchase price of 100% of the principal balance
thereof. The depositor will designate the first day of the month in which the
related subsequent transfer date occurs as the cut-off date with respect to the
related subsequent mortgage loans. The amount paid from the pre-funding account
on each subsequent transfer date will not include accrued interest on the
related subsequent mortgage loans. Following each subsequent transfer date, the
aggregate principal balance of the mortgage loans in the mortgage pool will
increase by an amount equal to the aggregate principal balance of the related
subsequent mortgage loans so purchased and the amount in the pre-funding account
will decrease accordingly.
A pre-funding account will be established by the trustee and funded on the
closing date by the depositor with approximately $___________, subject to a
permitted variance, as described herein, equal to the aggregate principal
balance of any of the initial mortgage loans which are added or removed from the
trust fund, to provide the trust fund with sufficient funds to purchase
subsequent mortgage loans, provided that the original pre-funded amount will not
exceed 25% of the aggregate initial certificate principal balance of the
certificates. The original pre-funded amount will be reduced during the funding
period by the amount used to purchase subsequent mortgage loans for the mortgage
pool in accordance with the pooling and servicing agreement. During the period
from the closing date until the earliest of (i) the date on which the amount on
deposit in the pre-funding account is reduced to zero or (ii) _______________,
such amount will be maintained in the pre-funding account.
Any conveyance of subsequent mortgage loans on a subsequent transfer date
is subject to certain conditions including, but not limited to, the following:
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o each subsequent mortgage loan must satisfy the representations and
warranties specified in the subsequent transfer instrument and the
pooling and servicing agreement;
o the depositor will not select such subsequent mortgage loans in a
manner that it believes is adverse to the interests of the
certificateholders;
o the depositor will deliver opinions of counsel with respect to the
validity of the conveyance of such subsequent mortgage loans;
o each subsequent mortgage loan may not be 30 or more days
contractually delinquent as of the related subsequent cut-off
date;
o the original term to maturity of such subsequent mortgage loan
will not be less than ___ months and will not exceed ___ months;
o each subsequent mortgage loan may not provide for negative
amortization;
o each subsequent mortgage loan will not have an loan-to-value ratio
greater than 90%;
o each subsequent mortgage loan will have, as of the subsequent
cut-off date, a weighted average term since origination not in
excess of ____ months;
o no subsequent mortgage loan will have a mortgage rate less than
____% or greater than ___%;
o each subsequent mortgage loan will have been serviced by the
master servicer since origination or purchase by the depositor;
o each subsequent mortgage loan will have a first payment date not
later than ___________; and
o each subsequent mortgage loan will be underwritten in accordance
with the criteria set forth under "-Underwriting Standards of
__________ and Representations Concerning the Mortgage Loans".
In addition, following the purchase of all subsequent mortgage loans by the
trust fund, the mortgage loans (including the subsequent mortgage loans) will as
of the subsequent cut-off date:
o have a weighted average remaining term to stated maturity of not
more than ___ months and not less than ___ months;
o have a weighted average mortgage rate of not less than ____% and
not more than ____% by aggregate principal balance of the mortgage
loans;
o have a weighted average loan-to-value ratio of not more than ___%;
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o have no mortgage loan with a principal balance in excess of
$_________; and
o have a weighted average gross margin not less than ____%.
Notwithstanding the foregoing, any subsequent mortgage loan may be rejected
by either [RA] or [RA] if the inclusion of such subsequent mortgage loan would
adversely affect the ratings on any class of offered certificates.
UNDERWRITING STANDARDS OF ___________ AND REPRESENTATIONS CONCERNING THE
MORTGAGE LOANS
The mortgage loans will be acquired by the depositor from the mortgage loan
seller. All of the mortgage loans were originated or acquired by the mortgage
loan seller generally in accordance with the respective underwriting criteria
described below.
The information set forth below with regard to the mortgage loan seller's
underwriting standards has been provided to the depositor or compiled from
information provided to the depositor by the mortgage loan seller. None of the
depositor, the trustee, the underwriter or any of their respective affiliates
has made any independent investigation of such information or has made or will
make any representation as to the accuracy or completeness of such information.
The mortgage loans were originated generally in accordance with guidelines
(the "originator's underwriting guidelines") established by the mortgage loan
seller under the "Full Documentation", "Fast Trac" or "Stated Income"
residential loan programs (the "originator underwriting programs"). The
originator underwriting guidelines are primarily intended to evaluate the value
and adequacy of the mortgaged property as collateral and are also intended to
consider the mortgagor's credit standing and repayment ability. On a
case-by-case basis and only with the approval of two or more senior lending
officers, the mortgage loan seller may determine that, based upon compensating
factors, a prospective mortgagor not strictly qualifying under the underwriting
risk category guidelines described below warrants an underwriting exception.
Compensating factors may include, but are not limited to, low loan-to-value
ratio, low debt-to-income ratio, good credit history, stable employment and time
in residence at the applicant's current address. It is expected that a
substantial number of the mortgage loans to be included in the mortgage pool
will represent such underwriting exceptions.
Under the originator underwriting programs, during the underwriting
process, the mortgage loan seller or the originator for the mortgage loan seller
reviews and verifies the loan applicant's sources of income (except under the
Stated Income and Fast Trac residential loan programs), calculates the amount of
income from all such sources indicated on the loan application, reviews the
credit history of the applicant and calculates the debt-to-income ratio to
determine the applicant's ability to repay the loan, and reviews the mortgaged
property for compliance with the originator underwriting guidelines. The
originator underwriting guidelines are applied in accordance with a procedure
which complies with applicable federal and state laws and regulations and
requires (i) an appraisal of the mortgaged property which generally conforms to
Freddie Mac and Fannie Mae standards and (ii) a review of such appraisal, which
review may be
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<PAGE>
conducted by a representative of the mortgage loan seller or a staff appraiser
and, depending upon the original principal balance and loan-to-value ratio of
the mortgaged property, may include a desk review of the original appraisal or a
drive-by review appraisal of the mortgaged property. The originator underwriting
guidelines permit loans with loan-to-value ratios at origination of up to 90%.
The maximum allowable loan-to-value ratio varies based upon the income
documentation, property type, creditworthiness, debt service-to-income ratio of
the mortgagor and the overall risks associated with the loan decision. Under the
residential loan programs, the maximum combined loan-to-value ratio, including
any second deeds of trust subordinate to the mortgage loan seller's first deed
of trust, is generally 100% for owner occupied mortgaged properties and 90% for
non-owner occupied mortgaged properties.
All of the mortgage loans originated in the originator underwriting
programs are based on loan application packages submitted through mortgage
brokerage companies or the mortgage loan seller's retail branches, or are
purchased from approved originators pursuant to the originator underwriting
guidelines described herein. Loan application packages submitted through
mortgage brokerage companies, containing in each case relevant credit, property
and underwriting information on the loan request, are compiled by the applicable
mortgage brokerage company and submitted to the mortgage loan seller for
approval and funding. The mortgage brokerage companies receive a portion of the
loan origination fee charged to the mortgagor at the time the loan is made. No
single mortgage brokerage company accounts for more than 5%, measured by
outstanding principal balance, of the single-family mortgage loans originated by
the mortgage loan seller.
Each prospective mortgagor completes an application which includes
information with respect to the applicant's liabilities, income, credit history
and employment history, as well as certain other personal information. The
mortgage loan seller obtains a credit report on each applicant from a credit
reporting company. The applicant must generally provide to the mortgage loan
seller or the originator for the mortgage loan seller a letter explaining all
late payments on mortgage debt and, generally, consumer (i.e., non-mortgage)
debt. The report typically contains information relating to such matters as
credit history with local and national merchants and lenders, installment debt
payments and any record of defaults, bankruptcy, repossession, suits or
judgments. Under the Full Documentation residential loan program, self-employed
individuals are generally required to submit their most recent federal income
tax return. As part of its quality control system, the mortgage loan seller
reverifies information with respect to the foregoing matters that has been
provided by the mortgage brokerage company prior to funding a loan and
periodically audits files based on a random sample of closed loans. In the
course of its pre-funding audit, the mortgage loan seller reverifies the income
of each mortgagor or, for a self-employed individual, reviews the income
documentation obtained pursuant to the originator underwriting guidelines
(except under the Stated Income residential loan program). The mortgage loan
seller generally verifies the source of funds for the down payment.
Mortgaged properties that are to secure mortgage loans underwritten under
the originator underwriting programs are appraised by qualified independent
appraisers who are approved by the mortgage loan seller's internal valuation
managers. In most cases, below-average properties (including properties
requiring major deferred maintenance) are not acceptable as security for
mortgage loans in the originator underwriting programs. Each appraisal includes
a market data
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<PAGE>
analysis based on recent sales of comparable homes in the area and, where deemed
appropriate, replacement cost analysis based on the current cost of constructing
a similar home. Every independent appraisal is reviewed by a representative of
the mortgage loan seller or a staff appraiser before the loan is funded.
The originator 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 originator underwriting programs generally have payment histories and debt
ratios which would not satisfy Fannie Mae and Freddie Mac underwriting
guidelines and may have a record of major derogatory credit items such as
outstanding judgments or prior bankruptcies. The originator underwriting
guidelines establish the maximum permitted loan-to-value ratio for each loan
type based upon these and other risk factors.
Under the Fast Trac and Stated Income residential loan programs, the
mortgagor's employment and income sources must be stated on the mortgagor's
application. The mortgagor's income as stated must be reasonable for the related
occupation and such determination as to reasonableness is subject to the loan
underwriter's discretion. However, the mortgagor's income as stated on the
application is not independently verified. Verification of employment is
required for salaried mortgagors only. Maximum loan-to-value ratios are
generally lower under the Fast Trac and Stated Income residential loan programs
than those permitted under the Full Documentation residential loan program.
Except as otherwise stated above, the same mortgage credit, consumer credit and
collateral property underwriting guidelines that apply to the Full Documentation
residential loan program apply to the Fast Trac and Stated Income residential
loan programs.
The mortgage loan seller requires that all mortgage loans in the originator
underwriting programs have title insurance and be secured by liens on real
property. The mortgage loan seller also requires that fire and extended coverage
casualty insurance be maintained on the secured property in an amount at least
equal to the principal balance of the mortgage loan or the replacement cost of
the property, whichever is less. The mortgage loan seller does not require that
mortgage loans in the originator underwriting programs be covered by a primary
mortgage insurance policy.
RISK CATEGORIES
Under the originator underwriting programs, various risk categories are
used to grade the likelihood that the mortgagor will satisfy the repayment
conditions of the mortgage loan. These risk categories establish the maximum
permitted loan-to-value ratio and loan amount, given the occupancy status of the
mortgaged property and the mortgagor's credit history and debt ratio. In
general, higher credit risk mortgage loans are graded in categories which permit
higher debt ratios and more (or more recent) major derogatory credit items such
as outstanding judgments or prior bankruptcies; however, the originator
underwriting programs establish lower maximum loan-to-value ratios and maximum
loan amounts for loans graded in such categories.
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<PAGE>
The originator underwriting guidelines have the following categories and
criteria for grading the potential likelihood that an applicant will satisfy the
repayment obligations of a mortgage loan:
CREDIT GRADE: "A." Under the "A" risk categories, the applicant generally
must have repaid installment or revolving debt according to its terms and have
demonstrated steady employment over the last two years. Certain non-consumer
credit, collections or judgments may be disregarded on a case-by-case basis. Any
and all payments 60 days or more late within the past 12 months may not
represent more than 25% of the credit reported during that period. Minor
derogatory items are permitted on a case-by-case basis as to non-mortgage credit
when the majority of the consumer credit is good. No bankruptcy filings may have
occurred during the preceding two years and no discharge or notice of default
filings may have occurred during the preceding three years. The mortgaged
property must be in at least average condition. A maximum loan-to-value ratio of
90% is permitted for owner occupied purchase money and/or refinance mortgage
loans on single family and condominium properties, and a maximum loan-to-value
ratio of 80% is permitted on an owner occupied mortgaged property consisting of
two- to four-units or second homes. A maximum loan-to-value ratio of 80% is
permitted for non-owner occupied purchase money and/or refinance mortgage loans
on single family and condominium properties, and a maximum loan-to-value ratio
of 70% is permitted on a non-owner occupied mortgaged property consisting of
two-to-four units. Generally, the debt service-to-income ratio maximum may be
47%, but this may be allowed to be increased to 55% based on the mortgagor's net
disposable income and if the loan-to-value ratio is less than or equal to 85%.
CREDIT GRADE: "A1." Under the "A1" risk sub-category, in addition to
the characteristics described under the "A" risk category above, no late
payments are permitted during the previous twelve months on an existing
mortgage loan, either on the property which is being made subject to the
mortgage loan seller's lien or any mortgage on any other property for which
the applicant is listed as borrower. In addition, the applicant must have a
credit score of 620 or higher and a debt service-to-income ratio of 45% or
less.
CREDIT GRADE "A2." Under the "A2" risk sub-category, in addition to the
characteristics described under the "A" risk category above, no late
payments are permitted during the previous twelve months on an existing
mortgage loan, either on the property which is being made subject to the
mortgage loan seller's lien or any mortgage on any other property for which
the applicant is listed as borrower.
CREDIT GRADE "A3." Under the "A3" risk sub-category, in addition to the
characteristics described under the "A" risk category above, no late
payments are permitted during the previous twelve months on an existing
mortgage loan on the property which is being made subject to the mortgage
loan seller's lien.
CREDIT GRADE "A4." Under the "A4" risk sub-category, in addition to the
characteristics described under the "A" risk category above, a maximum of
one 30-day late payment and no 60-day late payments during the previous
twelve months are permitted on an existing
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mortgage loan, on the property which is being made subject to the mortgage
loan seller's lien or any mortgage on any other property for which the
applicant is listed as mortgagor.
CREDIT GRADE "A5." Under the "A5" risk sub-category, in addition to the
characteristics described under the "A" risk category above, a maximum of
two 30-day late payments and no 60-day late payments during the previous
twelve months are permitted on an existing mortgage loan, on the property
which is being made subject to the mortgage loan seller's lien or any
mortgage on any other property for which the applicant is listed as
mortgagor.
CREDIT GRADE: "B". Under the "B" risk category, the applicant must have
generally repaid installment or revolving debt according to its terms and have
demonstrated steady employment over the last two years. Certain non-consumer
credit, collections or judgments may be disregarded on a case-by-case basis. Up
to four minor derogatory items that are late 90 days or more are permitted on a
case-by-case basis as to non-mortgage credit when the majority of the consumer
credit is deemed good. Any and all payments 60 days or more late within the past
12 months may not represent more than 35% of the credit reported during that
period. No bankruptcy filings may have occurred during the preceding two years
and no discharge or notice of default filings may have occurred during the
preceding three years. The mortgaged property must be in at least average
condition. A maximum loan-to-value ratio of 85% is permitted for owner occupied
purchase money and/or refinance mortgage loans on single family and condominium
properties, and a maximum loan-to-value ratio of 80% is permitted for non-owner
occupied purchase money and/or refinance mortgage loans on single family and
condominium properties, and a maximum loan-to-value ratio of 70% is permitted on
a non-owner occupied mortgaged property consisting of two- to four-units or
second homes. Generally, the debt service-to-income ratio must be 50% or less
but this may be increased to 55% based on the mortgagor's net disposable income
and/or loan-to-value ratio.
CREDIT GRADE "B1." Under the "B1" risk sub-category, in addition to the
characteristics described under the "B" risk category described above, no
late payments are permitted during the previous twelve months on an
existing mortgage loan, on the property which is being made subject to the
mortgage loan seller's lien or any mortgage on any other property for which
the applicant is listed as mortgagor.
CREDIT GRADE "B2." Under the "B2" risk sub-category, in addition to the
characteristics described under the "B" risk category described above, a
maximum of one 30-day late payment and no 60-day late payments are
permitted during the previous twelve months on an existing mortgage loan,
on the property which is being made subject to the mortgage loan seller's
lien or any mortgage on any other property for which the applicant is
listed as mortgagor.
CREDIT GRADE "B3." Under the "B3" risk sub-category, in addition to the
characteristics described under the "B" risk category described above, a
maximum of two 30-day late payments and no 60-day late payments are
permitted during the previous twelve months on an existing mortgage loan,
on the property which is being made subject to the mortgage loan seller's
lien or any mortgage on any other property for which the applicant is
listed as mortgagor.
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CREDIT GRADE "B4." Under the "B4" risk sub-category, in addition to the
characteristics described under the "B" risk category described above, a
maximum of three 30-day late payments and generally no 60-day late payments
during the previous twelve months are permitted on an existing mortgage
loan, on the property which is being made subject to the mortgage loan
seller's lien or any mortgage on any other property for which the applicant
is listed as mortgagor.
CREDIT GRADE: "B-". Under the "B-" risk category, the applicant must have
generally repaid installment or revolving debt according to its terms and have
demonstrated steady employment over the last two years. No payment delinquent
more than 30 days at the time of application is permitted on an existing
mortgage loan. Certain non-consumer credit, collections or judgments may be
disregarded on a case-by-case basis. Payments 60 days or more late within the
last 12 months may not represent more than 50% of the credit items reported
during that period. No bankruptcy filings may have occurred during the preceding
eighteen months and no discharge or notice of default filings may have occurred
during the preceding two years. The mortgaged property must be in at least
average condition. A maximum loan-to-value ratio of 80% is permitted for owner
occupied purchase money and/or refinance mortgage loans on single family and
condominium properties, and a maximum loan-to-value ratio of 75% is permitted on
an owner occupied mortgaged property consisting of two-to-four units or second
homes. A maximum loan-to-value ratio of 75% is permitted for non-owner occupied
purchase money and/or refinance mortgage loans on single family and condominium
properties, and a maximum loan-to-value ratio of 65% is permitted on a non-owner
occupied mortgaged property consisting of two-to-four units or second homes.
Generally, the debt service-to-income ratio must not exceed 55%.
CREDIT GRADE "B-1." Under the "B-1" risk sub-category, in addition to
the characteristics described under the "B-" risk category described above,
no late payments are permitted during the previous twelve months on an
existing mortgage loan, on the property which is being made subject to the
mortgage loan seller's lien or any mortgage on any other property for which
the applicant is listed as mortgagor.
CREDIT GRADE "B-2." Under the "B-2" risk sub-category, in addition to
the characteristics described under the "B-" risk category described above,
a maximum of one 30-day late payment and no 60-day late payments are
permitted during the previous twelve months on an existing mortgage loan,
on the property which is being made subject to the mortgage loan seller's
lien or any mortgage on any other property for which the applicant is
listed as mortgagor.
CREDIT GRADE "B-3." Under the "B-3" risk sub-category, in addition to
the characteristics described under the "B-" risk category described above,
a maximum of two 30-day late payments and no 60-day late payments are
permitted during the previous twelve months on an existing mortgage loan,
on the property which is being made subject to the mortgage loan seller's
lien or any mortgage on any other property for which the applicant is
listed as mortgagor.
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<PAGE>
CREDIT GRADE "B-4." Under the "B-4" risk sub-category, in addition to
the characteristics described under the "B-" risk category described above,
a maximum of three 30-day late payments and generally no 60-day late
payments during the previous twelve months ate permitted on an existing
mortgage loan, on the property which is being made subject to the mortgage
loan seller's lien or any mortgage on any other property for which the
applicant is listed as mortgagor.
CREDIT GRADE "B-5." Under the "B-5" risk sub-category, in addition to
the characteristics described under the "B-" risk category described above,
a maximum of one 60-day late payment during the previous twelve months are
permitted on an existing mortgage loan, on the property which is being made
subject to the mortgage loan seller's lien or any mortgage on any other
property for which the applicant is listed as mortgagor.
CREDIT GRADE: "C". Under the "C" risk category, the applicant may have
experienced significant credit problems in the past. A maximum of two 60-day
late payments and one 90-day late payment, or three 60-day late payments and no
90-day late payments, within the last 12 months is permitted on an existing
mortgage loan. An existing mortgage loan is not required to be current at the
time the application is submitted. Consumer credit derogatory items will be
considered on a case-by-case basis. No bankruptcy, discharge or notice of
default filings may have occurred during the preceding twelve months. The
mortgaged property must be in at least average condition. A maximum
loan-to-value ratio of 75% is permitted for owner occupied purchase money and/or
refinance mortgage loans on single family and condominium properties, and a
maximum loan-to-value ratio of 70% is permitted on an owner occupied mortgaged
property consisting of two-to-four units or second homes. A maximum
loan-to-value ratio of 70% is permitted for non-owner occupied purchase money
and/or refinance mortgage loans on single family and condominium properties, and
a maximum loan-to-value ratio of 60% is permitted on a non-owner occupied
mortgaged property consisting of two-to-four units or second homes. Generally,
the debt service-to-income ratio must not exceed 55%; however, a debt
service-to-income ratio of 55% to 60% will be considered on a case-by-case
basis.
CREDIT GRADE:"D". Under the "D" risk category, the applicant may have
experienced significant credit problems in the past. The applicant may be in
bankruptcy or have received a notice of default or foreclosure, and in any such
case must provide a reasonable explanation as to why the problem no longer
exists. The mortgaged property must be in at least average condition. A maximum
loan-to-value ratio of 65% is permitted for owner occupied purchase money and/or
refinance mortgage loans on single family and condominium properties, and a
maximum loan-to-value ratio of 60% is permitted on an owner occupied mortgaged
property consisting of two-to-four units or second homes. A maximum
loan-to-value ratio of 65% is permitted for non-owner occupied purchase money
and/or refinance mortgage loans on single family and condominium properties, and
a maximum loan-to-value ratio of 50% is permitted on a non-owner occupied
mortgaged property consisting of two-to-four units or second homes. Generally,
the debt service-to-income ratio must not exceed 55%; however, a debt
service-to-income ratio of 55% to 60% will be considered on a case-by-case
basis.
The mortgage loan seller will make representations and warranties as of the
closing date with respect to the mortgage loans, and will be obligated to
replace, cure or repurchase any such
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<PAGE>
mortgage loan in respect of which a material breach of the representations and
warranties it has made has occurred (other than those breaches which have been
cured). For a discussion of the representations and warranties made and the
repurchase obligation, see "The Depositor's Mortgage Loan Purchase
Program--Representations by or on behalf of Mortgage Loan Sellers; Remedies for
Breach of Representation" in the Prospectus.
ADDITIONAL INFORMATION CONCERNING THE MORTGAGE LOANS
The description in this prospectus supplement of the initial mortgage pool
and the initial mortgaged properties is based upon the mortgage pool as
constituted at the close of business on the cut-off date, as adjusted for the
scheduled principal payments due on or before the cut-off date. Prior to the
issuance of the certificates, mortgage loans may be removed from the mortgage
pool as a result of incomplete documentation or otherwise if the depositor deems
the removal necessary or desirable, and may be prepaid at any time. A limited
number of other mortgage loans may be included in the mortgage pool prior to the
issuance of the certificates unless including these mortgage loans would
materially alter the characteristics of the mortgage pool as described in this
prospectus supplement. The depositor believes that the information set forth in
this prospectus supplement will be representative of the characteristics of the
mortgage pool as it will be constituted at the time the certificates are issued,
although the range of mortgage rates and maturities and other characteristics of
the mortgage loans may vary.
The subsequent mortgage loans may have characteristics different from those
of the initial mortgage loans. However each subsequent mortgage loan must
satisfy the eligibility criteria referred to herein under "-Conveyance of
Subsequent Mortgage Loans and the Pre-Funding Account."
YIELD ON THE CERTIFICATES
SHORTFALLS IN COLLECTIONS OF INTEREST
When a principal prepayment in full is made on a mortgage loan, the
mortgagor is charged interest only for the period beginning with the date on
which the scheduled monthly payment was due for the preceding monthly payment up
to the date of the prepayment, instead of for a full month. When a partial
principal prepayment is made on a mortgage loan, the mortgagor is not charged
interest on the amount of the prepayment for the month in which the prepayment
is made. In addition, the application of the Soldiers' and Sailors' Civil Relief
Act of 1940, as amended or the Relief Act, to any mortgage loan will adversely
affect, for an indeterminate period of time, the ability of the master servicer
to collect full amounts of interest on the mortgage loans affected by
application of the Relief Act. The master servicer is obligated to pay from its
own funds only those interest shortfalls attributable to full and partial
prepayments by the mortgagors on the mortgage loans master serviced by it, but
only to the extent of its aggregate servicing fee for the related due period.
The due period, with respect to any distribution date, commences on the second
day of the month immediately preceding the month in which the distribution date
occurs and ends on the first day of the month in which the distribution date
occurs. Accordingly, the effect of:
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<PAGE>
o any principal prepayments on the mortgage loans, to the extent that
Prepayment Interest Shortfalls exceed Compensating Interest or
o any shortfalls resulting from the application of the Relief Act, will
be to reduce the aggregate amount of interest collected that is available for
distribution to holders of the certificates.
Any of these shortfalls will be allocated among the certificates as
provided in this prospectus supplement under "Description of the
Certificates--Interest Distributions" and "--Overcollateralization Provisions".
The certificate insurance policy will not cover any shortfalls resulting from
the application of the Relief Act. See "Legal Aspects of Mortgage
Assets--Soldiers' and Sailors' Civil Relief Act of 1940" in the prospectus. See
"Pooling and Servicing Agreement--Servicing and Other Compensation and Payment
of Expenses" in this prospectus supplement.
GENERAL PREPAYMENT CONSIDERATIONS
The rate of principal payments on each class of offered certificates, the
aggregate amount of distributions on each class of offered certificates and the
yield to maturity of each class of offered certificates will be related to the
rate and timing of payments of principal on the mortgage loans and the amount,
if any, contributed from the pre-funding account at the end of the funding
period. The rate of principal payments on the mortgage loans in the mortgage
pool will in turn be affected by the amortization schedules of the mortgage
loans as they change from time to time to accommodate changes in the mortgage
rates and by the rate of principal prepayments on the mortgage loans, including
for this purpose payments resulting from refinancings, liquidations of the
mortgage loans due to defaults, casualties, condemnations and repurchases,
whether optional or required, by the depositor, the mortgage loan seller, the
originator, the insurer, the master servicer or the majorityholder of the Class
CE Certificates. The mortgage loans may be prepaid by the mortgagors at any
time; however, with respect to approximately _____% of the mortgage loans, by
aggregate principal balance as of the cut-off date, a prepayment may subject the
related mortgagor to a prepayment charge.
Prepayments, liquidations and repurchases of the mortgage loans will result
in distributions in respect of principal to the holders of the class or classes
of offered certificates then entitled to receive distributions that otherwise
would be distributed over the remaining terms of these mortgage loans. Since the
rates of payment of principal on the mortgage loans will depend on future events
and a variety of factors, no assurance can be given as to the rate of principal
prepayments. The extent to which the yield to maturity of any class of offered
certificates may vary from the anticipated yield will depend upon the degree to
which they are purchased at a discount or premium and the degree to which the
timing of payments on these certificates is sensitive to prepayments on the
mortgage loans. Further, an investor should consider, in the case of any
certificate purchased at a discount, the risk that a slower than anticipated
rate of principal payments on the mortgage loans could result in an actual yield
to the investor that is lower than the anticipated yield. In the case of any
certificate purchased at a premium, the risk that a faster than anticipated rate
of principal payments could result in an actual yield to the investor that is
lower than the anticipated yield. In most cases, the earlier a prepayment of
principal on the
S-31
<PAGE>
mortgage loans occurs, the greater the effect on the investor's yield to
maturity. As a result, the effect on an investor's yield of principal payments
occurring at a rate higher or lower than the rate anticipated by the investor
during the period immediately following the issuance of the certificates would
not be fully offset by a subsequent like reduction or increase in the rate of
principal payments. See "Yield Considerations" and "Maturity and Prepayment
Considerations" in this prospectus supplement and "Yield and Maturity
Considerations" in the prospectus.
It is highly unlikely that the mortgage loans will prepay at any constant
rate until maturity or that all of the mortgage loans will prepay at the same
rate. Moreover, the timing of prepayments on the mortgage loans may
significantly affect the actual yield to maturity on the offered certificates,
even if the average rate of principal payments experienced over time is
consistent with an investor's expectation.
Because principal distributions are paid to certain classes of offered
certificates before other classes, holders of classes of offered certificates
having a later priority of payment bear a greater risk of losses than holders of
classes having earlier priorities for distribution of principal. This is because
the certificates having later priority will represent an increasing percentage
interest in the trust fund before principal distributions are made on these
certificates. Prior to a certain date, as described herein, all principal
payments on the mortgage loans will be allocated to the Class A-1 Certificates.
Thereafter, during certain periods subject to certain delinquency triggers
described herein, all principal payments on the mortgage loans will be allocated
to the offered certificates in the priorities described under "Description of
the Certificates-Principal Distributions on the Offered Certificates" in the
prospectus supplement.
The rate of payments, including prepayments, on pools of mortgage loans is
influenced by a variety of economic, geographic, social and other factors. If
prevailing mortgage rates fall significantly below the mortgage rates on the
mortgage loans in the mortgage pool, the rate of prepayment and refinancing
would be expected to increase. Conversely, if prevailing mortgage rates rise
significantly above the mortgage rates on the mortgage loans in the mortgage
pool, the rate of prepayment on the mortgage loans would be expected to
decrease. Other factors affecting prepayment of mortgage loans include changes
in mortgagors' housing needs, job transfers, unemployment, mortgagors' net
equity in the mortgaged properties and servicing decisions. There can be no
certainty as to the rate of prepayments on the mortgage loans in the mortgage
pool during any period or over the life of the certificates. See "Yield and
Maturity Considerations" in the prospectus.
Defaults on mortgage loans are expected to occur with greater frequency in
their early years. In addition, default rates in most cases are higher for
mortgage loans used to refinance an existing mortgage loan. In the event of a
mortgagor's default on a mortgage loan in the mortgage pool, other than as
provided by the certificate insurance policy as described in this prospectus
supplement, there can be no assurance that recourse beyond the specific
mortgaged property pledged as security for repayment will be available. See "The
Mortgage Pool--Underwriting Standards of __________ and Representations
Concerning the Mortgage Loans" in this prospectus supplement.
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<PAGE>
Furthermore, to the extent that the original pre-funded amount has not been
fully applied to the purchase of subsequent mortgage loans by the end of the
funding period, the holders of the Class A-1 Certificates will receive on the
distribution date immediately following the end of the funding period a
prepayment of principal in an amount equal to the lesser of (i) any amounts
remaining in the pre-funding account and (ii) the outstanding certificate
principal balance of the Class A-1 Certificates. Although no assurance can be
given, it is anticipated by the depositor that the principal amount of
subsequent mortgage loans sold to the trust fund will require the application of
substantially all amounts on deposit in the pre-funding account and that there
will be no material amount of principal prepaid to the holders of the Class A-1
Certificates. However, it is unlikely that the depositor will be able to deliver
subsequent mortgage loans with an aggregate principal balance identical to the
pre-funded amount.
SPECIAL YIELD CONSIDERATIONS
The mortgage rates on the mortgage loans adjust semi-annually based upon
the six-month LIBOR index, after an initial period of approximately three years,
whereas the pass-through rate on the offered certificates (other than the Class
M-3 Certificates) adjusts monthly and may be based upon one-month LIBOR as
described under "Description of the Certificates--Calculation of One-Month
LIBOR" herein. One-month LIBOR and the six-month LIBOR index applicable to the
mortgage loans may respond differently to economic and market factors, and there
is not necessarily a correlation between them. It is possible, for example, that
if both one-month LIBOR and the six-month LIBOR index rise during the same
period, one-month LIBOR may rise more rapidly than the six-month LIBOR index or
may rise higher than the six-month LIBOR index. Thus, the interest due on the
mortgage loans during any due period, net of the expenses of the trust fund, may
not equal the amount of interest that would accrue at one-month LIBOR plus the
applicable spread on the offered certificates during the related Interest
Accrual Period. In such an event the rate payable to the holders of the offered
certificates (other than the Class M-3 Certificates) will be the Net WAC
Pass-Through Rate, this would adversely affect the yield to maturity on such
certificates, and the holders of such Certificates WILL NOT be entitled to
interest in excess of the Net WAC Pass-Through Rate on any future distribution
date. In addition, the Net WAC Pass-Through Rate will be reduced by the
prepayment of mortgage loans with high mortgage rates.
All of the mortgage loans are adjustable-rate mortgage loans. As is the
case with conventional fixed-rate mortgage loans, adjustable-rate mortgage loans
may be subject to a greater rate of principal prepayments in a declining
interest rate environment. For example, if prevailing interest rates were to
fall significantly, adjustable-rate mortgage loans could be subject to higher
prepayment rates than if prevailing interest rates were to remain constant
because the availability of fixed-rate mortgage loans at competitive interest
rates may encourage mortgagors to refinance their adjustable-rate mortgage loans
to "lock in" lower fixed interest rates. The rate of payments (including
prepayments) on pools of mortgage loans is influenced by a variety of economic,
geographic, social and other factors, including changes in mortgagors' housing
needs, job transfers, unemployment, mortgagors' net equity in the mortgaged
properties and servicing decisions. No assurances can be given as to the rate of
prepayments on the mortgage loans in stable or changing interest rate
environments and the seller makes no representations as to the particular
factors that will affect the prepayment of the mortgage loans.
S-33
<PAGE>
WEIGHTED AVERAGE LIFE
Weighted average life refers to the amount of time that will elapse from
the date of issuance of a security until each dollar of principal of the
security will be repaid to the investor. The weighted average life of the
offered certificates of each class will be influenced by the rate at which
principal on the mortgage loans is paid, which may be in the form of scheduled
payments or prepayments, including repurchases and prepayments of principal by
the mortgagor as well as amounts received by virtue of condemnation, insurance
or foreclosure with respect to the mortgage loans, and the timing of these
payments.
Except as otherwise described under "Description of the
Certificates--Principal Distributions on the Offered Certificates" in this
prospectus supplement, distributions of principal will be made to the classes of
the offered certificates according to the priorities described in this
prospectus supplement, rather than on a PRO RATA basis among the classes of
Class A Certificates, unless an insurer default exists. The timing of
commencement of principal distributions to each class of the offered
certificates and the weighted average life of each class will be affected by the
rates of prepayment on the mortgage loans experienced both before and after the
commencement of principal distributions on each class.
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The model used in this prospectus supplement
assumes a prepayment rate for the mortgage loans of ___% CPR. No representation
is made that the mortgage loans in the mortgage pool will prepay at this rate or
any other rate. To assume __% CPR or any other CPR percentage is to assume that
the stated percentage of the outstanding principal balance of the pool is
prepaid over the course of a year.
The tables following the next paragraph indicate the percentage of the
initial certificate principal balance of the indicated classes of certificates
that would be outstanding after each of the dates shown at various constant
percentages of the prepayment model and the corresponding weighted average life
of each class of certificates. The table is based on the following assumptions:
o the mortgage pool consists of ____ mortgage loans with the
characteristics set forth in the table immediately following these
bullet points entitled "Assumed Mortgage Loan Characteristics",
o distributions on the certificates are received, in cash, on the __ day
of each month, commencing in ________ ____,
o the mortgage loans prepay at the constant percentages of the prepayment
model indicated,
o no defaults or delinquencies occur in the payment by mortgagors of
principal and interest on the mortgage loans and no shortfalls due to
the application of the Relief Act are incurred,
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<PAGE>
o none of the depositor, the mortgage loan seller, the originator, the
majorityholder of the Class CE certificates, the insurer, the master
servicer or any other person purchases from the trust fund any mortgage
loan based on any obligation or option under the pooling and servicing
agreement, except as indicated in the second sentence following the
table entitled "Percent of Initial Certificate Principal Balance
Outstanding at the Specified Percentages of the Prepayment Model",
o scheduled monthly payments on the mortgage loans are received on the
first day of each month commencing in ________ ____, and are computed
prior to giving effect to any prepayments received in the prior month,
o prepayments representing payment in full of individual mortgage loans
are received on the last day of each month commencing in _______ ____,
and include 30 days' interest on the mortgage loan,
o the scheduled monthly payment for each mortgage loan is calculated
based on its principal balance, mortgage rate and remaining term to
maturity so that the mortgage loan will amortize in amounts sufficient
to repay the remaining principal balance of the mortgage loan by its
remaining term to maturity,
o the certificates are purchased on _______ __, ____;
o the six-month LIBOR index remains constant at ____% per annum and the
mortgage rate on each mortgage loan is adjusted on the due date
immediately following the next adjustment date and in subsequent
adjustable dates necessary to equal the six-month LIBOR index plus the
applicable gross margin, subject to the applicable periodic rate cap
each as set forth in the related mortgage note;
o one-month LIBOR remains constant at ____% per annum;
o the monthly payment on each mortgage loan is adjusted on the due date
immediately following the next adjustment date (and on subsequent
adjustment dates if necessary) to equal a fully amortizing monthly
payment;
o the subsequent mortgage loan are purchased on ____________ resulting in
no mandatory prepayment from the pre-funding account on the
distribution date immediately following the end of the funding period;
o the initial mortgage loans and the subsequent mortgage loans are
included in the mortgage pool as of the cut-off date; and
o the servicing fee rate is ____% per annum, the trustee's fee rate is
_____% per annum and the amount of the premium payable to the insurer
is as described under the heading "Pooling and Servicing
Agreement-Matters Regarding the Insurer".
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<PAGE>
<TABLE>
<CAPTION>
ASSUMED MORTGAGE LOAN CHARACTERISTICS
PRINCIPAL
BALANCE ORIGINAL TERM REMAINING TERM NEXT RATE MAXIMUM MINIMUM PERIODIC
AS OF THE MORTGAGE TO MATURITY TO MATURITY ADJUSTMENT GROSS MORTGAGE MORTGAGE RATE
CUT-OFF DATE RATE (MONTHS) (MONTHS) DATE MARGIN (%) RATE(%) RATE(%) CAP(%)
------------ ---- -------- -------- ---- ---------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ % % % % %
$ % % % % %
$ % % % % %
</TABLE>
There will be discrepancies between the characteristics of the actual
mortgage loans (after the purchase of subsequent mortgage loans) and the
characteristics assumed in preparing the table immediately following this
paragraph. Any discrepancy may have an effect upon the percentages of the
initial certificate principal balances outstanding and the weighted average
lives of the classes of certificates set forth in the table. In addition, to the
extent that the actual mortgage loans included in the mortgage pool have
characteristics that differ from those assumed in preparing the table
immediately following this paragraph and since it is not likely that the level
of the six-month LIBOR index or one-month LIBOR will remain constant as assumed,
the classes of certificates may mature earlier or later than indicated by the
table immediately following this paragraph. Based on the foregoing assumptions,
the table immediately following this paragraph indicates the weighted average
life of each class of the offered certificates and sets forth the percentage of
the initial certificate principal balance of each class of certificates that
would be outstanding after each of the dates shown, at various percentages of
the prepayment model. Neither the prepayment model used in this prospectus
supplement nor any other prepayment model or assumption purports to be a
historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of mortgage loans, including the
mortgage loans included in the trust fund. Variations in the prepayment
experience and the balance of the mortgage loans that prepay may increase or
decrease the percentages of initial certificate principal balance and weighted
average lives shown in the following table. These variations may occur even if
the average prepayment experience of all of the mortgage loans equals any of the
specified percentages of the prepayment model.
<TABLE>
<CAPTION>
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING AT THE
SPECIFIED PERCENTAGES OF THE PREPAYMENT MODEL
CLASS A-1 CERTIFICATES CLASS A-2 CERTIFICATES
---------------------- ----------------------
DISTRIBUTION DATE 0% 15% 28% 35% 45% 0% 15%% 28% 35% 45%
----------------- -- --- --- --- --- -- ---- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
................................
................................
................................
Weighted Average Life
in Years......................
S-36
<PAGE>
Weighted Average Life
in Years......................
</TABLE>
The weighted average life of a certificate is determined by (a) multiplying
the amount of each distribution of principal by the number of years from the
date of issuance of the certificate to the related distribution date, (b) adding
the results and (c) dividing the sum by the initial certificate principal
balance of the certificate. The last row of weighted average lives is calculated
using the calculation set forth in the prior sentence but assumes that the
majorityholder of the Class CE Certificates or master servicer exercises its
option to purchase the mortgage loans on the earliest possible distribution date
in which it is permitted to exercise this option. See "Pooling and Servicing
Agreement--Termination" in this prospectus supplement.
There is no assurance that prepayments of the mortgage loans will conform
to any of the levels of the prepayment model indicated in the immediately
preceding table or to any other level, or that the actual weighted average life
of any class of certificates will conform to any of the weighted average lives
set forth in the immediately preceding table. Furthermore, the information
contained in the table with respect to the weighted average life of each
specified class of certificates is not necessarily indicative of the weighted
average life of each class that might be calculated or projected under different
or varying prepayment assumptions.
The characteristics of the mortgage loans included in the mortgage pool
will differ from those assumed in preparing the immediately preceding table. In
addition, it is unlikely that any mortgage loan will prepay at any constant
percentage of the prepayment model until maturity or that all of the mortgage
loans included in the mortgage pool will prepay at the same rate. The timing of
changes in the rate of prepayments may significantly affect the actual yield to
maturity to investors, even if the average rate of principal prepayments is
consistent with the expectations of investors.
DESCRIPTION OF THE CERTIFICATES
GENERAL DESCRIPTION OF THE CERTIFICATES
The certificates will consist of ________ classes of certificates,
designated as:
o the Class A-1 Certificates and the Class A-2 Certificates which will also
be referred to in this prospectus supplement as the Class A Certificates;
o the Class CE Certificates;
o the Class P Certificates, and
o the Class R-I Certificates, the Class R-II Certificates and the Class
R-III Certificates which will also be referred to in this prospectus supplement
as the Residual Certificates.
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<PAGE>
Only the Class A Certificates are offered by this prospectus supplement.
The Class CE Certificates, the Class P Certificates and the Residual
Certificates which are not being offered hereby, will be delivered on the
closing date to a wholly-owned bankruptcy remote subsidiary of the originator as
partial consideration for the mortgage loans.
The certificates represent in the aggregate the entire beneficial ownership
interest in a trust fund consisting primarily of a segregated pool of
conventional, one- to four-family, adjustable- rate, fully-amortizing, first
lien mortgage loans having original terms to maturity of not greater than 30
years, and funds deposited by the depositor in the pre-funding account and the
interest coverage account and an aggregate principal balance as of _______ __,
____, which date shall also be referred to in this prospectus supplement as the
cut-off date, after application of scheduled payments due whether or not
received, of approximately $___________, subject to a permitted variance as
described in this prospectus supplement under "The Mortgage Pool".
Each class of the offered certificates will have the approximate initial
certificate principal balance as set forth in the summary of this prospectus
supplement and will have the Pass- Through Rate determined as provided under
"Summary of Prospectus Supplement--Pass- Through Rate" and "--Interest
Distributions" in this prospectus supplement.
The offered certificates will be issued, maintained and transferred on the
book-entry records of the Depository Trust Company, or DTC, and its participants
and in that capacity, will be referred to in this prospectus supplement as the
book-entry certificates. The book-entry certificates will be issued in minimum
denominations of $_____ and integral multiples of $____ in excess of the minimum
denominations.
The depositor has been informed by DTC that DTC's nominee will be CEDE &
Co. No person acquiring an interest in any offered certificate will be entitled
to receive a certificate representing that person's interest, except as set
forth in the section of this prospectus supplement entitled "--Definitive
Certificates". Unless and until a certificate is issued in fully registered
certificated form, a definitive certificate, under the limited circumstances
described in this prospectus supplement, all references to actions by
certificateholders with respect to the offered certificates shall refer to
actions taken by DTC upon instructions from its participants, and all references
in this prospectus supplement to distributions, notices, reports and statements
to certificateholders with respect to the offered certificates shall refer to
distributions, notices, reports and statements to DTC CEDE & Co., as the
registered holder of the offered certificates, for distribution to certificate
owners in accordance with DTC procedures. See "--Registration of the Book-Entry
Certificates" and "--Definitive Certificates" in this prospectus supplement.
No service charge will be imposed for any registration of transfer or
exchange, but the trustee may require payment of a sum sufficient to cover any
tax or other governmental charge imposed in connection with any registration of
this kind.
All distributions to holders of the certificates, other than the final
distribution on any class of certificates, will be made on each distribution
date by or on behalf of the trustee to the persons in whose names the
certificates are registered at the close of business on the related record date.
The record date for each distribution date is:
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<PAGE>
o with respect to any book-entry certificates, the close of business on
the business day immediately preceding the distribution date or
o with respect to any other class of certificates, including any
definitive certificates, the close of business on the last business day of the
month preceding the month in which the distribution date occurs.
Distributions will be made either by check mailed to the address of each
the certificateholder as it appears in the certificate register or upon written
request to the trustee at least five business days prior to the relevant Record
Date by any holder of certificates having an aggregate initial certificate
principal balance that is in excess of the lesser of:
o $5,000,000 or
o two-thirds of the initial aggregate certificate principal balance or
Notional Amount, as applicable, of that class of certificates
by wire transfer in immediately available funds to the account of the
certificateholder specified in the request. The final distribution on any class
of certificates will be made in like manner, but only upon presentment and
surrender of these certificates at the corporate trust office of the trustee or
another location specified in the notice to certificateholders of the final
distribution.
REGISTRATION OF THE BOOK-ENTRY CERTIFICATES
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 New York Uniform Commercial Code, and a
clearing agency registered under the provisions of Section 17A of the Securities
Exchange Act of 1934, as amended. DTC was created to hold securities for its
participating organizations and to facilitate the clearance and settlement of
securities transactions between its participants through electronic book
entries, thereby eliminating the need for physical movement of certificates.
Participants include securities brokers and dealers, including the underwriter
of the certificates offered by this prospectus supplement, banks, trust
companies and clearing corporations. Indirect access to the DTC system is also
available to others such as banks, brokers, dealers, and trust companies that
clear through or maintain a custodial relationship with a participant, either
directly or indirectly.
Certificate owners that are not participants or indirect participants but
desire to purchase, sell or otherwise transfer ownership of, or other interests
in, the book-entry certificates may do so only through participants and indirect
participants. In addition, certificate owners will receive all distributions of
principal of and interest on the book-entry certificates from the trustee
through DTC and DTC participants. The trustee will forward payments to DTC in
same day funds and DTC will forward these payments to participants in next day
funds settled through the New York Clearing House. Each participant will be
responsible for disbursing these payments to indirect participants or to
certificate owners. Unless and until definitive certificates are issued, it is
anticipated that the only certificateholder of the book-entry certificates will
be CEDE & Co., as nominee of DTC. Certificate owners will not be recognized by
the trustee as certificateholders,
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as the term is used in the pooling and servicing agreement and certificate
owners will be permitted to exercise the rights of certificateholders only
indirectly through DTC and its participants.
Under the rules, regulations and procedures creating and affecting DTC and
its operations, DTC is required to make book-entry transfers of the book-entry
certificates among participants and to receive and transmit distributions of
principal of, and interest on, the book-entry certificates. Participants and
indirect participants with which certificate owners have accounts with respect
to the book-entry certificates similarly are required to make book-entry
transfers and receive and transmit payments on behalf of their respective
certificate owners. Accordingly, although certificate owners will not possess
definitive certificates, the rules, regulations and procedures creating and
affecting DTC and its operations provide a mechanism by which certificate owners
through their participants and indirect participants will receive payments and
will be able to transfer their interest.
Because DTC can only act on behalf of participants, who in turn act on
behalf of indirect participants and on behalf of banks, the ability of a
certificate owner to pledge book-entry certificates to persons or entities that
do not participate in the DTC system, or to otherwise act with respect to these
certificates, may be limited due to the absence of physical certificates for the
book-entry certificates. In addition, under a book-entry format, certificate
owners may experience delays in their receipt of payments since distributions
will be made by the trustee to CEDE & Co., as nominee for DTC.
Under the rules, regulations and procedures creating and affecting DTC and
its operations , DTC will take action permitted to be taken by a
certificateholder under the pooling and servicing agreement only at the
direction of one or more participants to whose DTC account the book-entry
certificates are credited. Additionally, under the rules, regulations and
procedures creating and affecting DTC and its operations, DTC will take actions
with respect to specified voting rights only at the direction of and on behalf
of participants whose holdings of book-entry certificates evidence these
specified voting rights. DTC may take conflicting actions with respect to voting
rights, to the extent that participants whose holdings of book-entry
certificates evidencing these voting rights, authorize divergent action.
However, DTC's ability to perform properly its services is also dependent
upon other parties, including but not limited to, issuers and their agents, as
well as third party vendors from whom DTC licenses software and hardware, and
third party vendors on which DTC relies for information or the provision of
services, including telecommunication and electrical utility service providers,
among others.
According to DTC, the foregoing information with respect to DTC has been
provided to its participants and other members of the financial community for
informational purposes only and is not intended to serve as a representation,
warranty or contract modification of any kind.
The depositor, the master servicer, the insurer and the trustee will have
no liability for any actions taken by DTC or its nominee including, without
limitation, actions for any aspect of the records relating to or payments made
on account of beneficial ownership interests in the offered
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certificates held by CEDE & Co., as nominee for DTC, or for maintaining,
supervising or reviewing any records relating to beneficial ownership interests.
DEFINITIVE CERTIFICATES
Definitive certificates will be issued to certificate owners or their
nominees, respectively, rather than to DTC or its nominee, only if:
o the depositor advises the trustee in writing that DTC is no longer
willing or able to discharge properly its responsibilities as clearing agency
with respect to the book-entry certificates and the depositor is unable to
locate a qualified successor,
o the depositor, at its option, elects to terminate the book-entry
system through DTC, or
o after the occurrence of an event of default, certificate owners
representing in the aggregate not less than 51% of the Voting Rights of the
book-entry certificates advise the trustee and DTC through participants, in
writing, that the continuation of a book-entry system through DTC, or a
successor to DTC, is no longer in the certificate owners' best interest.
Upon the occurrence of any event described in the immediately preceding
paragraph, the trustee is required to notify all certificate owners through
participants of the availability of definitive certificates. Upon surrender by
DTC of the definitive certificates representing the book-entry certificates and
receipt of instructions for re-registration, the trustee will reissue the
book-entry certificates as definitive certificates issued in the respective
principal amounts owned by individual certificate owners, and thereafter the
trustee will recognize the holders of definitive certificates as
certificateholders under the pooling and servicing agreement. Definitive
certificates will be issued in minimum denominations of $______, except that any
beneficial ownership represented by a book-entry certificate in an amount less
than $______ immediately prior to the issuance of a definitive certificate shall
be issued in a minimum denomination equal to the amount of this beneficial
ownership.
GLOSSARY OF TERMS
The following terms are given the meanings shown below to help describe the
cash flows on the certificates:
AVAILABLE DISTRIBUTION AMOUNT: The Available Distribution Amount for any
distribution date is equal to the sum, net of amounts reimbursable therefrom to
the master servicer or the trustee, of (i) the aggregate amount of scheduled
monthly payments on the mortgage loans due on the related due date and received
on or prior to the related determination date, after deduction of the servicing
fee, the trustee fee and the premium payable with respect to the certificate
insurance policy, (ii) certain unscheduled payments in respect of the mortgage
loans, including prepayments, insurance proceeds, liquidation proceeds and
proceeds from repurchases of and substitutions for the mortgage loans occurring
during the preceding calendar month, (iii) all P&I Advances with respect to the
mortgage loans received for such distribution date, (iv) with respect to the
distribution date immediately following the end of the funding period, any
amounts
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remaining in the pre-funding account after giving effect to any purchase of
subsequent mortgage loans and (v) with respect to each distribution date during
the funding period and on the distribution date immediately following the end of
the funding period, any amounts withdrawn by the trustee from the Interest
Coverage Account for distribution on the certificates. The holders of the Class
P Certificates will be entitled to all prepayment charges received on the
mortgage loans and such amounts will not be available for distribution to the
offered certificates.
BANKRUPTCY LOSS: A Bankruptcy Loss is a Deficient Valuation or a Debt
Service Reduction.
CERTIFICATE PRINCIPAL BALANCE: The certificate principal balance of a
certificate outstanding at any time represents the then maximum amount that the
holder thereof is entitled to receive as distributions allocable to principal
from the cash flow on the mortgage loans and the other assets in the trust fund.
The certificate principal balance of any class of offered certificates as of any
date of determination is equal to the initial certificate principal balance
thereof reduced by the aggregate of (a) all amounts allocable to principal
previously distributed with respect to such certificate and (b) any reductions
in the certificate principal balance thereof deemed to have occurred in
connection with allocations of Realized Losses in the manner described herein.
The certificate principal balance of the Class CE Certificates as of any date of
determination is equal to the excess, if any, of (a) the then aggregate
principal balance of the mortgage loans over (b) the then aggregate certificate
principal balance of the offered certificates and the Class P Certificates.
CLASS A-1 PRINCIPAL DISTRIBUTION AMOUNT: The Class A-1 Principal
Distribution Amount for any distribution date on or after the Stepdown Date and
on which a Trigger Event is not in effect, is an amount equal to the excess of
(x) the Certificate Principal Balance of the Class A-1 Certificates immediately
prior to such distribution date over (y) the lesser of (A) the product of (i)
approximately _____% and (ii) the aggregate principal balance of the mortgage
loans as of the last day of the related Due Period and (B) the aggregate
principal balance of the mortgage loans as of the last day of the related Due
Period minus approximately $_________.
CLASS A-2 PRINCIPAL DISTRIBUTION AMOUNT: The Class A-2 Principal
Distribution Amount for any distribution date on or after the Stepdown Date and
on which a Trigger Event is not in effect, is an amount equal to the excess of
(x) the sum of (i) the Certificate Principal Balance of the Class A-1
Certificates (after taking into account the payment of the Class A-1 Principal
Distribution Amount on such distribution date) and (ii) the Certificate
Principal Balance of the Class A-2 Certificates immediately prior to such
distribution date over (y) the lesser of (A) the product of (i) approximately
_____% and (ii) the aggregate principal balance of the mortgage loans as of the
last day of the related Due Period and (B) the aggregate principal balance of
the mortgage loans as of the last day of the related Due Period minus
approximately $_________.
COMPENSATING INTEREST: With respect to any principal prepayments, any
payments made by the master servicer from its own funds to cover Prepayment
Interest Shortfalls.
CREDIT ENHANCEMENT PERCENTAGE: The Credit Enhancement Percentage for any
Distribution Date is the percentage obtained by dividing (x) the aggregate
Certificate Principal Balance of the Class A-2 Certificates, the Class CE
Certificates and the Class M Certificates by (y) the aggregate principal balance
of the mortgage loans, calculated after taking into account
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distributions of principal on the mortgage loans and distributions of principal
to the holders of the certificates then entitled to distributions of principal
on such distribution date.
CUMULATIVE INSURANCE PAYMENTS: As of any distribution date, Cumulative
Insurance Payments refers to the aggregate of any payments made by the insurer
under the certificate insurance policy to the extent not previously reimbursed,
plus interest on these payments.
DEBT SERVICE REDUCTION: A Debt Service Reduction is any reduction in the
amount which a mortgagor is obligated to pay on a monthly basis with respect to
a mortgage loan as a result of any proceeding initiated under the United States
Bankruptcy Code, other than a reduction attributable to a Deficient Valuation.
DEFICIENT VALUATION: A Deficient Valuation is a valuation by a court of
competent jurisdiction of the mortgaged property in an amount less than the then
outstanding indebtedness under the mortgage loan, which valuation results from a
proceeding initiated under the United States Bankruptcy Code.
DUE PERIOD: The Due Period with respect to any distribution date commences
on the second day of the month immediately preceding the month in which such
distribution date occurs and ends on the first day of the month in which such
distribution date occurs.
EXPENSE ADJUSTED MORTGAGE RATE: The Expense Adjusted Mortgage Rate on any
mortgage loan is equal to the then applicable mortgage rate thereon minus the
sum of (i) the trustee fee rate and (ii) the servicing fee rate. For any
distribution date, the trustee fee rate is equal to _____% per annum and the
servicing fee rate is equal to ____% per annum.
INSURED PAYMENTS: Insured Payments shall mean with respect to the offered
certificates as of any distribution date, the sum of:
(i) any shortfall in amounts available in the distribution account, as
defined in the pooling and servicing agreement, to pay the Interest Distribution
Amount on the offered certificates for the related Interest Accrual Period,
(ii) the excess, if any, of:
o the aggregate Certificate Principal Balance of the offered
certificates then outstanding over
o the aggregate principal balances of the mortgage loans then
outstanding and
(iii) without duplication of the amount specified in clause (ii), the
aggregate Certificate Principal Balance of the offered certificates to the
extent unpaid on the final distribution date or the earlier termination of the
trust fund under the terms of the pooling and servicing agreement.
INTEREST ACCRUAL PERIOD: The Interest Accrual Period for any distribution
date and the offered certificates is the period commencing on the distribution
date of the month immediately
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preceding the month in which such distribution date occurs (or, in the case of
the first period, commencing on the closing date) and ending on the day
preceding such distribution date, and all distributions of interest on the
offered certificates will be based on a 360-day year and the actual number of
days in the applicable Interest Accrual Period.
INTEREST CARRY FORWARD AMOUNT: The Interest Carry Forward Amount with
respect to the offered certificates and any distribution date is equal to the
amount, if any, by which the Interest Distribution Amount for such class of
certificates for the immediately preceding distribution date exceeded the actual
amount distributed on such certificates in respect of interest on such
immediately preceding distribution date, together with any Interest Carry
Forward Amount with respect to such certificates remaining unpaid from the
previous distribution date plus interest accrued thereon at the related
Pass-Through Rate on such certificates for the most recently ended Interest
Accrual Period. The Interest Carry Forward Amount with respect to the Class A-1
Certificates or the Class A-2 Certificates, if any, is distributed as part of
the Class A-1 Interest Distribution Amount or the Class A-2 Interest
Distribution Amount, as applicable, on each distribution date.
INTEREST DISTRIBUTION AMOUNT: The Interest Distribution Amount for the
offered certificates of any class on any distribution date is equal to interest
accrued during the related Interest Accrual Period on the Certificate Principal
Balance of that class immediately prior to such distribution date at the then
applicable Pass-Through Rate for such class, and reduced (to not less than
zero), in the case of each such class, by the allocable share, if any, for such
class of Prepayment Interest Shortfalls to the extent not covered by
Compensating Interest paid by the master servicer, shortfalls resulting from the
application of the Relief Act and certain other interest shortfalls not covered
by the subordination provided by more subordinate classes of certificates. On
any distribution date, any shortfalls resulting from application of the Relief
Act and any Prepayment Interest Shortfalls to the extent not covered by
Compensating Interest paid by the master servicer will be allocated first, to
the interest distribution amount with respect to the Class CE Certificates, and
thereafter, to the Interest Distribution Amounts with respect to the Offered
Certificates on a PRO RATA basis based on the respective amounts of interest
accrued on such Certificates for such Distribution Date. The Holders of the
Offered Certificates will be entitled to reimbursement for any such interest
shortfalls, subject to available funds, in the priorities described under
"--Overcollateralization Provisions" herein.
INTEREST REMITTANCE AMOUNT: The Interest Remittance Amount for any
distribution date is that portion of the Available Distribution Amount for such
distribution date that represents interest received or advanced on the mortgage
loans.
NET MONTHLY EXCESS CASHFLOW: The Net Monthly Excess Cashflow for any
distribution date is equal to the sum of (a) any Overcollateralization Reduction
Amount and (b) the excess of (x) the Available Distribution Amount for such
Distribution Date over (y) the sum for such distribution date of the aggregate
of the Interest Distribution Amounts payable to the holders of the offered
certificates and the sum of the amounts described in clauses (b)(i) through
(iii) of the definition of Principal Distribution Amount.
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NET WAC PASS-THROUGH RATE: The Net WAC Pass-Through Rate for any
distribution date is a rate per annum equal to the weighted average of the
Expense Adjusted Mortgage Rates on the then outstanding mortgage loans, weighted
based on their Scheduled Principal Balances as of the first day of the calendar
month preceding the month in which the distribution date occurs multiplied by a
fraction, the numerator of which is 30 and the denominator of which is the
actual number of days elapsed in the related Interest Accrual Period. If for any
distribution date the Pass-Through Rate for any class of the offered
certificates is limited to the Net WAC Pass- Through Rate for such distribution
date, the holders of such Certificates WILL NOT be entitled to recover the
resulting basis risk shortfall on any future distribution date.
OVERCOLLATERALIZED AMOUNT: The Overcollateralized Amount with respect to
any distribution date, is the excess, if any, of (a) the sum of the aggregate
principal balance of the mortgage loans immediately following such distribution
date and the amount of any funds in the pre-funding account over (b) the sum of
the aggregate Certificate Principal Balances of the offered certificates and the
Class P Certificates, after taking into account the payment of the amounts
described in clauses (b)(i) through (iv) of the definition of Principal
Distribution Amount on such distribution date.
OVERCOLLATERALIZATION INCREASE AMOUNT: The Overcollateralization Increase
Amount with respect to the offered certificates and any distribution date, is
any amount of Net Monthly Excess Cashflow actually applied as an accelerated
payment of principal to the extent the Required Overcollateralized Amount
exceeds the Overcollateralized Amount as of such distribution date.
OVERCOLLATERALIZED REDUCTION AMOUNT: The Overcollateralized Reduction
Amount with respect to the offered certificates and any distribution date, is
the amount by which the Overcollateralized Amount exceeds the Required
Overcollateralized Amount after taking into account all other distributions to
be made on such distribution date, which amount shall be distributed as Net
Monthly Excess Cashflow pursuant to the priorities set forth under
"Overcollateralization Provisions" in this prospectus supplement.
PASS-THROUGH RATE: The Pass-Through Rate for each class of certificates
will be a rate per annum equal to the lesser of (i) one-month LIBOR plus ____%
in the case of each distribution date through and including the distribution
date on which the aggregate principal balance of the mortgage loans (and
properties acquired in respect thereof) remaining in the trust fund is reduced
to less than 10% of the sum of the aggregate principal balance of the initial
mortgage loans as of the cut-off date and the original pre-funded amount, or
one-month LIBOR plus ____%, in the case of any distribution date thereafter and
(ii) the Net WAC Pass-Through Rate for such Distribution Date.
PREPAYMENT INTEREST SHORTFALLS: With respect to any principal prepayments
of the mortgage loans, any resulting interest shortfall.
PREPAYMENT PERIOD: The Prepayment Period with respect to any distribution
date is the calendar month immediately preceding the month in which such
distribution date occurs.
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PRINCIPAL DISTRIBUTION AMOUNT: The Principal Distribution Amount for any
Distribution Date will be the lesser of:
(a) the excess of the Available Distribution Amount over the aggregate
of the Interest Distribution Amounts for the offered certificates; and
(b) THE SUM OF:
(i) the principal portion of all scheduled monthly payments on
the mortgage loans due during the related Due Period, whether or
not received on or prior to the related Determination Date;
(ii) the principal portion of all proceeds received in respect
of the repurchase of a mortgage loan (or, in the case of a
substitution, certain amounts representing a principal adjustment)
as required by the pooling and servicing agreement during the
related Prepayment Period;
(iii) the principal portion of all other unscheduled
collections, including insurance proceeds, liquidation proceeds
and all full and partial principal prepayments, received during
the related Prepayment Period, to the extent applied as recoveries
of principal on the mortgage loans, and with respect to the
distribution date immediately following the end of the funding
period, any amounts remaining in the pre-funding account after
giving effect to the purchase of any subsequent mortgage loans;
(iv) the principal portion of any Realized Losses incurred on
any mortgage loans in the calendar month preceding such
distribution date to the extent covered by Net Monthly Excess
Cashflow for such distribution date; and
(v) the amount of any Overcollateralization Increase Amount
for such distribution date;
MINUS
(vi) the amount of any Overcollateralization Reduction Amount
for such distribution date.
REALIZED LOSS: A Realized Loss is any Bankruptcy Loss or the amount of loss
realized with respect to any defaulted mortgage loan that is finally liquidated
through foreclosure sale, disposition of the related mortgaged property (if
acquired on behalf of the certificateholders by deed in lieu of foreclosure) or
otherwise. The amount of loss realized, if any, will equal the portion of the
unpaid principal balance remaining, if any, plus interest thereon through the
last day of the month in which such mortgage loan was finally liquidated, after
application of all amounts recovered (net of amounts reimbursable to the master
servicer for P&I Advances, servicing advances and other related expenses,
including attorney's fees) towards interest and principal owing on the mortgage
loan.
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REQUIRED OVERCOLLATERALIZED AMOUNT: The Required Overcollateralized Amount
is the overcollaterized amount required at any time as set forth in the pooling
and servicing agreement.
SCHEDULED PRINCIPAL BALANCE: The Scheduled Principal Balance of any
mortgage loan as of any date of determination is equal to the principal balance
thereof as of the cut-off date (after application of all scheduled principal
payments due on or before the cut-off date, whether or not received), reduced by
(x) the principal portion of all monthly payments due on or before the date of
determination, whether or not received, (y) all amounts allocable to unscheduled
principal that were received prior to the calendar month in which the date of
determination occurs and (z) any Bankruptcy Loss (as defined herein) occurring
out of a Deficient Valuation (as defined herein) that was incurred prior to the
calendar month in which the date of determination occurs.
STEPDOWN DATE: The Stepdown Date for any distribution date is the later to
occur of (x) the distribution date occurring in _____________ and (y) the first
distribution date on which the Credit Enhancement Percentage (calculated for
this purpose only after taking into account distributions of principal on the
mortgage loans, but prior to any distribution of principal to the holders of the
certificates then entitled to distributions of principal on such distribution
date) is greater than or equal to approximately _____%.
TRIGGER EVENT: A Trigger Event is in effect with respect to any
distribution date, if the percentage obtained by dividing (x) the principal
amount of mortgage loans delinquent 60 days or more by (y) the aggregate
principal balance of the mortgage loans, in each case, as of the last day of the
previous calendar month, exceeds the lesser of (i) __% of the Credit Enhancement
Percentage (calculated for this purpose only with the aggregate Certificate
Principal Balance of the Class CE Certificates) and (ii) approximately _____%.
INTEREST DISTRIBUTIONS
Distributions in respect of interest will be made on each distribution date
to the holders of each class of offered certificates in an amount, allocable
among the offered certificates PRO RATA in accordance with the respective
amounts payable as to each in respect of interest, equal to the Interest
Remittance Amount for that class for that distribution date.
On any distribution date, any shortfalls resulting from the application of
the Relief Act will be allocated, first, to the interest distribution amount
with respect to the Class CE Certificates, and thereafter, to the Interest
Distribution Amounts with respect to the offered certificates on a PRO RATA
basis based on the respective amounts of interest accrued on these certificates
for the distribution date. On any distribution date, any Prepayment Interest
Shortfalls to the extent not covered by Compensating Interest paid by the
servicers will be allocated to the interest distribution amount with respect to
the Class CE Certificates. The holders of the offered certificates will be
entitled to reimbursement for any shortfalls resulting from application of the
Relief Act, subject to available funds, in the priority described under
"--Overcollateralization Provisions" in this prospectus supplement.
Subject to the terms of the certificate insurance policy, any interest
losses incurred by the offered certificates, other than shortfalls resulting
from the application of the Relief Act, will be
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covered under the certificate insurance policy. Notwithstanding the foregoing,
however, if payments are not made as required under the certificate insurance
policy, any of these interest losses may be borne by the offered certificates to
the extent the amount of these losses is not paid from Net Monthly Excess
Cashflow, in the priority described under "--Overcollateralization Provisions"
in this prospectus supplement.
CALCULATION OF ONE-MONTH LIBOR
On the second business day preceding the beginning of each accrual period,
the trustee will determine one-month LIBOR for such accrual period with respect
to each class of the offered certificates (other than the Class M-3
Certificates). One-month LIBOR will be the rate for deposits in United States
dollars for a term equal to the relevant accrual period which appears in the
Telerate Page 3750 as of 11:00 a.m., London time, on such date. The first
accrual period shall begin on the closing date. If such rate does not appear on
Telerate Page 3750, the rate for that day will be determined on the basis of the
rates at which deposits in United States dollars are offered by the Reference
Banks at approximately 11:00 a.m., London time, on that day to banks in the
London interbank market for a term equal to the relevant accrual period. The
trustee will request the principal London office of each of the Reference Banks
to provide a quotation of its rate. If at least two such quotations are
provided, the rate for that day will be the arithmetic mean of the quotations
(rounded upwards if necessary to the nearest whole multiple of 0.0625%). If
fewer than two quotations are provided as requested, the rate for that day will
be the higher of (x) one-month LIBOR as determined on the previous interest
determination date and (y) the Reserve Interest Rate. The Reserve Interest Rate
shall be either (i) the arithmetic mean (rounded upwards if necessary to the
nearest whole multiple of 0.0625%) of the rates quoted by major banks in New
York City, selected by the trustee, at approximately 11:00 a.m., New York City
time, on that day for loans in United States dollars to leading European banks
for a term equal to the relevant accrual period or (ii) in the event that the
trustee can determine no such arithmetic mean, the lowest rate quoted by major
banks in New York City on that day for loans in United States dollars to leading
European banks for a term equal to the relevant accrual period.
Telerate Page 3750 means the display page currently so designated on the
Dow Jones Telerate Service (or such other page as may replace the page on that
service for the purpose of displaying comparable rates or prices) and Reference
Banks means leading banks selected by the trustee and engaged in transactions in
Eurodollar deposits in the international Eurocurrency market which are not
controlling, controlled by, or under common control with, the depositor, the
originator or the mortgage loan seller.
The establishment of one-month LIBOR on each interest determination date by
the trustee and the trustee's calculation of the rate of interest applicable to
the offered certificates for the related accrual period shall (in the absence of
manifest error) be final and binding.
PRINCIPAL DISTRIBUTIONS ON THE OFFERED CERTIFICATES
On each distribution date, the Principal Distribution Amount will be
distributed to the holders of the offered certificates then entitled to these
distributions.
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Notwithstanding the foregoing, as described under "--Overcollateralization
Provisions" in this prospectus supplement, no amounts will be distributed to the
holders of the offered certificates under clause (v) of the definition of
Principal Distribution Amount except to the extent of any Net Monthly Excess
Cashflow remaining after payment to the holders of the offered certificates of
all amounts in respect of Realized Losses under clause (iv) of the definition of
Principal Distribution Amount and payment to the insurer of any Cumulative
Insurance Payments.
In no event will the Principal Distribution Amount with respect to any
distribution date be:
o less than zero or
o greater than the then outstanding aggregate Certificate Principal
Balance of the offered certificates.
The holders of the Class P Certificates will be entitled to all prepayment
charges received on the mortgage loans and these amounts will not be available
for distribution on the offered certificates.
In addition, on each distribution date, funds received as a result of a
claim under the certificate insurance policy in respect of the principal portion
of Realized Losses allocated to the offered certificates will be distributed by
the trust administrator on behalf of the trustee to the holders of these
certificates. See "--Financial Guaranty Insurance Policy" in this prospectus
supplement.
Distributions of the Principal Distribution Amount, and any amounts
distributable in accordance with clauses first and third under
"--Overcollateralization Provisions" in this prospectus supplement, on the
offered certificates on each distribution date will be made as follows:
o First, to the holders of the Class A-1 Certificates, until the
Certificate Principal Balance of the Class A-1 Certificates has been
reduced to zero; and
o Second, to the holders of the Class A-2 Certificates, until the
Certificate Principal Balance of the Class A-2 Certificates has been
reduced to zero.
Notwithstanding the foregoing priorities, if an Insurer Default exists, the
priority of distributions of principal among the offered certificates will be
disregarded and distributions allocable to principal will be paid on each
succeeding distribution date to holders of the offered certificates, on a PRO
RATA basis, based on the Certificate Principal Balances of the offered
certificates.
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OVERCOLLATERALIZATION PROVISIONS
The weighted average Expense Adjusted Mortgage Rate for the mortgage loans
is generally expected to be higher than the weighted average of the Pass-Through
Rates on the offered certificates, thus generating excess interest collections
which, in the absence of Realized Losses, will not be necessary to fund interest
distributions on the offered certificates. The pooling and servicing requires
that, on each distribution date, the Net Monthly Excess Cashflow, if any, be
applied on such distribution date as an accelerated payment of principal on the
offered certificates, but only to the limited extent hereafter described.
With respect to any distribution date, any Net Monthly Excess Cashflow (or,
in the case of clause first below, the Net Monthly Excess Cashflow exclusive of
any Overcollateralization Reduction Amount) shall be paid as follows:
FIRST, to the holders of the class or classes of certificates then entitled
to receive distributions in respect of principal, in an amount equal to the
principal portion of any Realized Losses incurred on the mortgage loans;
SECOND, to the insurer, in an amount equal to any Cumulative Insurance
Payments;
THIRD, to the holders of the class or classes of Certificates then entitled
to receive distributions in respect of principal, in an amount equal to the
Overcollateralization Increase Amount;
FOURTH, to the holders of the offered certificates, in an amount equal to
such certificates' allocated share of any Prepayment Interest Shortfalls on
the mortgage loans to the extent not covered by Compensating Interest paid
by the master servicer and any shortfalls resulting from the application of
the Relief Act with respect to the mortgage loans;
FIFTH, to the insurer, for any amounts remaining due to the insurer under
the terms of the insurance agreement;
SIXTH, to the holders of the Class CE Certificates as provided in the
pooling and servicing; and
SEVENTH, to the holders of the Residual Certificates, any remaining
amounts; provided that if such distribution date is the distribution date
immediately following the expiration of the latest prepayment charge term
or any distribution date thereafter, then any such remaining amounts will
be distributed FIRST, to the holders of the Class P Certificates, until the
Certificate Principal Balance thereof has been reduced to zero; and SECOND,
to the holders of the Residual Certificates.
As of the closing date, the sum of the aggregate principal balance of the
initial mortgage loans as of the cut-off date and the original pre-funded amount
will exceed the sum of the aggregate certificate principal balances of the
offered certificates and the Class P Certificates by an amount equal to
approximately $__________, which is equal to the initial certificate principal
balance of the Class CE Certificates. Such amount represents approximately ____%
of the sum of the aggregate principal balance of the initial mortgage loans as
of the cut-off date and the
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original pre-funded amount, which is the initial amount of overcollateralization
required to be provided by the mortgage pool under the pooling and servicing.
Under the pooling and servicing, the Overcollateralized Amount is required to be
maintained at the Required Overcollateralized Amount. In the event that Realized
Losses are incurred on the mortgage loans, such Realized Losses may result in an
overcollateralization deficiency since such Realized Losses will reduce the
principal balance of the mortgage loans without a corresponding reduction to the
aggregate certificate principal balances of the offered certificates. In such
event, the pooling and servicing requires the payment from Net Monthly Excess
Cashflow, subject to available funds, of an amount equal to such
overcollateralization deficiency, which shall constitute a principal
distribution on the offered certificates in reduction of the certificate
principal balances thereof. This has the effect of accelerating the amortization
of the offered certificates relative to the amortization of the mortgage loans,
and of increasing the Overcollateralized Amount.
On and after the Stepdown Date and provided that a Trigger Event is not in
effect, the Required Overcollateralized Amount may be permitted to decrease
("step down") below the initial $__________ level to a level equal to
approximately ____% of the then current aggregate outstanding principal balance
of the mortgage loans (after giving effect to principal payments to be
distributed on such distribution date), subject to a floor of approximately
$_________.
In the event that the Required Overcollateralized Amount is required to
step up on any distribution date, the pooling and servicing agreement provides
that all Net Monthly Excess Cashflow remaining after the distributions described
in clauses first and second will be distributed in respect of the
Overcollateralization Increase Amount for the offered certificates until the
Overcollateralized Amount is equal to the stepped up Required Overcollateralized
Amount. This has the effect of accelerating the amortization of the offered
certificates relative to the amortization of the mortgage loans, and of
increasing the Overcollateralized Amount.
In the event that the Required Overcollateralized Amount is permitted to
step down on any distribution date, the pooling and servicing provides that a
portion of the principal which would otherwise be distributed to the holders of
the offered certificates on such distribution date shall be distributed to the
holders of the Class CE Certificates pursuant to the priorities set forth above.
With respect to each such distribution date, the Principal Distribution Amount
will be reduced by an amount equal to the Overcollateralized Reduction Amount.
This has the effect of decelerating the amortization of the offered certificates
relative to the amortization of the mortgage loans, and of reducing the
Overcollateralized Amount. However, if on any distribution date a Trigger Event
is in effect, the Required Overcollateralized Amount will not be permitted to
step down on such distribution date.
MANDATORY PREPAYMENTS ON CLASS A-1 CERTIFICATES
The Class A-1 Certificates will be prepaid on the distribution date
immediately following the end of the funding period to the extent of any amounts
remaining on deposit in the pre-funding account on such distribution date.
Although no assurance can be given, it is anticipated by the depositor that the
principal amount of subsequent mortgage loans sold to the trust fund will
require the application of substantially all of the original pre-funded amount
and that there will be no material amount of principal prepaid to the holders of
the Class A-1 Certificates from the
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pre-funding account. It is unlikely, however, that the depositor will be able to
deliver subsequent mortgage loans with an aggregate principal balance identical
to the related original pre-funded amount. Accordingly, a small amount of
principal is likely to be prepaid on the Class A-1 Certificates on the
distribution date immediately following the end of the funding period.
INTEREST COVERAGE ACCOUNT
The depositor will establish for the benefit of the holders of the
certificates an interest coverage account. On the closing date, the depositor
will deposit in the interest coverage account a cash amount as specified in the
pooling and servicing agreement. On each distribution date during the funding
period and on the distribution date immediately following, funds on deposit in
the interest coverage account will be applied by the trustee to cover shortfalls
in the amount of interest generated by the assets of the trust fund attributable
to the pre-funding feature. Such shortfall will exist during the funding period
because the interest accruing on the aggregate principal balance of the mortgage
loans during such period will be less than the amount of interest which would
have accrued on the mortgage loans if the subsequent mortgage loans were
included in the trust fund as of the closing date. On the first distribution
date following the termination of the funding period (after the distribution on
the certificates to be made on such distribution date), funds on deposit in the
interest coverage account, net of any investment income earned on such funds by
the master servicer, will be released by the trustee to the depositor or its
designee.
FINANCIAL GUARANTY INSURANCE POLICY
The following summary of the terms of the certificate insurance policy does
not purport to be complete and is qualified in its entirety by reference to the
certificate insurance policy. A form of the certificate insurance policy may be
obtained, upon request, from the depositor.
Simultaneously with the issuance of the offered certificates, the insurer
will deliver the certificate insurance policy to the trust administrator for the
benefit of the holders of the offered certificates. Under the certificate
insurance policy, the insurer will irrevocably and unconditionally guarantee
payment to the trust administrator on behalf of the trustee on each distribution
date for the benefit of the holders of the offered certificates, the full and
complete payment of Insured Payments with respect to the offered certificates
calculated in accordance with the original terms of the offered certificates
when issued and without regard to any amendment or modification of the offered
certificates or the pooling and servicing agreement except amendments or
modifications to which the insurer has given its prior written consent. The
certificate insurance policy does not cover Relief Act shortfalls.
If any Insured Payment is avoided as a preference payment under applicable
bankruptcy, insolvency, receivership or similar law, the Insurer will pay that
amount out of funds of the insurer on the later of:
o the date when due to be paid under the order referred to below OR
o the first to occur of
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o the fourth business day following receipt by the insurer from the
trust administrator of:
(A) a certified copy of the order of the court or other
governmental body which exercised jurisdiction to the effect that
a holder of offered certificates is required to return principal
or interest distributed with respect to an offered certificate
during the term of the certificate insurance policy because those
distributions were avoidable preferences under applicable
bankruptcy law, which order shall be referred to in this
prospectus supplement as the order,
(B) a certificate of the holder of offered certificates that
the Order has been entered and is not subject to any stay, and
(C) an assignment duly executed and delivered by the holder of
offered certificates, in the form as is reasonably required by the
insurer and provided to the holder of offered certificates by the
insurer, irrevocably assigning to the insurer all rights and
claims of the holder of offered certificates relating to or
arising under the offered certificates against the debtor which
made the preference payment or otherwise with respect to the
preference payment, or
o the date of receipt by the insurer from the trust administrator
of the items referred to in clauses (A), (B) and (C) if, at least four
business days prior to the date of receipt, the insurer shall have
received written notice from the trust administrator that these items
were to be delivered on that date and that date was specified in the
notice. These payment shall be disbursed to the receiver, conservator,
debtor-in-possession or trustee in bankruptcy named in the Order and
not to the trust administrator or holder of offered certificates
directly, unless a holder of offered certificates has previously paid
these amount to the receiver, conservator, debtor-in-possession or
trustee in bankruptcy named in the Order, in which case the payment
shall be disbursed to the trust administrator for distribution to the
holder of the offered certificates upon proof of the payment reasonably
satisfactory to the insurer. In connection with the foregoing, the
insurer shall have the rights provided under the pooling and servicing
agreement.
Payment of claims under the certificate insurance policy made in respect of
Insured Payments will be made by the insurer following receipt by the insurer of
the appropriate notice for payment on the later to occur of 12:00 noon, New York
City time, on the second business day following receipt of notice for payment,
and 12:00 noon, New York City time, on the relevant distribution date.
The terms receipt and received, with respect to the certificate insurance
policy, means actual delivery to the insurer and to its fiscal agent appointed
by the insurer at its option, if any, prior to 12:00 p.m., New York City time,
on a business day; delivery either on a day that is not a business day or after
12:00 p.m., New York City time, shall be deemed to be receipt on the next
succeeding business day. If any notice or certificate given under the
certificate insurance policy by the trust administrator is not in proper form or
is not properly completed, executed or
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delivered, it shall be deemed not to have been received, and the insurer or the
fiscal agent shall promptly so advise the trust administrator and the trust
administrator may submit an amended notice.
Under the certificate insurance policy, business day means any day other
than:
o a Saturday or Sunday or
o a day on which banking institutions in the City of New York, New
York, the State of New York or in the city in which the corporate trust office
of the trust administrator is located, are authorized or obligated by law or
executive order to be closed.
The insurer's obligations under the certificate insurance policy to make
Insured Payments shall be discharged to the extent funds are transferred to the
trust administrator as provided in the certificate insurance policy, whether or
not these funds are properly applied by the trust administrator.
The term of the certificate insurance policy means the period from and
including the date of issuance of the certificate insurance policy to and
including the date on which the Certificate Principal Balances of the offered
certificates are reduced to zero, plus the additional period, to the extent
specified in the certificate insurance policy, during which any payment on the
offered certificates could be avoided in whole or in part as a preference
payment.
The insurer shall be subrogated to the rights of the holders of the offered
certificates to receive payments of principal and interest, as applicable, with
respect to distributions on these certificates to the extent of any payment by
the insurer under the certificate insurance policy. To the extent the insurer
makes Insured Payments, either directly or indirectly, as by paying through the
trust administrator, to the holders of the offered certificates, the insurer
will be subrogated to the rights of the holders of the offered certificates, as
applicable, with respect to the Insured Payment and shall be deemed to the
extent of the payments so made to be a registered holder of the offered
certificates for purposes of payment.
Claims under the certificate insurance policy constitute direct unsecured
and unsubordinated obligations of the insurer, and will rank not less than PARI
PASSU with any other unsecured and unsubordinated indebtedness of the insurer
except for obligations in respect to tax and other payments to which preference
is or may become afforded by statute. The terms of the certificate insurance
policy cannot be modified, altered or affected by any other agreement or
instrument, or by the merger, consolidation or dissolution of the depositor. The
certificate insurance policy by its terms may not be canceled or revoked prior
to distribution in full of all guaranteed distributions, as defined in the
certificate insurance policy. The certificate insurance policy is governed by
the laws of the State of New York. The certificate insurance policy is not
covered by the property/casualty insurance security fund specified in Article 76
of the New York Insurance Law.
To the fullest extent permitted by applicable law, the insurer agrees under
the certificate insurance policy not to assert, and waives, for the benefit of
each holder of the offered
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certificates, all its rights, whether by counterclaim, setoff or otherwise, and
defenses, including, without limitation, the defense of fraud, whether acquired
by subrogation, assignment or otherwise, to the extent that these rights and
defenses may be available to the insurer to avoid payment of its obligations
under the certificate insurance policy in accordance with the express provisions
of the certificate insurance policy.
Under the terms of the pooling and servicing agreement, unless an insurer
default exists, the insurer will be entitled to exercise rights of the holders
of the offered certificates, without the consent of the certificateholders, and
the holders of the offered certificates may exercise these rights only with the
prior written consent of the insurer. See "Pooling and Servicing
Agreement--Voting Rights" and "--Matters Regarding the Insurer" in this
prospectus supplement.
The depositor, the mortgage loan seller, the servicers and the insurer will
enter into an insurance and indemnity agreement under which the depositor, the
mortgage loan seller and the servicers will agree to reimburse, with interest,
the insurer for amounts paid due to claims under the certificate insurance
policy. The depositor, the mortgage loan seller and the servicers will further
agree to pay the insurer all reasonable charges and expenses which the insurer
may pay or incur relative to any amounts paid under the certificate insurance
policy or otherwise in connection with the transaction and to indemnify the
insurer against liabilities as set forth in the insurance and indemnity
agreement. Except to the extent provided tin this prospectus supplement, amounts
owing under the insurance and indemnity agreement will be payable solely from
the trust fund. An event of default by either servicer under the insurance and
indemnity agreement will constitute an event of default by that servicer under
the pooling and servicing agreement and allow the insurer, among other things,
to direct the trustee to terminate that servicer. An event of default by each
servicer under the insurance and indemnity agreement includes:
o the servicer's failure to pay when due any amount owed under the
insurance and indemnity agreement or other documents,
o the servicer's untruth or incorrectness in any material respect of
any representation or warranty of the servicer in the insurance and indemnity
agreement, the pooling and servicing agreement, in its capacity as servicer, or
other documents,
o the servicer's failure to perform or to observe any covenant or
agreement in the insurance and indemnity agreement, the pooling and servicing
agreement, in its capacity as servicer, and other documents,
o the servicer's failure to pay its debts or the occurrence of events
of insolvency or bankruptcy with respect to the servicer and
o the occurrence of an event of default relating to the servicer under
the pooling and servicing agreement or other documents.
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ALLOCATION OF LOSSES; SUBORDINATION
In the event that amounts recovered in connection with the final
liquidation of a defaulted mortgage loan are insufficient to reimburse the
servicers for P&I Advances and servicing advances, these amounts may be
reimbursed to the servicers out of any funds in the certificate account prior to
the distribution on the certificates.
Any Realized Losses on the mortgage loans will be allocated on any
distribution date,
FIRST, to Net Monthly Excess Cashflow,
SECOND, to the Class CE Certificates until the Certificate Principal
Balance of the Class CE Certificates has been reduced to zero, and
THIRD, to the offered certificates on a PRO RATA basis.
The pooling and servicing agreement does not permit the allocation of any
Realized Losses to the Class P Certificates. The certificate insurance policy
will cover any Realized Losses allocable to the offered certificates under
clause third. Notwithstanding the foregoing, however, if payments are not made
as required under the certificate insurance policy, Realized Losses will be
allocated to the offered certificates.
If Realized Losses have been allocated to the offered certificates and the
insurer has defaulted in its obligation to cover these Realized Losses, these
amounts with respect to the certificates will no longer accrue interest nor will
these amounts be reinstated thereafter, even if Net Monthly Excess Cashflow and
the Overcollateralized Amount are greater than zero on any subsequent
distribution dates.
Any allocation of a Realized Loss to a certificate will be made by reducing
the Certificate Principal Balance of that certificate by the amount so allocated
as of the distribution date in the month following the calendar month in which
the Realized Loss was incurred. An allocation of a Realized Loss on a PRO RATA
basis between two or more classes of certificates means an allocation to each
class of certificates on the basis of its then outstanding Certificate Principal
Balance prior to giving effect to distributions to be made on the distribution
date. Notwithstanding anything to the contrary described in this prospectus
supplement, in no event will the Certificate Principal Balance of an offered
certificate be reduced more than once in respect of any particular amount both:
o allocable to the offered certificate in respect of Realized Losses
and
o payable as principal to the holder of the offered certificate from
Net Monthly Excess Cashflow or from amounts paid under the certificate insurance
policy.
P&I ADVANCES
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Subject to the limitations described in the next paragraph, the master
servicer will be obligated to advance or cause to be advanced on or before each
distribution date its own funds, or funds in the certificate account that are
not included in the Available Distribution Amount for that distribution date.
The amount of the master servicer's advance will be equal to the aggregate of
all payments of principal and interest, net of the servicing fee, that were due
during the related due period on the mortgage loans master serviced by it and
that were delinquent on the related determination date, plus amounts
representing assumed payments not covered by any current net income on the
mortgaged properties acquired by foreclosure or deed in lieu of foreclosure. The
determination date with respect to any distribution date is on the 1st day of
the month in which the distribution date occurs or, if the 1st day is not a
business day, on the immediately preceding business day.
P&I Advances are required to be made only to the extent they are deemed by
the master servicer to be recoverable from related late collections, insurance
proceeds or liquidation proceeds. The purpose of making P&I Advances is to
maintain a regular cash flow to the certificateholders, rather than to guarantee
or insure against losses. The master servicer will not be required to make any
P&I Advances with respect to reductions in the amount of the monthly payments on
the mortgage loans due to bankruptcy proceedings or the application of the
Relief Act.
All P&I Advances will be reimbursable to the master servicer from late
collections, insurance proceeds and liquidation proceeds from the mortgage loan
as to which the unreimbursed P&I Advance was made. In addition, any P&I Advances
previously made in respect of any mortgage loan that are deemed by the master
servicer to be nonrecoverable from related late collections, insurance proceeds
or liquidation proceeds may be reimbursed to the master servicer out of any
funds in the certificate account prior to the distributions on the certificates.
In the event the master servicer fails in its obligation to make any P&I
Advance, the trustee will be obligated to make any P&I Advance, to the extent
required in the pooling and servicing agreement.
THE MORTGAGE LOAN SELLER
____________________________, a ________________________ company, obtained
the mortgage loans from the originator. The mortgage loan seller will transfer
the mortgage loans to the depositor pursuant to a mortgage loan purchase
agreement, dated as of ________________, among the mortgage loan seller, the
originator and the depositor.
POOLING AND SERVICING AGREEMENT
GENERAL DESCRIPTION OF THE POOLING AND SERVICING AGREEMENT
The certificates will be issued under the pooling and servicing agreement,
a form of which is filed as an exhibit to the registration statement. A current
report on Form 8-K relating to the certificates containing a copy of the pooling
and servicing agreement as executed will be filed by the depositor with the
Securities and Exchange Commission within fifteen days of the initial issuance
of the certificates. The trust fund created under the pooling and servicing
agreement will consist of:
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o all of the depositor's right, title and interest in and to the
mortgage loans, the related mortgage notes, mortgages and other related
documents,
o all payments on or collections in respect of the mortgage loans due
after the cut-off date, together with any proceeds of the mortgage loans,
o any mortgaged properties acquired on behalf of certificateholders by
foreclosure or by deed in lieu of foreclosure, and any revenues received on the
mortgaged properties,
o the rights of the trustee under all insurance policies required to be
maintained under the pooling and servicing agreement,
o the rights of the depositor under the mortgage loan purchase
agreement among the depositor, the mortgage loan seller and the originator,
other than rights of the depositor to indemnification by the originator, and
o all of the depositor's right, title and interest in and to the
subsequent mortgage loans and the rights of the depositor under any related
subsequent transfer instrument.
Reference is made to the prospectus for important information in addition
to that set forth in this prospectus supplement regarding the trust fund, the
terms and conditions of the pooling and servicing agreement and the offered
certificates. The offered certificates will be transferable and exchangeable at
the corporate trust offices of the trustee, located in Minneapolis, Minnesota.
The depositor will provide to a prospective or actual certificateholder without
charge, on written request, a copy, without exhibits, of the pooling and
servicing agreement. Requests should be addressed to the ______________________.
ASSIGNMENT OF THE MORTGAGE LOANS
The depositor will deliver to the trustee or to a custodian with respect to
each mortgage loan:
o the mortgage note endorsed without recourse to the trustee to reflect
the transfer of the mortgage loan,
o the original mortgage with evidence of recording indicated on the
mortgage and
o an assignment of the mortgage in recordable form to the trustee,
reflecting the transfer of the mortgage loan. These assignments of mortgage
loans are required to be recorded by or on behalf of the depositor in the
appropriate offices for real property records except for mortgages held under
the MERS(R) System and except in the state of California or in other states
where, in the opinion of counsel acceptable to the trustee, recording of the
assignment is not required to protect the trustee's interest in the mortgage
loan against the claim of any subsequent transferee or any successor to or
creditor of the depositor, the master servicer, the mortgage loan seller or the
originator. If the depositor uses the MERS(R) System with respect to any
mortgage loan, it will deliver evidence that the mortgage is held for the
trustee through the MERS(R) System instead of an assignment of the mortgage in
recordable form.
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THE MASTER SERVICER
The information set forth in the following paragraphs has been provided by
the master servicer. None of the depositor, the underwriter, the trustee or any
of their respective affiliates has made or will make any representation as to
the accuracy or completeness of such information.
[Name of master servicer], a _______________ [corporation], is engaged in
the business of originating, purchasing and selling sub-prime mortgage loans
secured by one- to four-family residences. [Name of master servicer]'s business
was begun in ___________.
Pursuant to the pooling and servicing agreement, [name of master servicer]
will serve as the master servicer for the mortgage loans sold indirectly by it
to the depositor. The master servicer is approved as a seller/servicer for
Fannie Mae and Freddie Mac and as a non-supervised mortgagee by the U.S.
Department of Housing and Urban Development. As of _________, the master
servicer had ___ offices, consisting of __ loan origination centers located in
_________ and ___ loan origination centers located throughout the rest of the
United States.
LENDING ACTIVITIES AND LOAN SALES. The master servicer originates real
estate loans through its network of offices and loan origination centers. The
master servicer also participates in secondary market activities by originating
and selling mortgage loans while continuing to service the majority of the loans
sold. In other cases the master servicer's whole loan sale agreements provide
for the transfer of servicing rights.
The master servicer's primary lending activity is funding loans to enable
mortgagors to purchase or refinance residential real property, which loans are
secured by first or second liens on the related real property. The master
servicer's single-family real estate loans are predominantly "conventional"
mortgage loans, meaning that they are not insured by the Federal Housing
Administration or partially guaranteed by the U.S. Department of Veterans
Affairs.
The following table summarizes the master servicer's one- to four-family
residential mortgage loan origination and sales activity for the periods shown
below. Sales activity may include sales of mortgage loans purchased by the
master servicer from other loan originators.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
1995 1996 1997 1998 1999
(DOLLARS IN THOUSANDS)
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Originations and
Purchases.. $ $ $ $ $
Sales................ $ $ $ $ $
</TABLE>
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LOAN SERVICING. The master servicer services all of the mortgage loans it
originates that are retained in its portfolio and continues to service at least
a majority of the loans that have been sold to investors. Servicing includes
collecting and remitting loan payments, accounting for principal and interest,
contacting delinquent mortgagors, and supervising foreclosure in the event of
unremedied defaults. The master servicer's servicing activities are audited
periodically by applicable regulatory authorities. Certain financial records of
the master servicer relating to its loan servicing activities are reviewed
annually as part of the audit of the master servicer's financial statements
conducted by its independent accountants.
COLLECTION PROCEDURES; DELINQUENCY AND LOSS EXPERIENCE.
When a mortgagor fails to make a required payment on a residential mortgage
loan, the master servicer attempts to cause the deficiency to be cured by
corresponding with the mortgagor. In most cases, deficiencies are cured
promptly. Pursuant to the master servicer's customary procedures for residential
mortgage loans serviced by it for its own account, the master servicer generally
mails a notice of intent to foreclose to the mortgagor after the loan is
delinquent two payments and, within one month thereafter, if the loan remains
delinquent, typically institutes appropriate legal action to foreclose on the
property securing the loan. If foreclosed, the property is sold at public or
private sale and may be purchased by the master servicer. In California, real
estate lenders are generally unable as a practical matter to obtain a deficiency
judgment against the mortgagor on a loan secured by single-family real estate.
LOAN SERVICING PORTFOLIO
The following table sets forth the delinquency and loss experience at the
dates indicated for residential (one- to four-family) first lien loans serviced
directly by the master servicer that were originated or purchased by the master
servicer:
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<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------- -----------------
(Dollars in Thousands)
<S> <C> <C>
Total Outstanding Principal
Balance...................................... $ $
Number of Loans................................
DELINQUENCY
Period of Delinquency:
31-60 Days
Principal Balance...................... $ $
Number of Loans........................
Delinquency as a Percentage
of Total Outstanding
Principal Balance.................... % %
Delinquency as a Percentage
of Number of Loans................... % %
61-90 Days
Principal Balance...................... $ $
Number of Loans........................
Delinquency as a Percentage
of Total Outstanding
Principal Balance.................... % %
Delinquency as a Percentage
of Number of Loans................... % %
91 Days or More
Principal Balance...................... $ $
Number of Loans........................
Delinquency as a Percentage
of Total Outstanding
Principal Balance.................... % %
Delinquency as a Percentage
of Number of Loans................... % %
Total Delinquencies:
Principal Balance...................... $ $
Number of Loans........................
Delinquency as a Percentage
of Total Outstanding
Principal Balance.................... % %
Delinquency as a Percentage
of Number of Loans................... % %
FORECLOSURES PENDING(1)
Principal Balance...................... $ $
Number of Loans........................
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Foreclosures Pending as a
Percentage of Total
Outstanding Principal
Balance.............................. % %
Foreclosures Pending as a
Percentage of Number of
Loans................................ % %
NET LOAN LOSSES for the
Period(2).................................... $ $
NET LOAN LOSSES as a
Percentage of Total Outstanding
Principal Balance............................ % %
</TABLE>
(1) Includes mortgage loans which are in foreclosure but as to which title to
the mortgaged property has not been acquired, at the end of the period
indicated. Foreclosures pending are included in the delinquencies set forth
above.
(2) Net Loan Losses is calculated for all loans as the aggregate of the net
loan loss for all such loans liquidated during the period indicated. The
net loan loss for any such loan is equal to the difference between (a) the
principal balance plus accrued interest through the date of liquidation
plus all liquidation expenses related to such loan and (b) all amounts
received in connection with the liquidation of such loan. The majority of
residential loans serviced by the master servicer have been conveyed to
REMIC trust funds.
As of ________ __, ____, ____ one- to four-family residential properties
relating to loans in the master servicer's servicing portfolio had been acquired
through foreclosure or deed in lieu of foreclosure and were not liquidated.
There can be no assurance that the delinquency and loss experience of the
mortgage loans will correspond to the loss experience of the master servicer's
mortgage portfolio set forth in the foregoing table. The statistics shown above
represent the delinquency and loss experience for the master servicer's total
servicing portfolio only for the periods presented, whereas the aggregate
delinquency and loss experience on the mortgage loans will depend on the results
obtained over the life of the trust fund. The master servicer's portfolio
includes mortgage loans with payment and other characteristics which are not
representative of the payment and other characteristics of the mortgage loans. A
substantial number of the mortgage loans may also have been originated based on
originator underwriting guidelines that are less stringent than those generally
applicable to the servicing portfolio reflected in the foregoing table. 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 (which may or may not affect real property values)
may affect the timely payment by mortgagors of scheduled payments of principal
and interest on the mortgage loans and, accordingly, the actual rates of
delinquencies, foreclosures and losses with respect to the mortgage loans.
The delinquency and loss experience percentages set forth above in the
immediately preceding table are calculated on the basis of the total mortgage
loans serviced as of the end of
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the periods indicated. However, because the total outstanding principal balance
of residential loans serviced by the master servicer has increased from $_____
at __________ __, ____ to $____________ at _________ __, ____, the total
outstanding principal balance of originated loans serviced as of the end of any
indicated period includes many loans that will not have been outstanding long
enough to give rise to some or all of the indicated periods of delinquency. In
the absence of such substantial and continual additions of newly originated
loans to the total amount of loans serviced, the percentages indicated above
would be higher and could be substantially higher. The actual delinquency
percentages with respect to the mortgage loans may be expected to be
substantially higher than the delinquency percentages indicated above because
the composition of the mortgage loans will not change.
THE TRUSTEE
___________________, a national banking association, will act as trustee
for the certificates under the pooling and servicing agreement. The trustee's
offices for notices under the pooling and servicing agreement are located at .
The principal compensation to be paid to the trustee, or the trustee's fee,
in respect of its obligations under the pooling and servicing agreement will be
equal to accrued interest at the trustee's fee rate of ______% per annum on the
stated principal balance of each mortgage loan. The pooling and servicing
agreement will provide that the trustee and any director, officer, employee or
agent of the trustee will be indemnified by the trust fund and will be held
harmless against any loss, liability or expense, incurred by the trustee in
connection with any pending or threatened claim or legal action arising out of
or in connection with the acceptance or administration of its obligations and
duties under the pooling and servicing agreement, other than any loss, liability
or expense:
o resulting from a breach of the master servicer's obligations and
duties under the pooling and servicing agreement,
o that constitutes a specific liability of trustee under the pooling and
servicing agreement or
o incurred by reason of willful misfeasance, bad faith or negligence in
the performance of the trustee's duties under the pooling and servicing
agreement or as a result of a breach, or by reason of reckless disregard, of the
trustee's obligations and duties under the pooling and servicing agreement.
In addition the pooling and servicing agreement will provide that the
trustee and any director, officer, employee or agent of the trustee will be
reimbursed from the trust fund for all costs associated with the transfer of
servicing in the event of a master servicer event of default.
This indemnification will not include expenses, disbursements and advances
incurred or made by the trustee, including the compensation and the expenses and
disbursements of its agents and counsel, in the ordinary course of the trustee's
performance in accordance with the provisions of the pooling and servicing
agreement.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
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The principal compensation to be paid to the master servicer, or the
servicing fee, in respect of its servicing activities for the certificates will
be equal to accrued interest at the servicing fee rate of ____% per annum with
respect to each mortgage loan master serviced by it for each calendar month on
the same principal balance on which interest on the mortgage loan accrues for
the calendar month. As additional servicing compensation, the master servicer is
entitled to retain all ancillary income including assumption fees, NSF fees,
reconveyance and late payment charges (with the exception of prepayment charges
to be distributed to the holders of the Class P Certificates) to the extent
collected from mortgagors, together with any interest or other income earned on
funds held in the certificate account and any escrow accounts in respect of
mortgage loans master serviced by it. The master servicer is obligated to offset
any Prepayment Interest Shortfall in respect of mortgage loans master serviced
by it on any distribution date with Compensating Interest to the extent of its
aggregate servicing fee for the distribution date. The master servicer is
obligated to pay insurance premiums and ongoing expenses associated with the
mortgage pool in respect of mortgage loans master serviced by it and incurred by
the master servicer in connection with its responsibilities under the pooling
and servicing agreement. The master servicer is entitled to reimbursement for
these expenses as provided in the pooling and servicing agreement. See
"Distributions on the Securities--Retained Interest; Servicing or Administration
Compensation and Payment of Expenses" in the prospectus for information
regarding expenses payable by the master servicer and "Federal Income Tax
Consequences" in this prospectus supplement regarding taxes payable by the
master servicer.
VOTING RIGHTS
At all times, __% of all voting rights will be allocated among the holders
of the offered certificates in proportion to the then outstanding certificate
principal balances of their respective certificates, 1% of all voting rights
will be allocated among the holders of the Class P Certificates and 1/3 of 1% of
all voting rights will be allocated among the holders of each class of the
Residual Certificates in proportion to the percentage interests in each class
evidenced by their respective certificates.
MATTERS REGARDING THE INSURER
Under the pooling and servicing agreement, on each distribution date, the
trustee is required to pay to the insurer a premium with respect to the
certificate insurance policy equal to __/__ times ____% per annum times the
Certificate Principal Balance of the offered certificates.
Under the terms of the pooling and servicing agreement, unless there exists
a continuance of any failure by the insurer to make a required payment under the
certificate insurance policy or there exists a proceeding in bankruptcy by or
against the insurer, either of these conditions constituting, an insurer
default, the insurer will be entitled to exercise, among others, the following
rights of the holders of the offered certificates, without the consent of those
holders, and the holders of the offered certificates may exercise these rights
only with the prior written consent of the insurer:
o the right to direct the trustee to terminate the rights and
obligations of the master servicer under the pooling and servicing agreement in
the event of a default by the master servicer;
o the right to consent to or direct any waivers of defaults by the
master servicer;
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o the right to remove the trustee under the pooling and servicing
agreement; and
o the right to institute proceedings against master servicer in the
event of default by the master servicer and refusal of the trustee to institute
these proceedings.
In addition, unless an insurer default exists, the insurer will have the
right to direct all matters relating to any proceeding seeking the avoidance as
a preferential transfer under applicable bankruptcy, insolvency, receivership or
similar law of any distribution made with respect to the offered certificates,
and, unless an insurer default exists, the insurer's consent will be required
prior to, among other things:
o the removal of the trustee,
o the appointment of any successor trustee or master servicer, as the
case may be, or
o any amendment to the pooling and servicing agreement.
TERMINATION
The majority holder of the Class CE Certificates (or if such holder does
not exercise such option, the master servicer or the insurer) will have the
right to purchase the mortgage loans and any properties acquired in respect of
the mortgage loans on any distribution date, once the aggregate principal
balance of the mortgage loans and properties at the time of purchase is reduced
to less than __% of the sum of the aggregate principal balance of the mortgage
loans as of the cut-off date plus the original pre-funded amount. If the
majority Class CE certificateholder, the master servicer or the insurer, elects
to exercise this option, the election will effect the termination of the trust
fund and the early retirement of the certificates. In the event the majority
Class CE certificateholder, the master servicer or the insurer exercises this
option, notwithstanding the terms of the prospectus, the purchase price payable
in connection with the termination will be equal to the greater of par or the
fair market value of the mortgage loans, plus accrued interest for each mortgage
loan at the related mortgage rate to but not including the first day of the
month in which the repurchase price is distributed. The portion of the purchase
price allocable to the certificates of each class will be, to the extent of
available funds:
o in the case of the certificates of any class 100% of the then
outstanding certificate principal balance of the class, PLUS
o in the case of the certificates of any class, one month's interest on
the then outstanding certificate principal balance of the class at the then
applicable Pass-Through Rate for the class plus any previously accrued but
unpaid interest on the class.
The holders of the Residual Certificates shall pledge any amount received
in a termination in excess of par to the holders of the Class CE Certificates.
In no event will the trust created by the pooling and servicing agreement
continue beyond the expiration of 21 years from the death of the survivor of the
persons named in the pooling and servicing agreement. For further information
regarding the circumstances under which the obligations created by the pooling
and servicing agreement will terminate in respect of the certificates see,
"Description of the Securities--Termination" in the prospectus.
THE INSURER
S-65
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The following information has been supplied by __________________, or the
insurer, for inclusion in this prospectus supplement. No representation is made
by the depositor or the underwriter as to the accuracy and completeness of this
information.
GENERAL
The principal executive offices of the insurer are located at
_______________, and its telephone number at that location is __________.
REINSURANCE
According to an intercompany agreement, liabilities on financial guaranty
insurance written or reinsured from third parties by the insurer or any of its
domestic or Bermuda operating insurance company subsidiaries are generally
reinsured among these companies on an agreed-upon percentage substantially
proportional to their respective capital, surplus and reserves, subject to
applicable statutory risk limitations. In addition, the insurer reinsures a
portion of its liabilities under its financial guaranty insurance policies with
other reinsurers under various treaties and on a transaction-by-transaction
basis. This reinsurance is utilized by the insurer as a risk management device
and to comply with statutory and rating agency requirements; it does not alter
or limit the insurer's obligations under any financial guaranty insurance
policy.
RATINGS
The insurer's insurance financial strength is rated "Aaa" by _________. The
insurer's insurer financial strength is rated "AAA" by each of ____________ and
____________. The insurer's claims-paying ability is rated "AAA" by ___________
and ___________ and _______________. These ratings reflect only the views of the
respective rating agencies, are not recommendations to buy, sell or hold
securities and are subject to revision or withdrawal at any time by the rating
agencies. See "Ratings".
CAPITALIZATION
<TABLE>
<CAPTION>
ACTUAL AS ADJUSTED
(UNAUDITED)
(IN THOUSANDS)
--------------
<S> <C> <C>
Deferred Premium Revenue
(net of prepaid reinsurance premiums)................................ $______________ $______________
Surplus Notes.............................................................
Minority Interest.........................................................
Shareholder's Equity
Common Stock.........................................................
Additional Paid-In Capital...........................................
Accumulated Other Comprehensive Income (net of
deferred income taxes)...........................................
Accumulated Earnings.................................................
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Total Shareholder's Equity................................................
Total Deferred Premium Revenue, Surplus Notes, Minority
Interest and Shareholder's Equity.........................................
</TABLE>
------------------
As adjusted in the immediately preceding table is necessary to give effect
to the:
o purchase by _________ of $__ million of surplus notes from the
insurer in connection with the formation of a new indirect _________
subsidiary of the insurer, initially capitalized with $___ million,
including a $__ million minority interest owned by ____________, and
o contribution by _______ to the capital of the insurer of
approximately $__ million, representing a portion of the proceeds from
the sale by Holdings of $___ million of _______% Senior Quarterly
Income Debt Securities due ____.
For further information concerning the insurer, see the Consolidated
Financial Statements of the insurer and subsidiaries, and the notes to those
statements, incorporated by reference in this prospectus supplement. The
insurer's financial statements are included as exhibits in the Annual Reports on
Form 10-K and the Quarterly Reports on Form 10-Q filed with the Securities and
Exchange Commission and may be reviewed at the EDGAR web site maintained by the
Securities and Exchange Commission and at Holding's website,
http://www._______.com. Copies of the statutory quarterly and annual financial
statements filed with the State of New York Insurance Department by the insurer
are available upon request to the State of New York Insurance Department.
INCORPORATION OF DOCUMENTS BY REFERENCE
In addition to the documents described under "Incorporation of Certain
Information by Reference" in the prospectus, the consolidated financial
statements of the insurer and subsidiaries included in or as exhibits to the
following documents which have been filed with the Securities and Exchange
Commission by _________, are hereby incorporated by reference in this prospectus
supplement, which together with the prospectus, forms a part of the depositor's
registration statement:
o the Annual Report on Form 10-K for the year ended December 31, 1998
and
o the Quarterly Report on Form 10-Q for the period ended
_________________.
All financial statements of the insurer and subsidiaries included in
documents filed by Holdings under Section 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934, as amended, subsequent to the date of this
prospectus supplement and prior to the termination of the offering of the
offered certificates shall be 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 these documents.
The depositor will provide without charge to any person to whom this
prospectus supplement is delivered, upon oral or written request of that person,
a copy of any or all of the foregoing financial statements incorporated by
reference. Requests for these copies should be directed to ___________________.
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INSURANCE REGULATION
The insurer is licensed and subject to regulation as a financial guaranty
insurance corporation under the laws of the State of New York, its state of
domicile. In addition, the insurer and its insurance subsidiaries are subject to
regulation by insurance laws of the various other jurisdictions in which they
are licensed to do business. As a financial guaranty insurance corporation
licensed to do business in the State of New York, the insurer is subject to
Article 69 of the New York Insurance Law which, among other things, limits the
business of each insurer to financial guaranty insurance and related lines,
requires that each insurer maintain a minimum surplus to policyholders,
establishes contingency, loss and unearned premium reserve requirements for each
insurer, and limits the size of individual transactions or single risks and the
volume of transactions or aggregate risks that may be underwritten by each
insurer. Other provisions of the New York Insurance Law, applicable to non-life
insurance companies such as the insurer, regulate, among other things, permitted
investments, payment of dividends, transactions with affiliates, mergers,
consolidations, acquisitions or sales of assets and incurrence of liability for
borrowings.
FEDERAL INCOME TAX CONSEQUENCES
Three separate elections will be made to treat designated portions of the
trust fund (exclusive of the pre-funding account and the interest coverage
account) as real estate mortgage investment conduits or REMICs, designated as
REMIC I, REMIC II and REMIC III, for federal income tax purposes. Prior to the
sale of the offered certificates, Thacher Proffitt & Wood, counsel to the
depositor, will deliver its opinion to the effect that, assuming compliance with
all provisions of the pooling and servicing agreement, for federal income tax
purposes, the REMICs will qualify as REMICs under Sections 860A through 860G of
the Internal Revenue Code of 1986.
For federal income tax purposes:
o the Class R-I Certificates will be the sole class of residual interests
in REMIC I,
o separate non-certificated regular interests in REMIC I will be issued and
will be the regular interests in REMIC I,
o the Class R-II Certificates will be the sole class of residual interests
in REMIC II,
o separate non-certificated regular interests in REMIC II will be issued
and will be the regular interests in REMIC II,
o the Class R-III Certificates will be the sole class of residual interests
in REMIC III, and
o the offered certificates, the Class CE Certificates and the Class P
Certificates will be the regular interests in, and will be treated as debt
instruments of, REMIC III. See "Federal Income Tax
Consequences--REMICs--Classification of REMICs" in the prospectus.
For federal income tax reporting purposes, the offered certificates will
not be treated as having been issued with original issue discount. The
prepayment assumption that will be used in determining the rate of accrual of
original issue discount, premium and market discount, if any, for federal income
tax purposes will be based on the assumption that, subsequent to the date of any
determination, the mortgage loans will prepay at a rate equal to ____% of CPR.
No representation is made that the mortgage loans will prepay at that rate or at
any other rate. See
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<PAGE>
"Federal Income Tax Consequences--REMICs--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount" in the prospectus.
The IRS has issued regulations, referred to in this prospectus supplement
as the OID Regulations, under Sections 1271 to 1275 of the Code addressing the
treatment of debt instruments issued with original issue discount. The OID
Regulations may permit the holder of a debt instrument to recognize original
issue discount under a method that differs from that of the issuer. Accordingly,
it is possible that holders of offered certificates issued with original issue
discount may be able to select a method for recognizing original issue discount
that differs from that used in preparing reports to certificateholders and the
IRS. Prospective purchasers of offered certificates issued with original issue
discount are advised to consult their tax advisors concerning the tax treatment
of the certificates in this regard.
The offered certificates may be treated for federal income tax purposes as
having been issued with a premium. Whether any holder of an offered certificate
will be treated as holding a certificate with amortizable bond premium will
depend on that certificateholder's purchase price and the distributions
remaining to be made on the certificate at the time of its acquisition by the
certificateholder. Holders of offered certificates should consult their own tax
advisors regarding the possibility of making an election to amortize this
premium. See "Federal Income Tax Consequences--REMICs--Taxation of Owners of
REMIC Regular Certificates--Premium" in the prospectus.
The offered certificates will be treated as assets described in Section
7701(a)(19)(C) of the Code and real estate assets under Section 856(c)(4)(A) of
the Code, in the same proportion that the assets in the related trust fund would
be so treated. In addition, interest on the offered certificates will be treated
as interest on obligations secured by mortgages on real property under Section
856(c)(3)(B) of the Code, generally to the extent that the offered certificates
are treated as real estate assets under Section 856(c)(4)(A) of the Code.
Amounts held in the pre-funding account and interest coverage account may not be
treated as assets described in the foregoing sections of the Code. The offered
certificates also will be treated as qualified mortgages under Section
860G(a)(3) of the Code. See "Federal Income Tax
Consequences--REMICs--Characterization of Investments in REMIC Certificates" in
the prospectus.
It is not anticipated that the REMICs will engage in any transactions that
would subject the REMICs to the prohibited transactions tax as defined in
Section 860F(a)(2) of the Code, the contributions tax as defined in Section
860G(d) of the Code or the tax on net income from foreclosure property as
defined in Section 860G(c) of the Code. However, in the event that any tax is
imposed on REMIC I, REMIC II or REMIC III, this tax will be borne:
o by the trustee, if the trustee has breached its obligations with
respect to REMIC compliance under the pooling and servicing agreement,
o by the master servicer, if the master servicer has breached its
obligations with respect to REMIC compliance under the pooling and servicing
agreement and
o otherwise by the trust fund, with a resulting reduction in amounts
otherwise distributable to holders of the related offered certificates. See
"Description of the Securities" and "Federal Income Tax Consequences--REMICs" in
the prospectus.
S-69
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The responsibility for filing annual federal information returns and other
reports will be borne by the trustee or the master servicer. See "Federal Income
Tax Consequences--REMICs--Reporting and Other Administrative Matters" in the
prospectus.
For further information regarding the federal income tax consequences of
investing in the offered certificates, see "Federal Income Tax
Consequences--REMICs" in the prospectus.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the underwriting
agreement, dated _________ __, ____, the depositor has agreed to sell, and
______________, the underwriter, has agreed to purchase the offered
certificates. The underwriter is obligated to purchase all offered certificates
of the respective classes offered by this prospectus supplement if it purchases
any.
Distribution of the offered certificates will be made from time to time in
negotiated transactions or otherwise at varying prices to be determined at the
time of sale. Proceeds to the depositor from the sale of the offered
certificates, before deducting expenses payable by the depositor, will be
approximately _________% of the aggregate initial certificate principal balance
of the offered certificates, plus accrued interest on the offered certificates.
In connection with the purchase and sale of the offered certificates, the
underwriter may be deemed to have received compensation from the depositor in
the form of underwriting discounts.
The offered certificates are offered subject to receipt and acceptance by
the underwriter, to prior sale and to the underwriter's right to reject any
order in whole or in part and to withdraw, cancel or modify the offer without
notice. It is expected that delivery of the offered certificates will be made
through the facilities of DTC, Cedel and the Euroclear system on or about the
closing date. The offered certificates will be offered in Europe and the United
States.
The underwriting agreement provides that the depositor will indemnify the
underwriter against those civil liabilities set forth in the underwriting
agreement, including liabilities under the Securities Act of 1933, as amended,
or will contribute to payments the underwriter may be required to make in
respect of these liabilities.
SECONDARY MARKET
There is currently no secondary market for the offered certificates and
there can be no assurance that a secondary market for the offered certificates
will develop or, if it does develop, that it will continue. The underwriter
intends to establish a market in the offered certificates but is not obligated
to do so. There can be no assurance that any additional information regarding
the offered certificates will be available through any other source. In
addition, the depositor is not aware of any source through which price
information about the offered certificates will be available on an ongoing
basis. The limited nature of the information regarding the offered certificates
may adversely affect the liquidity of the offered certificates, even if a
secondary market for the offered certificates becomes available. The primary
source of information available to investors concerning the offered certificates
will be the monthly statements discussed in the prospectus under "Distribution
on the Securities--Form of Reports to Securityholders", which will include
information as to the outstanding principal balance of the offered certificates
and the status of the applicable form of credit enhancement.
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<PAGE>
LEGAL OPINIONS
Legal matters relating to the offered certificates will be passed upon for
the depositor by Thacher Proffitt & Wood, New York, New York.
EXPERTS
The consolidated balance sheets of the insurer and subsidiaries as of
December 31, ____ and ____ and the related consolidated statements of income,
changes in shareholder's equity, and cash flows for each of the three years in
the period ended December 31, ____, incorporated by reference in this prospectus
supplement, have been incorporated in this prospectus supplement in reliance on
the report of _______________, independent accountants, given on the authority
of that firm as experts in accounting and auditing.
RATINGS
It is a condition to the issuance of the certificates that the offered
certificates be rated "AAA" by _________________ and ____________.
The ratings of _________ and ________ assigned to mortgage pass-through
certificates address the likelihood of the receipt by certificateholders of all
distributions to which these certificateholders are entitled. The rating process
addresses structural and legal aspects associated with the certificates,
including the nature of the underlying mortgage loans. The ratings assigned to
mortgage pass-through certificates do not represent any assessment of the
likelihood that principal prepayments will be made by the mortgagors or the
degree to which prepayments will differ from that originally anticipated. The
ratings assigned by ________________ and _______________ on the offered
certificates are based in part upon the insurer's claims paying ability. Any
change in the ratings of the insurer by ____________ or ______________ may
result in a change on the ratings on the offered certificates. The ratings do
not address the possibility that certificateholders might suffer a lower than
anticipated yield due to non-credit events.
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 the assigning rating
organization. Each security rating should be evaluated independently of any
other security rating. In the event that the ratings initially assigned to the
offered certificates are subsequently lowered for any reason, no person or
entity is obligated to provide any additional credit support or credit
enhancement with respect to the offered certificates.
The depositor has not requested that any rating agency rate any class of
the offered certificates other than as stated in the immediately preceding
paragraph. However, there can be no assurance as to whether any other rating
agency will rate any class of the offered certificates, or, if it does, what
rating would be assigned by that rating agency. A rating on any class of the
offered certificates by another rating agency, if assigned at all, may be lower
than the ratings assigned to the classes of the offered certificates as stated
in the first paragraph of this section.
S-71
<PAGE>
LEGAL INVESTMENT
The offered certificates will not constitute mortgage related securities
for purposes of the SMMEA until such time as the balance of the pre-funding
account is reduced to zero. At such time, the offered certificates will
constitute mortgage related securities for purposes of SMMEA for so long as they
are rated not lower than the second highest rating category by a rating agency,
as defined in the prospectus, and, therefore, will be legal investments for some
entities to the extent provided in SMMEA. SMMEA, however, provides for state
limitation on the authority of these entities to invest in mortgage related
securities provided that restrictive legislation was enacted prior to October 3,
1991. There are ten states that have enacted legislation which overrides the
preemption provisions of SMMEA.
The depositor makes no representations as to the proper characterization of
any class of offered certificates for legal investment or other purposes, or as
to the ability of particular investors to purchase any class of offered
certificates under applicable legal investment restrictions. These uncertainties
may adversely affect the liquidity of any class of offered certificates.
Accordingly, all institutions whose investment activities are subject to legal
investment laws and regulations, regulatory capital requirements or review by
regulatory authorities should consult with their legal advisors in determining
whether and to what extent any class of offered certificates constitutes a legal
investment or is subject to investment, capital or other restrictions. On
December 1, 1998, the OTS issued Thrift Bulletin 13a entitled "Management of
Interest Rate Risk, Investment Securities and Derivative Activities", which is
applicable to thrift institutions regulated by the OTS. TB 13a should be
reviewed by any thrift institution prior to investing in the offered
certificates
See "Legal Investment" in the prospectus.
ERISA CONSIDERATIONS
A fiduciary of any employee benefit plan or any other plan or arrangement
subject to ERISA or Section 4975 of the Code, each referred to in this
prospectus supplement as a Plan, or any person investing Plan Assets of any Plan
should carefully review with its legal advisors whether the purchase, sale or
holding of certificates will give rise to a prohibited transaction under ERISA
or Section 4975 of the Code.
The U.S. Department of Labor has issued an individual exemption, Prohibited
Transaction Exemption 91-23, or the exemption, as described under
"Considerations for Benefit Plan Investors" in the prospectus, to the
underwriter. The exemption exempts from the application of the prohibited
transaction provisions of Section 406 of ERISA and the excise taxes imposed on
these prohibited transactions by Section 4975(a) and (b) of the Code and Section
502(i) of ERISA, transactions relating to the purchase, sale and holding of
pass-through certificates underwritten by the underwriter such as the offered
certificates, and the servicing and operation of asset pools such as the
mortgage pool. To obtain the benefit of the exemption, however, the conditions
set forth under "Considerations for Benefit Plan Investors" in the prospectus
must be satisfied. The purchase of the offered certificates by, on behalf of or
with the Plan Assets of any Plan may qualify for exemptive relief under the
exemption. However, the exemption contains a number of conditions which must be
met for the exemption to apply, as described in the
S-72
<PAGE>
prospectus, including the requirement that any Plan must be an accredited
investor as defined in Rule 501(a)(1) of Regulation D of the Securities and
Exchange Commission under the Securities Act of 1933, as amended. Additional
conditions, as described in the prospectus, must be met for the exemption to
apply to certificates evidencing interests in a trust fund including a
pre-funding account. A fiduciary of a Plan contemplating purchasing a offered
certificate must make its own determination that the conditions set forth in the
exemption will be satisfied with respect to the offered certificates.
Before purchasing an offered certificate, a fiduciary of a Plan should
itself confirm that the offered certificates constitute certificates for
purposes of the exemption and that the specific conditions of the exemption and
the other requirements set forth in the exemption would be satisfied. Any Plan
fiduciary that proposes to cause a Plan to purchase a certificate should consult
with its counsel with respect to the potential applicability to this investment
of the fiduciary responsibility and prohibited transaction provisions of ERISA
and the Code to the proposed investment. For further information regarding the
ERISA considerations of investing in the Certificates, see "Considerations For
Benefit Plan Investors" in the prospectus.
S-73
<PAGE>
$____________ (APPROXIMATE)
LONG BEACH SECURITIES CORP.
DEPOSITOR
[__] FLOATING-RATE MORTGAGE PASS-THROUGH CERTIFICATES
SERIES ____-__
PROSPECTUS SUPPLEMENT
DATED _________ ___, ____
MASTER SERVICER
UNDERWRITER
YOU SHOULD 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 CERTIFICATES OFFERED BY THIS PROSPECTUS SUPPLEMENT 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 certificates offered by this prospectus supplement
and with respect to their unsold allotments or subscriptions. In addition, all
dealers selling the offered certificates, whether or not participating in this
offering, may be required to deliver a prospectus supplement and prospectus
until _______ ___, ____.
<PAGE>
The information in this prospectus supplement is not complete and may be
changed. We may not sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This prospectus
supplement is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
Subject to Completion, Dated July __, 2000
[Version 3]
Prospectus Supplement (to Prospectus dated , ____)
$_______________ (APPROXIMATE)
[__] ASSET BACKED FLOATING RATE NOTES, SERIES ____-
[__] TRUST SERIES ____-__
LONG BEACH SECURITIES CORP.
DEPOSITOR
[NAME OF MATER SERVICER]
MASTER SERVICER
--------------------------------------------------------------------------------
YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-__ IN THIS
PROSPECTUS SUPPLEMENT AND PAGE __ IN THE PROSPECTUS.
This prospectus supplement, together with the accompanying prospectus will
constitute the complete prospectus.
--------------------------------------------------------------------------------
OFFERED NOTES The trust created for the Series _____-__ notes will hold
a pool of one- to four- family residential first mortgage
loans. The trust will issue ______ classes of offered
notes. You can find a list of these classes, together with
their note balances, interest rates and certain other
characteristics, on Page S-__ of this prospectus
supplement. Credit enhancement for the offered notes will
be provided by ______ classes of subordinated Class M
Notes. Each class of Class M Notes is subordinated to the
senior notes and any Class M Notes with a higher payment
priority.
UNDERWRITING _______________________, as underwriter, will offer to the
public the Class A Notes, the Class M-1 Notes, the Class
M-2 Notes and the Class M-3 Notes at varying prices to be
determined at the time of sale. The proceeds to the
depositor from the sale of the underwritten notes will be
approximately _____% of the principal balance of the
underwritten notes plus accrued interest, before deducting
expenses. See "Method of Distribution".
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE OFFERED NOTES OR DETERMINED THAT
THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
------------------------------
Underwriter
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS SUPPLEMENT
AND THE ACCOMPANYING PROSPECTUS
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION.
We provide information to you about the offered notes in three separate
documents that progressively provide more detail:
o the accompanying prospectus, which provides general information, some
of which may not apply to this series of notes;
o this prospectus supplement, which describes the specific terms of this
series of notes; and
o the annex to this prospectus supplement, which is an integral part of
the prospectus supplement.
Long Beach Securities Corp.'s principal offices are located at 1100 Town &
Country Road, Orange, California 92868 and its phone number is (___) _________.
S-2
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
----
PROSPECTUS SUPPLEMENT
<S> <C>
Summary of Prospectus Supplement........................................................................................S-3
Risk Factors............................................................................................................S-8
The Issuer.............................................................................................................S-59
The Seller.............................................................................................................S-60
The [SPE]..............................................................................................................S-60
The Owner Trustee......................................................................................................S-60
The Servicing Agreement................................................................................................S-62
The Indenture and Owner Trust Agreement................................................................................S-66
</TABLE>
S-3
<PAGE>
SUMMARY OF PROSPECTUS SUPPLEMENT
THE FOLLOWING SUMMARY IS A VERY BROAD OVERVIEW OF THE NOTES OFFERED BY
THIS PROSPECTUS SUPPLEMENT AND DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU
SHOULD CONSIDER IN MAKING YOUR INVESTMENT DECISION. TO UNDERSTAND ALL OF THE
TERMS OF THE OFFERED NOTES, READ CAREFULLY THIS ENTIRE PROSPECTUS SUPPLEMENT AND
THE ENTIRE ACCOMPANYING PROSPECTUS.
Title of Series........................[__] Asset-Backed Floating Rate Notes,
Series ____-_.
Cut-off Date...........................__________ __, ____.
Closing Date...........................On or about __________ __, ____.
Issuer.................................[__] Trust Series ____-__.
Depositor..............................Long Beach Securities Corp. The
depositor's principal offices are located
at 1100 Town & Country Road, Orange,
California 92868 and its telephone number
is (__) _________. The depositor will
deposit the mortgage loans into the
trust. SEE "THE DEPOSITOR" IN THE
PROSPECTUS.
Master Servicer and Originator.........__________________. SEE "THE SERVICING
AGREEMENTS--MASTER SERVICER" IN THIS
PROSPECTUS SUPPLEMENT.
Seller................................._______________. SEE "THE SELLER" IN THIS
PROSPECTUS SUPPLEMENT.
________ SPE..........................._______________. SEE "THE [SPE]" IN THIS
PROSPECTUS SUPPLEMENT.
Owner Trustee..........................________________. SEE "THE OWNER TRUSTEE"
IN THIS PROSPECTUS SUPPLEMENT.
Indenture Trustee......................__________________. SEE "THE INDENTURE
TRUSTEE" IN THIS PROSPECTUS SUPPLEMENT.
Payment Dates..........................Payments on the offered notes will be
made on the __th day of each month, or,
if that day is not a business day, on the
next succeeding business day, beginning
in ______ ____.
Offered Notes..........................Only the notes listed in the immediately
following table are being offered by this
prospectus supplement. Each class of
offered notes and their interest rates,
note balances and final maturity date are
set forth in the immediately following
table.
S-4
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
CLASS INITIAL NOTE NOTE INTEREST FINAL MATURITY DATE
BALANCE RATE
-------------------------- ------------------ ------------------------------ ----------------------------------
<S> <C> <C> <C>
A......................... $_________ Variable _______ ____
M-1....................... $_________ Variable _______ ____
M-2....................... $_________ Variable _______ ____
M-3....................... $_________ Variable _______ ____
========================== ================== ============================== ==================================
</TABLE>
The initial note balances of each class of offered notes listed in the
immediately preceding table is approximate. The note interest rate on each class
of offered notes is variable and will be calculated as described in this
prospectus supplement under "Description of the Notes--Note Interest Rates."
THE ISSUER
The notes will be issued by the issuer, a Delaware business trust established
under a trust agreement between the depositor and the owner trustee. The issuer
will issue _____ classes of notes representing non- recourse debt obligations of
the issuer secured by the trust estate. SEE "DESCRIPTION OF THE NOTES" IN THIS
PROSPECTUS SUPPLEMENT.
Distributions of interest and principal on the offered notes will be made only
from payments received in connection with the mortgage loans described in this
summary under the heading "Mortgage Loans."
EQUITY CERTIFICATES
[__] Trust Certificates, Series ____-__, will be issued under the owner trust
agreement and will represent the beneficial ownership interest in the issuer.
The equity certificates are not offered by this prospectus supplement.
THE MORTGAGE LOANS
The trust will contain approximately _____ [conventional] [sub-prime]
[nonconforming], one- to four-family, fixed-rate and adjustable- rate mortgage
loans secured by first liens on residential real properties. The mortgage loans
have an aggregate principal balance of approximately $__________ as of _________
__ ____.
The mortgage loans have original terms to maturity of not greater than [30]
years and the following characteristics as of __________ __ _____.
Approximate range of _____% to
mortgage rates: _____%.
Approximate weighted ______%.
average mortgage rate:
Approximate weighted ___ years
average remaining term to and ___
stated maturity: months.
Approximate range of $______ to
principal balances: $_______.
S-5
<PAGE>
Approximate average $_______.
principal balance:
Approximate range of _____% to
loan-to-value ratios: _____%.
Approximate weighted ______%.
average loan-to-value ratio:
FOR ADDITIONAL INFORMATION REGARDING THE MORTGAGE LOANS, SEE "THE MORTGAGE POOL"
IN THIS PROSPECTUS SUPPLEMENT.
THE NOTES
OFFERED NOTES. The offered notes will have the characteristics shown in the
table appearing on pages S-__ in this prospectus supplement. The interest rates
on each class of offered notes are variable and are calculated for each
distribution date as described in this prospectus supplement under "Description
of the Notes--Note Interest Rates."
The offered notes will be sold by the depositor to the underwriter on the
closing date.
The offered notes will initially be represented by one or more global notes
registered in the name of CEDE & Co., as nominee of DTC in minimum denominations
of $[10,000] and integral multiples of $[1.00] in excess of the minimum
denominations. SEE "DESCRIPTION OF THE NOTES --REGISTRATION" IN THIS PROSPECTUS
SUPPLEMENT.
CREDIT ENHANCEMENT
The credit enhancement provided for the benefit of the holders of the offered
notes consists of subordination as described in this prospectus supplement under
"Description of the Notes--Allocation of Losses; Subordination" in this
prospectus supplement.
SUBORDINATION. The rights of the holders of the Class M-1 Notes, the Class M-2
Notes and the Class M-3 Notes to receive distributions will be subordinated, to
the extent described in this prospectus supplement, to the rights of the holders
of the Class A Notes. The Class M-1 Notes, the Class M-2 Notes and the Class M-3
Notes are referred to in the prospectus supplement as subordinate notes.
In addition, the rights of the holders of subordinate notes with higher
numerical class designations will be subordinated to the rights of holders of
subordinate notes with lower numerical class designations, to the extent
described in this prospectus supplement.
Subordination is intended to enhance the likelihood of regular distributions on
the more senior notes in respect of interest and principal and to afford the
more senior notes protection against realized losses on the mortgage loans as
described in the next section.
ALLOCATION OF LOSSES. If subordinate notes remain outstanding, losses on the
mortgage loans will be allocated first to the class of subordinate notes with
the lowest payment priority, and the other classes of notes will not bear any
portion of these losses. If none of the subordinate notes remain outstanding,
losses on mortgage loans will be allocated to the Class A Notes.
P&I ADVANCES
Each servicer is required to advance delinquent payments of principal and
interest on the mortgage loans, subject to the limitations described under "P&I
Advances"
S-6
<PAGE>
in this prospectus supplement. These advances shall be referred to in this
prospectus supplement as P&I Advances. Each servicer is entitled to be
reimbursed for these advances, and therefore these advances are not a form of
credit enhancement. SEE "DESCRIPTION OF THE NOTES--P&I ADVANCES" IN THIS
PROSPECTUS SUPPLEMENT AND "DESCRIPTION OF THE SECURITIES--ADVANCES IN RESPECT OF
DELINQUENCIES" IN THE PROSPECTUS.
OPTIONAL REDEMPTION
At its option, the majority holder of the equity certificates may redeem the
notes and thereby effect termination and early retirement of the notes, after
the aggregate note balance has been reduced to less than [20%] of the aggregate
initial note balance. SEE "THE INDENTURE AND OWNER TRUST AGREEMENT-- OPTIONAL
REDEMPTION" IN THIS PROSPECTUS SUPPLEMENT AND "DESCRIPTION OF THE SECURITIES--
TERMINATION" IN THE PROSPECTUS.
FEDERAL INCOME TAX CONSEQUENCES
Upon the issuance of the notes, Thacher Proffitt & Wood, counsel to the
depositor, will deliver its opinion to the effect that the notes will be
characterized as indebtedness and the issuer will not be classified as an
association taxable as a corporation or a publicly traded partnership. FOR
FURTHER INFORMATION REGARDING THE FEDERAL INCOME TAX CONSEQUENCES OF INVESTING
IN THE OFFERED NOTES, SEE "FEDERAL INCOME TAX CONSEQUENCES" IN THIS PROSPECTUS
SUPPLEMENT AND IN THE PROSPECTUS.
RATINGS
It is a condition to the issuance of the notes that the offered notes receive
the following ratings from ______________ and ___________:
OFFERED [RA] [RA]
------- ---- ----
NOTES
-----
Class A AAA AAA
Class M-1 AA AA
Class M-2 A A
Class M-3 BBB BBB
A security rating does not address the frequency of prepayments on the mortgage
loans, the corresponding effect on yield to investors. SEE "YIELD ON THE NOTES"
AND "RATINGS" IN THIS PROSPECTUS SUPPLEMENT AND "YIELD CONSIDERATIONS" IN THE
PROSPECTUS.
LEGAL INVESTMENT
The offered notes, other than the Class ___ and Class ___ Notes, will constitute
mortgage related securities for purposes of the Secondary Mortgage Market
Enhancement Act of 1984, or SMMEA, for so long as they are rated not lower than
the second highest rating category by one or more nationally recognized
statistical rating organizations and therefore will be legal investments for
entities to the extent provided in SMMEA and applicable state laws. The Class
___ Notes and the Class ___ Notes will not constitute mortgage related
securities for purposes of SMMEA. SEE "LEGAL INVESTMENT" IN THIS PROSPECTUS
SUPPLEMENT AND IN THE PROSPECTUS.
S-7
<PAGE>
ERISA CONSIDERATIONS
Subject to important considerations discussed in this prospectus supplement, the
notes may be eligible for purchase by persons investing assets of employee
benefit plans or individual retirement accounts. Plans should consult with their
legal advisors before investing. SEE "ERISA CONSIDERATIONS" IN THIS PROSPECTUS
SUPPLEMENT AND IN THE PROSPECTUS.
S-8
<PAGE>
RISK FACTORS
The offered notes are not suitable investments for all investors. In
particular, you should not purchase the offered notes unless you understand and
are able to bear the prepayment, credit, liquidity and market risks associated
with these securities.
You should carefully consider the following factors in connection with the
purchase of the offered notes:
[APPROPRIATE RISK FACTORS AS NECESSARY]
[THE MORTGAGE LOANS WERE UNDERWRITTEN TO STANDARDS WHICH DO NOT CONFORM TO THE
STANDARDS OF FANNIE MAE OR FREDDIE MAC WHICH MAY RESULT IN LOSSES ON THE
MORTGAGE LOANS ALLOCATED TO YOUR NOTES.
The originator's underwriting standards are primarily intended to assess
the value of the mortgaged property and to evaluate the adequacy of the property
as collateral for the mortgage loan. The originator provides loans primarily to
borrowers who do not qualify for loans conforming to Fannie Mae and Freddie Mac
guidelines but who do have equity in their property. While the originator's
primary consideration in underwriting a mortgage loan is the value of the
mortgaged property, the originator also considers, among other things, a
mortgagor's credit history, repayment ability and debt service-to-income ratio,
as well as the type and use of the mortgaged property. The originator's
underwriting standards do not prohibit a mortgagor from obtaining secondary
financing at the time of origination of the originator's first lien, which
secondary financing would reduce the equity the mortgagor would otherwise have
in the related mortgaged property as indicated in the originator's loan-to-value
ratio determination.
As a result of the underwriting standards described in the immediately
preceding paragraph, the mortgage loans in the mortgage pool are likely to
experience rates of delinquency, foreclosure and bankruptcy that are higher, and
that may be substantially higher, than those experienced by mortgage loans
underwritten in a more traditional manner.
Furthermore, changes in the values of mortgaged properties may have a
greater effect on the delinquency, foreclosure, bankruptcy and loss experience
of the mortgage loans in the mortgage pool than on mortgage loans originated in
a more traditional manner. No assurance can be given that the values of the
related mortgaged properties have remained or will remain at the levels in
effect on the dates of origination of the related mortgage loans. SEE "THE
MORTGAGE POOL--UNDERWRITING STANDARDS OF ___________ AND REPRESENTATIONS
CONCERNING THE MORTGAGE LOANS" IN THIS PROSPECTUS SUPPLEMENT].
[LIMITED SERVICING HISTORY AND PERFORMANCE DATA WITH RESPECT TO THE MASTER
SERVICER
The Master Servicer began directly servicing mortgage loans in
[___________]. As a result, the Master Servicer has limited experience servicing
mortgage loans similar to the mortgage loans in the mortgage pool. The Master
Servicer's limited experience in servicing mortgage loans may result in greater
defaults and losses on the mortgage loans in the mortgage pool and
S-9
<PAGE>
result in accelerated prepayments on the Offered Certificates. You will bear any
reinvestment risk resulting from such accelerated prepayments.
Because the Master Servicer commenced its direct servicing operations in
November 1998, the Master Servicer does not have historical delinquency,
bankruptcy, foreclosure or default experience that may be referred to for
purposes of examining the Master Servicer's performance in servicing mortgage
loans similar to the mortgage loans in the mortgage pool, other than to the
limited extent as described under "Pooling and Servicing Agreement--The Master
Servicer--Collection Procedures; Delinquency and Loss Experience" in this
prospectus supplement. There can be no assurance that such experience is or will
be representative.]
[CERTAIN OF THE MORTGAGE LOAN ARE BALLOON LOANS, WHICH MAY PRESENT A GREATER
RISK OF LOSS WITH RESPECT TO SUCH MORTGAGE LOANS
Approximately ____% of the mortgage loans, by aggregate principal balance
as of the Cut-off Date, are mortgage loans with balloon payments. Because
borrowers of mortgage loans with balloon payments are required to make
substantial higher final payments upon maturity, it is possible that the default
risk associated with such mortgage loans is greater than that associated with
fully- amortizing mortgage loans.]
[THE PAYMENT PERFORMANCE OF YOUR NOTES WILL BE RELATED TO THE PAYMENT
PERFORMANCE OF THE MORTGAGE LOANS IN THE TRUST FUND; THE MORTGAGE LOANS IN THE
TRUST FUND WHICH ARE DISCUSSED IN THIS SECTION MAY EXPOSE YOUR NOTES TO GREATER
LOSSES.
The notes represent an interest in mortgage loans. In the event that the
mortgaged properties fail to provide adequate security for the mortgage loans
included in the trust fund, any resulting losses, to the extent not covered by
the credit enhancement, will be allocated to the notes as described in this
prospectus supplement, and consequently may adversely affect the yield to
maturity on your notes. The depositor cannot assure you that the values of the
mortgaged properties have remained or will remain at the appraised values on the
dates of origination of the mortgage loans. Furthermore, particular mortgage
loans, including negative amortization mortgage loans, buydown mortgage loans
and mortgage loans requiring the mortgagor to make a balloon payment, may have a
greater likelihood of delinquency and foreclosure, and a greater likelihood of
loss in the event of delinquency or foreclosure. You should consider the
following risks associated with the mortgage loans included in the trust fund:
[AS APPLICABLE]
[APPROXIMATELY ____% OF THE MORTGAGE LOANS IN THE MORTGAGE POOL MAY RESULT IN
OUTSTANDING PRINCIPAL BALANCES IN EXCESS OF THE VALUE OF THE UNDERLYING
MORTGAGED PROPERTY WHICH COULD RESULT IN LOSSES ON YOUR NOTES.
Approximately ___% of the mortgage loans by aggregate principal balance as
of _______________, are subject to negative amortization. In the case of
mortgage loans that are subject to negative amortization, the principal balances
of these mortgage loans could be increased to an amount equal to or in excess of
the value of the underlying mortgaged properties, thereby increasing the
likelihood of default. To the extent that these losses are not covered the
credit enhancement in the trust fund, holders of the notes will bear all risk of
loss resulting from
S-10
<PAGE>
default by mortgagors 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 mortgage loans.
[THE INABILITY OF A MORTGAGOR TO MAKE LARGER MONTHLY PAYMENTS FOLLOWING THE
BUYDOWN PERIOD OF A BUYDOWN MORTGAGE LOAN MAY RESULT IN LOSSES ON THOSE MORTGAGE
LOANS.
Approximately ___% of the mortgage loans by aggregate principal balance as
of _________________ are buydown mortgage loans, subject to temporary buydown
plans under which the monthly payments made by the mortgagor during the early
years of the mortgage loan will be less than the scheduled monthly payments on
the mortgage loan, the resulting difference to be made up from :
o an amount contributed by the borrower, the seller of the mortgaged
property or another source and placed in a custodial account,
o investment earnings on the amount, if any, contributed by the borrower, or
o additional buydown funds to be contributed over time by the mortgagor's
employer or another source.
In most cases, the mortgagor under each buydown mortgage loan will be qualified
at the applicable lower monthly payment. Accordingly, the repayment of a buydown
mortgage loan is dependent on the ability of the mortgagor to make larger level
monthly payments after the buydown funds have been depleted and, for some
buydown mortgage loans, during the initial buydown period. The inability of a
mortgagor to make these larger monthly payments could lead to losses on the
mortgage loans, and to the extent not covered by the credit enhancement, may
adversely affect the yield to maturity on your notes.
[THE INABILITY OF A MORTGAGOR TO MAKE A BALLOON PAYMENT AT MATURITY, MAY EXPOSE
YOUR NOTES TO LOSSES.
Approximately ___% of the mortgage loans by aggregate principal balance as
of ________________ may not be fully amortizing, or may not amortize at all,
over their terms to maturity and, thus, will require substantial payments of
principal and interest, that is, balloon payments, at their stated maturity.
Mortgage loans of this type involve a greater degree of risk than
self-amortizing loans because the ability of a mortgagor to make a balloon
payment typically will depend upon its ability either to fully refinance the
loan or to sell the related mortgaged property at a price sufficient to permit
the mortgagor to make the balloon payment. The ability of a mortgagor to
accomplish either of these goals will be affected by a number of factors,
including the value of the related mortgaged property, the level of available
mortgage rates at the time of sale or refinancing, the mortgagor's equity in the
related mortgaged property, prevailing economic conditions and the availability
of credit for loans secured by comparable real properties.
S-11
<PAGE>
[APPROXIMATELY ____% OF THE MORTGAGE LOANS IN THE MORTGAGE POOL HAVE LIMITED
RECOURSE TO THE RELATED BORROWER, WHICH MAY RESULT IN LOSSES WITH RESPECT TO
THESE MORTGAGE LOANS ALLOCATED TO YOUR NOTES.
Approximately ___% of the mortgage loans by aggregate principal balance as
of ________________ are nonrecourse loans or loans for which recourse may be
restricted or unenforceable. As to those mortgage loans, recourse in the event
of mortgagor default will be limited to the specific real property and other
assets, if any, that were pledged to secure the mortgage loan. If the value of
the mortgaged property and other security has declined, the trust fund could
suffer losses on these mortgage loans that, to the extent not covered by [the
credit enhancement] may be allocated to your notes. However, even with respect
to those mortgage loans that provide for recourse against the mortgagor and its
assets, there can be no assurance that enforcement of the recourse provisions
will be practicable, or that the other assets of the mortgagor will be
sufficient to permit a recovery in respect of a defaulted mortgage loan in
excess of the liquidation value of the related mortgaged property.
[THE INABILITY OF A MORTGAGOR TO MAKE VARYING MONTHLY PAYMENTS UNDER A HOME
EQUITY LINE OF CREDIT LOAN MAY RESULT IN LOSSES ON YOUR NOTES.
Approximately ___% of the mortgage loans by aggregate principal balance as
of ________________ are mortgage loans that provide the borrower with a line of
credit under which amounts may be advanced to the borrower by the lender from
time to time. Collection on these types of mortgage loans may vary because,
among other things:
o borrowers may make payments during any month as low as the minimum
monthly payment for that month, or just the interest and fees for that month
during any interest-only period, or
o borrowers may make payments as high as the entire outstanding charges
on the mortgage loan.
It is possible that borrowers may fail to make the required periodic
payment and, to the extent not covered by the credit enhancement, these losses
may adversely affect the yield to maturity on your motes.
[APPROXIMATELY ____% OF THE MORTGAGE LOANS IN THE MORTGAGE POOL ARE SECURED BY
JUNIOR LIENS, WHICH MAY EXPOSE THE OFFERED NOTES TO LOSSES IF THE TRUST FUND
DOES NOT RECEIVE ADEQUATE FUNDS IN CONNECTION WITH A FORECLOSURE OF THE RELATED
SENIOR LIEN TO SATISFY BOTH THE SENIOR AND JUNIOR LIEN.
Approximately ___% of the mortgage loans by aggregate principal balance as
of ________________ are mortgage loans secured by junior liens and with respect
to approximately ___% of these junior liens, the related senior liens are not
included in the trust fund. The primary risk to holders of mortgage loans
secured by junior liens is the possibility that adequate funds will not be
received in connection with a foreclosure of the related senior liens to satisfy
fully both the senior liens and the junior lien mortgage loan. The claims of the
holders of the senior
S-12
<PAGE>
liens will be satisfied in full out of proceeds of the liquidation of the
mortgage loan, if these proceeds are sufficient, before the trust fund as holder
of the junior lien receives any payments in respect of the mortgage loan. If the
master servicer were to foreclose on any junior lien mortgage loan, it would do
so subject to any related senior liens. In order for the debt related to the
mortgage loan to be paid in full at this type of sale, a bidder at the
foreclosure sale of a junior lien mortgage loan would have to bid an amount
sufficient to pay off all sums due under the junior lien mortgage loan and the
senior liens or purchase the mortgaged property subject to the senior liens.
Liquidation expenses with respect to defaulted junior mortgage loans do not vary
directly with the outstanding principal balance of the loan at the time of
default. A decline in the value of the mortgaged properties securing the
mortgage loans with junior liens may increase the likelihood that, in the event
of a default by the related mortgagor, liquidation or other proceeds will be
insufficient to satisfy the junior lien mortgage loan after satisfaction of any
senior liens and the payment of any liquidation expenses. In the event that the
proceeds from a foreclosure or similar sale of the related mortgaged property
are insufficient to satisfy all senior liens and the mortgage loan in the
aggregate, the trust fund, as the holder of the junior lien, and, accordingly,
holders of the notes bear:
o the risk of delay in distributions while a deficiency judgment against
the borrower is obtained,
o the risk of loss if the deficiency judgment is not realized upon and
o the risk that deficiency judgments may not be available in all
jurisdictions.
Other factors may affect the prepayment rate of junior lien mortgage loans,
such as the amounts of, and interest on, the related senior mortgage loans and
the use of senior lien mortgage loans as long-term financing for home purchases
and junior lien mortgage loans as shorter-term financing for a variety of
purposes, such as home improvement, educational expenses and purchases of
consumer durable such as automobiles. Accordingly, junior lien mortgage loans
may experience a higher rate of prepayments than traditional senior lien
mortgage loans. In addition, any future limitations on the rights of borrowers
to deduct interest payments on junior lien mortgage loans for federal income tax
purposes may further increase the rate of prepayments on junior lien mortgage
loans.
[APPROXIMATELY ____% OF THE MORTGAGE LOANS IN THE MORTGAGE POOL WERE ORIGINATED
OUTSIDE THE UNITED STATES, WHICH MAY RESULT IN LOSSES WITH RESPECT TO THESE
MORTGAGE LOANS.
Approximately ___% of the mortgage loans by aggregate principal balance as
of ________________, are mortgage loans secured by properties located in Puerto
Rico and Guam. The risk of loss on mortgage loans secured by properties located
in Puerto Rico and Guam may be greater than on mortgage loans that are made to
mortgagors who are United States residents and citizens or that are secured by
properties located in the United States. In particular, the procedure for the
foreclosure of a real estate mortgage under the laws of the Commonwealth of
Puerto Rico varies from the procedures applicable in each of the fifty states of
the United States which may affect the satisfaction of the related mortgage
loan. In addition, the depositor is not aware of any historical prepayment
experience with respect to mortgage loans secured by
S-13
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properties located in Puerto Rico or Guam and, accordingly, prepayments on these
loans may not occur at the same rate or be affected by the same factors as other
mortgage loans.
[APPROXIMATELY ____% OF THE MORTGAGE LOANS IN THE MORTGAGE POOL ARE DELINQUENT
AS OF THE CUT-OFF DATE, WHICH MAY RESULT IN LOSSES WITH RESPECT TO THESE
MORTGAGE LOANS.
Approximately ____% of the mortgage loans, by aggregate principal balance
as of _______ __, ____, were thirty days or more but less than sixty days
delinquent in their monthly payments as of ______ __, ____. Approximately ____%
of the mortgage loans, by aggregate principal balance as of _______ __, ____,
were sixty days or more but less than ninety days delinquent in their monthly
payments as of the _______ __, ____. However, investors in the mortgage loans
should realize that approximately _____% of the mortgage loans, by aggregate
principal balance as of _______ __, ____, have a first payment date occurring on
or after _______ __, ____ and, therefore, these mortgage loans could not have
been delinquent as of _______ __, ____].
[APPROXIMATELY ____% OF THE MORTGAGE LOANS IN THE MORTGAGE POOL HAVE HIGH
LOAN-TO-VALUE RATIOS, SO THAT THE RELATED BORROWER HAS LITTLE OR NO EQUITY IN
THE RELATED MORTGAGED PROPERTY, WHICH MAY RESULT IN LOSSES WITH RESPECT TO THESE
MORTGAGE LOANS ALLOCATED TO YOUR NOTES.
Approximately _____% of the mortgage loans, by aggregate principal balance
as of _______ __, ____, had a loan-to-value ratio or a combined loan-to-value
ratio, in the case of any second lien mortgage loan, at origination in excess of
80%. No mortgage loan in the mortgage pool with a loan-to-value ratio or a
combined loan-to-value ratio, in the case of any second lien mortgage loan, at
origination in excess of 80% will be covered by a primary mortgage insurance
policy. No first lien mortgage loan will have a loan-to-value ratio exceeding
__% at origination and no second lien mortgage loan will have a combined
loan-to-value ratio exceeding _____% at origination. Mortgage loans with higher
loan-to-value ratios may present a greater risk of loss in that an overall
decline in the residential real estate market, a rise in interest rates over a
period of time and the condition of a mortgaged property, as well as other
factors, may have the effect of reducing the value of the mortgaged property
from the appraised value at the time the mortgage loan was originated. If there
is a reduction in value of the mortgaged property, the loan-to-value ratio may
increase over what it was at the time the mortgage loan was originated. This
increase may reduce the likelihood of liquidation or other proceeds being
insufficient to satisfy the mortgage loan and any losses, to the extent not
covered by the credit enhancement, may affect the yield to maturity or your
notes. Furthermore, investors should note that the value of the mortgaged
property may be insufficient to cover the outstanding balance of the notes.
There can be no assurance that the loan-to-value ratio of any mortgage loan
determined at any time after origination is less than or equal to its original
loan-to-value ratio.
[APPROXIMATELY ____% OF THE MORTGAGE LOANS IN THE MORTGAGE POOL ARE CONCENTRATED
IN THE STATE OF [NAME OF STATE], WHICH MAY RESULT IN LOSSES WITH RESPECT TO
THESE MORTGAGE LOANS.
Approximately ___% of the mortgage loans are in the state of [Name of
State.] Investors should note that some geographic regions of the United States
from time to time will experience weaker regional economic conditions and
housing markets causing a decline in property values
S-14
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in those areas, and consequently, will experience higher rates of loss and
delinquency than will be experienced on mortgage loans located in other
geographic regions. A region's economic condition and housing market may be
directly, or indirectly, adversely affected by a number of factors including
natural disasters or civil disturbances such as earthquakes, hurricanes, floods,
eruptions or riots. The economic impact of any of these types of events may also
be felt in areas beyond the region immediately affected by the disaster or
disturbance. A concentration of mortgage loans in the trust fund in a region
experiencing a deterioration in economic conditions or a decline in real estate
values may expose your notes to losses in addition to those present for similar
mortgage-backed securities without this concentration. The depositor cannot
assure you that the values of the mortgaged properties have remained or will
remain at the appraised values on the dates of origination of the mortgage
loans. Any deterioriation of economic conditions in [name of state] which
adversely affects the ability of borrowers to make payments on the mortgage
loans may increase the likelihood of delinquency and foreclosure of the mortgage
loans that may result in losses that, to the extent not covered by the [credit
enhancement] will be allocated to your notes.
[THE CLASS M-1 NOTES, THE CLASS M-2 NOTES AND THE CLASS M-3 NOTES WILL BE
PARTICULARLY SENSITIVE TO LOSSES ON THE MORTGAGE LOANS.
The weighted average lives of, and the yields to maturity on, the Class M-1
Notes, the Class M-2 Nots and the Class M-3 Notes will be progressively more
sensitive, in increasing order of their numerical class designations, to the
rate and timing of mortgagor defaults and the severity of ensuing losses on the
mortgage loans. If the actual rate and severity of losses on the mortgage loans
is higher than those assumed by an investor in one of the Class M-1 Notes, the
Class M-2 Notes or the Class M-3 Notes, the actual yield to maturity of that
note may be lower than the yield anticipated by the holder based on that
assumption. The timing of losses on the mortgage loans will also affect an
investor's actual yield to maturity, even if the rate of defaults and severity
of losses over the life of the mortgage pool are consistent with an investor's
expectations. In most cases, the earlier a loss occurs, the greater the effect
on an investor's yield to maturity. Losses on the mortgage loans in any due
period, to the extent they exceed the overcollateralized amount following
payments of principal on the related payment date, will reduce the note balance
of the class of notes then outstanding with the highest numerical class
designation. As a result of these reductions, less interest will accrue on the
class of subordinate notes than would otherwise be the case].
[THE CLASS M-1 NOTES, THE CLASS M-2 NOTES AND THE CLASS M-3 NOTES WILL NOT BE
ENTITLED TO RECEIVE PRINCIPAL PAYMENTS UNTIL ALL PRINCIPAL PAYMENTS HAVE BEEN
MADE ON THE CLASS A NOTES WHICH MAY LEAD TO LOSSES WITH RESPECT TO THESE NOTES
Unless the note balance of the Class A Notes has been reduced to zero, the
Class M-1 Notes, the Class M-2 Notes and the Class M-3 Notes will not be
entitled to any principal payments until _________ ____ or a later period as
described in this prospectus supplement. As a result, the weighted average lives
of these notes will be longer than would otherwise be the case if payments of
principal were allocated among all of the notes at the same time. As a result of
the longer weighted average lives of these notes, the holders of these notes
have a greater risk of suffering a loss on their investments. Further, because
these notes might not receive any
S-15
<PAGE>
principal if certain delinquency levels occur, it is possible for these notes to
receive no principal payments even if no losses have occurred on the mortgage
pool].
[YOUR NOTES WILL BE LIMITED OBLIGATIONS SOLELY OF THE TRUST FUND AND NOT OF ANY
OTHER PARTY.
The notes will not represent an interest in or obligation of the depositor,
the master servicer, the seller, the [SPE], the indenture trustee, the owner
trustee or any of their respective affiliates. Neither the notes nor the
underlying mortgage loans will be guaranteed or insured by any governmental
agency or instrumentality, or by the depositor, the master servicer, the
indenture trustee, the owner trustee or any of their respective affiliates.
Proceeds of the assets included in the trust will be the sole source of payments
on the offered notes, and there will be no recourse to the depositor, the master
servicer, the seller, the [SPE], the indenture trustee, the owner trustee or any
other entity in the event that these proceeds are insufficient or otherwise
unavailable to make all payments provided for under the offered notes].
[THE DIFFERENCE BETWEEN THE INTEREST RATES ON THE NOTES AND THE MORTGAGE LOANS
MAY RESULT IN INTEREST SHORTFALLS ALLOCATED TO YOUR NOTES.
The note interest rate for each class of notes adjusts monthly based on a
particular index, subject to limitations as described in this prospectus
supplement. However, the mortgage rates on the fixed rate mortgage loans are
fixed and will not vary with any index, and the mortgage rates on the adjustable
rate mortgage loans adjust semi-annually, after an initial fixed rate period in
the case of delayed first-adjustment adjustable rate mortgage loans, based on a
separate index which may not move in tandem with the index for the notes and
which is subject to periodic and lifetime limitations. As a result of the
foregoing as well as other factors such as the prepayment behavior of the
mortgage pool, relative increases in the index or relative decreases in the
weighted average of the mortgage rates on the mortgage loans could:
o cause the amount of interest generated by the mortgage pool to be
less than the aggregate of the amount of interest that would otherwise be
payable on the notes, leading one or more classes of notes to accept payments of
interest at a later date, or
o cause the maximum note interest rate to apply to one or more classes
of notes.
Because the mortgage rate for each adjustable rate mortgage loan will be
adjusted, subject to periodic and lifetime limitations, to equal the sum of the
index and the related gross margin, these rates could be higher than prevailing
market interest rates, possibly resulting in an increase in the rate of
prepayments on the adjustable rate mortgage loans after their adjustments. In
particular, investors should note that approximately _____% of the adjustable
rate mortgage loans have their interest rates fixed for two years following
origination and approximately _____% of the adjustable rate mortgage loans have
their interest rates fixed for three years following origination, in each case
by aggregate principal balance as of _________ __, ___. The weighted average
next adjustment date for the adjustable rate mortgage loans whose interest rates
are fixed for two years is _______ ____, and the weighted average next
adjustment date for the adjustable rate mortgage loans whose interest rates are
fixed for three years is _______ ____].
S-16
<PAGE>
[THE RATE AND TIMING OF PRINCIPAL DISTRIBUTIONS ON YOUR NOTES WILL BE AFFECTED
BY THE RATE OF PREPAYMENTS ON THE MORTGAGE LOANS.
The rate and timing of distributions allocable to principal on the offered
notes will depend, in most cases, on the rate and timing of principal payments,
including prepayments and collections upon defaults, liquidations and
repurchases, on the mortgage loans and the allocation of these payments to pay
principal on the offered notes. As is the case with mortgage-backed securities,
the offered notes are subject to substantial inherent cash-flow uncertainties
because the mortgage loans may be prepaid at any time. However, with respect to
approximately ____% of the mortgage loans, by aggregate principal balance as of
_______ __, ____, a full and voluntary prepayment may subject the related
mortgagor to a prepayment charge. A prepayment charge may or may not act as a
deterrent to prepayment of these mortgage loans. See "The Mortgage Pool" in this
prospectus supplement.
[THE RATE OF PREPAYMENTS ON THE MORTGAGE LOANS WILL VARY DEPENDING ON FUTURE
MARKET CONDITIONS WHICH COULD IMPACT THE RATE AND TIMING OF PRINCIPAL
DISTRIBUTIONS ON YOUR NOTES.
In most cases, when prevailing interest rates are increasing, prepayment
rates on mortgage loans tend to decrease. This decrease in the prepayment rates
on the mortgage loans will result in a reduced rate of return of principal to
investors in the offered notes at a time when reinvestment at higher prevailing
rates would be desirable. Conversely, when prevailing interest rates are
declining, prepayment rates on mortgage loans tend to increase. This increase in
the prepayment rates on the mortgage loans will result in a greater rate of
return of principal to investors in the offered notes at a time when
reinvestment at comparable yields may not be possible.
Distributions of principal will be made to the subordinate notes according
to the priorities described in this prospectus supplement. The timing of
commencement of principal distributions and the weighted average life of each
class of notes will be affected by the rates of prepayment on the mortgage loans
experienced both before and after the commencement of principal distributions on
each class. For further information regarding the effect of principal
prepayments on the weighted average lives of the offered notes, see "Yield on
the Notes" in this prospectus supplement and the table entitled "Percent of
initial note balance outstanding at the following percentages of the prepayment
assumption" in that section].
[THE YIELD ON YOUR NOTES WILL VARY DEPENDING ON THE RATE OF PREPAYMENTS.
The yield to maturity on the offered notes will depend on:
o the applicable note interest rate and note accrual rate on that
interest rate from time to time;
o the applicable purchase price; and
o the rate and timing of principal payments, including prepayments and
collections upon defaults, liquidations and repurchases, on the
mortgage loans and the allocation of these payments to reduce the note
balance of the notes, as well as other factors.
S-17
<PAGE>
The yield to investors on any class of offered notes will be adversely
affected by any allocation to the class of interest shortfalls on the mortgage
loans.
In most cases, if the offered notes are purchased at a premium and
principal distributions on the offered notes occur at a rate faster than
anticipated at the time of purchase, the investor's actual yield to maturity
will be lower than that assumed at the time of purchase. Conversely, if the
offered notes are purchased at a discount and principal distributions on the
offered notes occur at a rate slower than that anticipated at the time of
purchase, the investor's actual yield to maturity will be lower than that
originally assumed.
The proceeds to the depositor from the sale of the offered notes were
determined based on a number of assumptions, including a prepayment assumption
of __% CPR and weighted average lives corresponding to that prepayment
assumption. No representation is made that the mortgage loans will prepay at
that rate or at any other rate. The yield assumptions for the offered notes will
vary as determined at the time of sale].
[VIOLATION OF CONSUMER PROTECTION LAWS MAY RESULT IN LOSSES ON THE MORTGAGE
LOANS AND YOUR NOTES.
Applicable state laws regulate interest rates and other charges, require
disclosure, and require licensing of the originators. In addition, other state
laws, public policy and principles of equity relating to the protection of
consumers, unfair and deceptive practices and debt collection practices may
apply to the origination, servicing and collection of the mortgage loans.
The mortgage loans are also subject to federal laws, including:
o the Federal Truth-in-Lending Act and Regulation Z promulgated
thereunder, which require disclosures to the borrowers regarding
the terms of the mortgage loans;
o the Equal Credit Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age,
race, color, sex, religion, marital status, national origin,
receipt of public assistance or the exercise of any right under
the Consumer Credit Protection Act, in the extension of credit;
and
o the Fair Credit Reporting Act, which regulates the use and
reporting of information related to the borrower's credit
experience.
Depending on the provisions of the applicable law and the specific facts
and circumstances involved, violations of these federal or state laws, policies
and principles may limit the ability of the trust to collect all or part of the
principal of or interest on the mortgage loans, may entitle the borrower to a
refund of amounts previously paid and, in addition, could subject the
Originators to damages and administrative enforcement.
The seller will represent that as of the closing date, each mortgage loan
is in compliance with applicable federal and state laws and regulations. In the
event of a breach of this representation,
S-18
<PAGE>
the seller will be obligated to cure the breach or repurchase or replace the
affected mortgage loan in the manner described in the prospectus].
All capitalized terms used in this prospectus supplement will have the
meanings assigned to them under "Description of the Notes--Glossary of Terms" or
in the prospectus under "Glossary."
THE MORTGAGE POOL
GENERAL DESCRIPTION OF THE MORTGAGE LOANS
The mortgage pool will consist of approximately _____ conventional, one- to
four-family, fixed-rate mortgage loans and approximately _____ conventional,
one-to four-family, adjustable- rate mortgage loans. In each case, the mortgage
loans will be secured by first liens on residential real properties and have an
aggregate principal balance as of ________ __, ____, which date will also be
referred to in this prospectus supplement as the cut-off date, of approximately
$___________ after application of scheduled payments due on or before the
cut-off date whether or not received, subject to a permitted variance of plus or
minus 5%. The mortgage loans have original terms to maturity of not greater than
[30] years. References to percentages of the mortgage loans, unless otherwise
noted, are calculated based on the aggregate principal balance of the mortgage
loans as of the cut-off date. The mortgage loans are secured by first mortgages
or deeds of trust or other similar security instruments creating first liens on
residential properties consisting of attached, detached or semi-detached, one-
to four-family dwelling units, townhouses, individual condominium units,
individual units in planned unit developments and manufactured housing.
The mortgage loans to be included in the mortgage pool will be acquired by
the depositor on the closing date from the [SPE], who will have acquired the
mortgage loans on the closing date from the seller. The seller in turn will have
acquired the mortgage loans on the closing date from ________________, an
affiliate of the depositor who will have acquired the mortgage loans directly or
indirectly from the originators. See "--Underwriting Standards of ___________
and Representations Concerning the Mortgage Loans", "[The SPE]" and "The Seller"
in this prospectus supplement.
Each adjustable rate mortgage loan provides for semi-annual adjustment to
its mortgage rate and for corresponding adjustments to the monthly payment
amount due on the mortgage loan, in each case on each adjustment date applicable
to the mortgage loan. However, in the case of approximately _____% and
approximately _____% of the adjustable rate mortgage loans by aggregate
principal balance as of the cut-off date which are referred to in this
prospectus supplement as delayed first adjustment mortgage loans, the first
adjustment date will occur after an initial period of approximately ____ years
and approximately __ years, respectively from the date of origination of those
mortgage loans. The weighted average month of origination of the ____ year
delayed first adjustment mortgage loans is _________ _____, and the weighted
average month of origination of the ____ year delayed first adjustment mortgage
loans is
--------- -----.
S-19
<PAGE>
On each adjustment date, the mortgage rate on each adjustable rate mortgage
loan will be adjusted to equal the sum, rounded as provided in the related
mortgage note, of the index applicable to the adjustable rate mortgage loans and
a fixed percentage amount, or gross margin. However, the mortgage rate on each
adjustable rate mortgage loan, including each delayed first adjustment mortgage
loan, will usually not increase or decrease by more than a specified periodic
adjustment limitation, or periodic rate cap, on any related adjustment date.
Furthermore, the mortgage rate on each adjustable rate mortgage loan will not
exceed a specified maximum mortgage rate over the life of the mortgage loan, or
be less than a specified minimum mortgage rate over the life of the mortgage
loan. For adjustment dates other than the first adjustment date after
origination, the periodic rate cap for the majority of the adjustable rate
mortgage loans is 1.00% per annum. With respect to substantially all of the
adjustable rate mortgage loans, for adjustment dates other than the first
adjustment date after origination, the periodic rate cap will not exceed ____%
per annum.
Effective with the first monthly payment due on each adjustable rate
mortgage loan after each related adjustment date, the monthly payment amount
will be adjusted to an amount that will amortize fully the outstanding principal
balance of the related adjustable rate mortgage loan over its remaining term and
pay interest at the mortgage rate as so adjusted. Due to the application of the
periodic rate caps and the maximum mortgage rates, the mortgage rate on each
mortgage loan, as adjusted on any related adjustment date, may be less than the
sum of the index applicable to the adjustable rate mortgage loans and gross
margin, calculated as described under "--The Index Applicable to the Adjustable
Rate Mortgage Loans" in this prospectus supplement. None of the adjustable rate
mortgage loans permits the related mortgagor to convert the adjustable mortgage
rate on the adjustable rate mortgage loan to a fixed mortgage rate.
In most cases, the mortgage loans have scheduled monthly payments due on
the first day of the month. Each mortgage loan will contain a customary
due-on-sale clause or will be assumable by a creditworthy purchaser of the
related mortgaged property.
Approximately ______% of the mortgage loans provide for payment by the
mortgagor of a prepayment charge in limited circumstances on voluntary
prepayments in full made within one to five years from the date of origination
of these mortgage loans. The amount of the prepayment charge is as provided in
the related mortgage note. In most cases, prepayment charge obligations expire
by their terms after a limited period specified in the related mortgage note.
The weighted average month of origination of the mortgage loans with prepayment
charges is _________ ____. The holders of the equity certificates will be
entitled to all prepayment charges received on the mortgage loans, and this
amount will not be available for distribution on the notes. Under certain
instances, as described in the related servicing agreement, the related servicer
may waive the payment of any otherwise applicable prepayment charge, and
accordingly, there can be no assurance that the prepayment charges will have any
effect on the prepayment performance of the mortgage loans.
None of the mortgage loans are buydown mortgage loans.
Approximately ____% of the mortgage loans are balloon loans. Each balloon
loan is a fixed rate mortgage loan that amortizes over ___ months, but the final
payment, or balloon payment,
S-20
<PAGE>
on each balloon loan is due and payable on the ___th month. The amount of the
balloon payment on each balloon loan is substantially in excess of the amount of
the scheduled monthly payment on the balloon loan for the period prior to the
due date of the balloon payment.
The average principal balance of the mortgage loans at origination was
approximately $_______. No mortgage loan had a principal balance at origination
greater than approximately $________ or less than approximately $______. The
average principal balance of the mortgage loans as of the cut-off date was
approximately $_______.
The mortgage loans had mortgage rates as of the cut-off date ranging from
approximately ____% per annum to approximately _____% per annum, and the
weighted average mortgage rate was approximately ______% per annum. The weighted
average loan-to-value ratio of the mortgage loans at origination was
approximately _____%. At origination, no mortgage loan will have a loan-to-value
ratio greater than approximately _____% or less than approximately ____%.
The weighted average remaining term to maturity of the mortgage loans will
be approximately __ years and __ months as of the cut-off date. None of the
mortgage loans will have a first due date prior to _______ ____ or after
___________ ____, or will have a remaining term to maturity of less than __
years or greater than __ years as of the cut-off date. The latest maturity date
of any mortgage loan is __________ ____.
As of the cut-off date, the adjustable rate mortgage loans had gross
margins ranging from approximately ____% to approximately ____%, minimum
mortgage rates ranging from approximately ____% per annum to approximately
_____% per annum and maximum mortgage rates ranging from approximately _____%
per annum to approximately _____% per annum. As of the cut-off date, the
weighted average gross margin was approximately ______%, the weighted average
minimum mortgage rate was approximately _____% per annum and the weighted
average maximum mortgage rate was approximately _______% per annum. The latest
first adjustment date following the cut-off date on any adjustable rate mortgage
loan occurs in _______ ____ and the weighted average next adjustment date for
all of the mortgage loans following the cut-off date is _______ ____.
The mortgage loans are expected to have the following characteristics as of
the cut-off date (the sum in any column may not equal the total indicated due to
rounding):
S-21
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL BALANCES OF THE MORTGAGE LOANS AT ORIGINATION
% OF
AGGREGATE AGGREGATE
ORIGINAL ORIGINAL
NUMBER PRINCIPAL PRINCIPAL
RANGE ($) OF LOANS BALANCE BALANCE
--------- -------- -------- -------
<S> <C> <C> <C>
. . . . . . . . . . . .
. . . . . . . . . . . .
. . . . . . . . . . . .
. . . . . . . . . . . .
. . . . . . . . . . . .
. . . . . . . . . . . .
. . . . . . . . . . . .
. . . . . . . . . . . .
. . . . . . . . . . . .
. . . . . . . . . . . .
. . . . . . . . . . . .
. . . . . . . . . . . .
. . . . . . . . . . . .
. . . . . . . . . . . .
. . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . .
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL BALANCES OF THE MORTGAGE LOANS AS OF THE CUT-OFF DATE
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
RANGE ($) OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------- -------- ---------------- ----------------
<S> <C> <C> <C>
. . . . . . . . . . .
. . . . . . . . . . .
. . . . . . . . . . .
. . . . . . . . . . .
. . . . . . . . . . .
. . . . . . . . . . .
. . . . . . . . . . .
. . . . . . . . . . .
. . . . . . . . . . .
. . . . . . . . . . .
. . . . . . . . . . .
. . . . . . . . . . .
. . . . . . . . . . .
. . . . . . . . . . .
. . . . . . . . . . .
. . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . .
</TABLE>
S-22
<PAGE>
<TABLE>
<CAPTION>
MORTGAGE RATES OF THE MORTGAGE LOANS AS OF THE CUT-OFF DATE
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
MORTGAGE RATE(%) OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
---------------- -------- ---------------- ----------------
<S> <C> <C> <C>
........................................................
........................................................
........................................................
........................................................
........................................................
Total..............................................
</TABLE>
<TABLE>
<CAPTION>
MAXIMUM MORTGAGE RATES OF THE ADJUSTABLE RATE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
MAXIMUM NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
MORTGAGE RATE(%) OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
---------------- -------- ---------------- ----------------
<S> <C> <C> <C>
........................................................
........................................................
........................................................
........................................................
Total..............................................
</TABLE>
<TABLE>
<CAPTION>
MINIMUM MORTGAGE RATES OF THE ADJUSTABLE RATE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
MINIMUM NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
MORTGAGE RATE (%) OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
----------------- -------- ---------------- ----------------
<S> <C> <C> <C>
........................................................
........................................................
........................................................
........................................................
Total..............................................
</TABLE>
<TABLE>
<CAPTION>
GROSS MARGINS OF THE ADJUSTABLE RATE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
GROSS MARGIN (%) OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
---------------- -------- ---------------- ----------------
<S> <C> <C> <C>
........................................................
........................................................
........................................................
........................................................
Total..............................................
</TABLE>
S-23
<PAGE>
<TABLE>
<CAPTION>
ORIGINAL LOAN-TO-VALUE RATIOS OF THE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
LOAN-TO-VALUE RATIO(%) OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
---------------------- -------- ---------------- ----------------
<S> <C> <C> <C>
........................................................
........................................................
........................................................
........................................................
Total..............................................
</TABLE>
<TABLE>
<CAPTION>
GEOGRAPHIC DISTRIBUTION OF THE MORTGAGED PROPERTIES
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
LOCATION OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
-------- -------- ---------------- ----------------
<S> <C> <C> <C>
........................................................
........................................................
........................................................
........................................................
........................................................
Total..............................................
</TABLE>
<TABLE>
<CAPTION>
MORTGAGED PROPERTY TYPES OF THE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
PROPERTY TYPE OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
------------- -------- ---------------- ----------------
<S> <C> <C> <C>
........................................................
........................................................
........................................................
........................................................
........................................................
........................................................
Total..............................................
</TABLE>
S-24
<PAGE>
<TABLE>
<CAPTION>
MORTGAGED PROPERTY OCCUPANCY STATUS OF THE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
OCCUPANCY STATUS OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
---------------- -------- ---------------- ----------------
<S> <C> <C> <C>
........................................................
........................................................
Total..............................................
</TABLE>
The occupancy status of a Mortgaged Property is as represented by the
mortgagor in its loan application.
<TABLE>
<CAPTION>
LOAN PURPOSE OF THE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
LOAN PURPOSE OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
------------ -------- ---------------- ----------------
<S> <C> <C> <C>
........................................................
........................................................
........................................................
Total..............................................
</TABLE>
<TABLE>
<CAPTION>
LOAN PROGRAMS OF THE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
LOAN PROGRAM OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
------------ -------- ---------------- ----------------
<S> <C> <C> <C>
........................................................
........................................................
........................................................
Total..............................................
</TABLE>
S-25
<PAGE>
<TABLE>
<CAPTION>
RISK CATEGORIES OF THE FIXED RATE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
RISK CATEGORIES OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------------- -------- ---------------- ----------------
<S> <C> <C> <C>
........................................................
........................................................
........................................................
........................................................
........................................................
Total..............................................
</TABLE>
<TABLE>
<CAPTION>
RISK CATEGORIES OF THE ADJUSTABLE RATE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
RISK CATEGORIES OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------------- -------- ---------------- ----------------
<S> <C> <C> <C>
........................................................
........................................................
........................................................
........................................................
........................................................
........................................................
Total..............................................
</TABLE>
<TABLE>
<CAPTION>
NEXT ADJUSTMENT DATES FOR THE ADJUSTABLE RATE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
MONTH OF NEXT ADJUSTMENT DATE OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
----------------------------- -------- ---------------- ----------------
<S> <C> <C> <C>
........................................................
........................................................
........................................................
........................................................
Total...................................................
</TABLE>
S-26
<PAGE>
THE INDEX APPLICABLE TO THE ADJUSTABLE RATE MORTGAGE LOANS
As of any adjustment date, the index applicable to the determination of the
mortgage rate on each adjustable rate mortgage loan will be the average of the
interbank offered rates for six- month United States dollar deposits in the
London market as published in THE WALL STREET JOURNAL and as of a date as
specified in the related mortgage note. In the event that this index becomes
unavailable or otherwise unpublished, each servicer will select a comparable
alternative index over which it has no direct control and which is readily
verifiable.
The table immediately following this paragraph sets forth historical
average rates of six- month LIBOR for the months indicated as made available
from Fannie Mae, which rates may differ from the rates of the index applicable
to the determination of the mortgage rate on each adjustable rate mortgage loan,
which is six-month LIBOR as published in THE WALL STREET JOURNAL as described in
the preceding paragraph. The table does not purport to be representative of the
subsequent rates of the index which will be used to determine the Mortgage Rate
on each adjustable rate mortgage loan.
Year
----------------------------------
Month ____ ____ ____ ____ ____ ____ ____
-----
UNDERWRITING STANDARDS OF __________ AND REPRESENTATIONS CONCERNING THE MORTGAGE
LOANS
The mortgage loans will be acquired by the depositor from the mortgage loan
seller. All of the mortgage loans were originated or acquired by the mortgage
loan seller generally in accordance with the respective underwriting criteria
described below.
The information set forth below with regard to the mortgage loan seller's
underwriting standards has been provided to the depositor or compiled from
information provided to the depositor by the mortgage loan seller. None of the
depositor, the trustee, the underwriter or any of their respective affiliates
has made any independent investigation of such information or has made or will
make any representation as to the accuracy or completeness of such information.
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The mortgage loans were originated generally in accordance with guidelines
(the "originator's underwriting guidelines") established by the mortgage loan
seller under the "Full Documentation", "Fast Trac" or "Stated Income"
residential loan programs (the "originator underwriting programs"). The
originator underwriting guidelines are primarily intended to evaluate the value
and adequacy of the mortgaged property as collateral and are also intended to
consider the mortgagor's credit standing and repayment ability. On a
case-by-case basis and only with the approval of two or more senior lending
officers, the mortgage loan seller may determine that, based upon compensating
factors, a prospective mortgagor not strictly qualifying under the underwriting
risk category guidelines described below warrants an underwriting exception.
Compensating factors may include, but are not limited to, low loan-to-value
ratio, low debt-to-income ratio, good credit history, stable employment and time
in residence at the applicant's current address. It is expected that a
substantial number of the mortgage loans to be included in the mortgage pool
will represent such underwriting exceptions.
Under the originator underwriting programs, during the underwriting
process, the mortgage loan seller or the originator for the mortgage loan seller
reviews and verifies the loan applicant's sources of income (except under the
Stated Income and Fast Trac residential loan programs), calculates the amount of
income from all such sources indicated on the loan application, reviews the
credit history of the applicant and calculates the debt-to-income ratio to
determine the applicant's ability to repay the loan, and reviews the mortgaged
property for compliance with the originator underwriting guidelines. The
originator underwriting guidelines are applied in accordance with a procedure
which complies with applicable federal and state laws and regulations and
requires (i) an appraisal of the mortgaged property which generally conforms to
Freddie Mac and Fannie Mae standards and (ii) a review of such appraisal, which
review may be conducted by a representative of the mortgage loan seller or a
staff appraiser and, depending upon the original principal balance and
loan-to-value ratio of the mortgaged property, may include a desk review of the
original appraisal or a drive-by review appraisal of the mortgaged property. The
originator underwriting guidelines permit loans with loan-to-value ratios at
origination of up to 90%. The maximum allowable loan-to-value ratio varies based
upon the income documentation, property type, creditworthiness, debt
service-to-income ratio of the mortgagor and the overall risks associated with
the loan decision. Under the residential loan programs, the maximum combined
loan-to-value ratio, including any second deeds of trust subordinate to the
mortgage loan seller's first deed of trust, is generally 100% for owner occupied
mortgaged properties and 90% for non-owner occupied mortgaged properties.
All of the mortgage loans originated in the originator underwriting
programs are based on loan application packages submitted through mortgage
brokerage companies or the mortgage loan seller's retail branches, or are
purchased from approved originators pursuant to the originator underwriting
guidelines described herein. Loan application packages submitted through
mortgage brokerage companies, containing in each case relevant credit, property
and underwriting information on the loan request, are compiled by the applicable
mortgage brokerage company and submitted to the mortgage loan seller for
approval and funding. The mortgage brokerage companies receive a portion of the
loan origination fee charged to the mortgagor at the time the loan is made. No
single mortgage brokerage company accounts for more than 5%, measured by
outstanding principal balance, of the single-family mortgage loans originated by
the mortgage loan seller.
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Each prospective mortgagor completes an application which includes
information with respect to the applicant's liabilities, income, credit history
and employment history, as well as certain other personal information. The
mortgage loan seller obtains a credit report on each applicant from a credit
reporting company. The applicant must generally provide to the mortgage loan
seller or the originator for the mortgage loan seller a letter explaining all
late payments on mortgage debt and, generally, consumer (i.e., non-mortgage)
debt. The report typically contains information relating to such matters as
credit history with local and national merchants and lenders, installment debt
payments and any record of defaults, bankruptcy, repossession, suits or
judgments. Under the Full Documentation residential loan program, self-employed
individuals are generally required to submit their most recent federal income
tax return. As part of its quality control system, the mortgage loan seller
reverifies information with respect to the foregoing matters that has been
provided by the mortgage brokerage company prior to funding a loan and
periodically audits files based on a random sample of closed loans. In the
course of its pre-funding audit, the mortgage loan seller reverifies the income
of each mortgagor or, for a self-employed individual, reviews the income
documentation obtained pursuant to the originator underwriting guidelines
(except under the Stated Income residential loan program). The mortgage loan
seller generally verifies the source of funds for the down payment.
Mortgaged properties that are to secure mortgage loans underwritten under
the originator underwriting programs are appraised by qualified independent
appraisers who are approved by the mortgage loan seller's internal valuation
managers. In most cases, below-average properties (including properties
requiring major deferred maintenance) are not acceptable as security for
mortgage loans in the originator underwriting programs. Each appraisal includes
a market data analysis based on recent sales of comparable homes in the area
and, where deemed appropriate, replacement cost analysis based on the current
cost of constructing a similar home. Every independent appraisal is reviewed by
a representative of the mortgage loan seller or a staff appraiser before the
loan is funded.
The originator 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 originator underwriting programs generally have payment histories and debt
ratios which would not satisfy Fannie Mae and Freddie Mac underwriting
guidelines and may have a record of major derogatory credit items such as
outstanding judgments or prior bankruptcies. The originator underwriting
guidelines establish the maximum permitted loan-to-value ratio for each loan
type based upon these and other risk factors.
Under the Fast Trac and Stated Income residential loan programs, the
mortgagor's employment and income sources must be stated on the mortgagor's
application. The mortgagor's income as stated must be reasonable for the related
occupation and such determination as to reasonableness is subject to the loan
underwriter's discretion. However, the mortgagor's income as stated on the
application is not independently verified. Verification of employment is
required for salaried mortgagors only. Maximum loan-to-value ratios are
generally lower under the Fast Trac and Stated Income residential loan programs
than those permitted under the Full Documentation residential loan program.
Except as otherwise stated above, the same mortgage credit, consumer credit and
collateral property underwriting guidelines that apply to the Full
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Documentation residential loan program apply to the Fast Trac and Stated Income
residential loan programs.
The mortgage loan seller requires that all mortgage loans in the originator
underwriting programs have title insurance and be secured by liens on real
property. The mortgage loan seller also requires that fire and extended coverage
casualty insurance be maintained on the secured property in an amount at least
equal to the principal balance of the mortgage loan or the replacement cost of
the property, whichever is less. The mortgage loan seller does not require that
mortgage loans in the originator underwriting programs be covered by a primary
mortgage insurance policy.
RISK CATEGORIES
Under the originator underwriting programs, various risk categories are
used to grade the likelihood that the mortgagor will satisfy the repayment
conditions of the mortgage loan. These risk categories establish the maximum
permitted loan-to-value ratio and loan amount, given the occupancy status of the
mortgaged property and the mortgagor's credit history and debt ratio. In
general, higher credit risk mortgage loans are graded in categories which permit
higher debt ratios and more (or more recent) major derogatory credit items such
as outstanding judgments or prior bankruptcies; however, the originator
underwriting programs establish lower maximum loan-to-value ratios and maximum
loan amounts for loans graded in such categories.
The originator underwriting guidelines have the following categories and
criteria for grading the potential likelihood that an applicant will satisfy the
repayment obligations of a mortgage loan:
CREDIT GRADE: "A." Under the "A" risk categories, the applicant generally
must have repaid installment or revolving debt according to its terms and have
demonstrated steady employment over the last two years. Certain non-consumer
credit, collections or judgments may be disregarded on a case-by-case basis. Any
and all payments 60 days or more late within the past 12 months may not
represent more than 25% of the credit reported during that period. Minor
derogatory items are permitted on a case-by-case basis as to non-mortgage credit
when the majority of the consumer credit is good. No bankruptcy filings may have
occurred during the preceding two years and no discharge or notice of default
filings may have occurred during the preceding three years. The mortgaged
property must be in at least average condition. A maximum loan-to-value ratio of
90% is permitted for owner occupied purchase money and/or refinance mortgage
loans on single family and condominium properties, and a maximum loan-to-value
ratio of 80% is permitted on an owner occupied mortgaged property consisting of
two- to four-units or second homes. A maximum loan-to-value ratio of 80% is
permitted for non-owner occupied purchase money and/or refinance mortgage loans
on single family and condominium properties, and a maximum loan-to-value ratio
of 70% is permitted on a non-owner occupied mortgaged property consisting of
two-to-four units. Generally, the debt service-to-income ratio maximum may be
47%, but this may be allowed to be increased to 55% based on the mortgagor's net
disposable income and if the loan-to-value ratio is less than or equal to 85%.
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CREDIT GRADE: "A1." Under the "A1" risk sub-category, in addition to
the characteristics described under the "A" risk category above, no late
payments are permitted during the previous twelve months on an existing
mortgage loan, either on the property which is being made subject to the
mortgage loan seller's lien or any mortgage on any other property for which
the applicant is listed as borrower. In addition, the applicant must have a
credit score of 620 or higher and a debt service-to-income ratio of 45% or
less.
CREDIT GRADE "A2." Under the "A2" risk sub-category, in addition to the
characteristics described under the "A" risk category above, no late
payments are permitted during the previous twelve months on an existing
mortgage loan, either on the property which is being made subject to the
mortgage loan seller's lien or any mortgage on any other property for which
the applicant is listed as borrower.
CREDIT GRADE "A3." Under the "A3" risk sub-category, in addition to the
characteristics described under the "A" risk category above, no late
payments are permitted during the previous twelve months on an existing
mortgage loan on the property which is being made subject to the mortgage
loan seller's lien.
CREDIT GRADE "A4." Under the "A4" risk sub-category, in addition to the
characteristics described under the "A" risk category above, a maximum of
one 30-day late payment and no 60-day late payments during the previous
twelve months are permitted on an existing mortgage loan, on the property
which is being made subject to the mortgage loan seller's lien or any
mortgage on any other property for which the applicant is listed as
mortgagor.
CREDIT GRADE "A5." Under the "A5" risk sub-category, in addition to the
characteristics described under the "A" risk category above, a maximum of
two 30-day late payments and no 60-day late payments during the previous
twelve months are permitted on an existing mortgage loan, on the property
which is being made subject to the mortgage loan seller's lien or any
mortgage on any other property for which the applicant is listed as
mortgagor.
CREDIT GRADE: "B". Under the "B" risk category, the applicant must have
generally repaid installment or revolving debt according to its terms and have
demonstrated steady employment over the last two years. Certain non-consumer
credit, collections or judgments may be disregarded on a case-by-case basis. Up
to four minor derogatory items that are late 90 days or more are permitted on a
case-by-case basis as to non-mortgage credit when the majority of the consumer
credit is deemed good. Any and all payments 60 days or more late within the past
12 months may not represent more than 35% of the credit reported during that
period. No bankruptcy filings may have occurred during the preceding two years
and no discharge or notice of default filings may have occurred during the
preceding three years. The mortgaged property must be in at least average
condition. A maximum loan-to-value ratio of 85% is permitted for owner occupied
purchase money and/or refinance mortgage loans on single family and condominium
properties, and a maximum loan-to-value ratio of 80% is permitted for non-owner
occupied purchase money and/or refinance mortgage loans on single family and
condominium properties, and a maximum loan-to-value ratio of 70% is permitted on
a non-owner occupied mortgaged property consisting of two- to four-units or
second homes. Generally, the debt
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service-to-income ratio must be 50% or less but this may be increased to 55%
based on the mortgagor's net disposable income and/or loan-to-value ratio.
CREDIT GRADE "B1." Under the "B1" risk sub-category, in addition to the
characteristics described under the "B" risk category described above, no
late payments are permitted during the previous twelve months on an
existing mortgage loan, on the property which is being made subject to the
mortgage loan seller's lien or any mortgage on any other property for which
the applicant is listed as mortgagor.
CREDIT GRADE "B2." Under the "B2" risk sub-category, in addition to the
characteristics described under the "B" risk category described above, a
maximum of one 30-day late payment and no 60-day late payments are
permitted during the previous twelve months on an existing mortgage loan,
on the property which is being made subject to the mortgage loan seller's
lien or any mortgage on any other property for which the applicant is
listed as mortgagor.
CREDIT GRADE "B3." Under the "B3" risk sub-category, in addition to the
characteristics described under the "B" risk category described above, a
maximum of two 30-day late payments and no 60-day late payments are
permitted during the previous twelve months on an existing mortgage loan,
on the property which is being made subject to the mortgage loan seller's
lien or any mortgage on any other property for which the applicant is
listed as mortgagor.
CREDIT GRADE "B4." Under the "B4" risk sub-category, in addition to the
characteristics described under the "B" risk category described above, a
maximum of three 30-day late payments and generally no 60-day late payments
during the previous twelve months are permitted on an existing mortgage
loan, on the property which is being made subject to the mortgage loan
seller's lien or any mortgage on any other property for which the applicant
is listed as mortgagor.
CREDIT GRADE: "B-". Under the "B-" risk category, the applicant must have
generally repaid installment or revolving debt according to its terms and have
demonstrated steady employment over the last two years. No payment delinquent
more than 30 days at the time of application is permitted on an existing
mortgage loan. Certain non-consumer credit, collections or judgments may be
disregarded on a case-by-case basis. Payments 60 days or more late within the
last 12 months may not represent more than 50% of the credit items reported
during that period. No bankruptcy filings may have occurred during the preceding
eighteen months and no discharge or notice of default filings may have occurred
during the preceding two years. The mortgaged property must be in at least
average condition. A maximum loan-to-value ratio of 80% is permitted for owner
occupied purchase money and/or refinance mortgage loans on single family and
condominium properties, and a maximum loan-to-value ratio of 75% is permitted on
an owner occupied mortgaged property consisting of two-to-four units or second
homes. A maximum loan-to-value ratio of 75% is permitted for non-owner occupied
purchase money and/or refinance mortgage loans on single family and condominium
properties, and a maximum loan-to-value ratio of 65% is permitted on a non-owner
occupied mortgaged property consisting
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of two-to-four units or second homes. Generally, the debt service-to-income
ratio must not exceed 55%.
CREDIT GRADE "B-1." Under the "B-1" risk sub-category, in addition to
the characteristics described under the "B-" risk category described above,
no late payments are permitted during the previous twelve months on an
existing mortgage loan, on the property which is being made subject to the
mortgage loan seller's lien or any mortgage on any other property for which
the applicant is listed as mortgagor.
CREDIT GRADE "B-2." Under the "B-2" risk sub-category, in addition to
the characteristics described under the "B-" risk category described above,
a maximum of one 30-day late payment and no 60-day late payments are
permitted during the previous twelve months on an existing mortgage loan,
on the property which is being made subject to the mortgage loan seller's
lien or any mortgage on any other property for which the applicant is
listed as mortgagor.
CREDIT GRADE "B-3." Under the "B-3" risk sub-category, in addition to
the characteristics described under the "B-" risk category described above,
a maximum of two 30-day late payments and no 60-day late payments are
permitted during the previous twelve months on an existing mortgage loan,
on the property which is being made subject to the mortgage loan seller's
lien or any mortgage on any other property for which the applicant is
listed as mortgagor.
CREDIT GRADE "B-4." Under the "B-4" risk sub-category, in addition to
the characteristics described under the "B-" risk category described above,
a maximum of three 30-day late payments and generally no 60-day late
payments during the previous twelve months ate permitted on an existing
mortgage loan, on the property which is being made subject to the mortgage
loan seller's lien or any mortgage on any other property for which the
applicant is listed as mortgagor.
CREDIT GRADE "B-5." Under the "B-5" risk sub-category, in addition to
the characteristics described under the "B-" risk category described above,
a maximum of one 60-day late payment during the previous twelve months are
permitted on an existing mortgage loan, on the property which is being made
subject to the mortgage loan seller's lien or any mortgage on any other
property for which the applicant is listed as mortgagor.
CREDIT GRADE: "C". Under the "C" risk category, the applicant may have
experienced significant credit problems in the past. A maximum of two 60-day
late payments and one 90-day late payment, or three 60-day late payments and no
90-day late payments, within the last 12 months is permitted on an existing
mortgage loan. An existing mortgage loan is not required to be current at the
time the application is submitted. Consumer credit derogatory items will be
considered on a case-by-case basis. No bankruptcy, discharge or notice of
default filings may have occurred during the preceding twelve months. The
mortgaged property must be in at least average condition. A maximum
loan-to-value ratio of 75% is permitted for owner occupied purchase money and/or
refinance mortgage loans on single family and condominium properties, and a
maximum loan-to-value ratio of 70% is permitted on an owner occupied mortgaged
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property consisting of two-to-four units or second homes. A maximum
loan-to-value ratio of 70% is permitted for non-owner occupied purchase money
and/or refinance mortgage loans on single family and condominium properties, and
a maximum loan-to-value ratio of 60% is permitted on a non-owner occupied
mortgaged property consisting of two-to-four units or second homes. Generally,
the debt service-to-income ratio must not exceed 55%; however, a debt
service-to-income ratio of 55% to 60% will be considered on a case-by-case
basis.
CREDIT GRADE:"D". Under the "D" risk category, the applicant may have
experienced significant credit problems in the past. The applicant may be in
bankruptcy or have received a notice of default or foreclosure, and in any such
case must provide a reasonable explanation as to why the problem no longer
exists. The mortgaged property must be in at least average condition. A maximum
loan-to-value ratio of 65% is permitted for owner occupied purchase money and/or
refinance mortgage loans on single family and condominium properties, and a
maximum loan-to-value ratio of 60% is permitted on an owner occupied mortgaged
property consisting of two-to-four units or second homes. A maximum
loan-to-value ratio of 65% is permitted for non-owner occupied purchase money
and/or refinance mortgage loans on single family and condominium properties, and
a maximum loan-to-value ratio of 50% is permitted on a non-owner occupied
mortgaged property consisting of two-to-four units or second homes. Generally,
the debt service-to-income ratio must not exceed 55%; however, a debt
service-to-income ratio of 55% to 60% will be considered on a case-by-case
basis.
The mortgage loan seller will make representations and warranties as of the
closing date with respect to the mortgage loans, and will be obligated to
replace, cure or repurchase any such mortgage loan in respect of which a
material breach of the representations and warranties it has made has occurred
(other than those breaches which have been cured). For a discussion of the
representations and warranties made and the repurchase obligation, see "The
Depositor's Mortgage Loan Purchase Program--Representations by or on behalf of
Mortgage Loan Sellers; Remedies for Breach of Representation" in the Prospectus.
ADDITIONAL INFORMATION CONCERNING THE MORTGAGE LOANS
The description in this prospectus supplement of the mortgage pool and the
mortgaged properties is based upon the mortgage pool as constituted as of the
close of business on the cut- off date, as adjusted for the scheduled principal
payments due on or before that date. Prior to the issuance of the notes,
mortgage loans may be removed from the mortgage pool as a result of incomplete
documentation or otherwise if the depositor deems the removal necessary or
desirable, and may be prepaid at any time. A limited number of other mortgage
loans may be included in the mortgage pool prior to the issuance of the notes
unless including these mortgage loans would materially alter the characteristics
of the mortgage pool. The depositor believes that the information set forth
throughout this prospectus supplement will be representative of the
characteristics of the mortgage pool as it will be constituted at the time the
notes are issued, although the range of mortgage rates and maturities and other
characteristics of the mortgage loans may vary.
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YIELD ON THE NOTES
GENERAL PREPAYMENT CONSIDERATIONS
The rate of principal payments on the notes, the aggregate amount of
payments on the notes and the yield to maturity of the notes will be related to
the rate and timing of payments of principal on the mortgage loans. The rate of
principal payments on the mortgage loans will in turn be affected by the
amortization schedules of the mortgage loans and by the rate of principal
prepayments on the mortgage loans, including for this purpose, payments
resulting from refinancings, liquidations of the mortgage loans due to defaults,
casualties, condemnations and repurchases, whether optional or required, by the
depositor, the seller or the majority holder of the equity certificates. The
mortgage loans may be prepaid by the mortgagors at any time; however, as
described under "The Mortgage Pool" in this prospectus supplement, with respect
to approximately _____% of the mortgage loans, by aggregate principal balance as
of the cut-off date, a prepayment may subject the related mortgagor to a
prepayment charge. In most cases, prepayment charge obligations expire by their
terms after a limited period specified in the related mortgage note. The
weighted average month of origination of the mortgage loans with prepayment
charges is ________ ____.
Prepayments, liquidations and repurchases of the mortgage loans will result
in payments in respect of principal to the holders of the class or classes of
notes then entitled to receive these payments that otherwise would be
distributed over the remaining terms of the mortgage loans. Since the rates of
payment of principal on the mortgage loans will depend on future events and a
variety of factors, no assurance can be given as to that rate or the rate of
principal prepayments. The extent to which the yield to maturity of any class of
notes may vary from the anticipated yield will depend upon the degree to which
the notes are purchased at a discount or premium and the degree to which the
timing of payments on the notes is sensitive to prepayments on the mortgage
loans. Further, an investor should consider, in the case of any note purchased
at a discount, the risk that a slower than anticipated rate of principal
payments on the mortgage loans could result in an actual yield to that investor
that is lower than the anticipated yield. In the case of any note purchased at a
premium, the risk that a faster than anticipated rate of principal payments
could result in an actual yield to that investor that is lower than the
anticipated yield. In most cases, the earlier a prepayment of principal is made
on the mortgage loans, the greater the effect on the yield to maturity of the
notes. As a result, the effect on an investor's yield of principal payments
occurring at a rate higher, or lower, than the rate anticipated by the investor
during the period immediately following the issuance of the notes would not be
fully offset by a subsequent like reduction, or increase, in the rate of
principal payments. See "Maturity and Prepayment Considerations" in the
prospectus.
It is highly unlikely that the mortgage loans will prepay at any constant
rate until maturity or that all of the mortgage loans will prepay at the same
rate. Moreover, the timing of prepayments on the mortgage loans may
significantly affect the actual yield to maturity on the notes, even if the
average rate of principal payments experienced over time is consistent with an
investor's expectation. The rate of payments, including prepayments, on pools of
mortgage loans is influenced by a variety of economic, geographic, social and
other factors. If prevailing mortgage
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rates fall significantly below the mortgage rates on the mortgage loans, the
rate of prepayment and refinancing would be expected to increase. Conversely, if
prevailing mortgage rates rise significantly above the mortgage rates on the
mortgage loans, the rate of prepayment on the mortgage loans would be expected
to decrease. Other factors affecting prepayment of mortgage loans include
changes in mortgagors' housing needs, job transfers, unemployment, mortgagors'
net equity in the mortgaged properties and servicing decisions. In addition, in
the case of the adjustable rate mortgage loans in the mortgage pool, the
existence of the applicable periodic rate cap, maximum mortgage rate and minimum
mortgage rate may affect the likelihood of prepayments resulting from
refinancings. There can be no certainty as to the rate of prepayments on the
mortgage loans during any period or over the life of the notes. See "Yield
Considerations" and "Maturity and Prepayment Considerations" in the prospectus.
Because principal payments are paid to senior classes of notes before other
classes, holders of classes of notes having a later priority of payment bear a
greater risk of losses, because these notes will represent an increasing
percentage of the trust estate during the period prior to the commencement of
payments of principal on these notes, than holders of classes having earlier
priorities for payment of principal. As described in this prospectus supplement
under "Description of the Notes--Principal Payments on the Notes," prior to the
Stepdown Date, all principal payments on the mortgage loans will be allocated to
the Class A Notes. After that date, subject to delinquency triggers described in
this prospectus supplement, all principal payments on the mortgage loans will be
allocated among all classes of the notes then outstanding as described under
"Description of the Notes--Principal Payments on the Notes" in this prospectus
supplement.
Defaults on mortgage loans are expected to occur with greater frequency in
their early years. In addition, default rates may be higher for mortgage loans
used to refinance an existing mortgage loan. In the event of a mortgagor's
default on a mortgage loan, there can be no assurance that recourse will be
available beyond the specific mortgaged property pledged as security for
repayment. See "The Mortgage Pool--Underwriting Standards of ___________ and
Representations Concerning the Mortgage Loans" in this prospectus supplement.
SPECIAL YIELD CONSIDERATIONS
The note interest rate for each class of notes adjusts monthly based on
one-month LIBOR as described under "Description of the Notes--Calculation of
One-Month LIBOR" in this prospectus supplement, subject to the maximum Note
Interest Rate and the Available Interest Rate. However, the mortgage rates on
the fixed rate mortgage loans are fixed and will not vary with any index. The
mortgage rates on the adjustable rate mortgage loans adjust semi-annually, after
an initial fixed rate period in the case of delayed first adjustment mortgage
loans, based on the index applicable to the adjustable rate mortgage loans,
which may not move in tandem with one-month LIBOR, subject to periodic and
lifetime limitations. Investors should note that approximately _____% of the
mortgage loans are ____ year delayed first adjustment mortgage loans,
approximately ____% of the mortgage loans are _____ year delayed first
adjustment loans and approximately _____% of the mortgage loans are fixed rate
mortgage loans, in each case by aggregate principal balance as of the cut-off
date. The weighted average month of origination of the ____ year delayed first
adjustment mortgage loans is _____ ____, and the weighted average
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month of origination of the ______ year delayed first adjustment mortgage loans
is ______ ____.
Because of the application of the maximum Note Interest Rate and the
Available Interest Rate, increases in the Note Interest Rate on the notes may be
limited for extended periods or indefinitely in a rising interest rate
environment. The interest due on the mortgage loans during any due period may
not equal the amount of interest that would accrue at one-month LIBOR plus the
applicable spread on the notes during the related Interest Accrual Period. In
addition, the index applicable to the adjustable rate mortgage loans and
one-month LIBOR may respond differently to economic and market factors. Thus, it
is possible, for example, that if both one- month LIBOR and the index applicable
to the adjustable rate mortgage loans rise during the same period, one-month
LIBOR may rise more rapidly than the index applicable to the adjustable rate
mortgage loans or may rise higher than the index applicable to the adjustable
rate mortgage loans. This could potentially result in Interest Carry Forward
Amounts with respect to one or more classes of notes. As a result of the
foregoing as well as other factors such as the prepayment behavior of the
mortgage pool, relative increases in one-month LIBOR or relative decreases in
the weighted average of the mortgage rates on the mortgage loans could:
o cause the Current Interest Payment Amount generated by the mortgage
pool to be less than the aggregate of the Interest Payment Amounts that
would otherwise be payable on the notes, leading one or more classes of
notes to incur Interest Carry Forward Amounts, or
o could cause the maximum Note Interest Rate to apply to one or more
classes of notes.
Because the mortgage rate for each adjustable rate mortgage loan will be
adjusted, subject to periodic and lifetime limitations, to equal the sum of the
index applicable to the adjustable rate mortgage loans and the related gross
margin, the mortgage rates could be higher than prevailing market interest
rates, possibly resulting in an increase in the rate of prepayments on the
adjustable rate mortgage loans after their adjustments.
As described under "Description of the Notes--Allocation of Losses;
Subordination," amounts otherwise distributable to holders of the subordinate
notes may be made available to protect the holders of the Class A Notes against
interruptions in payments due to mortgagor delinquencies, to the extent not
covered by P&I Advances. These delinquencies may affect the yield to investors
on classes of subordinate notes and, even if subsequently cured, will affect the
timing of the receipt of payments by the holders of classes of subordinate
notes. In addition, a larger than expected rate of delinquencies or losses will
affect the rate of principal payments on each class of subordinate notes. See
"Description of the Notes--Principal Payments on the Notes" in this prospectus
supplement.
WEIGHTED AVERAGE LIVES
Weighted average life refers to the amount of time that will elapse from
the date of issuance of a security until each dollar of principal of that
security will be repaid to the investor. The weighted average life of each class
of notes will be influenced by the rate at which principal on the mortgage loans
is paid, which may be in the form of scheduled payments or prepayments,
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<PAGE>
including repurchases and prepayments of principal by the borrower as well as
amounts received by virtue of condemnation, insurance or foreclosure with
respect to the mortgage loans, and the timing of these payments.
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The model used in this prospectus supplement
assumes a prepayment rate for the mortgage loans of __% CPR. CPR assumes that
the outstanding principal balance of a pool of mortgage loans prepays at a
specified constant annual rate or CPR. In generating monthly cash flows, this
rate is converted to an equivalent constant monthly rate. To assume __% CPR or
any other CPR percentage is to assume that the stated percentage of the
outstanding principal balance of the pool is prepaid over the course of a year.
No representation is made that the mortgage loans will prepay at __% CPR or any
other rate.
The tables following the next paragraph indicate the percentage of the
initial Note Balance of the notes that would be outstanding after each of the
dates shown at various percentages of the prepayment assumption and the
corresponding weighted average lives of the notes. The tables are based on the
following assumptions:
o the mortgage pool consists of __ mortgage loans with the
characteristics set forth in the table in this prospectus supplement
entitled "Assumed Mortgage Loan Characteristics,"
o payments on the notes are received, in cash, on the 25th day of each
month, commencing in _______ ____,
o the mortgage loans prepay at the percentages of the prepayment
assumption indicated,
o no defaults or delinquencies occur in the payment by mortgagors of
principal and interest on the mortgage loans,
o none of the majority holder of the equity certificates, the seller,
the master servicer, the servicers or any other person purchases from
the trust estate any mortgage loan or redeems the notes under any
obligation or option under the indenture, the servicing agreements or
any other agreement except as otherwise indicated in the second
sentence following the table entitled "Percent of initial Note Balance
outstanding at the specified percentages of the prepayment assumption,"
and no partial early redemption of the notes occurs with respect to the
mortgage loans,
o scheduled monthly payments on the mortgage loans are received on the
first day of each month commencing in _______ ____, and are computed
prior to giving effect to any prepayments received in the prior month,
o prepayments representing payment in full of individual mortgage loans
are received on the last day of each month commencing in ________ ____,
and include 30 days' interest on the mortgage loan,
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o the scheduled monthly payment for each mortgage loan is calculated
based on its principal balance, mortgage rate, original term to stated
maturity and remaining term to stated maturity so that the mortgage
loan will amortize in amounts sufficient to repay the remaining
principal balance of the mortgage loan by its remaining term to stated
maturity,
o the notes are purchased on ________ __, ____,
o the index applicable to the adjustable rate mortgage loans remains
constant at _____% per annum and the mortgage rate on each adjustable
rate mortgage loan is adjusted on the next adjustment date, and on
subsequent adjustment dates, if necessary, to equal the index
applicable to the adjustable rate mortgage loans plus the applicable
gross margin, subject to the applicable periodic rate cap,
o one-month LIBOR remains constant at _____% per annum,
o the monthly payment on each adjustable rate mortgage loan is adjusted
on the due date immediately following the next adjustment date, and on
subsequent adjustment dates, if necessary, to equal a fully amortizing
monthly payment and
o the master servicing fee rate is as set forth in the table entitled
"Assumed Mortgage Loan Characteristics" and the master servicing fee is
payable monthly, the servicing fee rate for each servicer is equal to
____% per annum and the servicing fees are payable monthly, and the
indenture trustee fee rate is equal to ______% per annum and the
indenture trustee fee is paid monthly.
<TABLE>
<CAPTION>
ASSUMED MORTGAGE LOAN CHARACTERISTICS
REMAINING
PRINCIPAL ORIGINAL TERM MAXIMUM MINIMUM PERIODI MASTER
BALANCE TERM TO TO NEXT MORTGAGE MORTGAGE RATE SERVICING PREPAY
AS OF THE MORTGAGE MATURITY MATURITY ADJUSTMENT GROSS RATE RATE CAP FEE RATE PENALTY
CUT-OFF DATE RATE(%) (MONTHS) (MONTHS) DATE MARGIN(%) (%) (%) (%) (%) (YES/NO)
------------ ------- -------- -------- ---- --------- --- --- --- --- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
There will be discrepancies between the characteristics of the actual
mortgage loans and the characteristics assumed in preparing the tables in this
prospectus supplement. Any discrepancy of this kind may have an effect upon the
percentages of the initial Note Balance outstanding and the weighted average
lives of the notes set forth in the tables in this prospectus supplement. In
addition, since the actual mortgage loans included in the mortgage pool will
have
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<PAGE>
characteristics that differ from those assumed in preparing the tables set forth
immediately following the next paragraph and since it is not likely the level of
the index applicable to the adjustable rate mortgage loans or one-month LIBOR
will remain constant as assumed, the notes may mature earlier or later than
indicated by the tables. In addition, as described under "Description of the
Notes--Principal Payments on the Notes" in this prospectus supplement, the
occurrence of the Stepdown Date or a Trigger Event will have the effect of
accelerating or decelerating the amortization of the notes, affecting the
weighted average lives of the notes.
Based on the foregoing assumptions, the tables following this paragraph
indicate the weighted average lives of the notes and set forth the percentages
of the initial Note Balance of the notes that would be outstanding after each of
the payment dates shown, at various percentages of the prepayment assumption.
Neither the prepayment model used in this prospectus supplement nor any other
prepayment model or assumption purports to be an historical description of
prepayment experience or a prediction of the anticipated rate of prepayment of
any pool of mortgage loans, including the mortgage loans included in the
mortgage pool. Variations in the prepayment experience and the balance of the
mortgage loans that prepay may increase or decrease the percentages of initial
Note Balances and weighted average lives shown in the following tables. These
variations may occur even if the average prepayment experience of all the
mortgage loans equals any of the specified percentages of the prepayment
assumption.
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<PAGE>
<TABLE>
<CAPTION>
PERCENT OF INITIAL NOTE BALANCE OUTSTANDING AT THE
SPECIFIED PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS A NOTES CLASS M-1 NOTES
---------------------------------- ----------------------------------
PAYMENT DATE 0% 15% 28% 35% 45% 0% 15% 28% 35% 45%
------------ -- --- --- --- --- -- --- --- --- ---
<S> <C> <C>
Closing Date..........
......................
......................
......................
......................
Weighted Average
Life in Years.........
Weighted Average
Life in Years.........
</TABLE>
<TABLE>
<CAPTION>
CLASS M-2 NOTES CLASS M-3 NOTES
------------------------------------- ------------------------------------
PAYMENT DATE 0% 15% 28% 35% 45% 0% 15% 28% 35% 45%
------------ -- --- --- --- --- -- --- --- --- ---
<S> <C> <C>
Closing Date..........
......................
......................
......................
......................
Weighted Average
Life in Years.........
Weighted Average
Life in Years.........
</TABLE>
The weighted average life of a note is determined by (a) multiplying the
amount of each payment of principal by the number of years from the date of
issuance of the note to the related payment date, (b) adding the results and (c)
dividing the sum by the initial Note Balance of the notes. The weighted average
lives set forth in the bottom row of the table are calculated according to the
previous sentence but assumes the majority holder of the equity certificates
exercises its option to redeem the notes when the aggregate Note Balance has
been reduced to less than 20% of the initial aggregate Note Balance. See "The
Indenture and Owner Trust Agreement--Redemption" in this prospectus supplement.
S-41
<PAGE>
There is no assurance that prepayments of the mortgage loans will conform
to any of the levels of the prepayment assumption indicated in the immediately
preceding tables, or to any other level, or that the actual weighted average
lives of the notes will conform to any of the weighted average lives set forth
in the immediately preceding tables. Furthermore, the information contained in
the tables with respect to the weighted average lives of the notes is not
necessarily indicative of the weighted average lives that might be calculated or
projected under different or varying prepayment or index level assumptions.
The characteristics of the mortgage loans will differ from those assumed in
preparing the immediately preceding tables. In addition, it is unlikely that any
mortgage loan will prepay at any constant percentage until maturity, that all of
the mortgage loans will prepay at the same rate or that the level of the index
applicable to the adjustable rate mortgage loans will remain constant or at any
level for any period of time. The timing of changes in the rate of prepayments
may significantly affect the actual yield to maturity to investors, even if the
average rate of principal prepayments and the level of the index applicable to
the adjustable rate mortgage loans is consistent with the expectations of
investors.
YIELD SENSITIVITY OF THE SUBORDINATE NOTES
If on any payment date, the Overcollateralized Amount and the Note Balances
of the Class M-3 Notes and the Class M-2 Notes have been reduced to zero, the
yield to maturity on the Class M-1 Notes will become extremely sensitive to
losses on the mortgage loans and the timing of losses, that are covered by
subordination, because the entire amount of any Realized Losses, to the extent
not covered by Net Monthly Excess Cashflow, will be allocated to the Class M-1
Notes. If on any payment date, the Overcollateralized Amount and the Note
Balance of the Class M-3 Notes have been reduced to zero, the yield to maturity
on the Class M-2 Notes will become extremely sensitive to losses on the mortgage
loans and the timing of losses that are covered by subordination, because the
entire amount of any Realized Losses, to the extent not covered by Net Monthly
Excess Cashflow, will be allocated to the Class M-2 Notes. If on any payment
date, the Overcollateralized Amount has been reduced to zero, the yield to
maturity on the Class M-3 Notes will become extremely sensitive to losses on the
mortgage loans and the timing of losses that are covered by subordination,
because the entire amount of any Realized Losses, to the extent not covered by
Net Monthly Excess Cashflow, will be allocated to the Class M-3 Notes. Once
Realized Losses have been allocated to the subordinate notes, Realized Losses
will not be reinstated thereafter. However, Allocated Realized Loss Amounts may
be paid to the holders of the subordinate notes, after distributions to the
holders of the Class A Notes and subordinate notes with lower numerical class
designations, but before the equity certificates are entitled to any
distributions. See "Description of the Notes--Overcollateralization Provisions"
in this prospectus supplement.
Investors in the subordinate notes should fully consider the risk that
Realized Losses on the mortgage loans could result in the failure of these
investors to fully recover their investments. For additional considerations
relating to the yield on the subordinate notes, see "Yield Considerations" and
"Maturity and Prepayment Considerations" in the prospectus.
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<PAGE>
DESCRIPTION OF THE NOTES
GENERAL DESCRIPTION OF THE NOTES
[__] Trust Series ____-__, [__] Asset-Backed Floating Rate Notes, Series
____-__ will consist of ____ classes of notes, designated as:
o the Class A Notes and
o the Class M-1 Notes, the Class M-2 Notes and the Class M-3 Notes
which will collectively be referred to in this prospectus supplement as the
subordinate notes.
The notes will be issued by [__] Trust Series ____-__, the issuer,
under the terms of an indenture, dated as of ________ __, ____, between the
issuer and the indenture trustee. Only the notes are offered by this prospectus
supplement. Trust certificates, Series ____-__, or the equity certificates, will
be issued under the terms of an owner trust agreement, dated as of ________ __,
____, between the depositor and the owner trustee, and will represent the
beneficial ownership interest in the issuer. The equity certificates are not
being offered by this prospectus supplement and will be delivered on the closing
date to the ____________, as partial consideration for the conveyance of the
mortgage loans by ____________ to the depositor.
Distributions on the offered notes will be made on the 25th day of each
month, or, if that day is not a business day, on the next succeeding business
day, beginning in _______ ____.
The notes represent non-recourse debt obligations of the issuer secured by
a trust estate, which consists primarily of a segregated pool of conventional,
one- to four-family, adjustable- rate and fixed-rate first lien mortgage loans
having an aggregate principal balance as of the cut- off date of approximately
$___________, subject to a permitted variance as described in this prospectus
supplement under "The Mortgage Pool." Proceeds of the trust estate will be the
sole source of payments on the notes. The issuer is not expected to have any
significant assets other than the trust estate pledged as collateral to secure
the notes.
The Class A Notes, the Class M-1 Notes, the Class M-2 Notes and the Class
M-3 Notes will have an aggregate initial note balance of approximately
$___________, approximately $_________, approximately $__________ and
approximately $__________, respectively, in each case subject to a permitted
variance of plus or minus [5]%. The Note Interest Rates on the notes are
adjustable, subject to the maximum Note Interest Rate and the Available Interest
Rate, and will be calculated for each payment date as described under "--Note
Interest Rate" in this prospectus supplement. The final maturity date of the
notes is the payment date occurring in
------- ----.
The notes will be issued, maintained and transferred on the book-entry
records of DTC and its participants in minimum denominations of $[10,000] and
integral multiples of $[1.00] in excess of the minimum denominations.
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<PAGE>
The notes will initially be represented by one or more global notes
registered in the name of the nominee of DTC as clearing agency, except as
provided under "Definitive Notes" in this prospectus supplement. The depositor
has been informed by DTC that DTC's nominee will be CEDE & Co. No person
acquiring an interest in any class of the notes will be entitled to receive a
note representing that person's interest, except as set forth in this prospectus
supplement under "Definitive Notes". Unless and until definitive notes are
issued under the limited circumstances described in this prospectus supplement,
all references to actions by noteholders with respect to the notes shall refer
to actions taken by DTC upon instructions from its participants, and all
references in this prospectus supplement to payments, notices, reports and
statements to noteholders with respect to the notes shall refer to payments,
notices, reports and statements to DTC or CEDE & Co., as the registered holder
of the notes, for payment to note owners in accordance with DTC procedures. See
"--Registration of the Notes" and "--Definitive Notes" in this prospectus
supplement.
Any definitive notes will be transferable and exchangeable at the offices
of the indenture trustee. No service charge will be imposed for any registration
of transfer or exchange, but the indenture trustee may require payment of a sum
sufficient to cover any tax or other governmental charge imposed in connection
with the registration of transfer or exchange.
All payments to holders of the notes, other than the final payment on any
class of notes, will be made by or on behalf of the indenture trustee to the
persons in whose names the notes are registered at the close of business on each
record date. The record date for each payment date is:
o with respect to the notes, other than any definitive notes, the close
of business on the business day immediately preceding the payment date or
o with respect to the definitive notes will be the close of business on
the last business day of the month preceding the month in which the payment date
occurs.
Payments will be made either by check mailed to the address of each
noteholder as it appears in the note register or upon written request to the
indenture trustee at least five business days prior to the relevant record date
by any holder of notes having an aggregate initial Note Balance that is in
excess of the lesser of:
o $5,000,000 or
o two-thirds of the initial aggregate Note Balance of that class of
notes, by wire transfer in immediately available funds to the account
of the noteholder specified in the request.
The final payment on any class of notes will be made in like manner, but
only upon presentment and surrender of the notes at the corporate trust office
of the indenture trustee or other location specified in the notice to
noteholders of the final payment.
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<PAGE>
REGISTRATION OF THE NOTES
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 New York Uniform Commercial Code, and a
clearing agency registered under the provisions of Section 17A of the Securities
Exchange Act of 1934, as amended. DTC was created to hold securities for its
participating organizations and to facilitate the clearance and settlement of
securities transactions between its participants through electronic book
entries, thereby eliminating the need for physical movement of notes.
Participants include securities brokers and dealers, including the underwriter
of the notes offered by this prospectus supplement, banks, trust companies and
clearing corporations. Indirect access to the DTC system is also available to
others such as banks, brokers, dealers, and trust companies that clear through
or maintain a custodial relationship with a participant, either directly or
indirectly.
Note owners that are not participants or indirect participants but desire
to purchase, sell or otherwise transfer ownership of, or other interests in, the
book-entry notes may do so only through participants and indirect participants.
In addition, note owners will receive all distributions of principal of and
interest on the book-entry notes from the indenture trustee through DTC and DTC
participants. The indenture trustee will forward payments to DTC in same day
funds and DTC will forward these payments to participants in next day funds
settled through the New York Clearing House. Each participant will be
responsible for disbursing these payments to indirect participants or to note
owners. Unless and until definitive notes are issued, it is anticipated that the
only noteholder of the book-entry notes will be CEDE & Co., as nominee of DTC.
Note owners will not be recognized by the indenture trustee as noteholders, as
the term is used in the indenture and note owners will be permitted to exercise
the rights of noteholders only indirectly through DTC and its participants.
Under the rules, regulations and procedures creating and affecting DTC and
its operations, DTC is required to make book-entry transfers of the book-entry
notes among participants and to receive and transmit distributions of principal
of, and interest on, the book-entry notes. Participants and indirect
participants with which note owners have accounts with respect to the book-entry
notes similarly are required to make book-entry transfers and receive and
transmit payments on behalf of their respective note owners. Accordingly,
although note owners will not possess definitive notes, the rules, regulations
and procedures creating and affecting DTC and its operations provide a mechanism
by which note owners through their participants and indirect participants will
receive payments and will be able to transfer their interest.
Because DTC can only act on behalf of participants, who in turn act on
behalf of indirect participants and on behalf of banks, the ability of a note
owner to pledge book-entry notes to persons or entities that do not participate
in the DTC system, or to otherwise act with respect to these notes, may be
limited due to the absence of physical notes for the book-entry notes. In
addition, under a book-entry format, note owners may experience delays in their
receipt of payments since distributions will be made by the indenture trustee to
CEDE & Co., as nominee for DTC.
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<PAGE>
Under the rules, regulations and procedures creating and affecting DTC and
its operations , DTC will take action permitted to be taken by a noteholder
under the indenture only at the direction of one or more participants to whose
DTC account the book-entry notes are credited. Additionally, under the rules,
regulations and procedures creating and affecting DTC and its operations, DTC
will take actions with respect to specified voting rights only at the direction
of and on behalf of participants whose holdings of book-entry notes evidence
these specified voting rights. DTC may take conflicting actions with respect to
voting rights, to the extent that participants whose holdings of book-entry
notes evidencing these voting rights, authorize divergent action.
However, DTC's ability to perform properly its services is also dependent
upon other parties, including but not limited to, issuers and their agents, as
well as third party vendors from whom DTC licenses software and hardware, and
third party vendors on which DTC relies for information or the provision of
services, including telecommunication and electrical utility service providers,
among others.
According to DTC, the foregoing information with respect to DTC has been
provided to its participants and other members of the financial community for
informational purposes only and is not intended to serve as a representation,
warranty or contract modification of any kind.
The issuer, the originators, the depositor, the master servicer, the
seller, the [SPE], the owner trustee, the indenture trustee and their respective
affiliates will have no 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 beneficial ownership
interests in the notes held by CEDE & Co., as nominee for DTC, or for
maintaining, supervising or reviewing any records relating to beneficial
ownership interests.
DEFINITIVE NOTES
Definitive notes will be issued to note owners or their nominees, rather
than to DTC or its nominee, only if:
o the depositor advises the indenture trustee in writing that DTC is no
longer willing or able to discharge properly its responsibilities as
clearing agency with respect to the notes and the depositor is unable
to locate a qualified successor,
o the depositor, at its option, advises the indenture trustee in
writing that it elects to terminate the book-entry system through DTC,
or
o after the occurrence of an event of default, note owners representing
in the aggregate not less than 51% of the voting rights of the notes
advise the indenture trustee and DTC through participants, in writing,
that the continuation of a book-entry system through DTC, or a
successor to DTC, is no longer in the note owners' best interest.
Upon the occurrence of any event described in the immediately preceding
paragraph, the indenture trustee is required to notify all note owners through
participants of the availability of
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<PAGE>
definitive notes. Upon surrender by DTC of the definitive notes representing the
notes and receipt of instructions for re-registration, the indenture trustee
will reissue the notes as definitive notes issued in the respective principal
amounts owned by individual note owners, and thereafter the indenture trustee
will recognize the holders of the definitive notes as noteholders under the
indenture. The definitive notes will be issued in minimum denominations of
$10,000, except that any beneficial ownership represented by a note in an amount
less than $10,000 immediately prior to the issuance of a definitive note shall
be issued in a minimum denomination equal to the amount represented by that
note.
BOOK-ENTRY FACILITIES
Note owners may elect to hold their interests in the notes through DTC in
the United States or through Cedel or Euroclear in Europe, if they are
participants of these systems, or indirectly through organizations which are
participants in these systems. The notes of each class will be issued in one or
more notes which equal the aggregate Note Balance of the class and will
initially be registered in the name of Cede & Co., the nominee of DTC. Cedel and
Euroclear will hold omnibus positions on behalf of their participants through
customers' securities accounts in Cedel's and Euroclear's names on the books of
their respective depositories which in turn will hold these positions in
customers' securities accounts in the depositories' names on the books of DTC.
Citibank will act as depositary for Cedel and Chase will act as depositary for
Euroclear.
Because of time zone differences, credits of securities received in Cedel
or Euroclear as a result of a transaction with a participant will be made during
subsequent securities settlement processing and dated the business day following
the DTC settlement date. These credits or any transactions in these securities
settled during this processing will be reported to the relevant Euroclear
participants or Cedel participants on that business day. Cash received in Cedel
or Euroclear as a result of sales of securities by or through a Cedel
participant or Euroclear participant to a participant of DTC will be received
with value on the DTC settlement date but will be available in the relevant
Cedel or Euroclear cash account only as of the business day following settlement
in DTC.
Transfers between participants will occur in accordance with DTC rules.
Transfers between Cedel participants and Euroclear participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Cedel
participants or Euroclear participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by Citibank or Chase, as applicable; however, these cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in that system in accordance
with its rules and procedures and within its established deadlines based on
European time. The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to Citibank
or Chase, as applicable, to take action to effect final settlement on its behalf
by delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal
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<PAGE>
procedures for same day funds settlement applicable to DTC. Cedel participants
and Euroclear participants may not deliver instructions directly to the European
depositories.
Cedel is incorporated under the laws of Luxembourg as a professional
depository. Cedel holds securities for its participating organizations and
facilitates the clearance and settlement of securities transactions between
Cedel participants through electronic book-entry changes in accounts of Cedel
participants, eliminating the need for physical movement of notes. Transactions
may be settled in Cedel in any of 28 currencies, including United States
dollars. Cedel provides to its Cedel participants, among other things, services
for safekeeping, administration, clearance and settlement of internationally
traded securities and securities lending and borrowing. Cedel interfaces with
domestic markets in several countries. As a professional depository, Cedel is
subject to regulation by the Luxembourg Monetary Institute. Cedel participants
are recognized financial institutions around the world, including underwriters,
securities brokers and dealers, banks, trust companies, clearing corporations
and other organizations. Indirect access to Cedel is also available to others,
such as banks, brokers, dealers and trust companies that clear through or
maintain a custodial relationship with a Cedel participant, either directly or
indirectly.
Euroclear was created in 1968 to hold securities for participants of
Euroclear and to clear and settle transactions between Euroclear participants
through simultaneous electronic book-entry delivery against payment, eliminating
the need for physical movement of notes and any risk from lack of simultaneous
transfers of securities and cash. Transactions may now be settled in any of 32
currencies, including United States dollars. Euroclear includes various other
services, including securities lending and borrowing and interfaces with
domestic markets in several countries similar to the arrangements for
cross-market transfers with DTC described above. Euroclear is operated by the
Brussels, Belgium office of Morgan Guaranty Trust Company of New York, or
Morgan, under contract with Euroclear Clearance Systems S.C., a Belgian
cooperative corporation. All operations are conducted by Morgan, and all
Euroclear securities clearance accounts and Euroclear cash accounts are accounts
with Morgan, not Euroclear Clearance Systems, S.C.. Euroclear Clearance Systems,
S.C. establishes policy for Euroclear on behalf of Euroclear participants.
Euroclear participants include banks, including central banks, securities
brokers and dealers and other professional financial intermediaries. Indirect
access to Euroclear is also available to other firms that clear through or
maintain a custodial relationship with a Euroclear participant, either directly
or indirectly.
Morgan is the Belgian branch of a New York banking corporation which is a
member bank of the Federal Reserve System. It is regulated and examined by the
Board of Governors of the Federal Reserve System and the New York State Banking
Department, as well as the Belgian Banking Commission.
Securities clearance accounts and cash accounts with Morgan are governed by
the Terms and Conditions Governing Use of Euroclear and the related Operating
Procedures of the Euroclear System and applicable Belgian law. These terms and
conditions govern transfers of securities and cash within Euroclear, withdrawals
of securities and cash from Euroclear, and receipts of payments with respect to
securities in Euroclear. All securities in Euroclear are held on a fungible
basis without attribution of specific notes to specific securities clearance
accounts. Morgan acts
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<PAGE>
under these terms and conditions only on behalf of Euroclear participants, and
has no record of or relationship with persons holding through Euroclear
participants.
Payments with respect to notes held through Cedel or Euroclear will be
credited to the cash accounts of Cedel participants or Euroclear participants in
accordance with the relevant system's rules and procedures, to the extent
received by Citibank or Chase, as applicable. These payments will be subject to
tax reporting in accordance with relevant United States tax laws and
regulations.
Although DTC, Cedel and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of notes among participants of DTC, Cedel and
Euroclear, they are under no obligation to perform or continue to perform these
procedures and these procedures may be discontinued at any time. See Annex I to
this prospectus supplement.
GLOSSARY OF TERMS
The following terms are given the meanings shown below to help describe the
cash flows on the notes:
ALLOCATED REALIZED LOSS AMOUNT: The Allocated Loss Amount with respect to
any class of subordinate notes and any payment date is the sum of:
o any Realized Loss allocated to that class of subordinate notes on the
payment date and
o any Allocated Realized Loss Amount for that class remaining unpaid
from previous payment dates plus accrued interest thereon at the Note
Accrual Rate for that class.
AVAILABLE INTEREST RATE: The Available Interest Rate for any payment date
is a rate per annum equal to the fraction, expressed as a percentage, the
numerator of which is:
o the Current Interest Payment Amount for the payment date,
and the denominator of which is
o the aggregate Note Balance of the notes immediately prior to the
payment date multiplied by the actual number of days elapsed in the
related Interest Accrual Period and divided by 360.
AVAILABLE PAYMENT AMOUNT: The Available Payment Amount for any payment date
is equal to the sum, net of amounts reimbursable therefrom to the master
servicer, the servicers, the indenture trustee or the owner trustee, of:
o the aggregate amount of scheduled monthly payments on the mortgage
loans due on the related due date and received on or prior to the
related determination date, after deduction of the master servicing
fee, the servicing fees and the indenture trustee fee,
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o unscheduled payments in respect of the mortgage loans, including
prepayments, insurance proceeds, liquidation proceeds and proceeds from
repurchases of and substitutions for the mortgage loans occurring
during the preceding calendar month and
o all P&I Advances with respect to the mortgage loans received for the
payment date.
BANKRUPTCY LOSS: A Bankruptcy Loss is a Deficient Valuation or a Debt
Service Reduction.
CLASS A PRINCIPAL PAYMENT AMOUNT: The Class A Principal Payment Amount for
any payment date on or after the Stepdown Date and on which a Trigger Event is
not in effect, is an amount equal to the excess of:
o the Note Balance of the Class A Notes immediately prior to the
payment date OVER
o the lesser of:
o the product of _____% and the aggregate principal balance of
the mortgage loans as of the last day of the related due
period and
o the aggregate principal balance of the mortgage loans as of
the last day of the related due period minus $_________.
CLASS M-1 PRINCIPAL PAYMENT AMOUNT: The Class M-1 Principal Payment Amount
for any payment date on or after the Stepdown Date and on which a Trigger Event
is not in effect, is an amount equal to the excess of:
o the sum of:
o the Note Balance of the Class A Notes, after taking into
account the payment of the Class A Principal Payment Amount on
the payment date and
o the Note Balance of the Class M-1 Notes immediately prior to
the payment date OVER
o the lesser of:
o the product of _____% and the aggregate principal balance of
the mortgage loans as of the last day of the related due
period and
o the aggregate principal balance of the mortgage loans as of
the last day of the related due period minus $_________.
CLASS M-2 PRINCIPAL PAYMENT AMOUNT: The Class M-2 Principal Payment Amount
for any payment date on or after the Stepdown Date and on which a Trigger Event
is not in effect, is an amount equal to the excess of:
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o the sum of:
o the Note Balance of the Class A Notes, after taking into
account the payment of the Class A Principal Payment Amount on
the payment date,
o the Note Balance of the Class M-1 Notes, after taking into
account the payment of the Class M-1 Principal Payment Amount
on the payment date and
o the Note Balance of the Class M-2 Notes immediately prior to
the payment date OVER
o the lesser of:
o the product of _____% and the aggregate principal balance of
the mortgage loans as of the last day of the related due
period and
o the aggregate principal balance of the mortgage loans as of
the last day of the related due period minus $__________.
CLASS M-3 PRINCIPAL PAYMENT AMOUNT: The Class M-3 Principal Payment Amount
for any payment date on or after the Stepdown Date and on which a Trigger Event
is not in effect, is an amount equal to the excess of:
o the sum of:
o the Note Balance of the Class A Notes, after taking into
account the payment of the Class A Principal Payment Amount on
the payment date,
o the Note Balance of the Class M-1 Notes, after taking into
account the payment of the Class M-1 Principal Payment Amount
on the payment date,
o the Note Balance of the Class M-2 Notes, after taking into
account the payment of the Class M-2 Principal Payment Amount
on the payment date and (d) the Note Balance of the Class M-3
Notes immediately prior to the payment date OVER
o the lesser of:
o the product of _____% and the aggregate principal balance of
the mortgage loans as of the last day of the related due
period and
o the aggregate principal balance of the mortgage loans as of
the last day of the related due period minus $__________.
COMPENSATING INTEREST: With respect to any principal prepayments, any
payments made by the master servicer from its own funds to cover Prepayment
Interest Shortfalls.
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CREDIT ENHANCEMENT PERCENTAGE: The Credit Enhancement Percentage for any
payment date is the percentage obtained by dividing:
o the sum of the Overcollateralized Amount and the aggregate Note
Balance of the subordinate notes by
o the aggregate principal balance of the mortgage loans, calculated
after taking into account payments of principal on the mortgage loans
and payment of the Principal Payment Amount to the notes on the payment
date.
CURRENT INTEREST PAYMENT AMOUNT: The Current Interest Payment Amount for
any payment date is an amount equal to interest collections or advances on the
mortgage loans during the related due period, net of the master servicing fee,
the servicing fees and the indenture trustee fee.
DEFICIENT VALUATION: With respect to any mortgage loan, a Deficient
Valuation is a valuation by a court of competent jurisdiction of the mortgaged
property in an amount less than the then outstanding indebtedness under the
mortgage loan, which valuation results from a proceeding initiated under the
United States Bankruptcy Code.
DEBT SERVICE REDUCTION: A Debt Service Reduction is any reduction in the
amount which a mortgagor is obligated to pay on a monthly basis with respect to
a mortgage loan as a result of any proceeding initiated under the United States
Bankruptcy Code, other than a reduction attributable to a Deficient Valuation.
INTEREST ACCRUAL PERIOD: The Interest Accrual Period for any payment date
is the period commencing on the payment date of the month immediately preceding
the month in which the payment date occurs, or, in the case of the first period,
commencing on the closing date, and ending on the day preceding the payment
date. All payments of interest on the notes will be based on a 360-day year and
the actual number of days in the applicable Interest Accrual Period.
INTEREST CARRY FORWARD AMOUNT: The Interest Carry Forward Amount with
respect to any class of notes and any payment date, is any shortfall in payment
of interest represented by the excess, if any, of the Interest Payment Amount
that would be payable on that class at the applicable Note Accrual Rate over the
Interest Payment Amount actually paid on the class at the Available Interest
Rate, together with any shortfall in payment of interest remaining unpaid from
previous payment dates plus interest accrued on those classes at the related
Note Accrual Rate.
INTEREST PAYMENT AMOUNT: The Interest Payment Amount for the notes of any
class on any payment date is equal to interest accrued during the related
Interest Accrual Period on the Note Balance of the notes immediately prior to
the payment date at the then-applicable Note Interest Rate for the class.
NET MONTHLY EXCESS CASHFLOW: The Net Monthly Excess Cashflow for any
payment date is equal to the sum of:
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o any Overcollateralization Reduction Amount and
o the excess of:
o the Available Payment Amount for the payment date OVER
o the sum for the payment date of the aggregate of the Interest
Payment Amounts payable to the holders of the notes and the sum of
the amounts described in clauses (b)(i) through (iii) of the
definition of Principal Payment Amount.
NOTE ACCRUAL RATE: The Note Accrual Rate with respect to any class of notes
and any payment date is the lesser of the rate described for that class in the
first bullet point under the definition of Note Interest Rate and the maximum
Note Interest Rate.
NOTE BALANCE: The Note Balance of a note outstanding at any time represents
the then maximum amount that the holder of that note is entitled to receive as
payments allocable to principal from the cash flow on the mortgage loans and the
other assets in the trust estate. The Note Balance of any class of notes as of
any date of determination is equal to the initial Note Balance of that class
reduced by the aggregate of:
o all amounts allocable to principal previously distributed with
respect to the note and
o any reductions in the Note Balance deemed to have occurred in
connection with allocations of Realized Losses.
NOTE INTEREST RATE:
o The Note Interest Rate on the Class A Notes will be a rate per annum
equal to the lesser of:
o one-month LIBOR plus ____%, in the case of each payment date
through and including the payment date on which the aggregate
Note Balance is reduced to less than __% of the aggregate
initial Note Balance, or one-month LIBOR plus ____%, in the
case of any payment date thereafter,
o the Available Interest Rate for the payment date and
o _____% per annum, which is also referred to as the maximum
Note Interest Rate.
o The Note Interest Rate on the Class M-1 Notes will be a rate per
annum equal to the lesser of:
o one-month LIBOR plus ____%, in the case of each payment date
through and including the payment date on which the aggregate Note
Balance is reduced to less
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than __% of the aggregate initial Note Balance, or one-month LIBOR
plus ____%, in the case of any payment date thereafter,
o the Available Interest Rate for the payment date and
o the maximum Note Interest Rate.
o The Note Interest Rate on the Class M-2 Notes will be a rate per
annum equal to the lesser of:
o one-month LIBOR plus ____%, in the case of each payment date
through and including the payment date on which the aggregate Note
Balance is reduced to less than __% of the aggregate initial Note
Balance, or one-month LIBOR plus ____%, in the case of any payment
date thereafter,
o the Available Interest Rate for the payment date and
o the maximum Note Interest Rate.
o The Note Interest Rate on the Class M-3 Notes will be a rate per
annum equal to the lesser of:
o one-month LIBOR plus ____%, in the case of each payment date
through and including the payment date on which the aggregate Note
Balance is reduced to less than __% of the aggregate initial Note
Balance, or one-month LIBOR plus _____%, in the case of any
payment date thereafter,
o the Available Interest Rate for the payment date and
o the maximum Note Interest Rate.
OVERCOLLATERALIZED AMOUNT: The Overcollateralized Amount with respect to
any payment date is the excess, if any, of the aggregate principal balance of
the mortgage loans immediately following the payment date OVER the Note Balance
of the notes, after taking into account the payment of the amounts described in
clauses (b)(i) through (iv) of the definition of Principal Payment Amount on the
payment date.
OVERCOLLATERALIZATION INCREASE AMOUNT: With respect to the notes and any
payment date, any amount of Net Monthly Excess Cashflow actually applied as an
accelerated payment of principal to the extent the Required Overcollateralized
Amount exceeds the Overcollateralized Amount as of the Payment Date.
OVERCOLLATERALIZATION REDUCTION AMOUNT: The Overcollateralization Reduction
Amount is the amount by which the Overcollateralized Amount exceeds the Required
Overcollateralized Amount.
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PREPAYMENT INTEREST SHORTFALL: With respect to any principal prepayments on
the mortgage loans, any resulting shortfall.
PRINCIPAL PAYMENT AMOUNT: The Principal Payment Amount for any payment
date, other than the final maturity date and the payment date immediately
following the acceleration of the notes due to an event of default, will be the
lesser of:
(a) the excess of the Available Payment Amount over the aggregate of
the Interest Payment Amounts for the notes; and
(b) THE SUM OF:
(i) the principal portion of all scheduled monthly payments on
the mortgage loans due during the related due period, whether or
not received on or prior to the related determination date;
(ii) the principal portion of all proceeds received during the
related prepayment period in respect of the repurchase of a
mortgage loan, or, in the case of a substitution, amounts
representing a principal adjustment, as contemplated in the
servicing agreements;
(iii) the principal portion of all other unscheduled
collections, including insurance proceeds, liquidation proceeds
and all full and partial principal prepayments, received during
the related prepayment period, to the extent applied as recoveries
of principal on the mortgage loans;
(iv) the principal portion of any Realized Losses incurred or
deemed to have been incurred on any mortgage loans in the calendar
month preceding the payment date to the extent covered by Net
Monthly Excess Cashflow for the payment date; and
(v) the amount of any Overcollateralization Increase Amount
for the payment date;
MINUS
(vi) the amount of any Overcollateralization Reduction Amount
for the payment date.
REALIZED LOSS: A Realized Loss is any Bankruptcy Loss and any amount of
loss realized with respect to any defaulted mortgage loan that is finally
liquidated through foreclosure sale, disposition of the related mortgaged
property if acquired on behalf of the noteholders by deed in lieu of foreclosure
or otherwise. The amount of loss realized, if any, will equal the portion of the
unpaid principal balance remaining, if any, plus interest on the remaining
unpaid principal balance through the last day of the month in which the mortgage
loan was finally liquidated, after application of all amounts recovered, net of
amounts reimbursable to the servicers for P&I
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Advances, servicing advances and other related expenses, including attorney's
fees, towards interest and principal owing on the mortgage loan.
REQUIRED OVERCOLLATERALIZED AMOUNT: The Overcollateralized Amount required
to be
SCHEDULED PRINCIPAL BALANCE: The Scheduled Principal Balance of any
mortgage loan as of any date of determination is equal to the principal balance
of the mortgage loan as of the cut-off date, after application of all scheduled
principal payments due on or before the cut-off date, whether or not received,
reduced by:
o the principal portion of all monthly payments due on or before the date
of determination, whether or not received,
o all amounts allocable to unscheduled principal that were received prior
to the calendar month in which the date of determination occurs, and
o any Bankruptcy Loss occurring out of a Deficient Valuation that was
incurred prior to the calendar month in which the date of determination occurs.
STEPDOWN DATE: The Stepdown Date for any payment date is the later to occur
of:
o the payment date occurring in _______ ____ and
o the first payment date on which the Credit Enhancement Percentage,
calculated for this purpose only after taking into account payments of
principal on the mortgage loans, but prior to any payment of the
Principal Payment Amount to the notes then entitled to payments of
principal on the payment date, is greater than or equal to _____%.
TRIGGER EVENT: With respect to any payment date, a Trigger Event is in
effect if the percentage obtained by dividing:
o the principal amount of mortgage loans delinquent 60 days or more by
o the aggregate principal balance of the mortgage loans, in each case,
as of the last day of the previous calendar month,
exceeds the lesser of:
o _____% of the Credit Enhancement Percentage and
o ------%.
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INTEREST PAYMENTS ON THE NOTES
The Note Interest Rate and the Note Accrual Rate for the notes for the
current related Interest Accrual Period, to the extent it has been determined,
and for the immediately preceding Interest Accrual Period may be obtained by
telephoning the indenture trustee at __________.
To the extent of the Current Interest Payment Amount, in the priorities set
forth immediately following this paragraph, the holders of each class of notes
will be entitled to receive on each payment date interest payments in an amount
equal to the Interest Payment Amount for that class. On each payment date, the
Current Interest Payment Amount will be distributed in the following order of
priority:
first, to the holders of the Class A Notes, the Interest Payment Amount for
the Class A Notes;
second, to the extent of the Current Interest Payment Amount remaining
after payment of the Interest Payment Amount for the Class A Notes, to the
holders of the Class M-1 Notes, the Interest Payment Amount for the Class
M-1 Notes;
third, to the extent of the Current Interest Payment Amount remaining after
payment of the Interest Payment Amounts for the Class A Notes and the Class
M-1 Notes, to the holders of the Class M-2 Notes, the Interest Payment
Amount for the Class M-2 Notes; and
fourth, to the extent of the Current Interest Payment Amount remaining
after payment of the Interest Payment Amounts for the Class A Notes, the
Class M-1 Notes and the Class M-2 Notes, to the holders of the Class M-3
Notes, the Interest Payment Amount for the Class M-3 Notes.
With respect to any payment date, to the extent that the aggregate of the
Interest Payment Amounts for the notes is limited by the Current Interest
Payment Amount for the related due period, the holders of some classes of notes
may receive an Interest Payment Amount calculated at the Available Interest Rate
rather than at the applicable Note Accrual Rate for those classes and the
payment date. The Interest Carry Forward Amount, if any, for any class of the
notes for any payment date is payable to the extent of available funds remaining
after other payments on the notes on the payment date, but before any payments
on the equity certificates on the payment date. See "--Overcollateralization
Provisions" in this prospectus supplement.
CALCULATION OF ONE-MONTH LIBOR
With respect to each Interest Accrual Period, on the second business
day preceding the Interest Accrual Period, or the interest determination date,
the indenture trustee will determine one-month LIBOR for the next Interest
Accrual Period. One-month LIBOR means, as of any interest determination date,
the London interbank offered rate for one-month U.S. dollar deposits which
appears on Telerate page 3750 as of 11:00 a.m. London time on that date. If the
rate does not appear on telerate page 3750, the rate for that day will be
determined on the basis of the offered rates of the reference banks for
one-month U.S. dollar deposits, as of 11:00 a.m., London
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time, on the interest determination date. The indenture trustee will request the
principal London office of each of the reference banks to provide a quotation of
its rate. If on the interest determination date two or more reference banks
provide offered quotations, one-month LIBOR for the related Interest Accrual
Period shall be the arithmetic mean of the offered quotations, rounded upwards
if necessary to the nearest whole multiple of 0.0625%. If on the interest
determination date fewer than two reference banks provide offered quotations,
one-month LIBOR for the related Interest Accrual Period shall be the higher of:
o one-month LIBOR as determined on the previous interest determination
date and
o the reserve interest rate.
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;
telerate page 3750 means the display page currently so designated on the Dow
Jones Telerate Capital Markets Report, or other page as may replace that page on
that service for the purpose of displaying comparable rates or prices);
reference banks means leading banks selected by the indenture trustee and
engaged in transactions in Eurodollar deposits in the international Eurocurrency
market:
o with an established place of business in London,
o which have been designated by the indenture trustee and
o not controlling, controlled by, or under common control with, the
depositor or the issuer; and
Reserve interest rate shall be the rate per annum that the indenture
trustee determines to be either:
o the arithmetic mean, rounded upwards if necessary to the nearest
whole multiple of 0.0625%, of the one-month U.S. dollar lending rates
which New York City banks selected by the indenture trustee are quoting
on the relevant interest determination date to the principal London
offices of leading banks in the London interbank market or,
o in the event that the indenture trustee can determine no arithmetic
mean, the lowest one-month U.S. dollar lending rate which New York City
banks selected by the indenture trustee are quoting on the interest
determination date to leading European banks.
The establishment of one-month LIBOR on each interest determination date by
the indenture trustee and the indenture trustee's calculation of the rate of
interest applicable to the notes for the related Interest Accrual Period shall,
in the absence of manifest error, be final and binding.
PRINCIPAL PAYMENTS ON THE NOTES
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On each payment date, the Principal Payment Amount will be distributed to
the holders of the notes then entitled to payments of principal.
The Principal Payment Amount for the final maturity date or the payment
date immediately following the acceleration of the notes due to an event of
default will equal the amount necessary to reduce the Note Balance of any notes
outstanding to zero. In no event will the Principal Payment Amount with respect
to any Payment Date be:
o less than zero or
o greater than the then-outstanding aggregate Note Balance of the
notes.
The Principal Payment Amount for the first payment date will include
approximately $_________ collected by the servicers in respect of prepayments on
the mortgage loans during the _________ ____ prepayment period.
On each Payment Date prior to the Stepdown Date or on which a Trigger Event
is in effect, the Principal Payment Amount shall be distributed:
o first, to the Class A Notes, until the Note Balance of the Class A
Notes has been reduced to zero;
o second, to the Class M-1 Notes, until the Note Balance of the Class
M-1 Notes has been reduced to zero;
o third, to the Class M-2 Notes, until the Note Balance of the Class
M-2 Notes has been reduced to zero; and
o fourth, to the Class M-3 Notes, until the Note Balance of the Class
M-3 Notes has been reduced to zero.
On each payment date on or after the Stepdown Date and on which a Trigger
Event is not in effect, the holders of the Class A Notes and the subordinate
notes shall be entitled to receive payments in respect of principal to the
extent of the Principal Payment Amount in the following amounts and order of
priority:
o FIRST, the lesser of:
o the Principal Payment Amount and
o the Class A Principal Payment Amount, shall be distributed to
the holders of the Class A Notes, until the Note Balance of the
Class A Notes has been reduced to zero;
o SECOND, the lesser of the excess of
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o the Principal Payment Amount over
o the amount distributed to the holders of the Class A Notes under
clause first above and the Class M-1 Principal Payment Amount,
shall be distributed to the holders of the Class M-1 Notes, until
the Note Balance of the Class M-1 Notes has been reduced to zero;
o THIRD, the lesser of the excess of
o the Principal Payment Amount over
o the sum of the amounts distributed to the holders of the Class A
Notes under clause first above and to the holders of the Class M-1
Notes under clause second above and the Class M-2 Principal
Payment Amount, shall be distributed to the holders of the Class
M-2 Notes, until the Note Balance Class M-2 Notes has been reduced
to zero; and
o FOURTH, the lesser of the excess of
o the Principal Payment Amount over
o the sum of the amounts distributed to the holders of the Class A
Notes under clause first above, to the holders of the Class M-1
Notes under clause second above and to the holders of the Class
M-2 Notes under clause third above and the Class M-3 Principal
Payment Amount, shall be distributed to the holders of the Class
M-3 Notes, until the Note Balance of the Class M-3 Notes has been
reduced to zero.
On the final maturity date or the payment date immediately following the
acceleration of the notes due to any event of default principal will be payable
on each class of notes in an amount equal to the Note Balance of that class on
the payment date. On the final maturity date or the payment date immediately
following the acceleration of the notes due to any event of default, amounts in
respect of accrued interest, Interest Carry Forward Amounts and Allocated
Realized Loss Amounts will also be payable on each class of notes in the
priorities set forth in the indenture. There can be no assurance, however, that
sufficient funds will be available on any date to retire the Note Balances and
pay any other amounts.
The allocation of payments in respect of principal to the Class A Notes on
each payment date prior to the Stepdown Date or on which a Trigger Event has
occurred, will have the effect of accelerating the amortization of the Class A
Notes while, in the absence of Realized Losses, increasing the respective
percentage interest in the principal balance of the mortgage loans evidenced by
the subordinate notes and the Overcollateralized Amount. Increasing the
respective percentage interest in the trust estate of the subordinate notes and
the Overcollateralized Amount relative to that of the Class A Notes is intended
to preserve the availability of the subordination provided by the subordinate
notes and the Overcollateralized Amount.
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The holders of the equity certificates will be entitled to all prepayment
charges received on the mortgage loans and these amounts will not be available
for distribution on the notes.
CREDIT ENHANCEMENT
The credit enhancement provided for the benefit of the holders of the notes
consists of subordination in this section, and overcollateralization, as
described under "--Overcollateralization Provisions" in the next section.
The rights of the holders of the subordinate notes and the equity
certificates to receive payments will be subordinated, to the extent described
in this prospectus supplement, to the rights of the holders of the Class A
Notes. This subordination is intended to enhance the likelihood of regular
receipt by the holders of the Class A Notes of the full amount of interest and
principal to which they are entitled and to afford these holders protection
against Realized Losses.
The protection afforded to the holders of the Class A Notes by means of the
subordination of the subordinate notes and the equity certificates will be
accomplished by:
o the preferential right of the holders of the Class A Notes to receive on
any payment date, prior to payment on the subordinate notes and the equity
certificates, payments in respect of interest and principal, subject to
available funds, and
o if necessary, the right of the holders of the Class A Notes to receive
future payments of amounts that would otherwise be payable to the holders of the
subordinate notes and the equity certificates.
In addition, the rights of the holders of subordinate notes with lower
numerical class designations will be senior to the rights of holders of
subordinate notes with higher numerical class designations, and the rights of
the holders of all of the subordinate notes to receive payments in respect of
the mortgage loans will be senior to the rights of the holders of the equity
certificates, in each case to the extent described in this prospectus
supplement. This subordination is intended to enhance the likelihood of regular
receipt by the holders of subordinate notes with lower numerical class
designations relative to the holders of subordinate notes with higher numerical
class designations, and by the holders of all of the subordinate notes relative
to the holders of the equity certificates, of the full amount of interest and
principal to which they are entitled and to afford these holders protection
against Realized Losses, as described under "--Allocation of Realized Losses" in
this prospectus supplement.
OVERCOLLATERALIZATION PROVISIONS
The weighted average mortgage rate for the mortgage loans, adjusted to
reflect the master servicing fee, the servicing fees and the indenture trustee
fee payable from interest received or advanced on the mortgage loans, is
expected to be higher than the weighted average of the Note Interest Rates on
the notes, thus generating excess interest collections which, in the absence of
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Realized Losses, will not be necessary to fund interest payments on the notes.
The indenture requires that, on each payment date, the Net Monthly Excess
Cashflow, if any, be applied on each payment date as an accelerated payment of
principal on class or classes of notes then entitled to receive payments in
respect of principal, but only to the limited extent hereafter described.
With respect to any payment date, any Net Monthly Excess Cashflow, or, in
the case of clause first below, the Net Monthly Excess Cashflow exclusive of any
Overcollateralization Reduction Amount, shall be paid as follows:
o FIRST, to the holders of the class or classes of notes then entitled to
receive payments in respect of principal, in an amount equal to the
principal portion of any Realized Losses incurred or deemed to have been
incurred on the mortgage loans;
o SECOND, to the holders of the class or classes of notes then entitled to
receive payments in respect of principal, in an amount equal to the
Overcollateralization Increase Amount;
o THIRD, to the holders of the Class A Notes, in an amount equal to the
Interest Carry Forward Amount for the Class A Notes;
o FOURTH, to the holders of the Class M-1 Notes, in an amount equal to the
Interest Carry Forward Amount for the Class M-1 Notes;
o FIFTH, to the holders of the Class M-1 Notes, in an amount equal to the
Allocated Realized Loss Amount for the Class M-1 Notes;
o SIXTH, to the holders of the Class M-2 Notes, in an amount equal to the
Interest Carry Forward Amount for the Class M-2 Notes;
o SEVENTH, to the holders of the Class M-2 Notes, in an amount equal to the
Allocated Realized Loss Amount for the Class M-2 Notes;
o EIGHTH, to the holders of the Class M-3 Notes, in an amount equal to the
Interest Carry Forward Amount for the Class M-3 Notes;
o NINTH, to the holders of the Class M-3 Notes, in an amount equal to the
Allocated Realized Loss Amount for the Class M-3 Notes; and
o TENTH, to the holders of the equity certificates as provided in the
indenture.
As of the closing date, the aggregate principal balance of the mortgage
loans as of the cut-off date will exceed the aggregate Note Balance of the notes
by an amount equal to approximately $_________. This amount represents
approximately ____% of the aggregate principal balance of the mortgage loans as
of the cut-off date, which is the initial amount of overcollateralization
required to be provided by the mortgage pool under the indenture. Under the
indenture, the
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Overcollateralized Amount is required to be maintained at the Required
Overcollateralized Amount. In the event that Realized Losses are incurred on the
mortgage loans, these Realized Losses may result in an overcollateralization
deficiency since these Realized Losses will reduce the principal balance of the
mortgage loans without a corresponding reduction to the aggregate Note Balance
of the notes. In the event of an occurrence of this kind, the indenture requires
the payment from Net Monthly Excess Cashflow, subject to available funds, of an
amount equal to any overcollateralization deficiency, which shall constitute a
principal payment on the notes in reduction of the Note Balances of those notes.
This has the effect of accelerating the amortization of the notes relative to
the amortization of the mortgage loans, and of increasing the Overcollateralized
Amount.
On and after the Stepdown Date and provided that a Trigger Event is not in
effect, the Required Overcollateralized Amount may be permitted to decrease, or
step down, below the initial $_________ level to a level equal to approximately
____% of the then current aggregate outstanding principal balance of the
mortgage loans, after giving effect to principal payments to be distributed on
the payment date, subject to a floor of $_________. In the event that the
Required Overcollateralized Amount is permitted to step down on any payment
date, the indenture provides that a portion of the principal which would
otherwise be distributed to the holders of the notes on the payment date shall
be distributed to the holders of the equity certificates, subject to the
priorities set forth in this section. With respect to each of these payment
dates, the Principal Payment Amount will be reduced by the Overcollateralization
Reduction Amount after taking into account all other payments to be made on the
payment date, which amount shall be distributed as Net Monthly Excess Cashflow
according to the priorities set forth in this section. This has the effect of
decelerating the amortization of the notes relative to the amortization of the
mortgage loans, and of reducing the Overcollateralized Amount. However, if on
any payment date a Trigger Event is in effect, the Required Overcollateralized
Amount will not be permitted to step down on the payment date.
ALLOCATION OF LOSSES; SUBORDINATION
Any Realized Loss on the mortgage loans will be allocated on any payment
date:
o first, to Net Monthly Excess Cashflow,
o second, to the Overcollateralized Amount,
o third, to the Class M-3 Notes,
o fourth, to the Class M-2 Notes, and
o fifth, to the Class M-1 Notes.
The indenture does not permit the allocation of Realized Losses to the
Class A Notes. Investors in the Class A Notes should note that although Realized
Losses cannot be allocated to the these notes, under certain loss scenarios
there will not be enough principal and interest
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collected on the mortgage loans to pay the Class A Notes all interest and
principal amounts to which they are then entitled.
Once Realized Losses have been allocated to the subordinate notes, these
Realized Losses will not be reinstated thereafter. However, Allocated Realized
Loss Amounts may be paid to the holders of these classes of notes, after
distributions to the holders of the Class A Notes and subordinate notes with
lower numerical class designations, but before the equity certificates are
entitled to any distributions.
Any allocation of a Realized Loss to a note will be made by reducing the
Note Balance of that note by the amount so allocated on the payment date in the
month following the calendar month in which the Realized Loss was incurred.
Notwithstanding anything to the contrary described in this prospectus
supplement, in no event will the Note Balance of any note be reduced more than
once in respect of any particular amount both:
o allocable to the notes in respect of Realized Losses and
o payable as principal to the holder of the notes from Net Monthly Excess
Cashflow.
P&I ADVANCES
Subject to the limitations described in the following paragraph, the master
servicer will be obligated to advance or cause to be advanced on or before each
payment date its own funds, or funds in the note account that are not included
in the Available Payment Amount for the payment date. The amount of the master
servicer's advance will be equal to the aggregate of all payments of principal
and interest, net of the servicing fee, that were due during the related due
period on the mortgage loans and that were delinquent on the related
determination date, plus amounts representing assumed payments not covered by
any current net income on the mortgaged properties acquired by foreclosure or
deed in lieu of foreclosure.
P&I Advances are required to be made only to the extent they are deemed by
the master servicer to be recoverable from related late collections, insurance
proceeds or liquidation proceeds. The purpose of making P&I Advances is to
maintain a regular cash flow to the noteholders, rather than to guarantee or
insure against losses. The master servicer will not be required to make any P&I
Advances with respect to reductions in the amount of the monthly payments on the
mortgage loans due to bankruptcy proceedings or the application of the Relief
Act.
All P&I Advances will be reimbursable to the master servicer from late
collections, insurance proceeds and liquidation proceeds from the mortgage loan
as to which the unreimbursed P&I Advance was made. In addition, any P&I Advances
previously made in respect of any mortgage loan that are deemed by the master
servicer to be nonrecoverable from related late collections, insurance proceeds
or liquidation proceeds may be reimbursed to the master servicer out of any
funds in the note account prior to the payments on the notes. In the event that
the master servicer
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fails in its obligation to make this advance, the indenture trustee will be
obligated to make the advance, in each case to the extent required in the
servicing agreement.
THE ISSUER
[__] Trust Series ____-__ is a business trust formed under the laws of the
State of [____] under an owner trust agreement, dated as of ________ __, ____,
between the depositor and the owner trustee for the transactions described in
this prospectus supplement. The owner trust agreement constitutes the governing
instrument under the laws of the State of [____] relating to business trusts.
After its formation, the issuer will not engage in any activity other than:
o acquiring and holding the mortgage loans and the proceeds from the
mortgage loans,
o issuing the notes and the equity certificates,
o making payments on the notes and the equity certificates and
o engaging in other activities that are necessary, suitable or
convenient to accomplish the foregoing or are incidental thereto or
connected therewith.
The issuer is not expected to have any significant assets other than the
trust estate pledged as collateral to secure the notes. The assets of the issuer
will consist of the mortgage loans pledged to secure the notes. The issuer's
principal offices are in __________, ________, in care of ________________, as
owner trustee.
THE SELLER
__________________, or the seller, in its capacity as mortgage loan seller,
will sell the mortgage loans to the ___________ under a mortgage loan purchase
agreement, dated as of _________ __, ____, between the seller and the [SPE].
THE [SPE]
_______________, the [SPE], a special purpose entity that is an affiliate
of the issuer and the seller, will convey the mortgage loans to the depositor
under an ownership transfer agreement, dated as of ________ __, ____, between
the [SPE] and the depositor.
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THE OWNER TRUSTEE
_________________ is the owner trustee under the owner trust agreement. The
owner trustee is a _________ banking corporation and its principal offices are
located in _____________.
Neither the owner trustee nor any director, officer or employee of the
owner trustee will be under any liability to the issuer or the noteholders under
the owner trust agreement under any circumstances, except for the owner
trustee's own misconduct, gross negligence, bad faith or grossly negligent
failure to act or in the case of the inaccuracy of the representations made by
the owner trustee in the owner trust agreement. All persons into which the owner
trustee may be merged or with which it may be consolidated or any person
resulting from a merger or consolidation shall be the successor of the owner
trustee under the owner trust agreement.
The principal compensation to be paid to the owner trustee in respect of
its obligations under the owner trust agreement will have been paid by or on
behalf of the issuer on or prior to the closing date.
THE INDENTURE TRUSTEE
____________________, a ____________ banking association, will act as
indenture trustee for the notes under the indenture. The indenture trustee's
offices for notices under the indenture are located at
______________________________ and its telephone number is --------------.
The principal compensation to be paid to the indenture trustee in respect
of its obligations under the indenture, or the indenture trustee fee, will be
equal to:
o accrued interest at ________% per annum, or the indenture trustee fee
rate, on the Scheduled Principal Balance of each mortgage loan, payable
monthly, and
o any interest or other income earned on funds held in the note
account, to the extent not payable as compensation to the related
servicer, as provided in the indenture.
The indenture will provide that the indenture trustee may withdraw funds
from the note account:
o to reimburse itself for all reasonable out-of-pocket expenses incurred or
made by it, including costs of collection and including reasonable compensation
and expenses, disbursements and advances of its agents, counsel, accountants and
experts and
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o to reimburse the owner trustee for all reasonable out-of pocket expenses
incurred or made by the owner trustee for all services rendered by the owner
trustee it in the owner trustee's execution of the trust created under the owner
trust agreement and in the exercise and performance of any of the owner
trustee's powers and duties under the owner trust agreement.
Under the indenture, the issuer, from the assets of the trust estate, shall
indemnify the indenture trustee against any and all loss, liability or expense,
including reasonable attorneys' fees, incurred by the indenture trustee in
connection with the administration of the trust estate and the performance of
the indenture trustee's duties hereunder. The issuer is not required, however,
to reimburse any expense or indemnify against any loss, liability or expense
incurred by the indenture trustee through the indenture trustee's own willful
misconduct, negligence or bad faith.
THE SERVICING AGREEMENT
The following summary describes the basic terms of the servicing
agreements, dated as of __________ __, ____, among the issuer, the indenture
trustee and the master servicer. The summary does not purport to be complete and
is subject to, and qualified in its entirety by reference to, the provisions of
the servicing agreement. Whenever particular sections or defined terms of the
servicing agreement are referred to, these sections or defined terms are
incorporated in this prospectus supplement by reference. The depositor will
provide to a prospective or actual noteholder without charge, on written
request, a copy, without exhibits, of the servicing agreements. Requests should
be addressed to the Secretary, Long Beach Securities Corp., 1100 Town & Country
Road, Orange, California 92868.
THE MASTER SERVICER
The information set forth in the following paragraphs has been provided by
the master servicer. None of the depositor, the underwriter, the trustee or any
of their respective affiliates has made or will make any representation as to
the accuracy or completeness of such information.
[Name of master servicer], a _______________ [corporation], is engaged in
the business of originating, purchasing and selling sub-prime mortgage loans
secured by one- to four-family residences. [Name of master servicer]'s business
was begun in ___________.
Pursuant to the pooling and servicing agreement, [name of master servicer]
will serve as the master servicer for the mortgage loans sold indirectly by it
to the depositor. The master servicer is approved as a seller/servicer for
Fannie Mae and Freddie Mac and as a non-supervised mortgagee by the U.S.
Department of Housing and Urban Development. As of _________, the master
servicer had ___ offices, consisting of __ loan origination centers located in
_________ and ___ loan origination centers located throughout the rest of the
United States.
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LENDING ACTIVITIES AND LOAN SALES. The master servicer originates real
estate loans through its network of offices and loan origination centers. The
master servicer also participates in secondary market activities by originating
and selling mortgage loans while continuing to service the majority of the loans
sold. In other cases the master servicer's whole loan sale agreements provide
for the transfer of servicing rights.
The master servicer's primary lending activity is funding loans to enable
mortgagors to purchase or refinance residential real property, which loans are
secured by first or second liens on the related real property. The master
servicer's single-family real estate loans are predominantly "conventional"
mortgage loans, meaning that they are not insured by the Federal Housing
Administration or partially guaranteed by the U.S. Department of Veterans
Affairs.
The following table summarizes the master servicer's one- to four-family
residential mortgage loan origination and sales activity for the periods shown
below. Sales activity may include sales of mortgage loans purchased by the
master servicer from other loan originators.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
1995 1996 1997 1998 1999
(DOLLARS IN THOUSANDS)
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Originations and
Purchases.. $ $ $ $ $
Sales................ $ $ $ $ $
</TABLE>
LOAN SERVICING. The master servicer services all of the mortgage loans it
originates that are retained in its portfolio and continues to service at least
a majority of the loans that have been sold to investors. Servicing includes
collecting and remitting loan payments, accounting for principal and interest,
contacting delinquent mortgagors, and supervising foreclosure in the event of
unremedied defaults. The master servicer's servicing activities are audited
periodically by applicable regulatory authorities. Certain financial records of
the master servicer relating to its loan servicing activities are reviewed
annually as part of the audit of the master servicer's financial statements
conducted by its independent accountants.
COLLECTION PROCEDURES; DELINQUENCY AND LOSS EXPERIENCE.
When a mortgagor fails to make a required payment on a residential mortgage
loan, the master servicer attempts to cause the deficiency to be cured by
corresponding with the mortgagor. In most cases, deficiencies are cured
promptly. Pursuant to the master servicer's customary procedures for residential
mortgage loans serviced by it for its own account, the master servicer generally
mails a notice of intent to foreclose to the mortgagor after the loan is
delinquent two payments and, within one month thereafter, if the loan remains
delinquent,
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typically institutes appropriate legal action to foreclose on the property
securing the loan. If foreclosed, the property is sold at public or private sale
and may be purchased by the master servicer. In California, real estate lenders
are generally unable as a practical matter to obtain a deficiency judgment
against the mortgagor on a loan secured by single-family real estate.
LOAN SERVICING PORTFOLIO
The following table sets forth the delinquency and loss experience at the
dates indicated for residential (one- to four-family) first lien loans serviced
directly by the master servicer that were originated or purchased by the master
servicer:
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<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------- -----------------
(Dollars in Thousands)
<S> <C> <C>
Total Outstanding Principal
Balance...................................... $ $
Number of Loans................................
DELINQUENCY
Period of Delinquency:
31-60 Days
Principal Balance...................... $ $
Number of Loans........................
Delinquency as a Percentage
of Total Outstanding
Principal Balance.................... % %
Delinquency as a Percentage
of Number of Loans................... % %
61-90 Days
Principal Balance...................... $ $
Number of Loans........................
Delinquency as a Percentage
of Total Outstanding
Principal Balance.................... % %
Delinquency as a Percentage
of Number of Loans................... % %
91 Days or More
Principal Balance...................... $ $
Number of Loans........................
Delinquency as a Percentage
of Total Outstanding
Principal Balance.................... % %
Delinquency as a Percentage
of Number of Loans................... % %
Total Delinquencies:
Principal Balance...................... $ $
Number of Loans........................
Delinquency as a Percentage
of Total Outstanding
Principal Balance.................... % %
Delinquency as a Percentage
of Number of Loans................... % %
FORECLOSURES PENDING(1)
Principal Balance...................... $ $
Number of Loans........................
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Foreclosures Pending as a
Percentage of Total
Outstanding Principal
Balance.............................. % %
Foreclosures Pending as a
Percentage of Number of
Loans................................ % %
NET LOAN LOSSES for the
Period(2).................................... $ $
NET LOAN LOSSES as a
Percentage of Total Outstanding
Principal Balance............................ % %
</TABLE>
--------------
(1) Includes mortgage loans which are in foreclosure but as to which title to
the mortgaged property has not been acquired, at the end of the period
indicated. Foreclosures pending are included in the delinquencies set forth
above.
(2) Net Loan Losses is calculated for all loans as the aggregate of the net
loan loss for all such loans liquidated during the period indicated. The
net loan loss for any such loan is equal to the difference between (a) the
principal balance plus accrued interest through the date of liquidation
plus all liquidation expenses related to such loan and (b) all amounts
received in connection with the liquidation of such loan. The majority of
residential loans serviced by the master servicer have been conveyed to
REMIC trust funds.
As of ________ __, ____, ____ one- to four-family residential properties
relating to loans in the master servicer's servicing portfolio had been acquired
through foreclosure or deed in lieu of foreclosure and were not liquidated.
There can be no assurance that the delinquency and loss experience of the
mortgage loans will correspond to the loss experience of the master servicer's
mortgage portfolio set forth in the foregoing table. The statistics shown above
represent the delinquency and loss experience for the master servicer's total
servicing portfolio only for the periods presented, whereas the aggregate
delinquency and loss experience on the mortgage loans will depend on the results
obtained over the life of the trust fund. The master servicer's portfolio
includes mortgage loans with payment and other characteristics which are not
representative of the payment and other characteristics of the mortgage loans. A
substantial number of the mortgage loans may also have been originated based on
originator underwriting guidelines that are less stringent than those generally
applicable to the servicing portfolio reflected in the foregoing table. 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 (which may or may not affect real property values)
may affect the timely payment by mortgagors of scheduled payments of principal
and interest on the mortgage loans and, accordingly, the actual rates of
delinquencies, foreclosures and losses with respect to the mortgage loans.
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The delinquency and loss experience percentages set forth above in the
immediately preceding table are calculated on the basis of the total mortgage
loans serviced as of the end of the periods indicated. However, because the
total outstanding principal balance of residential loans serviced by the master
servicer has increased from $_____ at __________ __, ____ to $____________ at
_________ __, ____, the total outstanding principal balance of originated loans
serviced as of the end of any indicated period includes many loans that will not
have been outstanding long enough to give rise to some or all of the indicated
periods of delinquency. In the absence of such substantial and continual
additions of newly originated loans to the total amount of loans serviced, the
percentages indicated above would be higher and could be substantially higher.
The actual delinquency percentages with respect to the mortgage loans may be
expected to be substantially higher than the delinquency percentages indicated
above because the composition of the mortgage loans will not change.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The principal compensation, or servicing fee, to be paid to the master
servicer in respect of its servicing activities for the notes will be equal to
accrued interest at the servicing fee rate of ____% per annum with respect to
each mortgage loan serviced by it for each calendar month on the same principal
balance on which interest on the mortgage loan accrues for the calendar month.
As additional servicing compensation, to the master servicer is entitled to
retain all assumption fees and late payment charges in respect of mortgage loans
serviced by it, to the extent collected from mortgagors, together with any
interest or other income earned on funds held in the note account, to the extent
not payable as compensation to the indenture trustee, and any escrow accounts in
respect of mortgage loans serviced by it.
When a principal prepayment in full is made on a mortgage loan, the
mortgagor is charged interest only for the period from the due date of the
preceding monthly payment up to the date of the prepayment, instead of for a
full month. When a partial principal prepayment is made on a mortgage loan, the
mortgagor is not charged interest on the amount of the prepayment for the month
in which the prepayment is made. The master servicer is obligated to pay from
its own funds Compensating Interest for any Prepayment Interest Shortfall, but
only to the extent of its aggregate servicing fee for the related due period.
The master servicer is obligated to pay insurance premiums and other ongoing
expenses associated with the mortgage pool in respect of mortgage loans serviced
by it and incurred by the master servicer in connection with its
responsibilities under the servicing agreement and is entitled to reimbursement
therefor as provided in the servicing agreement. See "Description of the
Securities--Retained Interest; Servicing Compensation and Payment of Expenses"
in the prospectus for information regarding expenses payable by the master
servicer.
THE INDENTURE AND OWNER TRUST AGREEMENT
The following summary describes basic terms of the indenture. The summary
does not purport to be complete and is subject to, and qualified in its entirety
by reference to, the provisions of the owner trust agreement and indenture.
Whenever particular defined terms of the indenture are referred to, these
defined terms are incorporated in this prospectus supplement by reference. The
depositor will provide to a prospective or actual noteholder without charge, on
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written request, a copy, without exhibits, of the indenture and the owner trust
agreement. Requests should be addressed to the Secretary, Long Beach Securities
Corp., 1100 Town & Country Road, Orange, California 92868.
GENERAL DESCRIPTION OF THE INDENTURE
The notes will be issued under the Indenture, a form of which is filed as
an exhibit to the registration statement. A Current Report on Form 8-K relating
to the notes containing a copy of the indenture and the owner trust agreement as
executed will be filed by the depositor with the Securities and Exchange
Commission within fifteen days of the initial issuance of the notes. Reference
is made to the prospectus for important information in addition to that set
forth in this prospectus supplement regarding the trust estate, the terms and
conditions of the indenture and the owner trust agreement and the notes. The
notes will be transferable and exchangeable at the corporate trust offices of
the indenture trustee, located in _______________.
ASSIGNMENT OF MORTGAGE LOANS
On or prior to the date the notes are issued, the seller will convey each
mortgage loan to the [SPE], who in turn will convey each mortgage loan to the
depositor, who in turn will convey each mortgage loan to the issuer.
At the time of issuance of the notes, the issuer will pledge all of its
right, title and interest in and to the mortgage loans, including all principal
and interest due on each mortgage loan after the cut-off dates, without
recourse, to the indenture trustee under the indenture as collateral for the
notes; provided, however, that the seller will reserve and retain all its right,
title and interest in and to principal and interest due on the mortgage loan on
or prior to the cut-off date, whether or not received on or prior to the cut-off
date, and to prepayments received prior to the cut-off date. The indenture
trustee, concurrently with this assignment, will authenticate and deliver the
notes at the direction of the issuer in exchange for, among other things, the
mortgage loans.
The indenture will require the issuer to deliver to the indenture trustee
or to a custodian with respect to each mortgage loan:
o the mortgage note endorsed without recourse to the indenture trustee,
o the original mortgage with evidence of recording indicated on the
mortgage and
o an assignment of the mortgage in recordable form to the indenture
trustee. These assignments of mortgage loans are required to be
recorded by or on behalf of the seller, at the expense of the seller,
in the appropriate offices for real property records except for
mortgages held under the MERS(R) System and except in the State of
California or in other states where, in the opinion of counsel
acceptable to the trustee, recording of the assignment is not required
to protect the trustee's interest in the mortgage loan against the
claim of any subsequent transferee or any successor to or creditor of
the depositor, the master servicer, the mortgage loan seller or the
originator. If the depositor uses the MERS(R) System with respect to
any mortgage loan, it will deliver evidence that the mortgage is held
for the trustee through the MERS(R) System instead of an assignment of
the mortgage in recordable form.
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EVENTS OF DEFAULT
Notwithstanding the prospectus, an event of default under the indenture
with respect to the notes is as follows:
o the failure of the issuer to pay the Interest Payment Amount, the
Principal Payment Amount or any Overcollateralization Increase Amount
on any payment date, in each case to the extent that funds are
available on the payment date to make these payments, which continues
unremedied for a period of five days;
o the failure by the issuer on the final maturity date to reduce the
Note Balances of any notes then outstanding to zero;
o a default in the observance or performance of any covenant or
agreement of the issuer in the indenture and the continuation of any
default of this kind for a period of thirty days after notice to the
issuer by the indenture trustee or by the holders of at least 25% of
the voting rights of the notes;
o any representation or warranty made by the issuer in the indenture or
in any certificate or other writing delivered under the indenture
having been incorrect in any material respect as of the time made, and
the circumstance in respect of which the representation or warranty
being incorrect not having been cured within thirty days after notice
is given to the issuer by the indenture trustee or by the holders of at
least 25% of the voting rights of the notes; or
o events of bankruptcy, insolvency, receivership or reorganization of
the issuer.
Notwithstanding the prospectus if an event of default occurs and is
continuing, the indenture trustee or the holders of a majority of the voting
rights may declare the note balance of all the Notes to be due and payable
immediately. This declaration may be rescinded and annulled by the holders of a
majority in aggregate outstanding Voting Rights.
If, following an event of default, the notes have been declared to be due
and payable, the indenture trustee may, in its discretion, notwithstanding this
acceleration, elect to maintain possession of the collateral securing the notes
and to continue to apply payments on the collateral as if there had been no
declaration of acceleration if the collateral continues to provide sufficient
funds for the payment of principal of and interest on the notes as they would
have become due if there had not been a declaration of acceleration. In
addition, the indenture trustee may not sell or otherwise liquidate the
collateral securing the notes following an event of default, unless:
o the holders of 100% of the then aggregate outstanding voting rights
consent to the sale,
o the proceeds of the sale or liquidation are sufficient to pay in full
the principal of and accrued interest, due and unpaid at their
respective Note Accrual Rates, on the outstanding notes at the date of
the sale or
o the indenture trustee determines that the collateral would not be
sufficient on an ongoing basis to make all payments on the notes as the
payments would have become due if the notes had not been declared due
and payable, and the indenture trustee obtains the consent of the
holders of 66 2/3% of the then aggregate outstanding voting rights.
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In the event that the indenture trustee liquidates the collateral in
connection with an event of default, the indenture provides that the indenture
trustee will have a prior lien on the proceeds of any liquidation for unpaid
fees and expenses. As a result, upon the occurrence of an event of default, the
amount available for payments to the noteholders would be less than would
otherwise be the case. However, the indenture trustee may not institute a
proceeding for the enforcement of its lien except in connection with a
proceeding for the enforcement of the lien of the indenture for the benefit of
the noteholders after the occurrence of an event of default.
In the event the principal of the notes is declared due and payable, the
holders of any notes issued at a discount from par may be entitled to receive no
more than an amount equal to the unpaid principal amount of the note less the
amount of the discount that is unamortized.
No noteholder will have any right under the indenture to institute any
proceeding with respect to the indenture unless:
o the holder previously has given to the indenture trustee written
notice of default and the continuance of this default,
o the holders of notes of any class evidencing not less than 25% of the
aggregate outstanding Note Balance constituting that class have made
written request upon the indenture trustee to institute a proceeding in
its own name as indenture trustee thereunder and have offered to the
indenture trustee reasonable indemnity,
o the indenture trustee has neglected or refused to institute any
proceeding for 60 days after receipt of a request and indemnity and
o no direction inconsistent with the written request has been given to
the indenture trustee during the 60 day period by the holders of a
majority of the Note Balance of that class.
However, the indenture trustee will be under no obligation to exercise any
of the trusts or powers vested in it by the indenture or to institute, conduct
or defend any litigation under the indenture or in relation to the indenture at
the request, order or direction of any of the holders of notes covered by the
indenture, unless those holders have offered to the indenture trustee reasonable
security or indemnity against the costs, expenses and liabilities which may be
incurred therein or thereby.
VOTING RIGHTS
At all times, 100% of all voting rights will be allocated among the holders
of the Class A Notes, or, after the Class A Notes have been paid in full, the
class of subordinate notes then outstanding with the lowest numerical class
designation, in proportion to the then outstanding Note Balances of their
respective notes.
OPTIONAL REDEMPTION
The circumstances under which the obligations created by the indenture will
terminate in respect of the notes are described in "Description of the
Securities--Termination" in the prospectus.
At its option, the majority holder of the equity certificates may redeem
the notes, in whole but not in part, on any payment date on or after the payment
date on which the aggregate Note
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Balance is reduced to less than 20% of the aggregate initial Note Balance. Any
redemption of this kind will be paid in cash at a price equal to the sum of:
o 100% of the aggregate Note Balance then outstanding,
o the aggregate of any Allocated Realized Loss Amounts on the notes
remaining unpaid immediately prior to the payment date,
o the aggregate of the Interest Payment Amounts on the notes for the
payment date and
o the aggregate of any Interest Carry Forward Amounts for the payment
date.
Upon any redemption of this kind, the remaining assets in the trust estate
shall be released from the lien of the indenture.
In no event will the trust created by the indenture continue beyond the
expiration of 21 years from the death of the survivor of the persons named in
the indenture. See "Description of the Securities--Termination" in the
Prospectus.
FEDERAL INCOME TAX CONSEQUENCES
Prior to the sale of the certificates, Thacher Proffitt & Wood, counsel to
the depositor, will deliver its opinion to the effect that based on the
application of existing law and assuming compliance with the owner trust
agreement, for federal income tax purposes:
o the notes will be characterized as indebtedness and not as
representing an ownership interest in the trust estate or an equity
interest in the issuer or the depositor and
o the issuer will not be classified as an association taxable as a
corporation for federal income tax purposes or a publicly traded
partnership as defined in Treasury Regulation Section 1.7704.
The notes will not be treated as having been issued with original issue
discount, as defined in the prospectus. The prepayment assumption that will be
used in determining the rate of amortization of market discount and premium, if
any, for federal income tax purposes will be based on the assumption that the
mortgage loans will prepay at a rate equal to __% CPR. No representation is made
that the mortgage loans will prepay at that rate or at any other rate. See
"Federal Income Tax Consequences" in the prospectus.
Taxable mortgage pool, or TMP, rules enacted as part of the Tax Reform Act
of 1986 treat certain arrangements in which debt obligations are secured or
backed by real estate mortgage loans as taxable corporations. An entity, or a
portion of an entity, will be characterized as a TMP if:
o substantially all of its assets are debt obligations and more than
50% of these debt obligations consist of real estate mortgage
loans or interests in real estate mortgage loans,
o the entity is the obligor under debt obligations with two or more
maturities, and
o payments on the debt obligations referred to in clause (ii) bear a
relationship to payments on the debt obligations referred to in
clause (i).
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Furthermore, a group of assets held by an entity can be treated as a
separate TMP if the assets are expected to produce significant cashflow that
will support one or more of the entity's issues of debt obligation.
It is anticipated that the issuer will be characterized as a TMP for
federal income tax purposes. In most cases, a TMP is treated as a separate
corporation not includible with any other corporation in a consolidated income
tax return, and is subject to corporate income taxation.
The notes will not be treated as assets described in Section 7701(a)(19)(C)
of the Code or real estate assets under Section 856(c)(4)(A) of the Code. In
addition, interest on the notes will not be treated as interest on obligations
secured by mortgages on real property under Section 856(c)(3)(B) of the Code.
The notes will also not be treated as qualified mortgages under Section
860G(a)(3)(C) of the Code.
Prospective investors in the notes should see "Federal Income Tax
Consequences" and "State and Other Tax Consequences" in the prospectus for a
discussion of the application of federal income and state and local tax laws to
the issuer and purchasers of the notes.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the underwriting
agreement, dated ________ __, ____, the depositor has agreed to sell, and
________________, as underwriter, has agreed to purchase the notes. The
underwriter is obligated to purchase all notes of the respective classes offered
by this prospectus supplement if it purchases any.
The notes will be purchased from the depositor by the underwriter and will
be offered by the underwriter to the public from time to time in negotiated
transactions or otherwise at varying prices to be determined at the time of
sale. Proceeds to the depositor from the sale of the notes, before deducting
expenses payable by the depositor, will be approximately ___% of the aggregate
initial Note Balance of the notes. In connection with the purchase and sale of
the notes, the underwriter may be deemed to have received compensation from the
depositor in the form of underwriting discounts.
The offered notes are offered subject to receipt and acceptance by the
underwriter, to prior sale and to the underwriter's right to reject any order in
whole or in part and to withdraw, cancel or modify the offer without notice. It
is expected that delivery of the offered notes will be made through the
facilities of DTC on or about the closing date.
The underwriting agreement provides that the depositor will indemnify the
underwriter against those civil liabilities set forth in the underwriting
agreement, including liabilities under the Securities Act of 1933, as amended,
or will contribute to payments the underwriter may be required to make in
respect of these liabilities.
SECONDARY MARKET
There can be no assurance that a secondary market for the notes will
develop or, if it does develop, that it will continue. The primary source of
information available to investors
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<PAGE>
concerning the notes will be the monthly statements discussed in the prospectus
under "Description of the Securities--Reports to Securityholders", which will
include information as to the outstanding Note Balance of the notes and the
status of the applicable form of credit enhancement. There can be no assurance
that any additional information regarding the notes will be available through
any other source. In addition, the depositor is not aware of any source through
which price information about the notes will be available on an ongoing basis.
The limited nature of the information regarding the notes may adversely affect
the liquidity of the notes, even if a secondary market for the notes becomes
available.
LEGAL OPINIONS
Legal matters relating to the notes will be passed upon for the depositor
by Thacher Proffitt & Wood, New York, New York and for the underwriter by
________________.
RATINGS
It is a condition of the issuance of the notes that the Class A Notes be
rated "AAA" by _____________ and "AAA" by _______________, that the Class M-1
Notes be rated at least "AA" by ____ and at least "AA" by ____, that the Class
M-2 Notes be rated at least "A" by ____ and at least "A" by _____ and that the
Class M-3 Notes be rated at least "BBB" by _____.
The ratings of _____ and _____ assigned to the notes address the likelihood
of the receipt by noteholders of all payments to which the noteholders are
entitled, other than payments of interest to the extent of any Interest Carry
Forward Amounts. The rating process addresses structural and legal aspects
associated with the notes, including the nature of the underlying mortgage
loans. The ratings assigned to the notes do not represent any assessment of the
likelihood that principal prepayments will be made by the mortgagors or the
degree to which the rate of these prepayments will differ from that originally
anticipated. The ratings do not address the possibility that noteholders might
suffer a lower than anticipated yield due to non-credit events.
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 the assigning rating
organization. Each security rating should be evaluated independently of any
other security rating. In the event that the ratings initially assigned to the
notes are subsequently lowered for any reason, no person or entity is obligated
to provide any additional credit support or credit enhancement with respect to
the notes.
The depositor has not requested that any rating agency rate the notes other
than as stated in the first paragraph of this section. However, there can be no
assurance as to whether any other rating agency will rate the notes, or, if it
does, what rating would be assigned by any other rating agency. A rating on the
notes by another rating agency, if assigned at all, may be lower than the
ratings assigned to the notes as stated in the first paragraph of this section.
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<PAGE>
LEGAL INVESTMENT
The Class A Notes and the Class M-1 Notes will constitute mortgage related
securities for purposes of SMMEA for so long as they are rated not lower than
the second highest rating category by a rating agency, as defined in the
prospectus, and will be legal investments for entities to the extent provided in
SMMEA. SMMEA, however, provides for state limitation on the authority of these
entities to invest in mortgage related securities, provided that the restricting
legislation was enacted prior to October 3, 1991. Ten states have enacted
legislation which overrides the preemption provisions of SMMEA. The Class M-2
Notes and the Class M-3 Notes will not constitute mortgage related securities
for purposes of SMMEA.
The depositor makes no representations as to the proper characterization of
the notes for legal investment or other purposes, or as to the ability of
particular investors to purchase the notes under applicable legal investment
restrictions. These uncertainties may adversely affect the liquidity of the
notes. Accordingly, all institutions whose investment activities are subject to
legal investment laws and regulations, regulatory capital requirements or review
by regulatory authorities should consult with their legal advisors in
determining whether and to what extent the notes constitute a legal investment
or are subject to investment, capital or other restrictions.
See "Legal Investment" in the prospectus.
ERISA CONSIDERATIONS
ERISA and the Code impose requirements on employee benefit plans and other
retirement plans and arrangements, including, but not limited to, individual
retirement accounts and annuities, as well as on collective investment funds and
certain separate and general accounts of insurance companies in which these
plans or arrangements are invested, all of which are referred to as a Plan, and
on persons who are fiduciaries with respect to these Plans. ERISA and the Code
prohibit certain transactions involving the assets of a Plan and disqualified
persons and parties in interest who have certain specified relationships to the
Plan. Accordingly, prior to making an investment in the notes, investing Plans
should determine whether the issuer, the depositor, the seller, the trust
estate, the underwriter, any other underwriter, the owner trustee, the indenture
trustee, the master servicer, the servicers, any other servicer, any
administrator, any provider of credit support, or any insurer or any of their
affiliates is a party in interest or disqualified person with respect to a Plan
and, if so, whether this transaction is subject to one or more statutory or
administrative exemptions. Additionally, an investment of the assets of a Plan
in securities may cause the assets included in the trust estate to be deemed
plan assets of the Plan, and any person with certain specified relationships to
the trust estate to be deemed a party in interest or disqualified person. The
U.S. Department of Labor, or DOL, has promulgated regulations at 29 C.F.R.
Section 2510.3-101 defining the term plan assets for purposes of applying the
general fiduciary responsibility provisions of ERISA and the prohibited
transaction provisions of ERISA and Section 4975 of the Code. Under these
regulations, when a Plan acquires an equity interest in another entity, such as
the trust estate, the underlying assets of that entity may be considered to be
plan assets. These regulations provide that the term equity interest means any
interest in an entity other than an instrument which is treated as indebtedness
under applicable local law and
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<PAGE>
which has no substantial equity features. Although not entirely free from doubt,
it is believed that, as of the date of this prospectus supplement, the notes
will be treated as debt obligations without significant equity features for the
purposes of the regulations. Because of the factual nature of certain of the
above-described provisions of ERISA, the Code and the regulations, Plans or
persons investing plan assets should carefully consider whether an investment of
this kind might constitute or give rise to a prohibited transaction under ERISA
or the Code. Any Plan fiduciary which proposes to cause a Plan to acquire any of
the notes should consult with its counsel with respect to the potential
consequences under ERISA and the Code of the Plan's acquisition and ownership of
the notes.
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<PAGE>
$___________ (APPROXIMATE)
LONG BEACH SECURITIES CORP.
DEPOSITOR
[__] ASSET-BACKED FLOATING RATE NOTES, SERIES ____-___
PROSPECTUS SUPPLEMENT
DATED _______ __, ____
MASTER SERVICER
UNDERWRITER
YOU SHOULD 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 NOTES OFFERED BY THIS PROSPECTUS SUPPLEMENT 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 notes offered by this prospectus supplement and
with respect to their unsold allotments or subscriptions. In addition, all
dealers selling the offered notes, whether or not participating in this
offering, may be required to deliver a prospectus supplement and prospectus
until _______ __, ____.
<PAGE>
ANNEX I
GLOBAL CLEARANCE AND SETTLEMENT AND DOCUMENTATION PROCEDURES
Except in limited circumstances described in this prospectus supplement
under "Description of the Notes--Definitive Notes", the globally offered Long
Beach Securities Corp., [__] Trust Series ____-__, [__] Asset-Backed Floating
Rate Notes, Series ____-__, Class A, Class M-1, Class M-2 and Class M-3 Notes
will be available only in book-entry form. Investors in the global securities
may hold the global securities through any of DTC, Cedel or Euroclear. The
global securities will be traceable 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 Cedel and Euroclear will
be conducted in the ordinary way in accordance with the normal rules and
operating procedures of Cedel and Euroclear and in accordance with conventional
eurobond practice, that 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 Cedel or Euroclear and DTC
participants holding notes will be effected on a delivery-against-payment basis
through the respective Depositories of Cedel and Euroclear, in such capacity,
and as DTC participants.
Non-U.S. holders of Global Securities will be subject to U.S. withholding
taxes unless those holders meet specific requirements and deliver appropriate
U.S. tax documents to the securities clearing organizations or their
participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the name of
CEDE as nominee of DTC. Investors' interests in the Global Securities will be
represented through financial institutions acting on their behalf as direct and
indirect participants in DTC. As a result, Cedel and Euroclear will hold
positions on behalf of their participants through their relevant depositary
which in turn will hold those positions in their accounts as DTC participants.
Investors electing to hold their Global 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 Global Securities through Cedel or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no lock-up or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
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SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
TRADING BETWEEN DTC PARTICIPANTS. Secondary market trading between DTC
participants will be settled using the procedures applicable to prior mortgage
loan asset-backed notes issues in same-day funds.
TRADING BETWEEN CEDEL AND/OR EUROCLEAR PARTICIPANTS. Secondary market
trading between Cedel participants or Euroclear participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
TRADING BETWEEN DTC, SELLER AND CEDEL OR EUROCLEAR PARTICIPANTS. When
Global Securities are to be transferred from the account of a DTC participant to
the account of a Cedel participant or a Euroclear participant, the purchaser
will send instructions to Cedel or Euroclear through a Cedel participant or
Euroclear participant at least one business day prior to settlement. Cedel or
Euroclear will instruct the relevant depositary, as the case may be, to receive
the Global Securities against payment. Payment will include interest accrued on
the Global Securities from and including the last coupon payment date to and
excluding the settlement date, on the basis of 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 depositary to the DTC participant's account against delivery of the
Global Securities. After settlement has been completed, the Global Securities
will be credited to the respective clearing system and by the clearing system,
in accordance with its usual procedures, to the Cedel participant's or Euroclear
participant's account. The securities credit will appear the next day (European
time) and the cash debt will be back-valued to, and the interest on the Global
Securities will accrue from, the value date, which would be the preceding day
when settlement occurred in New York. If settlement is not completed on the
intended value date--the trade fails-- the Cedel or Euroclear cash debt will be
valued instead as of the actual settlement date.
Cedel 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 Cedel or Euroclear. Under this approach,
they may take on credit exposure to Cedel or Euroclear until the Global
Securities are credited to their account one day later. As an alternative, if
Cedel or Euroclear has extended a line of credit to them, Cedel 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, Cedel
participants or Euroclear participants purchasing Global Securities would incur
overdraft charges for one day, assuming they cleared the overdraft when the
Global Securities were credited to their accounts. However, interest on the
Global Securities would accrue from the value date. Therefore, in many cases the
investment income on the Global Securities earned during that one-day period may
substantially reduce or offset the amount of overdraft charges, although the
result will depend on each Cedel participant's or Euroclear participant's
particular cost of funds. Since the settlement is taking place during New York
business hours, DTC
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participants can employ their usual procedures for crediting Global Securities
to the respective European depositary for the benefit of Cedel participants or
Euroclear participants. The sale proceeds will be available to the DTC seller on
the settlement date. Thus, to the DTC participants a cross-market transaction
will settle no differently than a trade between two DTC participants.
TRADING BETWEEN CEDEL OR EUROCLEAR SELLER AND DTC PURCHASER. Due to time
zone differences in their favor, Cedel participants and Euroclear participants
may employ their customary procedures for transactions in which Global
Securities are to be transferred by the respective clearing system, through the
respective depositary, to a DTC participant. The seller will send instructions
to Cedel or Euroclear through a Cedel participant or Euroclear participant at
least one business day prior to settlement. In these cases Cedel or Euroclear
will instruct the respective depositary, as appropriate, to credit the Global
Securities to the DTC participant's account against payment. Payment will
include interest accrued on the Global Securities from and including the last
coupon payment to and excluding the settlement date on the basis of the actual
number of days in the accrual period and a year assumed to consist to 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 Cedel participant or Euroclear
participant the following day, and receipt of the cash proceeds in the Cedel
participant's or Euroclear participant's account would be back-valued to the
value date, which would be the preceding day, when settlement occurred in New
York. Should the Cedel participant or Euroclear participant have a line of
credit with its respective clearing system and elect to be in debt in
anticipation of receipt of the sale proceeds in its account, the back-valuation
will extinguish any overdraft incurred over that one-day period. If settlement
is not completed on the intended value date--the trade fails--receipt of the
cash proceeds in the Cedel participant's or Euroclear participant's account
would instead be valued as of the actual settlement date.
Finally, day traders that use Cedel or Euroclear and that purchase Global
Securities from DTC participants for delivery to Cedel participants or Euroclear
participants should 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:
o borrowing through Cedel or Euroclear for one day, until the purchase
side of the trade is reflected in their Cedel or Euroclear accounts, in
accordance with the clearing system's customary procedures
o borrowing the Global Securities in the U.S. from a DTC participant no
later than one day prior to settlement, which would give the Global
Securities sufficient time to be reflected in their Cedel or Euroclear
account in order to settle the sale side of the trade; or
o 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 Cedel
participant or Euroclear participant.
MATERIAL U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through Cedel 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 applies to payments of interest, including original issue
discount, on registered debt issued by United States Persons, unless
o 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
o the beneficial owner takes one of the following steps to obtain an
exemption or reduced tax rate:
o EXEMPTION FOR NON-UNITED STATES PERSONS (FORM W-8). Beneficial
holders of Global Securities that are non-United States 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.
o EXEMPTION FOR NON-UNITED STATES PERSONS WITH EFFECTIVELY CONNECTED
INCOME (FORM 4224). A non-United States Person, including a
non-U.S. corporation or bank with a U.S. branch, for which the
interest income is effectively connected with its conduct of a
trade or business in the United States, can obtain an exemption
from the withholding tax by filing Form 4224 (Exemption from
Withholding of Tax on Income Effectively Connected with the
Conduct of a Trade or Business in the United States).
o EXEMPTION OR REDUCED RATE FOR NON-UNITED STATES PERSONS RESIDENT
IN TREATY COUNTRIES (FORM 1001). Non-United States 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 (Holdership, 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
noteholders or their agent.
o EXEMPTION FOR UNITED STATES PERSONS (FORM W-9). United States
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 holder 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
security--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. This summary
does not deal with all aspects of U.S. Federal income tax withholding that may
be relevant to foreign holders of the Global Securities. Investors are advised
to consult their own tax advisors for specific tax advice concerning their
holding and disposing of the Global Securities.
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The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
MORTGAGE PASS-THROUGH CERTIFICATES
MORTGAGE-BACKED NOTES
(ISSUABLE IN SERIES)
LONG BEACH SECURITIES CORP.
Depositor
YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 3 OF THIS
PROSPECTUS AND IN THE PROSPECTUS SUPPLEMENT.
THE PROSPECTUS TOGETHER WITH THE ACCOMPANYING PROSPECTUS SUPPLEMENT WILL
CONSTITUTE THE FULL PROSPECTUS.
THE SECURITIES:
Long Beach Securities Corp., as depositor, will sell the securities, which may
be in the form of mortgage pass-through certificates or mortgage-backed notes.
Each issue of securities will have its own series designation and will evidence
either:
o the ownership of trust fund assets, or
o debt obligations secured by trust fund assets.
THE TRUST FUND AND ITS ASSETS
The assets of a trust fund will primarily include any combination of various
types of one- to four- family residential first and junior lien mortgage loans,
multifamily first and junior mortgage loans, commercial first and junior
mortgage loans, mixed-use residential and commercial first and junior mortgage
loans, home equity lines of credit, cooperative apartment loans, manufactured
housing conditional sales contracts and installment loan agreements, home
improvement installment sales contracts and installment loan agreements or home
equity revolving lines of credit, including partial balances of those lines of
credit or beneficial interests in those lines of credit.
CREDIT ENHANCEMENT
The assets of the trust fund for a series of securities may also include a
financial guaranty insurance policy, pool insurance policies, letters of credit,
reserve funds or currency or interest rate exchange agreements or any
combination of credit support. Credit enhancement may also be provided by means
of subordination of one or more classes of securities, cross-collateralization
or by overcollateralization.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED THESE SECURITIES OR DETERMINED THAT THIS PROSPECTUS IS
ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Offers of the securities may be made through one or more different methods,
including through underwriters as described in "Methods of Distribution" in this
prospectus and in the related prospectus supplement.
The date of this Prospectus is [__________].
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
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<S> <C>
Risk Factors......................................................................................................3
Description of the Trust Funds...................................................................................10
Description of the Mortgage Assets to be Included in a
Trust Fund.......................................................................................................11
Description of the Pre-Funding Account for the Purchase
of Additional Mortgage Loans.....................................................................................21
The Depositor....................................................................................................21
Use of Proceeds..................................................................................................21
Yield and Maturity Considerations................................................................................22
Maturity and Weighted Average Life...............................................................................25
Foreclosures and Payment Plans...................................................................................28
The Depositor's Mortgage Loan Purchase
Program..........................................................................................................29
Underwriting Standards...........................................................................................29
Qualifications of Originators and Mortgage Loan Sellers..........................................................31
Representations by or on behalf of Mortgage Loan Sellers;
Remedies for Breach of Representation............................................................................32
Description of the Securities....................................................................................34
Assignment of Trust Fund Assets; Review of Files by
Trustee..........................................................................................................35
Representations and Warranties; Repurchases......................................................................38
Establishment of Collection Account; Deposits to
Collection Account In Respect of Trust Fund Assets...............................................................40
Deposits to Distribution Account.................................................................................44
Distributions on the Securities..................................................................................45
Advances by Master Servicer in Respect of Delinquencies
on the Trust Fund Assets.........................................................................................47
Form of Reports to Securityholders...............................................................................48
Collection and Other Servicing Procedures Employed by
the Master Servicer..............................................................................................50
Description of Sub-Servicing.....................................................................................51
Procedures for Realization Upon Defaulted Mortgage
Assets...........................................................................................................53
Retained Interest; Servicing or Administration
Compensation and Payment of Expenses.............................................................................55
Annual Evidence as to the Compliance of the Master
Servicer.........................................................................................................56
Matters Regarding the Master Servicer and the Depositor..........................................................56
Events of Default under the Governing Agreement and
Rights Upon Events of Default....................................................................................57
Amendment of the Governing Agreements............................................................................61
Termination of the Trust Fund and Disposition of Trust
Fund Assets......................................................................................................63
Optional Purchase by the Master Servicer of Defaulted
Mortgage Loans...................................................................................................64
Duties of the Trustee............................................................................................64
Description of the Trustee.......................................................................................64
Description of Credit Support....................................................................................65
Subordination....................................................................................................66
Letter of Credit.................................................................................................67
Mortgage Pool Insurance Policy...................................................................................69
Special Hazard Insurance Policy..................................................................................71
Bankruptcy Bond..................................................................................................73
Financial Guarantee Insurance....................................................................................73
Reserve Fund.....................................................................................................73
Overcollateralization............................................................................................74
Cross-Support Features...........................................................................................74
Other Financial Obligations Related to the
Securities.......................................................................................................74
Swaps and Yield Supplement Agreements............................................................................74
Purchase Obligations.............................................................................................75
Description of Primary Insurance Policies........................................................................76
Primary Mortgage Insurance Policies..............................................................................76
Primary Hazard Insurance Policies................................................................................76
FHA Insurance....................................................................................................78
VA Guarantees....................................................................................................82
Legal Aspects of Mortgage Assets.................................................................................82
Mortgage Loans...................................................................................................82
Cooperative Loans................................................................................................83
Manufactured Housing Contracts...................................................................................84
Foreclosure on Mortgages.........................................................................................87
Foreclosure on Mortgaged Properties Located in the
Commonwealth of Puerto Rico......................................................................................89
Foreclosure on Cooperative Shares................................................................................90
Repossession with respect to Manufactured Housing
Contracts........................................................................................................91
Rights of Redemption with respect to Mortgage Loans..............................................................92
Notice of Sale; Redemption Rights with respect to
Manufactured Housing Contracts...................................................................................93
Anti-Deficiency Legislation and Other Limitations on
Lenders..........................................................................................................93
Junior Mortgages.................................................................................................95
Home Equity Line of Credit Loans.................................................................................96
Consumer Protection Laws with respect to Manufactured
Housing Contracts and Home Improvement Contracts.................................................................96
Other Limitations................................................................................................97
Enforceability of Provisions.....................................................................................98
Leases and Rents.................................................................................................99
Subordinate Financing............................................................................................99
Applicability of Usury Laws......................................................................................99
Alternative Mortgage Instruments................................................................................100
Formaldehyde Litigation with respect to Manufactured
Homes...........................................................................................................101
Soldiers' and Sailors' Civil Relief Act of 1940.................................................................102
Environmental Legislation.......................................................................................102
Forfeitures in Drug and RICO Proceedings........................................................................103
Negative Amortization Loans.....................................................................................104
Installment Contracts...........................................................................................104
Federal Income Tax Consequences.................................................................................105
General.........................................................................................................105
REMICs..........................................................................................................106
Notes...........................................................................................................126
Grantor Trust Funds.............................................................................................126
Partnership Trust Funds.........................................................................................137
FASIT securities................................................................................................143
State And Other Tax Consequences................................................................................143
Considerations For Benefit Plan Investors.......................................................................144
Investors Affected..............................................................................................144
Fiduciary Standards for ERISA Plans and Related
Investment Vehicles.............................................................................................144
Prohibited Transaction Issues for ERISA Plans, Keogh
Plans, IRAs and Related Investment Vehicles.....................................................................144
Possible Exemptive Relief.......................................................................................145
Consultation with Counsel.......................................................................................151
Government Plans................................................................................................151
Required Deemed Representations of Investors....................................................................151
Legal Investment................................................................................................152
Methods of Distribution.........................................................................................153
Legal Matters...................................................................................................154
Financial Information...........................................................................................155
Rating .......................................................................................................155
Available Information...........................................................................................155
Incorporation of Certain Information by
Reference.......................................................................................................155
</TABLE>
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RISK FACTORS
The offered securities are not suitable investments for all investors. In
particular, you should not purchase the offered securities unless you understand
and are able to bear the prepayment, credit, liquidity and market risks
associated with the securities.
You should carefully consider the following factors in connection with the
purchase of the securities offered hereby as well as any additional risk factors
that are set forth in the prospectus supplement related to your security:
THE SECURITIES WILL HAVE LIMITED LIQUIDITY SO INVESTORS MAY BE UNABLE TO SELL
THEIR SECURITIES OR MAY BE FORCED TO SELL THEM AT A DISCOUNT FROM THEIR INITIAL
OFFERING PRICE
There can be no assurance that a resale market for the securities of any
series will develop following the issuance and sale of any series of securities.
Even if a resale market does develop, it may not provide securityholders with
liquidity of investment or continue for the life of the securities of any
series. The prospectus supplement for any series of securities may indicate that
an underwriter specified in the prospectus supplement intends to establish a
secondary market in the securities, however no underwriter will be obligated to
do so. As a result, any resale prices that may be available for any offered
security in any market that may develop may be at a discount from the initial
offering price. The securities offered hereby will not be listed on any
securities exchange.
CREDIT SUPPORT MAY BE LIMITED; THE FAILURE OF CREDIT SUPPORT TO COVER LOSSES ON
THE TRUST FUND ASSETS WILL RESULT IN LOSSES ALLOCATED TO THE RELATED SECURITIES
Credit support is intended to reduce the effect of delinquent payments or
losses on the underlying trust fund assets on those classes of securities that
have the benefit of the credit support. With respect to each series of
securities, credit support will be provided in one or more of the forms referred
to in this prospectus and the related prospectus supplement. Regardless of the
form of credit support provided, the amount of coverage will usually be limited
in amount and in most cases will be subject to periodic reduction in accordance
with a schedule or formula. Furthermore, credit support may provide only very
limited coverage as to particular types of losses or risks, and may provide no
coverage as to other types of losses or risks. If losses on the trust fund
assets exceed the amount of coverage provided by any credit support or the
losses are of a type not covered by any credit support, these losses will be
borne by the holders of the related securities or specific classes of the
related securities. SEE "DESCRIPTION OF CREDIT SUPPORT".
THE TYPES OF MORTGAGE LOANS INCLUDED IN THE TRUST FUND RELATED TO YOUR
SECURITIES MAY BE ESPECIALLY PRONE TO DEFAULTS WHICH MAY EXPOSE YOUR SECURITIES
TO GREATER LOSSES
The securities will be directly or indirectly backed by mortgage loans,
manufactured housing conditional sales contracts and installment loan
agreements. The types of mortgage loans included in the trust fund may have a
greater likelihood of delinquency and foreclosure, and a greater likelihood of
loss in the event of delinquency and foreclosure. You should be aware that if
the mortgaged properties fail to provide adequate security for the mortgage
loans included in a trust
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fund, any resulting losses, to the extent not covered by credit support, will be
allocated to the related securities in the manner described in the related
prospectus supplement and consequently would adversely affect the yield to
maturity on those securities. The depositor cannot assure you that the values of
the mortgaged properties have remained or will remain at the appraised values on
the dates of origination of the related mortgage loans. The prospectus
supplement for each series of securities will describe the mortgage loans which
are to be included in the trust fund related to your security and risks
associated with those mortgage loans which you should carefully consider in
connection with the purchase of your security.
NONPERFECTION OF SECURITY INTERESTS IN MANUFACTURED HOMES MAY RESULT IN LOSSES
ON THE RELATED MANUFACTURED HOUSING CONTRACTS AND THE SECURITIES BACKED BY THE
MANUFACTURED HOUSING CONTRACTS
Any conditional sales contracts and installment loan agreements with
respect to manufactured homes included in a trust fund will be secured by a
security interest in a manufactured home. Perfection of security interests in
manufactured homes and enforcement of rights to realize upon the value of the
manufactured homes as collateral for the manufactured housing contracts are
subject to a number of federal and state laws, including the Uniform Commercial
Code as adopted in each state and each state's certificate of title statutes.
The steps necessary to perfect the security interest in a manufactured home will
vary from state to state. If the master servicer fails, due to clerical errors
or otherwise, to take the appropriate steps to perfect the security interest,
the trustee may not have a first priority security interest in the manufactured
home securing a manufactured housing contract. Additionally, courts in many
states have held that manufactured homes may become subject to real estate title
and recording laws. As a result, a security interest in a manufactured home
could be rendered subordinate to the interests of other parties claiming an
interest in the home under applicable state real estate law. The failure to
properly perfect a valid, first priority security interest in a manufactured
home securing a manufactured housing contract could lead to losses that, to the
extent not covered by credit support, may adversely affect the yield to maturity
of the related securities.
FORECLOSURE OF MORTGAGE LOANS MAY RESULT IN LIMITATIONS OR DELAYS IN RECOVERY
AND LOSSES ALLOCATED TO THE RELATED SECURITIES
Even assuming that the mortgaged properties provide adequate security for
the mortgage loans, substantial delays can be encountered in connection with the
liquidation of defaulted mortgage loans and corresponding delays in the receipt
of related proceeds by the securityholders could occur. An action to foreclose
on a mortgaged property securing a mortgage loan is regulated by state statutes,
rules and judicial decisions and is subject to many of the delays and expenses
of other lawsuits if defenses or counterclaims are interposed, sometimes
requiring several years to complete. In several states an action to obtain a
deficiency judgment is not permitted following a nonjudicial sale of a mortgaged
property. In the event of a default by a mortgagor, these restrictions may
impede the ability of the master servicer to foreclose on or sell the mortgaged
property or to obtain liquidation proceeds sufficient to repay all amounts due
on the related mortgage loan. The master servicer will be entitled to deduct
from liquidation proceeds all expenses incurred in attempting to recover amounts
due on the related liquidated mortgage loan and not yet repaid, including
payments to prior
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lienholders, accrued servicing fees, ancillary fees, legal fees and costs of
legal action, real estate taxes, maintenance and preservation expenses, monthly
advances and servicing advances. If any mortgaged properties fail to provide
adequate security for the mortgage loans in the trust fund related to your
security and insufficient funds are available from any applicable credit
support, you could experience a loss on your investment.
Liquidation expenses with respect to defaulted mortgage loans do not vary
directly with the outstanding principal balance of the loan at the time of
default. Therefore, assuming that a servicer takes the same steps in realizing
upon a defaulted mortgage loan having a small remaining principal balance as it
would in the case of a defaulted mortgage loan having a larger principal
balance, the amount realized after expenses of liquidation would be less as a
percentage of the outstanding principal balance of the smaller principal balance
mortgage loan than would be the case with a larger principal balance loan.
MORTGAGED PROPERTIES ARE SUBJECT TO ENVIRONMENTAL RISKS AND THE COST OF
ENVIRONMENTAL CLEAN-UP MAY INCREASE LOSSES ON THE RELATED MORTGAGE LOANS
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner of real property may be liable for the
costs of removal or remediation of hazardous or toxic substances on, under or in
the property. These laws often impose liability whether or not the owner or
operator knew of, or was responsible for, the presence of the hazardous or toxic
substances. A lender also risks liability on foreclosure of the mortgage on the
property. In addition, the presence of hazardous or toxic substances, or the
failure to properly remediate the property, may adversely affect the owner's or
operator's ability to sell the property. Although the incidence of environmental
contamination of residential properties is less common than that for commercial
properties, mortgage loans contained in a trust fund may be secured by mortgaged
properties in violation of environmental laws, ordinances or regulations. The
master servicer is generally prohibited from foreclosing on a mortgaged property
unless it has taken adequate steps to ensure environmental compliance with
respect to the mortgaged property. However, to the extent the master servicer
errs and forecloses on mortgaged property that is subject to environmental law
violations, and to the extent a mortgage loan seller does not provide adequate
representations and warranties against environmental law violations, or is
unable to honor its obligations, including the obligation to repurchase a
mortgage loan upon the breach of a representation or warranty, a trust fund
could experience losses which, to the extent not covered by credit support,
could adversely affect the yield to maturity on the related securities.
THE RATINGS OF YOUR SECURITIES MAY BE LOWERED OR WITHDRAWN WHICH MAY ADVERSELY
AFFECT THE LIQUIDITY OR MARKET VALUE OF YOUR SECURITY
It is a condition to the issuance of the securities that each series of
securities be rated in one of the four highest rating categories by a nationally
recognized statistical rating agency. A security rating is not a recommendation
to buy, sell or hold securities and may be subject to revision or withdrawal at
any time. No person is obligated to maintain the rating on any security, and
accordingly, there can be no assurance to you that the ratings assigned to any
security on the date on which the security is originally issued will not be
lowered or withdrawn by a rating agency at any
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time thereafter. The rating(s) of any series of securities by any applicable
rating agency may be lowered following the initial issuance of the securities as
a result of the downgrading of the obligations of any applicable credit support
provider, or as a result of losses on the related mortgage loans in excess of
the levels contemplated by the rating agency at the time of its initial rating
analysis. Neither the depositor, the master servicer nor any of their respective
affiliates will have any obligation to replace or supplement any credit support,
or to take any other action to maintain any rating(s) of any series of
securities. If any rating is revised or withdrawn, the liquidity or the market
value of your security may be adversely affected.
FAILURE OF THE MORTGAGE LOAN SELLER TO REPURCHASE OR REPLACE A MORTGAGE LOAN MAY
RESULT IN LOSSES ALLOCATED TO THE RELATED SECURITIES
Each mortgage loan seller will have made representations and warranties in
respect of the mortgage loans sold by the mortgage loan seller and evidenced by
a series of securities. In the event of a breach of a mortgage loan seller's
representation or warranty that materially adversely affects the interests of
the securityholders in a mortgage loan, the related mortgage loan seller will be
obligated to cure the breach or repurchase or, if permitted, replace the
mortgage loan as described under "Mortgage Loan Program-Representations as to
Mortgage Loans to be made by or on Behalf of Mortgage Loan Sellers; Remedies for
Breach of Representation". However, there can be no assurance that a mortgage
loan seller will honor its obligation to cure, repurchase or, if permitted,
replace any mortgage loan as to which a breach of a representation or warranty
arises. A mortgage loan seller's failure or refusal to honor its repurchase
obligation could lead to losses that, to the extent not covered by credit
support, may adversely affect the yield to maturity of the related securities.
In instances where a mortgage loan seller is unable, or disputes its
obligation, to repurchase affected mortgage loans, the master servicer may
negotiate and enter into one or more settlement agreements with the mortgage
loan seller that could provide for the purchase of only a portion of the
affected mortgage loans. Any settlement could lead to losses on the mortgage
loans which would be borne by the related securities. Neither the depositor nor
the master servicer will be obligated to purchase a mortgage loan if a mortgage
loan seller defaults on its obligation to do so, and no assurance can be given
that the mortgage loan sellers will carry out their repurchase obligations. A
default by a mortgage loan seller is not a default by the depositor or by the
master servicer. Any mortgage loan not so repurchased or substituted for shall
remain in the related trust fund and any related losses shall be allocated to
the related credit support, to the extent available, and otherwise to one or
more classes of the related series of securities.
All of the representations and warranties of a mortgage loan seller in
respect of a mortgage loan will have been made as of the date on which the
mortgage loan was purchased from the mortgage loan seller by or on behalf of the
depositor which will be a date prior to the date of initial issuance of the
related series of securities. A substantial period of time may have elapsed
between the date as of which the representations and warranties were made and
the later date of initial issuance of the related series of securities.
Accordingly, the mortgage loan seller's repurchase obligation, or, if specified
in the related prospectus supplement, limited replacement option, will not arise
if, during the period after the date of sale by the mortgage loan seller, an
event occurs that would have given
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rise to a repurchase obligation had the event occurred prior to sale of the
affected mortgage loan. The occurrence of events during this period that are not
covered by a mortgage loan seller's repurchase obligation could lead to losses
that, to the extent not covered by credit support, may adversely affect the
yield to maturity of the related securities.
THE YIELD TO MATURITY ON YOUR SECURITIES WILL DEPEND ON A VARIETY OF FACTORS
INCLUDING PREPAYMENTS
The timing of principal payments on the securities of a series will be
affected by a number of factors, including the following:
o the extent of prepayments on the underlying assets in the trust fund
or;
o how payments of principal are allocated among the classes of
securities of that series as specified in the related prospectus
supplement;
o if any party has an option to terminate the related trust fund early,
the effect of the exercise of the option;
o the rate and timing of defaults and losses on the assets in the
related trust fund;
o repurchases of assets in the related trust fund as a result of
material breaches of representations and warranties made by the
depositor, master servicer or mortgage loan seller; and;
o with respect to a trust fund containing home equity revolving credit
loans, additional draws on under the related credit line agreements.
Prepayments on mortgage loans are influenced by a number of factors,
including prevailing mortgage market interest rates, local and regional economic
conditions and homeowner mobility. The rate of prepayment of the mortgage loans
included in or underlying the assets in each trust fund may affect the yield to
maturity of the securities. In general, if you purchase a class of offered
securities at a price higher than its outstanding principal balance and
principal distributions on your class occur faster than you anticipate at the
time of purchase, the yield will be lower than you anticipate. Conversely, if
you purchase a class of offered securities at a price lower than its outstanding
principal balance and principal distributions on that class occur more slowly
than you anticipate at the time of purchase, the yield will be lower than you
anticipate.
To the extent amounts in any pre-funding account have not been used to
purchase additional mortgage loans, holders of the related securities may
receive an additional prepayment.
The yield to maturity on the types of classes of securities, including
securities that are entitled to principal distributions only or interest
distributions only, securities as to which accrued interest or a portion thereof
will not be distributed but rather added to the principal balance of the
security, and securities with an interest rate which fluctuates inversely with
an index, may be relatively more
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sensitive to the rate of prepayment on the related mortgage loans than other
classes of securities and, if applicable, to the occurrence of an early
retirement of the securities. The prospectus supplement for a series will set
forth the related classes of securities that may be more sensitive to prepayment
rates.
SEE "YIELD AND MATURITY CONSIDERATIONS" IN THIS PROSPECTUS.
THE EXERCISE OF AN OPTIONAL TERMINATION RIGHT WILL AFFECT THE YIELD TO MATURITY
ON THE RELATED SECURITIES
The prospectus supplement for each series of securities will set forth the
party or parties that may, at its option, purchase the assets of the related
trust fund if the aggregate principal balance of the mortgage loans and other
trust fund assets in the trust fund for that series is less than the percentage
specified in the related prospectus supplement of the aggregate principal
balance of the outstanding mortgage loans and other trust fund assets at the
cut-off date for that series. The percentage will be between 25% and 0%. The
exercise of the termination right will effect the early retirement of the
securities of that series. The prospectus supplement for each series of
securities will set forth the price to be paid by the terminating party and the
amounts that the holders of the securities will be entitled to receive upon
early retirement.
In addition to the repurchase of the assets in the related trust fund as
described in the paragraph above, the related prospectus supplement may permit
that, a holder of a non-offered class of securities will have the right, solely
at its discretion, to terminate the related trust fund on any distribution date
after the 12th distribution date following the date of initial issuance of the
related series of securities and until the date as the option to terminate as
described in the paragraph above becomes exercisable and thereby effect early
retirement of the securities of the series. Any call of this type will be of the
entire trust fund at one time; multiple calls with respect to any series of
securities will not be permitted. In this case, the call class must remit to the
trustee for distribution to the holders of the related securities offered hereby
a price equal to 100% of the principal balance of their securities offered
hereby as of the day of the purchase plus accrued interest thereon at the
applicable interest rate during the related period on which interest accrues on
their securities. If funds equal to the call price are not deposited with the
related trustee, the securities will remain outstanding. There will not be any
additional remedies available to securityholders. In addition, in the case of a
trust fund for which a REMIC election or elections have been made, the
termination will constitute a "qualified liquidation" under Section 860F of the
Internal Revenue Code. In connection with a call by the call class, the final
payment to the securityholders will be made upon surrender of the related
securities to the trustee. Once the securities have been surrendered and paid in
full, there will not be any continuing liability from the securityholders or
from the trust fund to securityholders.
A trust fund may also be terminated and the certificates retired upon the
master servicer's determination, if applicable and based upon an opinion of
counsel, that the REMIC status of the trust fund has been lost or that a
substantial risk exists that the REMIC status will be lost for the then current
taxable year.
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The termination of a trust fund and the early retirement of securities by
any party would decrease the average life of the securities and may adversely
affect the yield to holders of some or all classes of the related securities.
VIOLATIONS OF CONSUMER PROTECTION LAWS MAY RESULT IN LOSSES ON THE MORTGAGE
LOANS AND THE SECURITIES BACKED BY THOSE MORTGAGE LOANS
Federal and state laws, public policy and general principles of equity
relating to the protection of consumers, unfair and deceptive practices and debt
collection practices:
o regulate interest rates and other charges on mortgage loans;
o require specific disclosures to borrowers;
o require licensing of originators; and
o regulate generally the origination, servicing and collection process
for the mortgage loans.
Depending on the specific facts and circumstances involved, violations may
limit the ability of a trust fund to collect all or a part of the principal of
or interest on the mortgage loans, may entitle the borrower to a refund of
amounts previously paid and could result in liability for damages and
administrative enforcement against the originator or an assignee of the
originator, like a trust fund, or the initial servicer or a subsequent servicer,
as the case may be. In particular, it is possible that mortgage loans included
in a trust fund will be subject to the Home Ownership and Equity Protection Act
of 1994. The Homeownership Act adds additional provisions to Regulation Z, the
implementing regulation of the Federal Truth-In-Lending Act. These provisions
impose additional disclosure and other requirements on creditors with respect to
non-purchase money mortgage loans with interest rates or origination costs in
excess of prescribed levels. The provisions of the Homeownership Act apply on a
mandatory basis to all mortgage loans originated on or after October 1, 1995.
These provisions can impose specific statutory liabilities upon creditors who
fail to comply with their provisions and may affect the enforceability of the
related loans. In addition, any assignee of the creditor, like a trust fund,
would generally be subject to all claims and defenses that the consumer could
assert against the creditor, including the right to rescind the mortgage loan.
Recently, class action lawsuits under the Homeownership Act have been brought
naming as a defendant securitization trusts like the trust funds described in
this prospectus with respect to the mortgage loans.
In addition, amendments to the federal bankruptcy laws have been proposed
that could result in (1) the treatment of a claim secured by a junior lien in a
borrower's principal residence as protected only to the extent that the claim
was secured when the security interest was made and (2) the disallowance of
claims based on secured debt if the creditor failed to comply with specific
provisions of the Truth in Lending Act (15 U.S.C. ss.1639). These amendments
could apply retroactively to secured debt incurred by the debtor prior to the
date of effectiveness of the amendments.
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The mortgage loan seller will represent that all applicable federal and
state laws were complied with in connection with the origination of the mortgage
loans. If there is a material and adverse breach of a representation, the
depositor will be obligated to repurchase any affected mortgage loan or to
substitute a new mortgage loan into the related trust fund. If the mortgage loan
seller fails to repurchase or substitute, a trust fund could experience losses
which, to the extent not covered by credit support, could adversely affect the
yield to maturity on the related securities. SEE "LEGAL ASPECTS OF MORTGAGE
ASSETS".
Several capitalized terms are used in this prospectus to assist you in
understanding the terms of the securities. All of the capitalized terms used in
this prospectus are defined in the glossary beginning on page 156 in this
prospectus.
DESCRIPTION OF THE TRUST FUNDS
The trust fund for each series will be held by the trustee for the benefit
of the related securityholders. Each trust fund will consist of:
o a segregated pool of various types of first and junior lien mortgage
loans, cooperative apartment loans, manufactured housing conditional
sales contracts and installment loan agreements, home improvement
installment sales contracts and installment loan agreements or home
equity revolving lines of credit, including partial balances of those
lines of credit or beneficial interests in those lines of credit as
are subject to the related agreement governing the trust fund;
o amounts on deposit in the distribution account, pre-funding account,
if applicable, or any other account maintained for the benefit of the
securityholders;
o property acquired on behalf of securityholders by foreclosure, deed in
lieu of foreclosure or repossession and any revenues received on the
property;
o the rights of the depositor under any hazard insurance policies, FHA
insurance policies, VA guarantees and primary mortgage insurance
policies to be included in the trust fund, each as described under
"Description of Primary Insurance Policies";
o the rights of the depositor under the agreement or agreements under
which it acquired the mortgage loans to be included in the trust fund;
o the rights of the trustee in any cash advance reserve fund or surety
bond to be included in the trust fund, each as described under
"Advances by Master Servicer in Respect of Delinquencies on the Trust
Fund Assets"; and
o any letter of credit, mortgage pool insurance policy, special hazard
insurance policy, bankruptcy bond, financial guarantee insurance
policy, reserve fund, currency or interest rate exchange agreement or
guarantee, each as described under "Description of Credit Support".
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To the extent specified in the related prospectus supplement, a portion of
the interest received on a mortgage loan may not be included in the trust for
that series. Instead, the retained interest will be retained by or payable to
the originator, servicer or seller (or a designee of one of the foregoing) of
the loan, free and clear of the interest of securityholders under the related
agreement.
DESCRIPTION OF THE MORTGAGE ASSETS TO BE INCLUDED IN A TRUST FUND
Each mortgage asset will be originated by a person other than the
depositor. Each mortgage asset will be selected by the depositor for inclusion
in a trust fund from among those purchased by the depositor, either directly or
through its affiliates, from Long Beach Mortgage Company, the parent of the
depositor, and its affiliates or from banks, savings and loan associations,
mortgage bankers, mortgage brokers, investment banking firms, the Federal
Deposit Insurance Corporation and other mortgage loan originators or sellers not
affiliated with the depositor. Each seller of mortgage assets will be referred
to in this prospectus and the related prospectus supplement as a mortgage loan
seller. The mortgage assets acquired by the depositor will have been originated
in accordance with the underlying criteria described in this prospectus under
"The Depositor's Mortgage Loan Purchase Program-Underwriting Standards" and in
the prospectus supplement. All mortgage assets to be included in a trust fund as
of the closing date will have been purchased by the depositor on or before the
date of initial issuance of the related securities.
The mortgage assets included in a trust fund will be evidenced by a
promissory note or contract, referred to in this prospectus as a mortgage note,
and may be secured by any of the following:
o first or junior liens on one- to four-family residential properties
including detached and attached dwellings, townhouses, rowhouses,
individual condominium units, individual units in planned-unit
developments and individual units in de minimis planned-unit
developments. Loans secured by this type of property are referred to
in this prospectus as single-family loans and may be conventional
loans, FHA-insured loans or VA-guaranteed loans as specified in the
related prospectus supplement;
o first or junior liens secured by shares in a private cooperative
housing corporation that give the owner of the shares the right to
occupy a particular dwelling unit in the cooperative;
o rental apartments or projects, including apartment buildings owned by
cooperative housing corporations, containing five or more dwelling
units. The multifamily properties may include high-rise, mid-rise or
garden apartments. Loans secured by this type of property may be
conventional loans or FHA-insured loans as specified in the related
prospectus supplement;
o commercial properties including office buildings, retail buildings and
a variety of other commercial properties as may be described in the
related prospectus supplement;
o properties consisting of mixed residential and commercial structures;
o leasehold interests in residential properties, the title of which is
held by third party lessors;
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o manufactured homes that, in the case of mortgage loans, are
permanently affixed to their site or, in the case of manufactured home
conditional sales contracts and installment loan agreements, may be
relocated; or
o real property acquired upon foreclosure or comparable conversion of
the mortgage loans included in a trust fund.
No more than 10% of the assets of a trust fund, by original principal
balance of the pool, will be secured by commercial properties. The term of any
leasehold will exceed the term of the mortgage note by at least five years.
The manufactured homes securing the mortgage loans or manufactured housing
contracts will consist of manufactured homes within the meaning of 42 United
States Code, Section 5402(6), which defines a manufactured home as "a structure,
transportable in one or more sections, which in the traveling mode, is eight
body feet or more in width or forty body feet or more in length, or, when
erected on site, is three hundred twenty or more square feet, and which is built
on a permanent chassis and designed to be used as a dwelling with or without a
permanent foundation when connected to the required utilities, and includes the
plumbing, heating, air conditioning, and electrical systems contained therein;
except that such term shall include any structure which meets all the
requirements of this paragraph except the size requirements and with respect to
which the manufacturer voluntarily files a certification required by the
Secretary of Housing and Urban Development and complies with the standards
established under this chapter."
The home improvement contracts will be secured primarily by mortgages on
single family properties that are generally subordinate to other mortgages on
the same mortgaged property or by purchase money security interests in the home
improvements financed thereby.
The mortgaged properties may be located in any one of the fifty states, the
District of Columbia, Guam, Puerto Rico or any other territory of the United
States. The mortgaged properties may include vacation, second and non-owner
occupied homes.
The mortgage assets to be included in a trust fund will be any one of the
following types of mortgage assets:
o Fully amortizing mortgage assets with a fixed rate of interest and
level monthly payments to maturity;
o Fully amortizing mortgage assets with an interest rate that adjusts
periodically, with corresponding adjustments in the amount of monthly
payments, to equal the sum, which may be rounded, of a fixed
percentage amount and an index;
o ARM Loans that provide for an election, at the borrower's option, to
convert the adjustable interest rate to a fixed interest rate, which
will be described in the related prospectus supplement;
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o ARM Loans that provide for negative amortization or accelerated
amortization resulting from delays in or limitations on the payment
adjustments necessary to amortize fully the outstanding principal
balance of the loan at its then applicable interest rate over its
remaining term;
o Fully amortizing mortgage assets with a fixed interest rate and level
monthly payments, or payments of interest only, during the early years
of the term, followed by periodically increasing monthly payments of
principal and interest for the duration of the term or for a specified
number of years, which will be described in the related prospectus
supplement;
o Fixed interest rate mortgage assets providing for level payment of
principal and interest on the basis of an assumed amortization
schedule and a balloon payment at the end of a specified term;
o Mortgage assets that provide for a line of credit under which amounts
may be advanced to the borrower from time to time including home
equity revolving credit loans;
o Fixed interest rate mortgage assets that provide that the interest may
increase upon default, which increased rate may be subject to
adjustment and may or may not convert back to the original fixed
interest rate upon cure of the default;
o Fixed interest rate mortgage assets that provide for reductions in the
interest rate, and corresponding monthly payment due thereon during
the first 36 months of the term thereof; and
o Another type of mortgage loan described in the related prospectus
supplement.
Each single-family loan having a loan-to-value ratio at origination in
excess of 80% may be required to be covered by a primary mortgage guaranty
insurance policy insuring against default on the mortgage loan as to at least
the principal amount thereof exceeding 75% of the value of the mortgaged
property at origination of the mortgage loan. This type of insurance will remain
in force at least until the mortgage loan amortizes to a level that would
produce a loan-to-value ratio lower than 80%. SEE "DESCRIPTION OF PRIMARY
INSURANCE POLICIES--PRIMARY MORTGAGE INSURANCE POLICIES".
A mortgaged property may have been subject to secondary financing at
origination of the mortgage loan, but, unless otherwise specified in the related
prospectus supplement, the total amount of primary and secondary financing at
the time of origination of the mortgage loan did not, to the mortgage loan
seller's knowledge, produce a combined loan-to-value ratio in excess of 150%.
The trust fund may contain mortgage loans secured by junior liens, and the
related senior lien may not be included in the trust fund. The primary risk to
holders of mortgage loans secured by junior liens is the possibility that
adequate funds will not be received in connection with a foreclosure of the
related senior liens to satisfy fully both the senior liens and the junior
mortgage loan. In addition, some or all of the single family loans secured by
junior liens may be High LTV Loans. SEE "LEGAL ASPECTS OF MORTGAGE
ASSETS--FORECLOSURE ON MORTGAGES".
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The loan-to-value ratio of a mortgage loan at any given time is the ratio,
expressed as a percentage, of the then outstanding principal balance of the
mortgage loan, or, in the case of a home equity line of credit loan, the maximum
principal amount which may be advanced over the term of the loan, plus, in the
case of a mortgage loan secured by a junior lien, the outstanding principal
balance of the related senior liens, to the value of the related mortgaged
property. The value of a single-family property or cooperative unit, is the
lesser of (a) the appraised value determined in an appraisal obtained by the
originator at origination of the loan and (b) if the mortgaged property is being
purchased in conjunction with the origination of the mortgage loan the sales
price for the property. For purposes of calculating the loan-to-value ratio of a
manufactured housing contract relating to a new manufactured home, the value is
no greater than the sum of a fixed percentage of the list price of the unit
actually billed by the manufacturer to the dealer, exclusive of freight to the
dealer site, including accessories identified in the invoice, plus the actual
cost of any accessories purchased from the dealer, a delivery and set-up
allowance, depending on the size of the unit, and the cost of state and local
taxes, filing fees and up to three years prepaid hazard insurance premiums. With
respect to a used manufactured home, the value is generally the least of the
sale price, the appraised value, and the National Automobile Dealer's
Association book value plus prepaid taxes and hazard insurance premiums. The
appraised value of a manufactured home is based upon the age and condition of
the manufactured housing unit and the quality and condition of the mobile home
park in which it is situated, if applicable. Manufactured homes are less likely
than other types of housing to experience appreciation in value and are more
likely to experience depreciation in value.
The underwriting standards of the mortgage loan originator or mortgage loan
seller may require an internal review of the appraisal (a "review appraisal")
used to determine the loan-to-value of a mortgage loan which may be performed by
underwriters rather than a licensed appraiser. Where the review appraisal
results in a valuation of the mortgaged property that is less than a specified
percentage of the original appraisal, the loan-to-value ratio of the related
mortgage loan will be based on the review appraisal. The prospectus supplement
of each series will describe the percentage variance used by the related
mortgage loan originator or mortgage loan seller in determining whether the
review appraisal will apply.
A mortgage loan secured by a condominium unit will not be included in a
mortgage pool unless, at the time of sale of the mortgage loan by the mortgage
loan seller, representations and warranties as to the condominium project are
made by the mortgage loan seller or an affiliate of the mortgage loan seller or
by another person acceptable to the depositor having knowledge regarding the
subject matter of those representations and warranties. The mortgage loan
seller, or another party on its behalf, will have made the following
representations and warranties:
o If a condominium project is subject to developer control or to
incomplete phasing or add-ons, at least 50% of the units have been
sold to bona fide purchasers to be occupied as primary residences or
vacation or second homes.
o If a condominium project has been controlled by the unit owners, other
than the developer, and is not subject to incomplete phasing or
add-ons, at least 50% of the units been are occupied as primary
residences or vacation or second homes. SEE "THE DEPOSITOR'S MORTGAGE
LOAN PURCHASE PROGRAM--REPRESENTATIONS BY OR ON BEHALF OF MORTGAGE
LOAN SELLERS; REMEDIES FOR BREACH OF REPRESENTATION" IN THIS
PROSPECTUS FOR A DESCRIPTION
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OF OTHER REPRESENTATIONS MADE BY OR ON BEHALF OF MORTGAGE LOAN SELLERS AT THE
TIME MORTGAGE LOANS ARE SOLD.
The trust fund may include mortgage loans subject to temporary buydown
plans which provide that the monthly payments made by the borrower in the early
years of the mortgage loan will be less than the scheduled monthly payments on
the mortgage loan, the resulting difference to be made up from (a) an amount
contributed by the borrower, the seller of the mortgaged property, or another
source and placed in a custodial account and (b) unless otherwise specified in
the prospectus supplement, investment earnings on the buydown funds. The
borrower under a buydown mortgage loan is usually qualified at the lower monthly
payment taking into account the funds on deposit in the custodial account.
Accordingly, the repayment of a buydown mortgage loan is dependent on the
ability of the borrower to make larger level monthly payments after the funds in
the custodial account have been depleted. SEE "THE DEPOSITOR'S MORTGAGE LOAN
PURCHASE PROGRAM--UNDERWRITING STANDARDS" FOR A DISCUSSION OF LOSS AND
DELINQUENCY CONSIDERATIONS RELATING TO BUYDOWN MORTGAGE LOANS.
The trust fund may include mortgage loans with respect to which a portion
of the loan proceeds are held back from the mortgagor until required repairs or
improvements on the mortgaged property are completed, in accordance with the
mortgage loan seller's underwriting standards.
The trust fund may include mortgage loans that are delinquent as of the
date the related series of securities is issued. In that case, the related
prospectus supplement will set forth, as to each mortgage loan, available
information as to the period of delinquency and any other information relevant
for a prospective purchaser to make an investment decision. No mortgage loan in
a trust fund will be 90 or more days delinquent and no trust fund will include a
concentration of mortgage loans which are more than 30 and less than 90 days
delinquent of greater than 20%.
If so specified in the related prospectus supplement, a mortgage loan may
contain a prohibition on prepayment or a Lockout Period or require payment of a
prepayment penalty. A multifamily, commercial or mixed-use loan may also contain
a provision that entitles the lender to a share of profits realized from the
operation or disposition of the related mortgaged property. If the holders of
any class or classes of offered securities of a series will be entitled to all
or a portion of this type of equity participation, the related prospectus
supplement will describe the equity participation and the method or methods by
which distributions in respect thereof will be made to such holders.
HOME EQUITY REVOLVING CREDIT LOANS
GENERAL. The home equity revolving credit loans will be originated under
credit line agreements subject to a maximum amount or credit limit. In most
instances, interest on each home equity revolving credit loan will be calculated
based on the average daily balance outstanding during the billing cycle. The
billing cycle in most cases will be the calendar month preceding a due date.
Each home equity revolving credit loan will have a loan rate that is subject to
adjustment on the day specified in the related mortgage note, which may be daily
or monthly, equal to the sum of the index on the day specified in the
accompanying prospectus supplement, and the gross margin specified in the
related mortgage note, which may vary under circumstances if stated in the
accompanying prospectus supplement, subject to the maximum rate specified in the
mortgage note and the maximum rate permitted by applicable law. If specified in
the prospectus supplement, some home
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equity revolving credit loans may be teaser loans with an introductory rate that
is lower than the rate that would be in effect if the applicable index and gross
margin were used to determine the loan rate.
As a result of the introductory rate, interest collections on the loans may
initially be lower than expected. Commencing on their first adjustment date, the
loan rates on the teaser loans will be based on the applicable index and gross
margin.
The borrower for each home equity revolving credit loan may draw money, in
most cases with either checks or credit cards, subject to applicable law, on
such home equity revolving credit loan at any time during the period in which a
draw may be made under the related credit line agreement, which period we refer
to in this prospectus as the draw period. Unless specified in the accompanying
prospectus supplement, the draw period will not be more than 15 years. Unless
specified in the accompanying prospectus supplement, for each home equity
revolving credit loan, if the draw period is less than the full term of the home
equity revolving credit loan, the related borrower will not be permitted to make
any draw during the repayment period. Prior to the repayment period, or prior to
the date of maturity for loans without repayment periods, the borrower for each
home equity revolving credit loan will be obligated to make monthly payments on
the home equity revolving credit loan in a minimum amount as specified in the
related mortgage note, which usually will be the finance charge for each billing
cycle as described in the second following paragraph. In addition, if a home
equity revolving credit loan has a repayment period, during this period, the
borrower is required to make monthly payments consisting of principal
installments that would substantially amortize the principal balance by the
maturity date, and to pay any current finance charges and additional charges.
The borrower for each home equity revolving credit loan will be obligated
to pay off the remaining account balance on the related maturity date, which may
be a substantial principal amount. The maximum amount of any draw for any home
equity revolving credit loan is equal to the excess, if any, of the credit limit
over the principal balance outstanding under the mortgage note at the time of
the draw. Draws will be funded by the master servicer or servicer or other
entity specified in the accompanying Prospectus Supplement.
Unless specified in the accompanying prospectus supplement, for each home
equity revolving credit loan:
o the finance charge for any billing cycle, in most cases, will be an
amount equal to the aggregate of, as calculated for each day in the billing
cycle, the then-applicable loan rate divided by 365 multiplied by that day's
principal balance,
o the account balance on any day in most cases will be the aggregate of the
unpaid principal of the home equity revolving credit loan outstanding at the
beginning of the day, plus all related draws funded on that day and outstanding
at the beginning of that day, plus the sum of any unpaid finance charges and any
unpaid fees, insurance premiums and other charges, collectively known as
additional charges, that are due on the home equity revolving credit loan minus
the aggregate of all payments and credits that are applied to the repayment of
any draws on that day, and
o the principal balance on any day usually will be the related account
balance minus the sum of any unpaid finance charges and additional charges that
are due on the home equity revolving credit loan.
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Payments made by or on behalf of the borrower for each home equity
revolving credit loan, in most cases, will be applied, first, to any unpaid
finance charges that are due on the home equity revolving credit loan, second,
to any unpaid additional charges that are due thereon, and third, to any related
draws outstanding.
The mortgaged property securing each home equity revolving credit loan will
be subject to the lien created by the related loan in the amount of the
outstanding principal balance of each related draw or portion thereof, if any,
that is not included in the related pool, whether made on or prior to the
related cut-off date or thereafter. The lien will be the same rank as the lien
created by the mortgage relating to the home equity revolving credit loan, and
monthly payments, collections and other recoveries under the credit line
agreement related to the home equity revolving credit loan will be allocated as
described in the related prospectus supplement among the home equity revolving
credit loan and the outstanding principal balance of each draw or portion of
draw excluded from the pool. The depositor, an affiliate of the depositor or an
unaffiliated seller may have an interest in any draw or portion thereof excluded
from the pool. If any entity with an interest in a draw or portion thereof
excluded from the pool or any other excluded balance were to become a debtor
under the Bankruptcy Code and regardless of whether the transfer of the related
home equity revolving credit loan constitutes an absolute assignment, a
bankruptcy trustee or creditor of such entity or such entity as a
debtor-in-possession could assert that such entity retains rights in the related
home equity revolving credit loan and therefore compel the sale of such home
equity revolving credit loan over the objection of the trust fund and the
securityholders. If that occurs, delays and reductions in payments to the trust
fund and the securityholders could result.
In most cases, each home equity revolving credit loan may be prepaid in
full or in part at any time and without penalty, and the related borrower will
have the right during the related draw period to make a draw in the amount of
any prepayment made for the home equity revolving credit loan. The mortgage note
or mortgage related to each home equity revolving credit loan will usually
contain a customary "due-on-sale" clause.
As to each home equity revolving credit loan, the borrower's rights to
receive draws during the draw period may be suspended, or the credit limit may
be reduced, for cause under a limited number of circumstances, including, but
not limited to:
o a materially adverse change in the borrower's financial circumstances;
o a decline in the value of the mortgaged property significantly below
its appraised value at origination; or
o a payment default by the borrower.
However, as to each home equity revolving credit loan, a suspension or reduction
usually will not affect the payment terms for previously drawn balances. The
master servicer or the servicer, as applicable, will have no obligation to
investigate as to whether any of those circumstances have occurred or may have
no knowledge of their occurrence. Therefore, there can be no assurance that any
borrower's ability to receive draws will be suspended or reduced if the
foregoing circumstances occur. In the event of default under a home equity
revolving credit loan, at the discretion of the
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master servicer or servicer, the home equity revolving credit loan may be
terminated and declared immediately due and payable in full. For this purpose, a
default includes but is not limited to:
o the borrower's failure to make any payment as required;
o any action or inaction by the borrower that materially and adversely
affects the mortgaged property or the rights in the mortgaged
property; or
o any fraud or material misrepresentation by a borrower in connection
with the loan.
The master servicer or servicer will have the option to allow an increase
in the credit limit applicable to any home equity revolving credit loan in
certain limited circumstances. In most cases, the master servicer or servicer
will have an unlimited ability to allow increases provided that the specified
conditions are met including:
o a new appraisal or other indication of value is obtained; and
o the new combined LTV ratio is less than or equal to the original
combined LTV ratio.
If a new appraisal is not obtained and the other conditions in the
preceding sentence are met, the master servicer or servicer will have the option
to allow a credit limit increase for any home equity revolving credit loan
subject to the limitations described in the related agreement
The proceeds of the home equity revolving credit loans may be used by the
borrower to improve the related mortgaged properties, may be retained by the
related borrowers or may be used for purposes unrelated to the mortgaged
properties.
ALLOCATION OF HOME EQUITY REVOLVING CREDIT LOAN BALANCES. For any series of
securities backed by home equity revolving credit loans, the related trust fund
may include either (i) the entire principal balance of each home equity
revolving credit loan outstanding at any time, including balances attributable
to draws made after the related cut-off date, or (ii) a specified portion of the
total principal balance of each home equity revolving credit loan outstanding at
any time, which will consist of all or a portion of the principal balance
thereof as of the cut-off date minus the portion of all payments and losses
thereafter that are allocated to such balance, and may not include some portion
of the principal balance attributable to draws made after the cut-off date. In
this prospectus, we refer to the principal balance or portion of the principal
balance of each home equity revolving credit loan outstanding at any time and
included in the trust fund as the trust balance.
The accompanying prospectus supplement will describe the specific
provisions by which payments and losses on any home equity revolving credit loan
will be allocated as between the trust balance and any portion of the principal
balance of a home equity revolving credit loan, if any, not included in the
trust balance at any time, which may include balances attributable to draws
after the cut-off date and may include a portion of the principal balance
outstanding as of the cut-off date. In this prospectus, we refer to the portion
of the principal balance of each home equity revolving credit loan outstanding
at any time and not included in the trust fund as the excluded balance.
Typically, the provisions (i) may provide that principal payments made by the
borrower will be allocated as between the trust balance and any excluded balance
either on a pro rata basis, or first to the trust
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balance until reduced to zero, then to the excluded balance, or according to
other priorities specified in the accompanying prospectus supplement, and (ii)
may provide that interest payments, as well as liquidation proceeds or similar
proceeds following a default and any realized losses, will be allocated between
the trust balance and any excluded balance on a pro rata basis or according to
other priorities specified in the accompanying prospectus supplement.
Even if a trust fund initially includes the entire principal balance of the
home equity revolving credit loans, the related agreement may provide that after
a specified date or on the occurrence of specified events, the trust fund may
not include balances attributable to additional draws made thereafter. The
accompanying prospectus supplement will describe these provisions as well as the
related allocation provisions that would be applicable.
MORTGAGE LOAN INFORMATION IN PROSPECTUS SUPPLEMENT. Each prospectus
supplement will contain specific information with respect to the mortgage assets
contained in the related trust fund, as of the cut-off date specified in the
prospectus supplement, which will usually be close of business on the first day
of the month of formation of the related trust fund, to the extent specifically
known to the depositor as of the date of the prospectus supplement, including,
in summary form, the following:
o the aggregate outstanding principal balance, the largest, smallest and
average outstanding principal balance of the mortgage assets,
o the type of property securing the mortgage assets and the percentage
of mortgage assets in the related mortgage pool which are secured by
that type of property,
o the range of original terms to maturity of the mortgage assets,
o the earliest origination date and latest maturity date,
o the aggregate principal balance of mortgage loans having loan-to-value
ratios at origination exceeding 80%, or, with respect to mortgage
loans secured by a junior lien, the aggregate principal balance of
mortgage loans having combined loan-to-value ratios exceeding 80%,
o the interest rates or range of interest rates borne by the mortgage
loans,
o the geographical distribution of the mortgaged properties on a
state-by-state basis,
o the number and aggregate principal balance of buydown mortgage loans,
if any,
o a description of the retained interest, if any,
o with respect to ARM Loans, the index, the adjustment dates, the
highest, lowest and weighted average gross margin, and the maximum
interest rate variation at the time of any adjustment and over the
life of the ARM Loan,
o the range of debt service coverage ratios for mortgage loans secured
by multifamily properties or commercial properties, and
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o whether the mortgage loans provide for payments of interest only for
any period and the frequency and amount by which, and the term during
which, monthly payments adjust.
If specific information respecting the trust fund assets is not known to
the depositor at the time securities are initially offered, more general
information of the nature described in the bullet points above will be provided
in the prospectus supplement, and specific information as to the trust fund
assets to be included in the trust fund on the date of issuance of the
securities will be set forth in a report which will be available to purchasers
of the related securities at or before the initial issuance of the securities
and will be filed, together with the related pooling and servicing agreement,
with respect to each series of certificates, or the related servicing agreement,
trust agreement and indenture, with respect to each series of notes, as part of
a report on Form 8-K with the Securities and Exchange Commission within fifteen
days after the initial issuance. The composition and characteristics of a
mortgage pool containing revolving credit loans may change from time to time as
a result of any draws made after the related cut-off date under the related
credit line agreements. If mortgage assets are added to or deleted from the
trust fund after the date of the related prospectus supplement other than as a
result of any draws under credit line agreements relating to revolving credit
loans, the addition or deletion will be noted on the report on Form 8-K. In no
event, however, will more than 5%, by principal balance at the cut-off date, of
the mortgage assets deviate from the characteristics of the mortgage assets set
forth in the related prospectus supplement other than as a result of any draws
under credit line agreements relating to revolving credit loans. In addition, a
report on Form 8-K will be filed within 15 days after the end of any pre-funding
period containing information respecting the trust fund assets transferred to a
trust fund after the date of issuance of the related securities as described in
the following paragraph.
DESCRIPTION OF THE PRE-FUNDING ACCOUNT FOR THE PURCHASE OF ADDITIONAL MORTGAGE
LOANS
The agreement governing the trust fund may provide for the transfer by the
mortgage loan seller of additional mortgage assets to the related trust fund
after the date of initial issuance of the securities. In that case, the trust
fund will include a pre-funding account, into which all or a portion of the
proceeds of the sale of one or more classes of securities of the related series
will be deposited to be released as additional mortgage assets are transferred.
Additional mortgage assets will be required to conform to the requirements set
forth in the related agreement or other agreement providing for the transfer,
and will be underwritten to the same standards as the mortgage assets initially
included in the trust fund. A pre-funding account will be required to be
maintained as an eligible account under the related agreement and the amount
held in the pre-funding account shall at no time exceed 50% of the aggregate
outstanding principal balance of the securities. The related agreement providing
for the transfer of additional mortgage assets will provide that all transfers
must be made within 3 months, if a REMIC election has been made with respect to
the trust, or within 6 months after the date on which the related securities
were issued, and that amounts set aside to fund the transfers, whether in a
pre-funding account or otherwise, and not so applied within the required period
of time will be deemed to be principal prepayments and applied in the manner set
forth in the related prospectus supplement.
The depositor will be required to provide data regarding the additional
mortgage assets to the rating agencies and the security insurer, if any,
sufficiently in advance of the scheduled transfer to permit review by the rating
agencies and the security insurer. Transfer of the additional mortgage assets
will be further conditioned upon confirmation by the rating agencies that the
addition of
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mortgage assets to the trust fund will not result in the downgrading of the
securities or, in the case of a series guaranteed or supported by a security
insurer, will not adversely affect the capital requirements of the security
insurer. Finally, a legal opinion to the effect that the conditions to the
transfer of the additional mortgage assets have been satisfied will be required.
THE DEPOSITOR
Long Beach Securities Corp., the depositor, is a Delaware corporation
incorporated on July 13, 2000 as a wholly-owned subsidiary of Long Beach
Mortgage Company. The depositor was organized for the purpose of serving as a
private secondary mortgage market conduit. The depositor maintains its principal
office at 1100 Town & Country Road, Orange, California 92868. Its telephone
number is (714) 541-5378.
The depositor does not have, nor is it expected in the future to have, any
significant assets. The prospectus supplement for each series of securities will
disclose if the depositor is a party to any legal proceedings that could have a
material impact on the related trust fund and the interests of the potential
investors.
USE OF PROCEEDS
The net proceeds to be received from the sale of the securities will be
applied by the depositor to the purchase of trust fund assets or will be used by
the depositor for general corporate purposes. The depositor expects that it will
make additional sales of securities similar to the securities from time to time,
but the timing and amount of offerings of securities will depend on a number of
factors, including the volume of mortgage assets acquired by the depositor,
prevailing interest rates, availability of funds and general market conditions.
YIELD AND MATURITY CONSIDERATIONS
The yield on any offered security will depend on the following:
o the price paid by the securityholder,
o the rate at which interest accrued on the security,
o the receipt and timing of receipt of distributions on the security,
o the weighted average life of the mortgage assets in the related trust
fund,
o liquidations of mortgage assets following mortgagor defaults,
o purchases of mortgage assets in the event of optional termination of
the trust fund or breaches of representations made in respect of such
mortgage assets by the depositor, the master servicer and others, and
o in the case of securities evidencing interests in ARM Loans, by
changes in the interest rates or the conversions of ARM Loans to a
fixed interest rate.
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SECURITY INTEREST RATE. Securities of any class within a series may have
fixed, variable or adjustable security interest rates, which may or may not be
based upon the interest rates borne by the mortgage assets in the related trust
fund. The prospectus supplement with respect to any series of securities will
specify the security interest rate for each class of securities or, in the case
of a variable or adjustable security interest rate, the method of determining
the security interest rate. Holders of Stripped Interest Securities or a class
of securities having a security interest rate that varies based on the weighted
average interest rate of the underlying mortgage assets will be affected by
disproportionate prepayments and repurchases of mortgage assets having higher
interest rates than the average interest rate.
TIMING OF PAYMENT OF INTEREST AND PRINCIPAL. The effective yield to
securityholders entitled to payments of interest will be slightly lower than the
yield otherwise produced by the applicable security interest rate because, while
interest on the mortgage assets may accrue from the first day of each month, the
distributions of such interest will not be made until the distribution date
which may be as late as the 25th day of the month following the month in which
interest accrues on the mortgage assets. On each distribution date, a payment of
interest on the securities, or addition to the principal balance of a class of
Accrual Securities, will include interest accrued during the interest accrual
period described in the related prospectus supplement for that remittance date.
If the interest accrual period ends on a date other than a remittance date for
the related series, the yield realized by the holders of the securities may be
lower than the yield that would result if the interest accrual period ended on
the remittance date. In addition, if so specified in the related prospectus
supplement, interest accrued for an interest accrual period for one or more
classes of securities may be calculated on the assumption that distributions of
principal, and additions to the principal balance of Accrual Securities, and
allocations of losses on the mortgage assets may be made on the first day of the
interest accrual period for a remittance date and not on the remittance date.
This method would produce a lower effective yield than if interest were
calculated on the basis of the actual principal amount outstanding during an
interest accrual period.
When a principal prepayment in full is made on a mortgage loan, the
borrower is charged interest only for the period from the due date of the
preceding monthly payment up to the date of the prepayment, instead of for a
full month. When a partial prepayment is made on a mortgage loan other than a
home equity revolving credit loan, the mortgagor is not charged interest on the
amount of the prepayment for the month in which the prepayment is made.
Accordingly, the effect of principal prepayments in full during any month will
be to reduce the aggregate amount of interest collected that is available for
distribution to securityholders. The mortgage loans in a trust fund may contain
provisions limiting prepayments or requiring the payment of a prepayment penalty
upon prepayment in full or in part. If so specified in the related prospectus
supplement, a prepayment penalty collected may be applied to offset the
above-described shortfalls in interest collections on the related distribution
date. Otherwise, prepayment penalties collected may be available for
distribution only to a specific class of securities or may not be a part of the
related trust at all, and, therefore not available for distribution to any class
of securities. Full and partial principal prepayments collected during the
prepayment period set forth in a prospectus supplement will be available for
distribution to securityholders on the related distribution date. Neither the
trustee nor the depositor will be obligated to fund shortfalls in interest
collections resulting from prepayments. The prospectus supplement for a series
of securities may specify that the master servicer will be obligated to pay from
its own funds, without reimbursement, those interest shortfalls attributable to
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full and partial prepayments by mortgagors but only up to an amount equal to its
servicing fee for the related due period. SEE "DESCRIPTION OF THE SECURITIES".
In addition, if so specified in the related prospectus supplement, a holder
of a non-offered class of securities will have the right, solely at its
discretion, to terminate the related trust fund on any distribution date after
the 12th distribution date following the date of initial issuance of the related
series of securities and until the date as the Clean-up Call becomes exercisable
and thereby effect early retirement of the securities of the series. Any call of
this type will be of the entire trust fund at one time; multiple calls with
respect to any series of securities will not be permitted. Early termination
would result in the concurrent retirement of all outstanding securities of the
related series and would decrease the average lives of the terminated
securities, perhaps significantly. The earlier after the date of the initial
issuance of the securities that the termination occurs, the greater would be the
effect.
The outstanding principal balances of home equity revolving credit loans
are, in most cases, much smaller than traditional first lien mortgage loan
balances, and the original terms to maturity of those loans are often shorter
than those of traditional first lien mortgage loans. As a result, changes in
interest rates will not affect the monthly payments on those loans or contracts
to the same degree that changes in mortgage interest rates will affect the
monthly payments on traditional first lien mortgage loans. Consequently, the
effect of changes in prevailing interest rates on the prepayment rates on
shorter-term, smaller balance loans and contracts may not be similar to the
effects of those changes on traditional first lien mortgage loan prepayment
rates, or those effects may be similar to the effects of those changes on
mortgage loan prepayment rates, but to a smaller degree.
For some loans, including home equity revolving credit loans and ARM loans,
the loan rate at origination may be below the rate that would result if the
index and margin relating thereto were applied at origination. Under the
applicable underwriting standards, the borrower under each of the loans, other
than a home equity revolving credit loan, usually will be qualified on the basis
of the loan rate in effect at origination, and borrowers under home equity
revolving credit loans are usually qualified based on an assumed payment which
reflects a rate significantly lower than the maximum rate. The repayment of any
such loan may thus be dependent on the ability of the borrower to make larger
monthly payments following the adjustment of the loan rate. In addition,
depending upon the use of the revolving credit line and the payment patterns,
during the repayment period, a borrower may be obligated to make payments that
are higher than the borrower originally qualified for. Some of the home equity
revolving credit loans are not expected to significantly amortize prior to
maturity.
As a result, a borrower will, in these cases, be required to pay a substantial
principal amount at the maturity of a home equity revolving credit loan.
The Prospectus Supplement for each series of Securities may set forth
additional information regarding yield considerations.
PRINCIPAL PREPAYMENTS. The yield to maturity on the securities will be
affected by the rate of principal payments on the mortgage assets, including
principal prepayments, curtailments, defaults and liquidations. The rate at
which principal prepayments occur on the mortgage assets will be affected by a
variety of factors, including, without limitation, the following:
o the terms of the mortgage assets,
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o the level of prevailing interest rates,
o the availability of mortgage credit,
o in the case of multifamily loans and commercial loans, the quality of
management of the mortgaged properties, and
o economic, demographic, geographic, tax, legal and other factors.
In general, however, if prevailing interest rates fall significantly below
the interest rates on the mortgage assets included in a particular trust fund,
those mortgage assets are likely to be the subject of higher principal
prepayments than if prevailing rates remain at the rates borne by those mortgage
assets. Conversely, if prevailing interest rates rise significantly above the
interest rates on the mortgage assets included in a particular trust fund, those
mortgage assets are likely to be the subject of lower principal prepayments than
if prevailing rates remain at the rates borne by those mortgage assets. The rate
of principal payments on some or all of the classes of securities of a series
will correspond to the rate of principal payments on the mortgage assets
included in the related trust fund and is likely to be affected by the existence
of prepayment premium provisions of the mortgage assets in a mortgage pool, and
by the extent to which the servicer of any such mortgage asset is able to
enforce such provisions. There can be no certainty as to the rate of prepayments
on the mortgage assets during any period or over the life of the related
securities.
If the purchaser of a security offered at a discount calculates its
anticipated yield to maturity based on an assumed rate of distributions of
principal that is faster than that actually experienced on the mortgage assets,
the actual yield to maturity will be lower than that so calculated. Conversely,
if the purchaser of a security offered at a premium calculates its anticipated
yield to maturity based on an assumed rate of distributions of principal that is
slower than that actually experienced on the mortgage assets, the actual yield
to maturity will be lower than that so calculated. In either case, the effect on
yield of prepayments on one or more classes of securities of a series may be
mitigated or exacerbated by the priority of distributions of principal to those
classes as provided in the related prospectus supplement.
The timing of changes in the rate of principal payments on the mortgage
assets may significantly affect an investor's actual yield to maturity, even if
the average rate of distributions of principal is consistent with an investor's
expectation. In general, the earlier a principal payment is received on the
mortgage assets and distributed in respect of a security, the greater the effect
on such investor's yield to maturity. The effect on an investor's yield of
principal payments occurring at a rate higher or lower than the rate anticipated
by the investor during a given period may not be offset by a subsequent like
decrease or increase in the rate of principal payments.
DEFAULTS. The rate of defaults on the mortgage assets will also affect the
rate and timing of principal payments on the mortgage assets and thus the yield
on the securities. In general, defaults on single family loans are expected to
occur with greater frequency in their early years. However, mortgage assets that
require balloon payments, including multifamily loans, risk default at maturity,
or that the maturity of the balloon loan may be extended in connection with a
workout. The rate of default on mortgage loans which are refinance or limited
documentation mortgage loans, mortgage
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assets with high loan-to-value ratios, and ARM Loans may be higher than for
other types of mortgage assets. Furthermore, the rate and timing of defaults and
liquidations on the mortgage assets will be affected by the general economic
condition of the region of the country in which the related mortgaged properties
are located. The risk of delinquencies and loss is greater and prepayments are
less likely in regions where a weak or deteriorating economy exists, as may be
evidenced by, among other factors, increasing unemployment or falling property
values.
MATURITY AND WEIGHTED AVERAGE LIFE
PREPAYMENTS. The rates at which principal payments are received on the
mortgage assets included in a trust fund and the rate at which payments are made
from any credit support for the related series of securities may affect the
ultimate maturity and the weighted average life of each class of the series.
Weighted average life refers to the average amount of time that will elapse from
the date of issue of a security until each dollar of principal of that security
will be repaid to the investor. The weighted average life of a class of
securities of a series will be influenced by, among other factors, the rate at
which principal on the related mortgage assets is paid to that class, which may
be in the form of scheduled amortization or prepayments. For this purpose, the
term prepayment includes prepayments, in whole or in part, and liquidations due
to default. Prepayments on the mortgage assets in a trust fund will generally
accelerate the rate at which principal is paid on some or all of the classes of
the securities of the related series.
If so provided in the prospectus supplement for a series of securities, one
or more classes of securities may have a final scheduled remittance date, which
is the date on or prior to which the principal balance thereof is scheduled to
be reduced to zero, calculated on the basis of the assumptions applicable to
such series set forth therein.
In addition, the weighted average life of the securities may be affected by
the varying maturities of the related mortgage assets. If any mortgage assets in
a trust fund have actual terms to maturity of less than those assumed in
calculating the final scheduled remittance dates for the classes of securities
of the related series, one or more classes of the securities may be fully paid
prior to their respective final scheduled remittance dates, even in the absence
of prepayments. Accordingly, the prepayment experience of the mortgage pool
will, to some extent, be a function of the mix of interest rates and maturities
of the mortgage assets in that mortgage pool. SEE "DESCRIPTION OF THE TRUST
FUNDS".
Prepayments on loans are also commonly measured relative to a prepayment
standard or model, such as the Constant Prepayment Rate prepayment model or the
Standard Prepayment Assumption prepayment model, each as described below. CPR
represents a constant assumed rate of prepayment each month relative to the then
outstanding principal balance of a pool of loans for the life of those loans.
SPA represents an assumed rate of prepayment each month relative to the then
outstanding principal balance of a pool of loans. A prepayment assumption of
100% of SPA assumes prepayment rates of 0.2% per annum of the then outstanding
principal balance of the loans in the first month of the life of the loans and
an additional 0.2% per annum in each month thereafter until the thirtieth month.
Beginning in the thirtieth month and in each month thereafter during the life of
the loans, 100% of SPA assumes a constant prepayment rate of 6% per annum each
month.
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Neither CPR nor SPA nor any other prepayment model or assumption purports
to be an historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of loans. Moreover, CPR and SPA were
developed based upon historical prepayment experience for single family loans.
Thus, it is likely that prepayment of any mortgage assets will not conform to
any particular level of CPR or SPA.
The prospectus supplement with respect to each series of securities may
contain tables, if applicable, setting forth the projected weighted average life
of one or more classes of offered securities of the series and the percentage of
the initial principal balance of each class that would be outstanding on
specified remittance dates based on the assumptions stated in that prospectus
supplement, including assumptions that prepayments on the related mortgage
assets are made at rates corresponding to various percentages of CPR, SPA or at
other rates specified in the prospectus supplement. Tables and assumptions are
intended to illustrate the sensitivity of the weighted average life of the
securities to various prepayment rates and are not intended to predict or to
provide information that will enable investors to predict the actual weighted
average life of the securities. It is unlikely that prepayment of any mortgage
assets for any series will conform to any particular level of CPR, SPA or any
other rate specified in the related prospectus supplement.
There can be no assurance as to the rate of prepayment of the mortgage
loans underlying or comprising the trust fund assets in any trust fund. The
depositor is not aware of any 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 depositor that have been
compiled with respect to 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.
The depositor is not aware of any historical prepayment experience with respect
to mortgage loans secured by properties located in Puerto Rico or Guam and,
accordingly, prepayments on loans secured by properties in Puerto Rico or Guam
may not occur at the same rate or be affected by the same factors as other
mortgage loans.
TYPE OF MORTGAGE ASSET. The type of mortgage assets included in a trust
fund may affect the weighted average life of the related securities. A number of
mortgage assets may have balloon payments due at maturity, and because the
ability of a mortgagor to make a balloon payment typically will depend upon its
ability either to refinance the loan or to sell the related mortgaged property,
there is a risk that mortgage assets having balloon payments may default at
maturity, or that the servicer may extend the maturity of the mortgage asset in
connection with a workout. In addition, a number of mortgage assets may be
junior mortgage loans. The rate of default on junior mortgage loans may be
greater than that of mortgage loans secured by first liens on comparable
properties. In the case of defaults, recovery of proceeds may be delayed by,
among other things, bankruptcy of the mortgagor or adverse conditions in the
market where the property is located. In order to minimize losses on defaulted
mortgage assets, the servicer may, to the extent and under the circumstances set
forth in this prospectus and in the related servicing agreement, be permitted to
modify mortgage assets that are in default or as to which a payment default
appears imminent. Any defaulted balloon payment or modification that extends the
maturity of a mortgage asset will tend to extend the weighted average life of
the securities, thereby lengthening the period of time elapsed from the date of
issuance of a security until it is retired.
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Although the interest rates on ARM Loans will be subject to periodic
adjustments, adjustments generally will, unless otherwise specified in the
related prospectus supplement, (1) not increase or decrease the interest rate by
more than a fixed percentage amount on each adjustment date, (2) not increase
the interest rate over a fixed percentage amount during the life of any ARM Loan
and (3) be based on an index, which may not rise and fall consistently with the
mortgage interest rate, plus the related fixed percentage set forth in the
related mortgage note, which may be different from margins being used at the
time for newly originated adjustable rate mortgage loans. As a result, the
interest rates on the ARM Loans in a mortgage pool at any time may not equal the
prevailing rates for similar, newly originated adjustable rate mortgage loans.
In certain rate environments, the prevailing rates on fixed rate mortgage loans
may be sufficiently low in relation to the then-current mortgage rates on ARM
Loans with the result that the rate of prepayments may increase as a result of
refinancings. There can be no certainty as to the rate of prepayments on the
mortgage assets during any period or over the life of any series of securities.
The interest rates on ARM Loans subject to negative amortization generally
adjust monthly and their amortization schedules adjust less frequently. During a
period of rising interest rates, as well as immediately after origination when
initial interest rates are generally lower than the sum of the indices
applicable at origination and the related margins, the amount of interest
accruing on the principal balance of these types of mortgage assets may exceed
the amount of the minimum scheduled monthly payment thereon. As a result, a
portion of the accrued interest on negatively amortizing mortgage assets may
become deferred interest which will be added to the principal balance thereof
and will bear interest at the applicable interest rate. The addition of any
deferred interest to the principal balance of any related class or classes of
securities of a series will lengthen the weighted average life thereof and may
adversely affect yield to holders thereof, depending upon the price at which the
securities were purchased. In addition, with respect to certain ARM Loans
subject to negative amortization, during a period of declining interest rates,
it might be expected that each minimum scheduled monthly payment on the ARM Loan
would exceed the amount of scheduled principal and accrued interest on the
principal balance thereof, and since such excess will be applied to reduce the
principal balance of the related class or classes of securities, the weighted
average life of the securities will be reduced which may adversely affect yield
to holders thereof, depending upon the price at which such securities were
purchased.
There can be no assurance as to the rate of principal payments or draws on
the home equity revolving credit loans. In most cases, the home equity revolving
credit loans may be prepaid in full or in part without penalty. The prospectus
supplement will specify whether loans may not be prepaid in full or in part
without penalty. The rate of principal payments and the rate of draws, if
applicable, may fluctuate substantially from time to time. Such loans may
experience a higher rate of prepayment than typical first lien mortgage loans.
Due to the unpredictable nature of both principal payments and draws, the rates
of principal payments net of draws for those loans may be much more volatile
than for typical first lien mortgage loans.
For any series of securities backed by home equity revolving credit
loans, provisions governing whether future draws on the home equity revolving
credit loans will be included in the trust fune will have a significant effect
on the rate and timing of principal payments on the securities.
The rate at which additional balances are generated may be affected by a variety
of factors. The yield to maturity of the securities of any series, or the rate
and timing of principal payments on the loans may also be affected by the risks
associated with other loans.
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As a result of the payment terms of the home equity revolving credit
loans or of the mortgage provisions relating to future draws, there may be no
principal payments on those securities in any given month. In addition, it is
possible that the aggregate draws on home equity revolving credit loans included
in a trust fund may exceed the aggregate payments of principal on those home
equity revolving credit loans for the related period. If specified in the
accompanying prospectus supplement, a series of securities may provide for a
period during which all or a portion of the principal collections on the home
equity revolving credit loans are reinvested in additional balances or are
accumulated in a trust account pending commencement of an amortization period
relating to the securities.
FORECLOSURES AND PAYMENT PLANS. The number of foreclosures and the
principal amount of the mortgage assets that are foreclosed in relation to the
number of mortgage assets that are repaid in accordance with their terms will
affect the weighted average life of those mortgage assets and that of the
related series of securities. Servicing decisions made with respect to the
mortgage assets, including the use of payment plans prior to a demand for
acceleration and the restructuring of mortgage assets in bankruptcy proceedings,
may also have an effect upon the payment patterns of particular mortgage assets
and thus the weighted average life of the securities.
DUE-ON-SALE CLAUSES. Acceleration of mortgage payments as a result of
certain transfers of or the creation of encumbrances upon underlying mortgaged
property is another factor affecting prepayment rates that may not be reflected
in the prepayment standards or models used in the relevant prospectus
supplement. In most cases the mortgage assets will include "due-on-sale" clauses
that permit the lender in certain instances to accelerate the maturity of the
loan if the borrower sells, transfers or conveys the property. The master
servicer, on behalf of the trust fund, will employ its usual practices in
determining whether to exercise any right that the trustee may have as mortgagee
to accelerate payment of the mortgage asset. An ARM Loan may be assumable under
some conditions if the proposed transferee of the related mortgaged property
establishes its ability to repay the mortgage asset and, in the reasonable
judgment of the servicer or the related sub-servicer, the security for the ARM
Loan would not be impaired by the assumption. The extent to which ARM Loans are
assumed by purchasers of the mortgaged properties rather than prepaid by the
related mortgagors in connection with the sales of the mortgaged properties will
affect the weighted average life of the related series of securities. SEE "LEGAL
ASPECTS OF MORTGAGE ASSETS--ENFORCEABILITY OF CERTAIN PROVISIONS".
THE DEPOSITOR'S MORTGAGE LOAN PURCHASE PROGRAM
The mortgage loans to be included in a trust fund will be purchased by the
depositor, either directly or indirectly, from the mortgage loan sellers.
UNDERWRITING STANDARDS
All mortgage loans to be included in a trust fund will have been subject to
underwriting standards acceptable to the depositor and applied as described in
the following paragraph. Each mortgage loan seller, or another party on its
behalf, will represent and warrant that mortgage loans purchased by or on behalf
of the depositor from it have been originated by the related originators in
accordance with these underwriting guidelines.
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The underwriting standards are applied by the originators to evaluate the
value of the mortgaged property and to evaluate the adequacy of the mortgaged
property as collateral for the mortgage loan. While the originator's primary
consideration in underwriting a mortgage loan is the value of the mortgaged
property, the originator also considers the borrower's credit history and
repayment ability as well as the type and use of the mortgaged property. As a
result of this underwriting criteria, changes in the values of mortgage
properties may have a greater effect on the delinquency, foreclosure and loss
experience on the mortgage loans in a trust fund than these changes would be
expected to have on mortgage loans that are originated in a more traditional
manner. No assurance can be given by the depositor that the values of the
related mortgaged properties have remained or will remain at the levels in
effect on the dates of origination of the related mortgage loans.
High LTV Loans are underwritten with an emphasis on the creditworthiness of
the related mortgagor. High LTV Loans are underwritten with a limited
expectation of recovering any amounts from the foreclosure of the related
property.
In the case of the multifamily loans, commercial loans or mixed-use loans,
lenders typically look to the debt service coverage ratio of a loan as an
important measure of the risk of default on that loan. Unless otherwise defined
in the related prospectus supplement, the debt service coverage ratio of a
multifamily loan or commercial loan at any given time is the ratio of (1) the
net operating income of the related mortgaged property for a twelve-month period
to (2) the annualized scheduled payments on the mortgage loan and on any other
loan that is secured by a lien on the mortgaged property prior to the lien of
the related mortgage. Net operating incomes is: the total operating revenues
derived from a multifamily, commercial or mixed-use property, as applicable,
during that period, minus the total operating expenses incurred in respect of
that property during that period other than (a) non-cash items such as
depreciation and amortization, (b) capital expenditures and (c) debt service on
loans (including the related mortgage loan) secured by liens on that property.
The net operating income of a multifamily, commercial or mixed-use property, as
applicable, will fluctuate over time and may or may not be sufficient to cover
debt service on the related mortgage loan at any given time. As the primary
source of the operating revenues of a multifamily, commercial or mixed- use
property, as applicable, rental income (and maintenance payments from
tenant-stockholders of a cooperatively owned multifamily property) may be
affected by the condition of the applicable real estate market and/or area
economy. Increases in operating expenses due to the general economic climate or
economic conditions in a locality or industry segment, such as increases in
interest rates, real estate tax rates, energy costs, labor costs and other
operating expenses, and/or to changes in governmental rules, regulations and
fiscal policies, may also affect the risk of default on a multifamily,
commercial or mixed-use loan. Lenders also look to the loan-to-value ratio of a
multifamily, commercial or mixed-use loan as a measure of risk of loss if a
property must be liquidated following a default.
Typically, the underwriting process used by an originator is as described
in this and the next two following paragraphs. The prospectus supplement for a
series will describe any variations to this process as it applies to the related
mortgage assets. Initially, a prospective borrower is required to complete an
application with respect to the applicant's liabilities, income and credit
history and personal information, as well as an authorization to apply for a
credit report that summarizes the borrower's reported credit history with local
merchants and lenders and any record of bankruptcy. In addition, an employment
verification is obtained that reports the borrower's current salary and may
contain information regarding length of employment. If a prospective borrower is
self- employed, the borrower is required to submit copies of signed tax returns
or other proof of business income. The borrower may also be required to
authorize verification of deposits at financial institutions where the borrower
has demand or savings accounts. In the case of a multifamily loan, commercial
loan or mixed-use loan, the mortgagor will also be required to provide certain
information regarding the related mortgaged property, including a current rent
roll and operating income statements which may be pro forma and unaudited. In
addition, the originator will generally also consider the location of the
mortgaged property, the availability of competitive lease space and rental
income of comparable properties in the relevant market area, the overall economy
and demographic features of the geographic area and the mortgagor's prior
experience in owning and operating properties similar to the multifamily
properties or commercial properties, as the case may be.
In determining the adequacy of the property as collateral, an appraisal is
made of each property considered for financing, except in the case of new
manufactured homes whose appraised value is determined using the list price of
the unit and accessories as described above under "Description of the Trust
Funds". Each appraiser is selected in accordance with predetermined guidelines
established for appraisers. The appraiser is required to inspect the property
and verify that it is in good condition and that construction, if new, has been
completed. The appraisal is based on the market value of comparable homes, the
estimated rental income, if considered applicable by the appraiser, and, when
deemed appropriate, the cost of replacing the home. With respect to multifamily
properties, commercial properties and mixed-use properties, the appraisal must
specify whether an income analysis, a market analysis or a cost analysis was
used. An appraisal employing the income approach to value analyzes a property's
projected net cash flow, capitalization and other operational information in
determining the property's value. The market approach to value analyzes the
prices paid for the purchase of similar properties in the property's area, with
adjustments made for variations between those other properties and the property
being appraised. The cost approach to value requires the appraiser to make an
estimate of land value and then determine the current cost of reproducing the
improvements less any accrued depreciation. The value of the property being
financed, as indicated by the appraisal, must be high enough so that it
currently supports, and is anticipated to support in the future, the outstanding
loan balance.
In the case of single family loans and contracts, once all applicable
employment, credit and property information is received, the originator reviews
the applicant's source of income, calculates the amount of income from sources
indicated on the loan application or similar documentation, reviews the credit
history of the applicant, calculates the debt service-to-income ratio to
determine the applicant's ability to repay the loan, reviews the type of
property being financed and reviews the property. In evaluating the credit
quality of borrowers, the originator may utilize the FICO score supplied by the
credit bureau with the credit report (a statistical ranking of likely future
credit performance developed by Fair, Isaac & Company and three national credit
data repositories - Equifax, TransUnion and Experian).
In the case of a mortgage loan secured by a leasehold interest in a
residential property, the title to which is held by a third party lessor, the
mortgage loan seller, or another party on its behalf, will be required to
warrant, among other things, that the remaining term of the lease and any
sublease be at least five years longer than the remaining term of the mortgage
loan.
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With respect to any loan insured by the FHA, the mortgage loan seller is
required to represent that the FHA loan complies with the applicable
underwriting policies of the FHA. SEE "DESCRIPTION OF PRIMARY INSURANCE
POLICIES--FHA INSURANCE".
With respect to any loan guaranteed by the VA, the mortgage loan seller
will be required to represent that the VA loan complies with the applicable
underwriting policies of the VA. SEE "DESCRIPTION OF PRIMARY INSURANCE
POLICIES--VA GUARANTEES".
The recent foreclosure or repossession and delinquency experience with
respect to loans serviced by the master servicer or, if applicable, a
significant sub-servicer will be provided in the related prospectus supplement.
QUALIFICATIONS OF ORIGINATORS AND MORTGAGE LOAN SELLERS
Each originator will be required to satisfy the qualifications set forth in
this paragraph. Each originator must be an institution experienced in
originating conventional mortgage loans in accordance with customary and
reasonable practices and the mortgage loan seller's or the depositor's
guidelines, and must maintain satisfactory facilities to originate those loans.
Each originator must be a HUD-approved mortgagee or an institution the deposit
accounts in which are insured by the Bank Insurance Fund or Savings Association
Insurance Fund of the FDIC. In addition, with respect to FHA loans or VA loans,
each originator must be approved to originate the mortgage loans by the FHA or
VA, as applicable. Each originator and mortgage loan seller must also satisfy
criteria as to financial stability evaluated on a case by case basis by the
depositor.
REPRESENTATIONS BY OR ON BEHALF OF MORTGAGE LOAN SELLERS; REMEDIES FOR BREACH OF
REPRESENTATION
Each mortgage loan seller, or a party on its behalf, will have made
representations and warranties in respect of the mortgage loans sold by that
mortgage loan seller. The following material representations and warranties as
to the mortgage loans will be made by or on behalf of each mortgage loan seller:
o that any required hazard insurance was effective at the origination of
each mortgage loan, and that each required policy remained in effect
on the date of purchase of the mortgage loan from the mortgage loan
seller by or on behalf of the depositor;
o that either (A) title insurance insuring, subject only to permissible
title insurance exceptions, the lien status of the Mortgage was
effective at the origination of each mortgage loan and the policy
remained in effect on the date of purchase of the mortgage loan from
the mortgage loan seller by or on behalf of the depositor or (B) if
the mortgaged property securing any mortgage loan is located in an
area where title insurance policies are generally not available, there
is in the related mortgage file an attorney's certificate of title
indicating, subject to permissible exceptions set forth therein, the
lien status of the mortgage;
o that the mortgage loan seller had good title to each mortgage loan and
each mortgage loan was subject to no valid offsets, defenses,
counterclaims or rights of rescission except to the
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extent that any buydown agreement described herein may forgive some
indebtedness of a borrower;
o that each Mortgage constituted a valid lien on, or security interest
in, the mortgaged property, subject only to permissible title
insurance exceptions and senior liens, if any, and that the mortgaged
property was free from material damage and was in good repair;
o that there were no delinquent tax or assessment liens against the
mortgaged property;
o that each mortgage loan was not currently more than 90 days delinquent
as to required monthly payments of principal and interest; and
o that each mortgage loan was made in compliance with, and is
enforceable under, all applicable local, state and federal laws and
regulations in all material respects.
If a person other than a mortgage loan seller makes any of the foregoing
representations and warranties on behalf of the mortgage loan seller, the
identity of the person will be specified in the related prospectus supplement.
Any person making representations and warranties on behalf of a mortgage loan
seller shall be an affiliate of the mortgage loan seller or a person acceptable
to the depositor having knowledge regarding the subject matter of those
representations and warranties.
All of the representations and warranties made by or on behalf of a
mortgage loan seller in respect of a mortgage loan will have been made as of the
date on which the mortgage loan seller sold the mortgage loan to or on behalf of
the depositor. A substantial period of time may have elapsed between the date
the representation or warranty was made to or on behalf of the depositor and the
date of initial issuance of the series of securities evidencing an interest in
the related mortgage loan.
In the event of a breach of any representation or warranty made by a mortgage
loan seller, the mortgage loan seller will be obligated to cure the breach or
repurchase or replace the affected mortgage loan as described in the second
following paragraph. Since the representations and warranties made by or on
behalf of a mortgage loan seller do not address events that may occur following
the sale of a mortgage loan by that mortgage loan seller, it will have a cure,
repurchase or substitution obligation in connection with a breach of a
representation and warranty only if the relevant event that causes the breach
occurs prior to the date of the sale to or on behalf of the depositor. A
mortgage loan seller would have no repurchase or substitution obligations if the
relevant event that causes the breach occurs after the date of the sale to or on
behalf of the depositor.
However, the depositor will not include any mortgage loan in the trust fund for
any series of securities if anything has come to the depositor's attention that
would cause it to believe that the representations and warranties made in
respect of a mortgage loan will not be accurate and complete in all material
respects as of the date of initial issuance of the related series of securities.
The only representations and warranties to be made for the benefit of
holders of securities in respect of any mortgage loan relating to the period
commencing on the date of sale of a mortgage loan by the mortgage loan seller to
or on behalf of the depositor will be the limited representations of the
depositor and of the master servicer described below under "Description of the
Securities-- Assignment of Trust Fund Assets; Review of Files by Trustee". If
the master servicer is also a mortgage loan seller with respect to a particular
series, the representations will be in addition to the representations and
warranties made by the master servicer in its capacity as a mortgage loan
seller.
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The master servicer and the trustee, or the trustee, will promptly notify
the relevant mortgage loan seller of any breach of any representation or
warranty made by or on behalf of it in respect of a mortgage loan that
materially and adversely affects the value of that mortgage loan or the
interests in the mortgage loan of the securityholders. If the mortgage loan
seller cannot cure a breach within a specified time period from the date on
which the mortgage loan seller was notified of the breach, then the mortgage
loan seller will be obligated to repurchase the affected mortgage loan from the
trustee within a specified time period from the date on which the mortgage loan
seller was notified of the breach, at the purchase price therefor. A mortgage
loan seller, rather than repurchase a mortgage loan as to which a breach has
occurred, may have the option, within a specified period after initial issuance
of the related series of securities, to cause the removal of the mortgage loan
from the trust fund and substitute in its place one or more other mortgage
loans, in accordance with the standards described below under "Description of
the Securities--Assignment of the Mortgage Loans". The master servicer will be
required under the applicable servicing agreement to use its best efforts to
enforce the repurchase or substitution obligations of the mortgage loan seller
for the benefit of the trustee and the holders of the securities, following the
practices it would employ in its good faith business judgment were it the owner
of the mortgage loan. This repurchase or substitution obligation will constitute
the sole remedy available to holders of securities or the trustee for a breach
of representation by a mortgage loan seller. SEE "DESCRIPTION OF THE
SECURITIES".
Neither the depositor nor the master servicer will be obligated to purchase
or substitute for a mortgage loan if a mortgage loan seller defaults on its
obligation to do so, and no assurance can be given that mortgage loan sellers
will carry out their repurchase or substitution obligations with respect to
mortgage loans. To the extent that a breach of the representations and
warranties of a mortgage loan seller may also constitute a breach of a
representation made by the depositor, the depositor may have a repurchase or
substitution obligation as described below under "Description of the
Securities--Assignment of Trust Fund Assets; Review of Files by Trustee".
DESCRIPTION OF THE SECURITIES
The securities will be issued in series. Each series of certificates
evidencing interests in a trust fund consisting of mortgage loans will be issued
in accordance with a pooling and servicing agreement among the depositor, the
master servicer and the trustee named in the prospectus supplement. Each series
of notes evidencing indebtedness of a trust fund consisting of mortgage loans
will be issued in accordance with an indenture between the related issuer and
the trustee named in the prospectus supplement. The issuer of notes will be the
depositor or an owner trust established under an owner trust agreement between
the depositor and the owner trustee for the purpose of issuing a series of
notes. Where the issuer is an owner trust, the ownership of the trust fund will
be evidenced by equity certificates issued under the owner trust agreement. The
provisions of each agreement will vary depending upon the nature of the
securities to be issued thereunder and the nature of the related trust fund.
Various forms of pooling and servicing agreement, servicing agreement, owner
trust agreement, trust agreement and indenture have been filed as exhibits to
the registration statement of which this prospectus is a part. The following
summaries describe specific provisions which will appear in each agreement. The
prospectus supplement for a series of securities will describe additional
provisions of the agreement relating to a series. This prospectus together with
the prospectus supplement will describe the material terms of the agreement
governing the trust fund related to a series of securities. As used in this
prospectus supplement with respect to any series, the term certificate or the
term note refers to all of the certificates or notes of that series,
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whether or not offered by this prospectus and by the related prospectus
supplement, unless the context otherwise requires.
The certificates of each series, including any class of certificates not
offered hereby, will be issued in fully registered form only and will represent
the entire beneficial ownership interest in the trust fund created by the
related pooling and servicing agreement. The notes of each series, including any
class of notes not offered hereby, will be issued in fully registered form only
and will represent indebtedness of the trust fund created by the related
indenture. If so provided in the prospectus supplement, any class of securities
of any series may be represented by a certificate or note registered in the name
of a nominee of The Depository Trust Company. The interests of beneficial owners
of securities registered in the name of DTC will be represented by entries on
the records of participating members of DTC. Definitive certificates or notes
will be available for securities registered in the name of DTC only under the
limited circumstances provided in the related prospectus supplement. The
securities will be transferable and exchangeable for like securities of the same
class and series in authorized denominations at the corporate trust office of
the trustee as specified in the related prospectus supplement. The prospectus
supplement for each series of securities will describe any limitations on
transferability. No service charge will be made for any registration of exchange
or transfer of securities, but the depositor or the trustee or any agent of the
trustee may require payment of a sum sufficient to cover any tax or other
governmental charge.
Each series of securities may consist of either:
o a single class of securities evidencing the entire beneficial
ownership of or indebtedness of the related trust fund;
o two or more classes of securities evidencing the entire beneficial
ownership of or indebtedness of the related trust fund, one or more
classes of which will be senior in right of payment to one or more of
the other classes;
o two or more classes of securities, one or more classes of which are
entitled to (a) principal distributions, with disproportionate,
nominal or no interest distributions or (b) interest distributions,
with disproportionate, nominal or no principal distributions;
o two or more classes of securities which differ as to timing,
sequential order, priority of payment, security interest rate or
amount of distributions of principal or interest or both, or as to
which 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
portions of the mortgage pool, which series may include one or more
classes of securities, as to which accrued interest or a portion
thereof will not be distributed but rather will be added to the
principal balance of the security on each distribution date in the
manner described in the related prospectus supplement; and
o other types of classes of securities, as described in the related
prospectus supplement.
With respect to any series of notes, the equity certificates, insofar as
they represent the beneficial ownership interest in the issuer, will be
subordinate to the related notes.
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Each class of securities, other than interest only Strip Securities, will
have a stated principal amount and, unless otherwise provided in the related
prospectus supplement, will be entitled to payments of interest on the stated
principal amount based on a fixed, variable or adjustable interest rate. The
security interest rate of each security offered hereby will be stated in the
related prospectus supplement as the pass-through rate with respect to a
certificate and the note interest rate with respect to a note. SEE
"--DISTRIBUTION OF INTEREST ON THE SECURITIES" AND "--DISTRIBUTION OF PRINCIPAL
OF THE SECURITIES" BELOW.
The specific percentage ownership interest of each class of securities and
the minimum denomination for each security will be set forth in the related
prospectus supplement.
As to each series of certificates with respect to which a REMIC election is
to be made, the master servicer or the trustee will be obligated to take all
actions required in order to comply with applicable laws and regulations, and
will be obligated to pay any Prohibited Transaction Taxes or Contribution Taxes
arising out of a breach of its obligations with respect to its compliance
without any right of reimbursement therefor from the trust fund or from any
securityholder. A Prohibited Transaction Tax or Contribution Tax resulting from
any other cause will be charged against the related trust fund, resulting in a
reduction in amounts otherwise distributable to securityholders. SEE "FEDERAL
INCOME TAX CONSEQUENCES."
ASSIGNMENT OF TRUST FUND ASSETS; REVIEW OF FILES BY TRUSTEE
At the time of issuance of any series of securities, the depositor will
cause the pool of mortgage assets to be included in the related trust fund to be
assigned to the trustee, together with all principal and interest received by or
on behalf of the depositor on or with respect to the mortgage assets after the
related cut-off date, other than principal and interest due on or before the
cut-off date and other than any retained interest. The trustee will,
concurrently with the assignment of mortgage assets, deliver the securities to
the depositor in exchange for the trust fund assets. Each mortgage asset will be
identified in a schedule appearing as an exhibit to the related agreement. The
schedule of mortgage assets will include detailed information as to the mortgage
asset included in the related trust fund, including the outstanding principal
balance of each mortgage asset after application of payments due on the cut-off
date, information regarding the interest rate on the mortgage asset, the
interest rate net of the sum of the rates at which the servicing fees and the
retained interest, if any, are calculated, the retained interest, if any, the
current scheduled monthly payment of principal and interest, the maturity of the
mortgage note, the value of the mortgaged property, the loan-to-value ratio at
origination and other information with respect to the mortgage assets.
If so specified in the related prospectus supplement, and in accordance
with the rules of membership of Merscorp, Inc. and/or Mortgage Electronic
Registration Systems, Inc. or, MERS, assignments of the mortgages for the
mortgage loans in the related trust will be registered electronically through
Mortgage Electronic Registration Systems, Inc., or MERS(R) System. With respect
to mortgage loans registered through the MERS(R) System, MERS shall serve as
mortgagee of record solely as a nominee in an administrative capacity on behalf
of the trustee and shall not have any interest in any of those mortgage loans.
The depositor will, with respect to each mortgage asset, deliver or cause
to be delivered to the trustee, or to the custodian hereinafter referred to:
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o With respect to each mortgage loan, (1) the mortgage note endorsed,
without recourse, to the order of the trustee or in blank, (2) the
original Mortgage with evidence of recording indicated thereon and,
except with respect to home equity revolving credit loans, an
assignment of the Mortgage to the trustee or in blank, in recordable
form. The depositor may deliver lost note affidavit and indemnity in
lieu of a mortgage note that is missing. If a Mortgage has not yet
been returned from the public recording office, the depositor will
deliver or cause to be delivered, in lieu of the original Mortgage, a
copy of the Mortgage together with the depositor's certificate that
the original of the Mortgage was delivered to the recording office.
The depositor will promptly cause the assignment of each related
mortgage loan to be recorded in the appropriate public office for real
property records, except for Mortgages held under the MERS(R)System
and except in the State of California or in other states where, in the
opinion of counsel acceptable to the trustee, recording of the
assignment is not required to protect the trustee's interest in the
mortgage loan against the claim of any subsequent transferee or any
successor to or creditor of the depositor, the master servicer, the
relevant mortgage loan seller or any other prior holder of the
mortgage loan. If the depositor uses the MERS(R)System, it will
deliver evidence that the Mortgage is held for the trustee through the
MERS(R)System instead of an assignment of the Mortgage in recordable
form.
o With respect to each cooperative loan, (1) the cooperative note, (2)
the original security agreement, (3) the proprietary lease or
occupancy agreement, (4) the related stock certificate and related
stock powers endorsed in blank, and (5) a copy of the original filed
financing statement together with an assignment thereof to the trustee
in a form sufficient for filing. The depositor may deliver lost note
affidavit and indemnity in lieu of a cooperative note that is missing.
The depositor will promptly cause the assignment and financing
statement of each related cooperative loan to be filed in the
appropriate public office, except in states where in the opinion of
counsel acceptable to the trustee, filing of the assignment and
financing statement is not required to protect the trustee's interest
in the cooperative loan against the claim of any subsequent transferee
or any successor to or creditor of the depositor, the master servicer,
the relevant mortgage loan seller or any prior holder of the
cooperative loan.
o With respect to each manufactured housing contract or home improvement
contract, (1) the original contract endorsed, without recourse, to the
order of the trustee and copies of documents and (2) instruments
related to the contract and the security interest in the property
securing the contract, and (3) a blanket assignment to the trustee of
all contracts in the related trust fund and the documents and
instruments. In order to give notice of the right, title and interest
of the securityholders to the contracts, the depositor will cause to
be executed and delivered to the trustee a UCC-1 financing statement
identifying the trustee as the secured party and identifying all
contracts as collateral.
With respect to any mortgage loan secured by a mortgaged property located
in Puerto Rico, the Mortgages with respect to these mortgage loans either (a)
secure a specific obligation for the benefit of a specified person or (b) secure
an instrument transferable by endorsement. Endorsable Puerto Rico Mortgages do
not require an assignment to transfer the related lien. Rather, transfer of
endorsable mortgages follows an effective endorsement of the related mortgage
note and, therefore, delivery of the assignment referred to in the first bullet
point above would be inapplicable. Puerto
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Rico Mortgages that secure a specific obligation for the benefit of a specified
person, however, require an assignment to be recorded with respect to any
transfer of the related lien and the assignment for that purpose would be
delivered to the trustee.
The trustee, or the custodian, will review the mortgage loan documents
within a specified period after receipt, and the trustee, or the custodian, will
hold the mortgage loan documents in trust for the benefit of the
securityholders. If any mortgage loan document is found to be missing or
defective in any material respect, the trustee, or the custodian, shall notify
the master servicer and the depositor, and the master servicer shall immediately
notify the relevant mortgage loan seller. If the mortgage loan seller cannot
cure the omission or defect within a specified number of days after receipt of
notice, the mortgage loan seller will be obligated to repurchase the related
mortgage asset from the trustee at the repurchase price or substitute for the
mortgage asset. There can be no assurance that a mortgage loan seller will
fulfill this repurchase or substitution obligation. Although the master servicer
is obligated to use its best efforts to enforce the repurchase or substitution
obligation to the extent described above under "The Depositor's Mortgage Loan
Purchase Program--Representations by or on behalf of Mortgage Loan Sellers;
Remedies for Breach of Representation", neither the master servicer nor the
depositor will be obligated to repurchase or substitute for that mortgage asset
if the mortgage loan seller defaults on its obligation. The assignment of the
mortgage assets to the trustee will be without recourse to the depositor and
this repurchase or substitution obligation constitutes the sole remedy available
to the securityholders or the trustee for omission of, or a material defect in,
a constituent document.
REPRESENTATIONS AND WARRANTIES; REPURCHASES
With respect to the mortgage assets included in a trust fund, the depositor
will make representations and warranties as of a specified date, covering by way
of example, the following matters:
o the type of mortgaged property;
o the geographical concentration of the mortgage assets;
o the original loan-to-value ratio;
o the principal balance as of the cut-off date;
o the interest rate and maturity; and
o the payment status of the mortgage asset; and the accuracy of the
information set forth for each mortgage asset on the related mortgage
loan schedule.
Upon a breach of any representation of the depositor that materially and
adversely affects the value of a mortgage asset or the interests of the
securityholders in the mortgage asset, the depositor will be obligated either to
cure the breach in all material respects, repurchase the mortgage asset at the
repurchase price or substitute for that mortgage asset as described in the
paragraph below.
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If the depositor discovers or receives notice of any breach of its
representations or warranties with respect to a mortgage asset, the depositor
may be permitted under the agreement governing the trust fund to remove the
mortgage asset from the trust fund, rather than repurchase the mortgage asset,
and substitute in its place one or more mortgage assets, but only if (a) with
respect to a trust fund for which a REMIC election is to be made, the
substitution is effected within two years of the date of initial issuance of the
certificates, plus permissible extensions, or (b) with respect to a trust fund
for which no REMIC election is to be made, the substitution is effected within
180 days of the date of initial issuance of the securities. Each substitute
mortgage asset will, on the date of substitution, comply with the following
requirements:
(1) have an outstanding principal balance, after deduction of all
scheduled payments due in the month of substitution, not in excess
of, and not more than $10,000 less than, the outstanding principal
balance, after deduction of all unpaid scheduled payments due as
of the date of substitution, of the deleted mortgage asset,
(2) have an interest rate not less than, and not more than 1% greater
than, the interest rate of the deleted mortgage asset,
(3) have a remaining term to maturity not greater than, and not more
than one year less than, that of the deleted mortgage asset,
(4) have a Lockout Date, if applicable, not earlier than the Lockout
Date on the deleted mortgage loan, and
(5) comply with all of the representations and warranties set forth in
the pooling and servicing agreement or indenture as of the date of
substitution.
In connection with any substitution, an amount equal to the difference
between the purchase price of the deleted mortgage asset and the outstanding
principal balance of the substitute mortgage asset, after deduction of all
scheduled payments due in the month of substitution, together with one month's
interest at the applicable rate at which interest accrued on the deleted
mortgage loan, less the servicing fee rate and the retained interest, if any, on
the difference, will be deposited in the distribution account and distributed to
securityholders on the first distribution date following the prepayment period
in which the substitution occurred. In the event that one mortgage asset is
substituted for more than one deleted mortgage asset, or more than one mortgage
asset is substituted for one or more deleted mortgage assets, then the amount
described in (1) above will be determined on the basis of aggregate principal
balances, the rate described in (2) above with respect to deleted mortgage
assets will be determined on the basis of weighted average interest rates, and
the terms described in (3) above will be determined on the basis of weighted
average remaining terms to maturity and the Lockout Dates described in (4) above
will be determined on the basis of weighted average Lockout Dates.
With respect to any series as to which credit support is provided by means
of a mortgage pool insurance policy, in addition to making the representations
and warranties described above, the depositor or the related mortgage loan
seller, or another party on behalf of the related mortgage loan seller, as
specified in the related prospectus supplement, will represent and warrant to
the trustee that no action has been taken or failed to be taken, no event has
occurred and no state of facts exists or
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has existed on or prior to the date of the initial issuance of the securities
which has resulted or will result in the exclusion from, denial of or defense to
coverage under any applicable primary mortgage insurance policy, FHA insurance
policy, mortgage pool insurance policy, special hazard insurance policy or
bankruptcy bond, irrespective of the cause of the failure of coverage but
excluding any failure of an insurer to pay by reason of the insurer's own breach
of its insurance policy or its financial inability to pay. This representation
is referred to in this prospectus and the related prospectus supplement as the
insurability representation. Upon a breach of the insurability representation
which materially and adversely affects the interests of the securityholders in a
mortgage loan, the depositor or the mortgage loan seller, as the case may be,
will be obligated either to cure the breach in all material respects or to
purchase the affected mortgage asset at the purchase price. The related
prospectus supplement may provide that the performance of an obligation to
repurchase mortgage assets following a breach of an insurability representation
will be ensured in the manner specified in the prospectus supplement. SEE
"DESCRIPTION OF PRIMARY INSURANCE POLICIES" AND "DESCRIPTION OF CREDIT SUPPORT"
IN THIS PROSPECTUS AND IN THE RELATED PROSPECTUS SUPPLEMENT FOR INFORMATION
REGARDING THE EXTENT OF COVERAGE UNDER THE AFOREMENTIONED INSURANCE POLICIES.
The obligation to repurchase or, other than with respect to the
insurability representation if applicable, to substitute mortgage loans
constitutes the sole remedy available to the securityholders or the trustee for
any breach of the representations.
The master servicer will make representations and warranties regarding its
authority to enter into, and its ability to perform its obligations under, the
servicing agreement. Upon a breach of any representation of the master servicer
which materially and adversely affects the interests of the securityholders, the
master servicer will be obligated to cure the breach in all material respects.
ESTABLISHMENT OF COLLECTION ACCOUNT; DEPOSITS TO COLLECTION ACCOUNT IN RESPECT
OF TRUST FUND ASSETS
The master servicer or the trustee will, as to each trust fund, establish
and maintain or cause to be established and maintained one or more separate
accounts for the collection of payments on the related trust fund assets. These
accounts are collectively referred to in this prospectus and the related
prospectus supplement as the collection account. The collection account must be
either
o maintained with a bank or trust company, and in a
manner, satisfactory to the rating agency or agencies
rating any class of securities of the series,
o an account or accounts the deposits in which are
insured by the BIF or the SAIF, to the limits
established by the FDIC or
o a trust account or accounts maintained with the
corporate trust department of a federal or state
chartered depository institution or trust company
acting in its fiduciary capacity.
The collateral eligible to secure amounts in the collection account is
limited to United States government securities and other high-quality
investments specified in the related servicing agreement as permitted
investments. A collection account may be maintained as an interest bearing or a
non-interest bearing account, or the funds held in the collection account may be
invested
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pending each succeeding distribution date in permitted investments. Any interest
or other income earned on funds in the collection account will be paid to the
master servicer or the trustee or their designee as additional compensation. The
collection account may be maintained with an institution that is an affiliate of
the master servicer or the trustee, provided that the institution meets the
standards set forth in the bullet points above. If permitted by the rating
agency or agencies and so specified in the related prospectus supplement, a
collection account may contain funds relating to more than one series of
pass-through certificates and may, if applicable, contain other funds respecting
payments on mortgage loans belonging to the master servicer or serviced or
master serviced by it on behalf of others.
Each sub-servicer servicing a trust fund asset under a sub-servicing
agreement will establish and maintain one or more separate accounts which may be
interest bearing and which will comply with the standards with respect to
collection accounts or other standards as may be acceptable to the master
servicer. The sub-servicer is required to credit to the related sub-servicing
account on a daily basis the amount of all proceeds of mortgage assets received
by the sub-servicer, less its servicing compensation. The sub-servicer will
remit to the master servicer by wire transfer of immediately available funds all
funds held in the sub-servicing account with respect to each mortgage asset on
the monthly remittance date or dates specified in the related servicing
agreement.
The master servicer will deposit or cause to be deposited in the collection
account for each trust fund including mortgage loans, the following payments and
collections received, or advances made, by the master servicer or on its behalf
subsequent to the cut-off date, other than payments due on or before the cut-off
date and exclusive of any retained interest, unless otherwise specified in the
related prospectus supplement:
(1) all payments on account of principal, including principal
prepayments, on the mortgage assets;
(2) all payments on account of interest on the mortgage assets, net
of any portion retained by the master servicer or by a sub-servicer as its
servicing compensation and net of any retained interest;
(3) all proceeds of the hazard insurance policies and any special
hazard insurance policy, other than amounts to be not applied to the
restoration or repair of the property or released to the mortgagor in
accordance with the normal servicing procedures of the master servicer or
the related sub-servicer, subject to the terms and conditions of the
related Mortgage and mortgage note, any primary mortgage insurance policy,
any FHA insurance policy, any VA guarantee, any bankruptcy bond and any
mortgage pool insurance policy and all other amounts received and retained
in connection with the liquidation of defaulted mortgage loans, by
foreclosure or otherwise, together with the net proceeds on a monthly basis
with respect to any mortgaged properties acquired for the benefit of
securityholders by foreclosure or by deed in lieu of foreclosure or
otherwise;
(4) any amounts required to be paid under any letter of credit, as
described below under "Description of Credit Support--Letter of Credit";
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(5) any advances made as described below under "Advances by the
Master Servicer in respect of Delinquencies on the Trust Funds Assets";
(6) if applicable, all amounts required to be transferred to the
collection account from a reserve fund, as described below under
"Description of Credit Support--Reserve Funds";
(7) any buydown funds, and, if applicable, investment earnings
thereon, required to be deposited in the collection account as described in
the first paragraph below;
(8) all proceeds of any mortgage loan or property in respect of the
mortgage asset purchased by the master servicer, the depositor, any
sub-servicer or any mortgage loan seller as described under "The
Depositor's Mortgage Loan Purchase Program-Representations by or on behalf
of Mortgage Loan Sellers; Remedies for Breach of Representations" or
"--Assignment of Trust Fund Assets; Review of Files by Trustee" above,
exclusive of the retained interest, if any, in respect of the mortgage
asset;
(9) all proceeds of any mortgage loan repurchased as described
under "--Termination" below;
(10) all payments required to be deposited in the collection account
with respect to any deductible clause in any blanket insurance policy
described under "Description of Primary Insurance Policies--Primary Hazard
Insurance Policies"; and
(11) any amount required to be deposited by the master servicer in
connection with net losses realized on investments for the benefit of the
master servicer of funds held in the collection account.
With respect to each buydown mortgage loan, the master servicer, or a
sub-servicer, will deposit related buydown funds in a custodial account, which
may be interest bearing, and that otherwise meets the standards for collection
accounts. This account is referred to in this prospectus and the related
prospectus supplement as a buydown account. The terms of all buydown mortgage
loans provide for the contribution of buydown funds in an amount not less than
either (a) the total payments to be made from the buydown funds under the
related buydown plan or (b) if the buydown funds are present valued, that amount
that, together with investment earnings thereon at a specified rate, compounded
monthly, will support the scheduled level of payments due under the buydown
mortgage loan. Neither the master servicer, the sub-servicer nor the depositor
will be obligated to add to the buydown funds any of its own funds should
investment earnings prove insufficient to maintain the scheduled level of
payments. To the extent that any insufficiency in buydown funds is not
recoverable from the borrower, distributions to securityholders will be
affected. With respect to each buydown mortgage loan, the master servicer will
deposit in the collection account the amount, if any, of the buydown funds, and,
if applicable, investment earnings thereon, for each buydown mortgage loan that,
when added to the amount due from the borrower on the buydown mortgage loan,
equals the full monthly payment which would be due on the buydown mortgage loan
if it were not subject to the buydown plan.
If a buydown mortgage loan is prepaid in full or liquidated, the related
buydown funds will be applied as follows. If the mortgagor on a buydown mortgage
loan prepays the loan in its entirety
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during the buydown period, the master servicer will withdraw from the buydown
account and remit to the mortgagor in accordance with the related buydown plan
any buydown funds remaining in the buydown account. If a prepayment by a
mortgagor during the buydown period together with buydown funds will result in a
prepayment in full, the master servicer will withdraw from the buydown account
for deposit in the collection account the buydown funds and investment earnings
thereon, if any, which together with the prepayment will result in a prepayment
in full. If the mortgagor defaults during the buydown period with respect to a
buydown mortgage loan and the mortgaged property is sold in liquidation, either
by the master servicer or the insurer under any related insurance policy, the
master servicer will withdraw from the buydown account the buydown funds and all
investment earnings thereon, if any, for deposit in the collection account or
remit the same to the insurer if the mortgaged property is transferred to the
insurer and the insurer pays all of the loss incurred in respect of the default.
In the case of any prepaid or defaulted buydown mortgage loan the buydown funds
in respect of which were supplemented by investment earnings, the master
servicer will withdraw from the buydown account and either deposit in the
collection account or remit to the borrower, depending upon the terms of the
buydown plan, any investment earnings remaining in the related buydown account.
Any buydown funds, and any investment earnings thereon, deposited in the
collection account in connection with a full prepayment of the related buydown
mortgage loan will be deemed to reduce the amount that would be required to be
paid by the borrower to repay fully the related mortgage loan if the mortgage
loan were not subject to the buydown plan.
WITHDRAWALS. With respect to each series of securities, the master
servicer, trustee or special servicer may make withdrawals from the collection
account for the related trust fund for any of the following purposes, unless
otherwise provided in the related agreement and described in the related
prospectus supplement:
(1) to make distributions to the related securityholders on each
distribution date;
(2) to reimburse the master servicer or any other specified person for
unreimbursed amounts advanced by it in respect of mortgage loans in
the trust fund as described under "Advances by Master Servicer in
Respect of Delinquencies on the Trust Fund Assets" above, these
reimbursement to be made out of amounts received which were identified
and applied by the master servicer as late collections of interest
(net of related servicing fees) on and principal of the particular
mortgage assets with respect to which the advances were made or out of
amounts drawn under any form of credit enhancement with respect to the
mortgage assets;
(3) to reimburse the master servicer or a special servicer for unpaid
servicing fees earned by it and some unreimbursed servicing expenses
incurred by it with respect to mortgage assets in the trust fund and
properties acquired in respect thereof, these reimbursement to be made
out of amounts that represent Liquidation Proceeds and Insurance
Proceeds collected on the particular mortgage assets and properties,
and net income collected on the particular properties, with respect to
which the fees were earned or the expenses were incurred or out of
amounts drawn under any form of credit enhancement with respect to the
mortgage assets and properties;
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(4) to reimburse the master servicer or any other specified person for any
advances described in clause (2) above made by it and any servicing
expenses referred to in clause (3) above incurred by it which, in the
good faith judgment of the master servicer or the other person, will
not be recoverable from the amounts described in clauses (2) and (3),
respectively, the reimbursement to be made from amounts collected on
other mortgage assets in the trust fund or, if and to the extent so
provided by the related servicing agreement or indenture and described
in the related prospectus supplement, only from that portion of
amounts collected on the other mortgage assets that is otherwise
distributable on one or more classes of subordinate securities of the
related series;
(5) if and to the extent described in the related prospectus supplement,
to pay the master servicer, a special servicer or another specified
entity (including a provider of credit enhancement) interest accrued
on the advances described in clause (2) above made by it and the
servicing expenses described in clause (3) above incurred by it while
these remain outstanding and unreimbursed;
(6) to reimburse the master servicer, the company, or any of their
respective directors, officers, employees and agents, as the case may
be, for expenses, costs and liabilities incurred thereby, as and to
the extent described under "Matters Regarding the Master Servicer and
the Depositor";
(7) if and to the extent described in the related prospectus supplement,
to pay the fees of the trustee;
(8) to reimburse the trustee or any of its directors, officers, employees
and agents, as the case may be, for expenses, costs and liabilities
incurred thereby, as and to the extent described under "Description of
the Trustee";
(9) to pay the master servicer or the trustee, as additional compensation,
interest and investment income earned in respect of amounts held in
the collection account;
(10) to pay, generally from related income, the master servicer or a
special servicer for costs incurred in connection with the operation,
management and maintenance of any mortgaged property acquired by the
trust fund by foreclosure or by deed in lieu of foreclosure;
(11) if one or more elections have been made to treat the trust fund or
designated portions thereof as a REMIC, to pay any federal, state or
local taxes imposed on the trust fund or its assets or transactions,
as and to the extent described under "Federal Income Tax
Consequences--REMICS--Prohibited Transactions and Other Possible REMIC
Taxes";
(12) to pay for the cost of an independent appraiser or other expert in
real estate matters retained to determine a fair sale price for a
defaulted mortgage loan or a property acquired in respect thereof in
connection with the liquidation of the mortgage loan or property;
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(13) to pay for the cost of various opinions of counsel obtained pursuant
to the related servicing agreement or indenture for the benefit of the
related securityholders;
(14) to pay to itself, the depositor, a mortgage loan seller or any other
appropriate person all amounts received with respect to each mortgage
loan purchased, repurchased or removed from the trust fund pursuant to
the terms of the related servicing agreement and not required to be
distributed as of the date on which the related purchase price is
determined;
(15) to make any other withdrawals permitted by the related pooling and
servicing agreement or the related servicing agreement and indenture
and described in the related prospectus supplement;
(16) to pay for costs and expenses incurred by the trust fund for
environmental site assessments performed with respect to multifamily
or commercial properties that constitute security for defaulted
mortgage loans, and for any containment, clean-up or remediation of
hazardous wastes and materials present on that mortgaged properties,
as described under "Procedures for Realization Upon Defaulted Mortgage
Loans"; and
(17) to clear and terminate the collection account upon the termination of
the trust fund.
DEPOSITS TO DISTRIBUTION ACCOUNT
The trustee will, as to each trust fund, establish and maintain a
distribution account which must be an eligible account. The trustee will deposit
or cause to be deposited in the distribution account for each trust fund amounts
received from the master servicer or otherwise in respect of the related
securities.
DISTRIBUTIONS ON THE SECURITIES
Distributions allocable to principal and interest on the securities of each
series will be made by or on behalf of the trustee each month on each date as
specified in the related prospectus supplement and referred to as a distribution
date, commencing with the month following the month in which the applicable
cut-off date occurs. Distributions will be made to the persons in whose names
the securities are registered at the close of business on the Record Date, and
the amount of each distribution will be determined as of the close of business
on the date specified in the related prospectus supplement and referred to as
the determination date. All distributions with respect to each class of
securities on each distribution date will be allocated pro rata among the
outstanding securities in that class. Payments to the holders of securities of
any class on each distribution date will be made to the securityholders of the
respective class of record on the next preceding Record Date, other than in
respect of the final distribution, based on the aggregate fractional undivided
interests in that class represented by their respective securities. Payments
will be made by wire transfer in immediately available funds to the account of a
securityholder, if the securityholder holds securities in the requisite amount
specified in the related prospectus supplement and if the securityholder has so
notified the depositor or its designee no later than the date specified in the
related prospectus supplement. Otherwise, payments will be made by check mailed
to the address of the person entitled to payment as it appears on the security
register maintained by the depositor or its
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agent. The final distribution in retirement of the securities will be made only
upon presentation and surrender of the securities at the office or agency of the
depositor or its agent specified in the notice to securityholders of the final
distribution. With respect to each series of certificates or notes, the security
register will be referred to as the certificate register or note register,
respectively.
All distributions on the securities of each series on each distribution
date will be made from the available distribution amount described in the next
sentence, in accordance with the terms described in the related prospectus
supplement. The available distribution amount for each series of securities will
be described in the related prospectus supplement and will generally include the
following amounts for each distribution date:
(1) the total amount of all cash on deposit in the related
distribution account as of the corresponding determination date, exclusive
of:
(a) all scheduled payments of principal and interest
collected but due on a date subsequent to the related Due Period,
(b) all prepayments, together with related payments of the
interest thereon, Liquidation Proceeds, Insurance Proceeds and other
unscheduled recoveries received subsequent to the related Prepayment
Period, and
(c) all amounts in the distribution account that are due or
reimbursable to the depositor, the trustee, a mortgage loan seller, a
sub-servicer or the master servicer or that are payable in respect of
specified expenses of the related trust fund;
(2) if the related prospectus supplement so provides, interest or
investment income on amounts on deposit in the distribution account;
(3) all advances with respect to the distribution date;
(4) if the related prospectus supplement so provides, amounts paid
with respect to interest shortfalls resulting from prepayments during the
related Prepayment Period;
(5) to the extent not on deposit in the related distribution account
as of the corresponding determination date, any amounts collected under,
from or in respect of any credit support with respect to the distribution
date; and
(6) any other amounts described in the related prospectus
supplement.
The entire available distribution amount will be distributed among the
related securities, including any securities not offered hereby, on each
distribution date, and accordingly will be released from the trust fund and will
not be available for any future distributions.
DISTRIBUTIONS OF INTEREST ON THE SECURITIES. Each class of securities may
earn interest at a different rate, which may be a fixed, variable or adjustable
security interest rate. The related prospectus supplement will specify the
security interest rate for each class, or, in the case of a variable or
adjustable security interest rate, the method for determining the security
interest rate.
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Unless otherwise specified in the related prospectus supplement, interest on the
securities will be calculated on the basis of a 360-day year consisting of
twelve 30-day months.
With respect to each series of securities and each distribution date, the
distribution in respect of interest on each security, other than principal only
Strip Securities, will be equal to one month's interest on the outstanding
principal balance of the security immediately prior to the distribution date, at
the applicable security interest rate, subject to the following. As to each
Strip Security with no or a nominal principal balance, the distributions in
respect of interest on any distribution date will be on the basis of a notional
amount and equal one month's Stripped Interest. Prior to the time interest is
distributable on any class of Accrual Securities, interest accrued on that class
will be added to the principal balance thereof on each distribution date.
Interest distributions on each security of a series will be reduced in the event
of shortfalls in collections of interest resulting from prepayments on mortgage
loans, with that shortfall allocated among all of the securities of that series
if specified in the related prospectus supplement unless the master servicer is
obligated to cover the shortfalls from its own funds up to its servicing fee for
the related due period. With respect to each series of certificates or notes,
the interest distributions payable will be referred to in the applicable
prospectus supplement as the accrued certificate interest or accrued note
interest, respectively. SEE "YIELD AND MATURITY CONSIDERATIONS" in this
prospectus.
DISTRIBUTIONS OF PRINCIPAL OF THE SECURITIES. The principal balance of a
security, at any time, will equal the maximum amount that the holder will be
entitled to receive in respect of principal out of the future cash flow on the
mortgage assets and other assets included in the related trust fund. The
principal balance of each security offered hereby will be stated in the related
prospectus supplement as the certificate principal balance with respect to a
certificate and the note balance with respect to a note. With respect to each
security, distributions generally will be applied to undistributed accrued
interest thereon, and thereafter to principal. The outstanding principal balance
of a security will be reduced to the extent of distributions of principal on
that security, and, if and to the extent so provided on the related prospectus
supplement, by the amount of any realized losses, allocated to that security.
The outstanding principal balance of a security may be increased by any deferred
interest if so specified in the related prospectus supplement. The initial
aggregate principal balance of a series and each class of securities related to
a series will be specified in the related prospectus supplement. Distributions
of principal will be made on each distribution date to the class or classes of
securities entitled to principal until the principal balance of that class has
been reduced to zero. With respect to a Senior/Subordinate Series, distributions
allocable to principal of a class of securities will be based on the percentage
interest in the related trust fund evidenced by the class, which in turn will be
based on the principal balance of that class as compared to the principal
balance of all classes of securities of the series. Distributions of principal
of any class of securities will be made on a pro rata basis among all of the
securities of the class. Strip Securities with no principal balance will not
receive distributions of principal.
ALLOCATION TO SECURITYHOLDERS OF LOSSES ON THE TRUST FUND ASSETS. With
respect to any defaulted mortgage loan that is finally liquidated, through
foreclosure sale or otherwise, the amount of the realized loss incurred in
connection with liquidation will equal the excess, if any, of the unpaid
principal balance of the liquidated loan immediately prior to liquidation, over
the aggregate amount of Liquidation Proceeds derived from liquidation remaining
after application of the proceeds to unpaid accrued interest on the liquidated
loan and to reimburse the master servicer or any sub- servicer for related
unreimbursed servicing expenses. With respect to mortgage loans the principal
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balances of which have been reduced in connection with bankruptcy proceedings,
the amount of that reduction also will be treated as a realized loss. As to any
series of securities, other than a Senior/Subordinate Series, any realized loss
not covered as described under "Description of Credit Support" will be allocated
among all of the securities on a pro rata basis. As to any Senior/Subordinate
Series, realizes losses will be allocated first to the most subordinate class of
securities as described below under "Description of Credit
Support--Subordination".
ADVANCES BY MASTER SERVICER IN RESPECT OF DELINQUENCIES ON THE TRUST FUND ASSETS
With respect to any series of securities, the master servicer will advance
on or before each distribution date its own funds or funds held in the
collection account that are not included in the available distribution amount
for that distribution date unless the master servicer, in good faith, determines
that any advances made will not be reimbursable from proceeds subsequently
recovered on the mortgage asset related to the advance. The amount of each
advance will be equal to the aggregate of payments of interest, net of related
servicing fees and retained interest, that were due during the related Due
Period and were delinquent on the related determination date. The prospectus
supplement for a series may also provide that the master servicer will advance,
together with delinquent interest, the aggregate amount of principal payments
that were due during the related Due Period and delinquent as of the
determination date, subject to the same reimbursement determination, except
that, with respect to balloon loans, the master servicer will not have to
advance a delinquent balloon payment.
Advances are intended to maintain a regular flow of scheduled interest
payments to holders of the class or classes of securities entitled to payments,
rather than to guarantee or insure against losses. Advances of the master
servicer's funds will be reimbursable only out of related recoveries on the
mortgage assets respecting which advances were made, including amounts received
under any form of credit support; provided, however, that any advance will be
reimbursable from any amounts in the distribution account to the extent that the
master servicer shall determine that the advance is not ultimately recoverable
from Related Proceeds. If advances have been made by the master servicer from
excess funds in the distribution account, the master servicer will replace those
funds in the distribution account on any future distribution date to the extent
that funds in the distribution account on that distribution date are less than
payments required to be made to securityholders on that date. If so specified in
the related prospectus supplement, the obligations of the master servicer to
make advances may be secured by a cash advance reserve fund or a surety bond. If
applicable, information regarding the characteristics of, and the identity of
any obligor on, any surety bond, will be set forth in the related prospectus
supplement.
Advances in respect of delinquencies will not be made in connection with
home equity revolving credit loans, except as otherwise provided in the related
prospectus supplement. In the case of home equity revolving credit loans, the
master servicer or servicer is required to advance funds to cover any draws made
on a home equity revolving credit loan, subject to reimbursement by the entity
specified in the accompanying prospectus supplement, provided that as specified
in the accompanying prospectus supplement during any revolving period associated
with the related series of securities, draws may be covered first from principal
collections on the other loans in the mortgage pool.
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FORM OF REPORTS TO SECURITYHOLDERS
With each distribution to holders of any class of securities of a series,
the master servicer or the trustee, will forward or cause to be forwarded to
each securityholder, to the depositor and to those other parties as may be
specified in the related servicing agreement, a statement setting forth the
following as of the distribution date:
(1) the amount of the distribution to holders of securities of that
class applied to reduce the principal balance of the securities;
(2) the amount of the distribution to holders of securities of that
class allocable to interest;
(3) the amount of related administration or servicing compensation
received by the trustee or the master servicer and any sub-servicer and any
other customary information as the master servicer deems necessary or
desirable, or that a securityholder reasonably requests, to enable
securityholders to prepare their tax returns;
(4) if applicable, the aggregate amount of advances included in the
distribution, and the aggregate amount of unreimbursed advances at the
close of business on that distribution date;
(5) the aggregate principal balance of the mortgage loans at the
close of business on that distribution date;
(6) the number and aggregate principal balance of mortgage loans (a)
delinquent one month, (b) delinquent two or more months, and (c) as to
which foreclosure proceedings have been commenced;
(7) with respect to any mortgaged property acquired on behalf of
securityholders through foreclosure or deed in lieu of foreclosure during
the preceding calendar month, the principal balance of the related mortgage
loan as of the close of business on the distribution date in that month;
(8) the aggregate principal balance of each class of securities
(including any class of securities not offered hereby) at the close of
business on that distribution date, separately identifying any reduction in
the principal balance due to the allocation of any realized loss;
(9) the amount of any special hazard realized losses allocated to
the subordinate securities, if any, at the close of business on that
distribution date;
(10) the aggregate amount of principal prepayments made and realized
losses incurred during the related Prepayment Period;
(11) the amount deposited in the reserve fund, if any, on that
distribution date;
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(12) the amount remaining in the reserve fund, if any, as of the
close of business on that distribution date;
(13) the aggregate unpaid accrued interest, if any, on each class of
securities at the close of business on that distribution date;
(14) in the case of securities that accrue interest at the variable
rate, the security interest rate applicable to that distribution date, as
calculated in accordance with the method specified in the related
prospectus supplement; and
(15) as to any series which includes credit support, the amount
of coverage of each instrument of credit support included in the trust fund
as of the close of business on that distribution date.
In the case of information furnished under subclauses (1)-(3) above, the
amounts shall be expressed as a dollar amount per minimum denomination of
securities or for other specified portion thereof. With respect to each series
of certificates or notes, securityholders will be referred to as the
certificateholders or the noteholders, respectively.
Within a reasonable period of time after the end of each calendar year, the
master servicer or the trustee, as provided in the related prospectus
supplement, shall furnish to each person who at any time during the calendar
year was a holder of a security a statement containing the information set forth
in subclauses (1)-(3) above, aggregated for that calendar year or the applicable
portion thereof during which that person was a securityholder. The obligation of
the master servicer or the trustee shall be deemed to have been satisfied to the
extent that substantially comparable information shall be provided by the master
servicer or the trustee in accordance with any requirements of the Code as are
from time to time in force.
COLLECTION AND OTHER SERVICING PROCEDURES EMPLOYED BY THE MASTER SERVICER
The master servicer, directly or through sub-servicers, will make
reasonable efforts to collect all scheduled payments under the mortgage loans
and will follow or cause to be followed the collection procedures as it would
follow with respect to mortgage assets that are comparable to the mortgage
assets and held for its own account, provided these procedures are consistent
with the related servicing agreement and any related insurance policy,
bankruptcy bond, letter of credit or other insurance instrument described under
"Description of Primary Insurance Policies" or "Description of Credit Support".
Consistent with this servicing standard, the master servicer may, in its
discretion, waive any late payment charge in respect of a late mortgage loan
payment and, only upon determining that the coverage under any related insurance
instrument will not be affected, extend or cause to be extended the due dates
for payments due on a mortgage note for a period not greater than 180 days.
In instances in which a mortgage asset is in default, or if default is
reasonably foreseeable, and if determined by the master servicer to be in the
best interests of the related securityholders, the master servicer may permit
modifications of the mortgage asset rather than proceeding with foreclosure. In
making that determination, the estimated realized loss that might result if the
mortgage asset were liquidated would be taken into account. Modifications may
have the effect of reducing the interest
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rate on the mortgage asset, forgiving the payment of principal or interest or
extending the final maturity date of the mortgage asset. Any modified mortgage
asset may remain in the related trust fund, and the reduction in collections
resulting from the modification may result in reduced distributions of interest,
or other amounts, on, or may extend the final maturity of, one or more classes
of the related securities.
In connection with any significant partial prepayment of a mortgage asset,
the master servicer, to the extent not inconsistent with the terms of the
mortgage note and local law and practice, may permit the mortgage asset to be
reamortized so that the monthly payment is recalculated as an amount that will
fully amortize the remaining principal amount of the mortgage asset by the
original maturity date based on the original interest rate. Reamortization will
not be permitted if it would constitute a modification of the mortgage asset for
federal income tax purposes.
In any case in which property securing a mortgage asset, other than an ARM
Loan, multifamily loan or commercial loan, has been, or is about to be, conveyed
by the borrower, or in any case in which property securing a multifamily loan or
commercial loan has been, or is about to be, encumbered by the borrower, the
master servicer will exercise or cause to be exercised on behalf of the related
trust fund the lender's rights to accelerate the maturity of the mortgage asset
under any due-on-sale or due-on-encumbrance clause applicable to that mortgage
asset. The master servicer will only exercise these rights only if the exercise
of any these rights is permitted by applicable law and will not impair or
threaten to impair any recovery under any related insurance instrument. If these
conditions are not met or if the master servicer reasonably believes it is
unable under applicable law to enforce a due-on-sale or due-on-encumbrance
clause, the master servicer will enter into or cause to be entered into an
assumption and modification agreement with the person to whom the property has
been or is about to be conveyed or encumbered, under which that person becomes
liable under the mortgage note, cooperative note, manufactured housing contract
or home improvement contract and, to the extent permitted by applicable law, the
borrower remains liable thereon. The original mortgagor may be released from
liability on a mortgage asset if the master servicer shall have determined in
good faith that a release will not adversely affect the collectability of the
mortgage asset. An ARM Loan may be assumed if the ARM Loan is by its terms
assumable and if, in the reasonable judgment of the master servicer, the
proposed transferee of the related mortgaged property establishes its ability to
repay the loan and the security for the ARM Loan would not be impaired by the
assumption. If a mortgagor transfers the mortgaged property subject to an ARM
Loan without consent, that ARM Loan may be declared due and payable. Any fee
collected by or on behalf of the master servicer for entering into an assumption
agreement will be retained by or on behalf of the master servicer as additional
servicing compensation. In connection with any assumption, the terms of the
related mortgage asset may not be changed except in the instance where an
assumption is related to a defaulted cure. SEE "LEGAL ASPECTS OF
ASSETS--ENFORCEABILITY OF PROVISIONS".
In the case of multifamily loans, commercial loans or mixed-use loans, a
mortgagor's failure to make scheduled payments may mean that operating income is
insufficient to service the mortgage debt, or may reflect the diversion of that
income from the servicing of the mortgage debt. In addition, a mortgagor under a
multifamily loan, commercial loan or mixed-use loan that is unable to make
scheduled payments may also be unable to make timely payment of all required
taxes and otherwise to maintain and insure the related mortgaged property. In
general, the master servicer will be required to monitor any multifamily loan,
commercial loan or mixed-use loan that is in default,
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evaluate whether the causes of the default can be corrected over a reasonable
period without significant impairment of the value of the related mortgaged
property, initiate corrective action in cooperation with the mortgagor if cure
is likely, inspect the related mortgaged property and take such other actions as
are consistent with the related servicing agreement. A significant period of
time may elapse before the servicer is able to assess the success of any such
corrective action or the need for additional initiatives. The time within which
the master servicer can make the initial determination of appropriate action,
evaluate the success of corrective action, develop additional initiatives,
institute foreclosure proceedings and actually foreclose (or accept a deed to a
mortgaged property in lieu of foreclosure) on behalf of the securityholders of
the related series may vary considerably depending on the particular multifamily
loan, commercial loan or mixed-use loan, the mortgaged property, the mortgagor,
the presence of an acceptable party to assume the multifamily loan, commercial
loan or mixed-use loan and the laws of the jurisdiction in which the mortgaged
property is located.
If a mortgagor files a bankruptcy petition, the servicer may not be
permitted to accelerate the maturity of the related mortgage asset or to
foreclose on the mortgaged property for a considerable period of time. SEE
"LEGAL ASPECTS OF MORTGAGE ASSETS."
DESCRIPTION OF SUB-SERVICING
Any master servicer may delegate its servicing obligations in respect of
the mortgage assets to third-party servicers, but the master servicer will
remain obligated under the related servicing agreement. Each sub-servicer will
be required to perform the customary functions of a servicer of comparable
assets, including:
o collecting payments from borrowers and remitting the collections to
the master servicer,
o maintaining primary hazard insurance as described in this prospectus
and in any related prospectus supplement,
o filing and settling claims under primary hazard insurance policies,
which may be subject to the right of the master servicer to approve in
advance any settlement,
o maintaining escrow or impoundment accounts of borrowers for payment of
taxes, insurance and other items required to be paid by any borrower
in accordance with the mortgage asset,
o processing assumptions or substitutions where a due-on-sale clause is
not exercised,
o attempting to cure delinquencies,
o supervising foreclosures or repossessions,
o inspecting and managing mortgaged properties, if applicable, and
o maintaining accounting records relating to the mortgage assets.
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The master servicer will be responsible for filing and settling claims in
respect of mortgage assets in a particular mortgage pool under any applicable
mortgage pool insurance policy, bankruptcy bond, special hazard insurance policy
or letter of credit. SEE "DESCRIPTION OF CREDIT SUPPORT".
The sub-servicing agreement between any master servicer and a sub-servicer
will be consistent with the terms of the related servicing agreement and will
not result in a withdrawal or downgrading of any class of securities issued in
accordance with the related agreement. With respect to those mortgage assets
serviced by the master servicer through a sub-servicer, the master servicer will
remain liable for its servicing obligations under the related policy and
servicing agreement or servicing agreement as if the master servicer alone were
servicing those mortgage assets. Although each sub-servicing agreement will be a
contract solely between the master servicer and the sub- servicer, the agreement
under which a series of securities is issued will provide that, if for any
reason the master servicer for the series of securities is no longer acting in a
servicing capacity, the trustee or any successor master servicer must recognize
the sub-servicer's rights and obligations under the sub-servicing agreement.
The master servicer will be solely liable for all fees owed by it to any
sub-servicer, irrespective of whether the master servicer's compensation under
the related agreement is sufficient to pay the fees. However, a sub-servicer may
be entitled to a retained interest in mortgage assets. Each sub- servicer will
be reimbursed by the master servicer for expenditures which it makes, generally
to the same extent the master servicer would be reimbursed under the related
servicing agreement. SEE "DESCRIPTION OF THE SECURITIES--RETAINED INTEREST,
SERVICING OR ADMINISTRATION COMPENSATION AND PAYMENT OF EXPENSES".
The master servicer may require any sub-servicer to agree to indemnify the
master servicer for any liability or obligation sustained by the master servicer
in connection with any act or failure to act by the sub-servicer in its
servicing capacity. Each sub-servicer is required to maintain a fidelity bond
and an errors and omissions policy with respect to its officers, employees and
other persons acting on its behalf or on behalf of the master servicer.
PROCEDURES FOR REALIZATION UPON DEFAULTED MORTGAGE ASSETS
The master servicer will be required to foreclose upon or otherwise take
title in the name of the trustee, on behalf of the securityholders, of mortgaged
properties relating to defaulted mortgage assets to which no satisfactory
arrangements can be made for collection of delinquent payments, but the master
servicer will not be required to foreclose if it determines that foreclosure
would not be in the best interests of the securityholders or the provider of
credit support, if any.
In addition, unless otherwise specified in the related prospectus
supplement, the master servicer may not acquire title to any multifamily
property or commercial property securing a mortgage loan or take any other
action that would cause the related trustee, for the benefit of securityholders
of the related series, or any other specified person to be considered to hold
title to, to be a "mortgagee-in- possession" of, or to be an "owner" or an
"operator" of such mortgaged property within the meaning of federal
environmental laws, unless the master servicer has previously determined, based
on a report prepared by a person who regularly conducts environmental audits
(which report will be an expense of the trust fund), that either:
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(1) the mortgaged property is in compliance with applicable
environmental laws and regulations or, if not, that taking actions as are
necessary to bring the mortgaged property into compliance with these laws
is reasonably likely to produce a greater recovery on a present value basis
than not taking those actions; and
(2) there are no circumstances or conditions present at the mortgaged
property that have resulted in any contamination for which investigation,
testing, monitoring, containment, clean-up or remediation could be required
under any applicable environmental laws and regulations or, if those
circumstances or conditions are present for which any such action could be
required, taking those actions with respect to the mortgaged property is
reasonably likely to produce a greater recovery on a present value basis
than not taking those actions. SEE "LEGAL ASPECTS OF MORTGAGE
ASSETS--ENVIRONMENTAL LEGISLATION."
As servicer of the mortgage loans, the master servicer, on behalf of
itself, the trustee and the securityholders, will present claims to the insurer
under each insurance instrument, and will take reasonable steps as are necessary
to receive payment or to permit recovery thereunder with respect to defaulted
mortgage assets. As set forth above under "-Collection and Other Servicing
Procedures Employed by the Master Servicer", all collections by or on behalf of
the master servicer under any insurance instrument, other than amounts to be
applied to the restoration of a mortgaged property or released to the mortgagor,
are to be deposited in the distribution account for the related trust fund,
subject to withdrawal as previously described. The master servicer or its
designee will not receive payment under any letter of credit included as an
insurance instrument with respect to a defaulted mortgage asset unless all
Liquidation Proceeds and Insurance Proceeds which it deems to be finally
recoverable have been realized; however, the master servicer will be entitled to
reimbursement for any unreimbursed advances and reimbursable expenses
thereunder.
If any property securing a defaulted mortgage asset is damaged and
proceeds, if any, from the related hazard insurance policy or special hazard
insurance policy are insufficient to restore the damaged property to a condition
sufficient to permit recovery under the related credit insurance instrument, if
any, the master servicer is not required to expend its own funds to restore the
damaged property unless it determines (a) that the restoration will increase the
proceeds to securityholders on liquidation of the mortgage loan after
reimbursement of the master servicer for its expenses and (b) that its expenses
will be recoverable by it from related Insurance Proceeds or Liquidation
Proceeds.
If recovery on a defaulted mortgage asset under any related credit
insurance instrument is not available for the reasons set forth in the preceding
paragraph, the master servicer nevertheless will be obligated to follow or cause
to be followed the normal practices and procedures as it deems necessary or
advisable to realize upon the defaulted mortgage asset. If the proceeds of any
liquidation of the property securing the defaulted mortgage loan are less than
the outstanding principal balance of the defaulted mortgage loan plus interest
accrued thereon at the interest rate plus the aggregate amount of expenses
incurred by the master servicer in connection with those proceedings and which
are reimbursable under the servicing agreement, the trust fund will realize a
loss in the amount of the difference. The master servicer will be entitled to
withdraw or cause to be withdrawn from the collection or distribution account
out of the Liquidation Proceeds recovered on any defaulted mortgage asset, prior
to the distribution of any Liquidation Proceeds to securityholders, amounts
representing its normal servicing compensation on the mortgage loan,
unreimbursed
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servicing expenses incurred with respect to the mortgage asset and any
unreimbursed advances of delinquent monthly payments made with respect to the
mortgage loan.
If the master servicer or its designee recovers Insurance Proceeds with
respect to any defaulted mortgage loan, the master servicer will be entitled to
withdraw or cause to be withdrawn from the collection account or distribution
account out of Insurance Proceeds, prior to distribution of that amount to
securityholders, amounts representing its normal servicing compensation on that
mortgage loan, unreimbursed servicing expenses incurred with respect to the
mortgage loan and any unreimbursed advances of delinquent monthly payments made
with respect to the mortgage loan. In the event that the master servicer has
expended its own funds to restore damaged property and those funds have not been
reimbursed under any insurance instrument, it will be entitled to withdraw from
the collection account out of related Liquidation Proceeds or Insurance Proceeds
an amount equal to the expenses incurred by it, in which event the trust fund
may realize a loss up to the amount so charged. Because Insurance Proceeds
cannot exceed deficiency claims and expenses incurred by the master servicer, no
payment or recovery will result in a recovery to the trust fund which exceeds
the principal balance of the defaulted mortgage asset together with accrued
interest thereon at the interest rate net of servicing fees and the retained
interest, if any. In addition, when property securing a defaulted mortgage asset
can be resold for an amount exceeding the outstanding principal balance of the
related mortgage asset together with accrued interest and expenses, it may be
expected that, if retention of any amount is legally permissible, the insurer
will exercise its right under any related mortgage pool insurance policy to
purchase the property and realize for itself any excess proceeds. SEE
"DESCRIPTION OF PRIMARY INSURANCE POLICIES" AND "DESCRIPTION OF CREDIT SUPPORT".
With respect to collateral securing a cooperative loan, any prospective
purchaser will generally have to obtain the approval of the board of directors
of the relevant cooperative before purchasing the shares and acquiring rights
under the proprietary lease or occupancy agreement securing the cooperative
loan. This approval is usually based on the purchaser's income and net worth and
numerous other factors. The necessity of acquiring board approval could limit
the number of potential purchasers for those shares and otherwise limit the
master servicer's ability to sell, and realize the value of, those shares. SEE
"LEGAL ASPECTS OF MORTGAGE ASSETS--FORECLOSURE ON COOPERATIVES".
Realization on defaulted contracts may be accomplished through repossession
and subsequent resale of the underlying manufactured home or home improvement.
With respect to a defaulted home improvement contract, the master servicer will
decide whether to foreclose upon the mortgaged property or write off the
principal balance of such home improvement contract as a bad debt or take an
unsecured note. In doing so, the master servicer will estimate the expected
proceeds and expenses to determine whether a foreclosure proceeding or a
repossession and resale is appropriate. If a home improvement contract secured
by a lien on a mortgaged property is junior to another lien on the related
mortgaged property, following any default thereon, unless foreclosure proceeds
for such home improvement contract are expected to at least satisfy the related
senior mortgage loan in full and to pay foreclosure costs, it is likely that
such home improvement contract will be written off as bad debt with no
foreclosure proceeding.
RETAINED INTEREST; SERVICING OR ADMINISTRATION COMPENSATION AND PAYMENT OF
EXPENSES
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The prospectus supplement for a series of securities will specify whether
there will be any retained interest from the trust fund assets. A retained
interest in a trust fund asset represents a specified portion of the interest
payable thereon. The retained interest will be deducted from borrower payments
as received and will not be part of the related trust fund. Any partial recovery
of interest on a mortgage asset, after deduction of all applicable servicing
fees, will be allocated between retained interest, if any, and interest at the
interest rate on the mortgage loan, net of the rates at which the servicing fees
and the retained interest are calculated, on a pari passu basis.
The master servicer's primary compensation with respect to a series of
securities will come from the monthly payment to it, with respect to each
interest payment on a trust fund asset, of an amount equal to one-twelfth of the
servicing fee rate specified in the related prospectus supplement times the
scheduled principal balance of the trust fund asset. Since any retained interest
and the master servicer's primary compensation are percentages of the scheduled
principal balance of each trust fund asset, these amounts will decrease in
accordance with the amortization schedule of the trust fund assets. As
additional compensation in connection with a series of securities relating to
mortgage loans, the master servicer or the sub-servicers will retain all
assumption fees, late payment charges and , unless otherwise stated in the
prospectus supplement, prepayment penalties, to the extent collected from
mortgagors. Any interest or other income which may be earned on funds held in
the collection account, distribution account, sub-servicing account or any other
account created under the related servicing agreement may be paid as additional
compensation to the master servicer or the sub-servicers, as the case may be.
Any sub-servicer will receive a portion of the master servicer's primary
compensation as its sub-servicing compensation.
In addition to amounts payable to any sub-servicer, the master servicer may
pay from its servicing compensation expenses incurred in connection with its
servicing of the mortgage loans, including, without limitation, payment of the
fees and disbursements of the trustee and independent accountants, payment of
expenses incurred in connection with distributions and reports to
securityholders, and other expenses, as described in the related prospectus
supplement.
The master servicer is entitled to reimbursement for expenses incurred by
it in connection with the liquidation of defaulted mortgage assets, including
expenditures incurred by it in connection with the restoration of mortgaged
properties, the right of reimbursement being prior to the rights of
securityholders to receive any related Liquidation Proceeds. The master servicer
is also entitled to reimbursement from the collection account for advances.
ANNUAL EVIDENCE AS TO THE COMPLIANCE OF THE MASTER SERVICER
Each servicing agreement with respect to a series of securities will
provide that, on or before a specified date in each year, the first date being
at least six months after the related cut-off date, a firm of independent public
accountants will furnish a statement to the trustee to the effect that, on the
basis of the examination by the firm conducted substantially in compliance with
either the Uniform Single Attestation Program for Mortgage Bankers or the Audit
Program for Mortgages serviced for Freddie Mac, the servicing by or on behalf of
the master servicer of mortgage assets under servicing agreements substantially
similar to each other, including the related servicing agreement, was conducted
in compliance with the terms of those agreements except for any significant
exceptions or errors in records that, in the opinion of the firm, either the
Audit Program for Mortgages serviced for Freddie Mac, or paragraph 4 of the
Uniform Single Attestation Program for Mortgage Bankers,
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requires it to report. In rendering its statement the accounting firm may rely,
as to matters relating to the direct servicing of mortgage assets by
sub-servicers, upon comparable statements for examinations conducted
substantially in compliance with the Uniform Single Attestation Program for
Mortgage Bankers or the Audit Program for Mortgages serviced for Freddie Mac,
rendered within one year of the statement, of firms of independent public
accountants with respect to the related sub-servicer.
Each servicing agreement will also provide for delivery to the trustee, on
or before a specified date in each year, of an annual statement signed by an
officer of the master servicer to the effect that the master servicer has
fulfilled its obligations under the related agreement throughout the preceding
year.
Copies of the annual accountants' statement and the officer's statement of
the master servicer may be obtained by securityholders without charge upon
written request to the master servicer at the address set forth in the related
prospectus supplement.
MATTERS REGARDING THE MASTER SERVICER AND THE DEPOSITOR
The master servicer under each servicing agreement will be named in the
related prospectus supplement. The entity serving as master servicer may be an
affiliate of the depositor and may have other normal business relationships with
the depositor or the depositor's affiliates.
Each servicing agreement will provide that the master servicer may resign
from its obligations and duties under the related agreement only if its
resignation, and the appointment of a successor, will not result in a
downgrading of any class of securities or upon a determination that its duties
under the related agreement are no longer permissible under applicable law. No
resignation will become effective until the trustee or a successor servicer has
assumed the master servicer's obligations and duties under the related
agreement.
Each servicing agreement will further provide that neither the master
servicer, the depositor nor any director, officer, employee, or agent of the
master servicer or the depositor will be under any liability to the related
trust fund or securityholders for any action taken, or for refraining from the
taking of any action, in good faith under the related agreement, or for errors
in judgment; provided, however, that neither the master servicer, the depositor
nor any such person will be protected against any liability which would
otherwise be imposed by reason of willful misfeasance, bad faith or gross
negligence in the performance of duties thereunder or by reason of reckless
disregard of obligations and duties thereunder. Each servicing agreement will
further provide that the master servicer, the depositor and any director,
officer, employee or agent of the master servicer or the depositor will be
entitled to indemnification by the related trust fund and will be held harmless
against any loss, liability or expense incurred in connection with any legal
action relating to the related agreement or the securities, other than any loss,
liability or expense that is related to any specific mortgage loan or mortgage
loans, unless that loss, liability or expense is otherwise reimbursable under
the related agreement, and other than any loss, liability or expense incurred by
reason of willful misfeasance, bad faith or gross negligence in the performance
of duties thereunder or by reason of reckless disregard of obligations and
duties thereunder. In addition, each servicing agreement will provide that
neither the master servicer nor the depositor will be under any obligation to
appear in, prosecute or defend any legal action which is not incidental to its
respective responsibilities under the related
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agreement and which in its opinion may involve it in any expense or liability.
The master servicer or the depositor may, however, in its discretion undertake
any action which it may deem necessary or desirable with respect to the related
agreement and the rights and duties of the parties and the interests of the
securityholders. In that event, the legal expenses and costs of the action and
any resulting liability will be expenses, costs and liabilities of the
securityholders, and the master servicer or the depositor, as the case may be,
will be entitled to be reimbursed and to charge the trust fund for the
reimbursement. Distributions to securityholders will be reduced to pay for the
reimbursement as set forth in the related prospectus supplement and servicing
agreement.
Any person into which the master servicer may be merged or consolidated, or
any person resulting from any merger or consolidation to which the master
servicer is a party, or any person succeeding to the business of the master
servicer, will be the successor of the master servicer under each agreement, so
long as that person is qualified to sell mortgage loans to, and service mortgage
loans on behalf of, Fannie Mae or Freddie Mac.
EVENTS OF DEFAULT UNDER THE GOVERNING AGREEMENT AND RIGHTS UPON EVENTS OF
DEFAULT
POOLING AND SERVICING AGREEMENT
Events of default under each pooling and servicing agreement will include
each of the following unless otherwise stated in the related prospectus
supplement:
o any failure by the master servicer to distribute or cause to be
distributed to securityholders, or to remit to the trustee for
distribution to securityholders, any required payment that
continues unremedied for a specified number of business days
after the giving of written notice of the failure to the master
servicer by the trustee or the depositor, or to the master
servicer, the depositor and the trustee by the holders of
certificates evidencing not less than 25% of the voting rights;
o any failure by the master servicer duly to observe or perform in
any material respect any of its other covenants or obligations
under the agreement which continues unremedied for a specified
number of days after the giving of written notice of the failure
to the master servicer by the trustee or the depositor, or to the
master servicer, the depositor and the trustee by the holders of
certificates evidencing not less than 25% of the voting rights;
and
o events of insolvency, readjustment of debt, marshalling of assets
and liabilities or similar proceedings and actions by or on
behalf of the master servicer indicating its insolvency or
inability to pay its obligations.
So long as an event of default under a pooling and servicing agreement
remains unremedied, the depositor or the trustee may, unless otherwise provided
in the related prospectus supplement, and at the direction of holders of
certificates evidencing not less than 51% of the voting rights, the trustee
shall, terminate all of the rights and obligations of the master servicer under
the pooling and servicing agreement relating to the trust fund and in and to the
mortgage assets, other than any retained interest of the master servicer,
whereupon the trustee will succeed to all of the responsibilities, duties and
liabilities of the master servicer under the agreement and will be entitled
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to similar compensation arrangements. If the trustee is prohibited by law from
obligating itself to make advances regarding delinquent mortgage assets, then
the trustee will not be so obligated.
If the trustee is unwilling or unable so to act, it may or, at the written
request of the holders of certificates entitled to at least 51% of the voting
rights, it shall appoint, or petition a court of competent jurisdiction for the
appointment of, a loan servicing institution acceptable to the rating agency
with a net worth at the time of the appointment of at least $1,000,000 to act as
successor to the master servicer under the agreement. Pending the appointment of
a successor, the trustee is obligated to act in the capacity of master servicer.
The trustee and any successor master servicer may agree upon the servicing
compensation to be paid, which in no event may be greater than the compensation
payable to the master servicer under the related agreement.
No certificateholder will have the right under any pooling and servicing
agreement to institute any proceeding under the agreement unless:
o the certificateholder previously has given to the trustee written
notice of default,
o the holders of certificates evidencing not less than 25% of the voting
rights have made written request upon the trustee to institute the
proceeding in its own name as trustee thereunder,
o have offered to the trustee reasonable indemnity, and
o the trustee for fifteen days has neglected or refused to institute a
proceeding. The trustee, however, is under no obligation to exercise
any of the trusts or powers vested in it by any pooling and servicing
agreement or to make any investigation of matters arising thereunder
or to institute, conduct or defend any litigation at the request,
order or direction of any of the holders of certificates covered by
the agreement, unless the certificateholders have offered to the
trustee reasonable security or indemnity against the costs, expenses
and liabilities which may be incurred.
SERVICING AGREEMENT
A servicing default under the related servicing agreement will include each
of the following unless otherwise provided in the related prospectus supplement:
o any failure by the master servicer to make a required deposit to
the collection account or, if the master servicer is so required,
to distribute to the holders of any class of notes or equity
certificates of the series any required payment which continues
unremedied for a specified number of business days after the
giving of written notice of the failure to the master servicer by
the trustee or the issuer;
o any failure by the master servicer duly to observe or perform in
any material respect any other of its covenants or agreements in
the servicing agreement with respect to the series of notes which
continues unremedied for a specified number of days after the
giving of written notice of the failure to the master servicer by
the trustee or the issuer;
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o 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 and
o any other servicing default as set forth in the servicing
agreement.
So long as a servicing default remains unremedied, either the depositor or
the trustee may, by written notification to the master servicer and to the
issuer or the trustee or trust fund, as applicable, terminate all of the rights
and obligations of the master servicer under the servicing agreement, other than
any right of the master servicer as noteholder or as holder of the equity
certificates and other than the right to receive servicing compensation and
expenses for servicing the mortgage loans during any period prior to the date of
the termination. Upon termination of the master servicer the trustee will
succeed to all responsibilities, duties and liabilities of the master servicer
under the servicing agreement, other than the obligation to repurchase mortgage
loans, and will be entitled to similar compensation arrangements. If the trustee
would be obligated to succeed the master servicer but is unwilling to so act, it
may appoint, or if it is unable to so act, it shall appoint, or petition a court
of competent jurisdiction for the appointment of an approved mortgage servicing
institution with a net worth of at least $1,000,000 to act as successor to the
master servicer under the servicing agreement. Pending the appointment of a
successor, the trustee is obligated to act in the capacity of master servicer.
The trustee and the successor may agree upon the servicing compensation to be
paid, which in no event may be greater than the compensation to the initial
master servicer under the servicing agreement.
INDENTURE
An event of default under the indenture will include each of the following
unless otherwise provided in the related prospectus supplement:
o a default for a specified number of days or more in the payment of any
principal of or interest on any note of the series;
o failure to perform any other covenant of the depositor or the trust
fund in the indenture which continues for a specified number of days
after notice of failure is given in accordance with the procedures
described in the related prospectus supplement;
o any representation or warranty made by the depositor or the trust fund
in the indenture or in any related certificate or other writing having
been incorrect in a material respect as of the time made, and the
breach is not cured within a specified number of days after notice of
breach is given in accordance with the procedures described in the
related prospectus supplement;
o events of bankruptcy, insolvency, receivership or liquidation of the
depositor or the issuer; or
o any other event of default provided with respect to notes of that
series.
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If an event of default with respect to the notes of any series occurs and
is continuing, the trustee or the holders of a majority of the then aggregate
outstanding amount of the notes of the series may declare the principal amount,
or, if the notes of that series are Accrual Securities, the portion of the
principal amount as may be specified in the terms of that series, as provided in
the related prospectus supplement, of all the notes of the series to be due and
payable immediately. That declaration may, under the circumstances set forth in
the indenture, be rescinded and annulled by the holders of a majority in
aggregate outstanding amount of the related notes.
If following an event of default with respect to any series of notes, the
notes of the series have been declared to be due and payable, the trustee may,
in its discretion, notwithstanding the acceleration, elect to maintain
possession of the collateral securing the notes of the series and to continue to
apply payments on the collateral as if there had been no declaration of
acceleration if the collateral continues to provide sufficient funds for the
payment of principal of and interest on the notes of the series as they would
have become due if there had not been a declaration. In addition, the trustee
may not sell or otherwise liquidate the collateral securing the notes of a
series following an event of default, unless
o the holders of 100% of the then aggregate outstanding amount of the
notes of the series consent to the sale,
o the proceeds of the sale or liquidation are sufficient to pay in full
the principal of and accrued interest, due and unpaid, on the
outstanding notes of the series at the date of the sale, or
o the trustee determines that the collateral would not be sufficient on
an ongoing basis to make all payments on the notes as the payments
would have become due if the notes had not been declared due and
payable, and the trustee obtains the consent of the holders of 66 2/3%
of the then aggregate outstanding amount of the notes of the series.
If the trustee liquidates the collateral in connection with an event of
default, the indenture may provide that the trustee will have a prior lien on
the proceeds of any liquidation for unpaid fees and expenses. As a result, upon
the occurrence of an event of default, the amount available for payments to the
noteholders would be less than would otherwise be the case. However, the trustee
may not institute a proceeding for the enforcement of its lien except in
connection with a proceeding for the enforcement of the lien of the indenture
for the benefit of the noteholders after the occurrence of an event of default.
If the principal of the notes of a series is declared due and payable, the
holders of those notes issued at a discount from par may be entitled to receive
no more than an amount equal to the unpaid principal amount of the note less the
amount of the discount that is unamortized.
No noteholder or holder of an equity certificate generally will have any
right under an owner trust agreement or indenture to institute any proceeding
with respect to the agreement unless:
o the holder previously has given to the trustee written notice of
default and the default is continuing,
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o the holders of notes or equity certificates of any class evidencing
not less than 25% of the aggregate percentage interests constituting
the class (1) have made written request upon the trustee to institute
a proceeding in its own name as trustee thereunder and (2) have
offered to the trustee reasonable indemnity,
o the trustee has neglected or refused to institute a proceeding for 60
days after receipt of the request and indemnity, and
o no direction inconsistent with the written request has been given to
the trustee during the 60 day period by the holders of a majority of
the note balances of the class. However, the trustee will be under no
obligation to exercise any of the trusts or powers vested in it by the
applicable agreement or to institute, conduct or defend any litigation
at the request, order or direction of any of the holders of notes or
equity certificates covered by the agreement, unless the holders have
offered to the trustee reasonable security or indemnity against the
costs, expenses and liabilities which may be incurred therein or
thereby.
AMENDMENT OF THE GOVERNING AGREEMENTS
With respect to each series of certificates, each related pooling and
servicing agreement or trust agreement may be amended by the depositor, the
master servicer, and the trustee, upon consent of any credit support provider,
without the consent of any of the holders of certificates covered by the
agreement, to cure any ambiguity, to correct, modify or supplement any provision
in the agreement, or to make any other provisions with respect to matters or
questions arising under the agreement which are not inconsistent with the
provisions of the agreement, provided that the action will not adversely affect
in any material respect the interests of any holder of certificates covered by
the agreement. Each agreement may also be amended by the depositor, the master
servicer, if any, and the trustee, with the consent of the holders of
certificates evidencing not less than 66% of the voting rights, for any purpose,
but that no amendment may
o reduce in any manner the amount of or delay the timing of, payments
received on trust fund assets which are required to be distributed on
any certificate without the consent of the holder of the certificate,
o adversely affect in any material respect the interests of the holders
of any class of certificates in a manner other than as described in
the preceding bullet point, without the consent of the holders of
certificates of that class evidencing not less than 66% of the
aggregate voting rights of that class, or
o reduce the percentage of voting rights required by the preceding
bullet point for the consent to any amendment without the consent of
the holders of all certificates covered by the agreement then
outstanding.
However, with respect to any series of certificates as to which a REMIC
election is to be made, the trustee will not consent to any amendment of the
agreement unless it shall first have received an opinion of counsel to the
effect that the amendment will not cause the trust fund to fail to qualify as a
REMIC at any time that the related certificates are outstanding. The voting
rights evidenced by any
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certificate will be the portion of the voting rights of all of the certificates
in the related series allocated in the manner described in the related
prospectus supplement.
With respect to each series of notes, each related servicing agreement or
indenture may be amended by the parties to the agreement without the consent of
any of the holders of the notes covered by the agreement, to cure any ambiguity,
to correct, modify or supplement any provision in the agreement, or to make any
other provisions with respect to matters or questions arising under the
agreement which are not inconsistent with the provisions of the agreement,
provided that the action will not adversely affect in any material respect the
interests of any holder of notes covered by the agreement. Each agreement may
also be amended by the parties to the agreement with the consent of the holders
of notes evidencing not less than 66% of the voting rights, for any purpose, but
that no amendment may
o reduce in any manner the amount of or delay the timing of, payments
received on trust fund assets which are required to be distributed on
any note without the consent of the holder of that note,
o adversely affect in any material respect the interests of the holders
of any class of notes in a manner other than as described in the
preceding bullet point, without the consent of the holders of notes of
that class evidencing not less than 66% of the aggregate voting rights
of that class, or
o reduce the percentage of voting rights required by the preceding
bullet point for the consent to any amendment without the consent of
the holders of all notes covered by the agreement then outstanding.
The voting rights evidenced by any note will be the portion of the
voting rights of all of the notes in the related series allocated in
the manner described in the related prospectus supplement.
TERMINATION OF THE TRUST FUND AND DISPOSITION OF TRUST FUND ASSETS
The obligations created by the related agreements for each series of
securities will terminate upon the payment to securityholders of that series of
all amounts held in the distribution account or by the master servicer and
required to be paid to them under the agreements following the earlier of
o the final payment or other liquidation of the last asset included in
the related trust fund or the disposition of all underlying property
subject to the trust fund assets acquired upon foreclosure of the
trust fund assets, and
o the purchase of all of the assets of the trust fund by the party
entitled to effect the termination, under the circumstances and in the
manner set forth in the related prospectus supplement.
In no event, however, will the trust created by the related agreements
continue beyond the date specified in the related agreement. Written notice of
termination of the related agreements will be given to each securityholder, and
the final distribution will be made only upon surrender and cancellation of the
securities at an office or agency appointed by the trustee which will be
specified in the notice of termination.
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Any purchase of assets of the trust fund in connection with a termination,
shall be made at the price set forth in the related prospectus supplement which
in most cases will be equal to the greater of:
o the sum of (a) 100% of the stated principal balance of each mortgage
asset as of the day of the purchase plus accrued interest thereon at
the applicable interest rate net of the rates at which the servicing
fees and the retained interest, if any, are calculated to the first
day of the month following the purchase plus (b) the appraised value
of any underlying property subject to the mortgage assets acquired for
the benefit of securityholders, and
o the aggregate fair market value of all of the assets in the trust
fund, as determined by the trustee, the master servicer, and, if
different than both such persons, the person entitled to effect the
termination, in each case taking into account accrued interest at the
applicable interest rate net of the rates at which the servicing fees
and the retained interest, if any, are calculated to the first day of
the month following the purchase.
The exercise of an optimal termination right will effect early retirement
of the securities of that series, but the right of the person entitled to effect
the termination is subject to the aggregate principal balance of the outstanding
trust fund assets for the series at the time of purchase being less than the
percentage of the aggregate principal balance of the trust fund assets at the
cut-off date for that series specified in the related prospectus supplement,
which percentage will be between 25% and 0%.
In addition to the repurchase of the assets in the related trust fund
at the Clean-up Call, if so specified in the related prospectus supplement, a
holder of a non-offered class of securities described in the preceding paragraph
will have the right, solely at its discretion, to terminate the related trust
fund on any distribution date after the 12th distribution date following the
date of initial issuance of the related series of securities and until the date
as the Clean-up Call becomes exercisable and thereby effect early retirement of
the securities of the series. Any call of this type will be of the entire trust
fund at one time; multiple calls with respect to any series of securities will
not be permitted. If the call option is exercised, the Call Class must remit to
the trustee a price equal to 100% of the principal balance of the securities
offered hereby as of the day of the purchase plus accrued interest thereon at
the applicable security interest rate during the related period on which
interest accrues on the securities which the trustee will distribute to
securityholders. If funds to terminate are not deposited with the related
trustee, the securities will remain outstanding. There will not be any
additional remedies available to securityholders. In addition, in the case of a
trust fund for which a REMIC election or elections have been made, an early
termination will constitute a "qualified liquidation" under Section 860F of the
Code. In connection with a call by the Call Class, the final payment to the
securityholders will be made upon surrender of the related securities to the
trustee. Once the securities have been surrendered and paid in full, there will
not be any continuing liability from the securityholders or from the trust fund
to securityholders.
OPTIONAL PURCHASE BY THE MASTER SERVICER OF DEFAULTED MORTGAGE LOANS
The master servicer under the related servicing agreement will have the
option to purchase from the trust fund any mortgage asset 90 days or more
delinquent at a purchase price generally equal to
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the outstanding principal balance of the delinquent mortgage asset as of the
date of purchase, plus all accrued and unpaid interest on that principal
balance.
DUTIES OF THE TRUSTEE
The trustee makes no representations as to the validity or sufficiency of
any agreement, the securities or any mortgage loan or related document and is
not accountable for the use or application by or on behalf of the master
servicer of any funds paid to the master servicer or its designee in respect of
the securities or the mortgage loans, or deposited into or withdrawn from the
collection account or any other account by or on behalf of the master servicer.
If no event of default has occurred and is continuing, the trustee is required
to perform only those duties specifically required under the related agreement.
However, upon receipt of the various certificates, reports or other instruments
required to be furnished to it, the trustee is required to examine the documents
and to determine whether they conform to the requirements of the related
agreement.
DESCRIPTION OF THE TRUSTEE
The trustee or indenture trustee, each referred to as the trustee, under
each pooling and servicing agreement, trust agreement or indenture will be named
in the related prospectus supplement. The owner trustee for each series of notes
will be named in the related prospectus supplement. The commercial bank,
national banking association or trust company serving as trustee or owner
trustee may have normal banking relationships with the depositor and its
affiliates and with the master servicer and its affiliates.
DESCRIPTION OF CREDIT SUPPORT
For any series of securities, credit support may be provided with respect
to one or more classes thereof or the related mortgage assets. Credit support
may be in the form of the subordination of one or more classes to other classes
in a series of securities, letters of credit, insurance policies, surety bonds,
guarantees, the establishment of one or more reserve funds,
cross-collateralization, overcollateralization or another method of credit
support described in the related prospectus supplement, or any combination of
the foregoing. If so provided in the related prospectus supplement, any form of
credit support may be structured so as to be drawn upon by more than one series
of securities.
The credit support provided for a series of securities will in most cases
not provide protection against all risks of loss and will not guarantee
repayment of the entire principal balance of the securities and interest
thereon. If losses or shortfalls occur that exceed the amount covered by credit
support or that are not covered by credit support, securityholders will bear
their allocable share of deficiencies. Also, if a form of credit support covers
more than one pool of mortgage assets in a trust fund or more than one series of
securities, holders of securities evidencing interests in any of the covered
pools or covered trusts will be subject to the risk that the credit support will
be exhausted by the claims of other covered pools or covered trusts prior to
that covered pool or covered trust receiving any of its intended share of the
coverage.
If credit support is provided with respect to one or more classes of
securities of a series, or the related mortgage assets, the related prospectus
supplement will include a description of
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o the nature and amount of coverage under such credit support,
o any conditions to payment thereunder not otherwise described in
this prospectus,
o the conditions under which the amount of coverage under the
credit support may be reduced, terminated or replaced, and ,
o the material provisions relating to the credit support.
Additionally, the related prospectus supplement will set forth certain
information with respect to the credit support provider, including:
o a brief description of its principal business activities,
o its principal place of business, place of incorporation and the
jurisdiction under which it is chartered or licensed to do
business,
o if applicable, the identity of regulatory agencies that exercise
primary jurisdiction over the conduct of its business, and
o its total assets and its stockholders' or policyholders' surplus,
if applicable, as of the date specified in the prospectus
supplement.
A copy of the policy or agreement, as applicable, governing the
applicable credit support will be filed with the Commission as an exhibit to a
Current Report on Form 8-K to be filed within 15 days of issuance of the related
series.
SUBORDINATION
One or more classes of securities may be subordinate securities. In the
event of any realized losses on mortgage assets not in excess of the limitations
described in the following paragraph, the rights of the subordinate
securityholders to receive distributions with respect to the mortgage loans will
be subordinate to the rights of the senior securityholders to the extent
described in the related prospectus supplement.
All realized losses will be allocated to the subordinate securities of
the related series, or, if the series includes more than one class of
subordinate securities, to the outstanding class of subordinate securities
having the first priority for allocation of realized losses and then to
additional outstanding classes of subordinate securities, if any, until the
principal balance of the applicable subordinate securities has been reduced to
zero. Any additional realized losses will be allocated to the senior securities
or, if the series includes more than one class of senior securities, either on a
pro rata basis among all of the senior securities in proportion to their
respective outstanding principal balances or as otherwise provided in the
related prospectus supplement. However, with respect to realized losses that are
attributable to physical damage to mortgaged properties of a type that is not
covered by standard hazard insurance policies, the amount thereof that may be
allocated to the subordinate securities of the related series may be limited to
an amount specified in the related prospectus supplement. If so, any realized
losses of this type in excess of the amount allocable to
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the subordinate securities will be allocated among all outstanding classes of
securities of the related series, on a pro rata basis in proportion to their
respective outstanding principal balances, regardless of whether any subordinate
securities remain outstanding, or as otherwise provided in the related
prospectus supplement. Any allocation of a realized loss to a security will be
made by reducing the principal balance thereof as of the distribution date
following the Prepayment Period in which the realized loss was incurred.
As set forth under "Description of the Securities--Distributions of
Principal of the Securities", the rights of holders of the various classes of
securities of any series to receive distributions of principal and interest is
determined by the aggregate principal balance of each class.
The principal balance of any security will be reduced by all amounts previously
distributed on that security in respect of principal, and by any realized losses
allocated to that security. If there were no realized losses or prepayments of
principal on any of the mortgage loans, the respective rights of the holders of
securities of any series to future distributions would not change. However, to
the extent so provided in the related prospectus supplement, holders of senior
securities may be entitled to receive a disproportionately larger amount of
prepayments received, which will have the effect of accelerating the
amortization of the senior securities and increasing the respective percentage
interest in future distributions evidenced by the subordinate securities in the
related trust fund, with a corresponding decrease in the senior percentage, as
well as preserving the availability of the subordination provided by the
subordinate securities. In addition, as set forth in the paragraph above,
realized losses will be first allocated to subordinate securities by reduction
of the principal balance thereof, which will have the effect of increasing the
respective interest in future distributions evidenced by the senior securities
in the related trust fund.
If so provided in the related prospectus supplement, amounts otherwise
payable on any distribution date to holders of subordinate securities may be
deposited into a reserve fund. Amounts held in any reserve fund may be applied
as described below under "--Reserve Funds" and in the related prospectus
supplement.
With respect to any Senior/Subordinate Series, the terms and provisions
of the subordination may vary from those described in the preceding paragraphs
and any variation will be described in the related prospectus supplement.
If so provided in the related prospectus supplement, the credit support
for the senior securities of a Senior/Subordinate Series may include, in
addition to the subordination of the subordinate securities of the series and
the establishment of a reserve fund, any of the other forms of credit support
described in this prospectus supplement. If any of the other forms of credit
support described below is maintained solely for the benefit of the senior
securities of a Senior/Subordinate Series, then that coverage described may be
limited to the extent necessary to make required distributions on the senior
securities or as otherwise specified in the related prospectus supplement. If so
provided in the related prospectus supplement, the obligor on any other forms of
credit support maintained for the benefit of the senior securities of a
Senior/Subordinate Series may be reimbursed for amounts paid thereunder out of
amounts otherwise payable on the subordinate securities.
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LETTER OF CREDIT
As to any series of securities to be covered by a letter of credit, a
bank will deliver to the trustee an irrevocable letter of credit. The master
servicer or trustee will exercise its best reasonable efforts to keep or cause
to be kept the letter of credit in full force and effect, unless coverage
thereunder has been exhausted through payment of claims. The master servicer
will agree to pay the fees for the letter of credit on a timely basis unless, as
described in the related prospectus supplement, the payment of those fees is
otherwise provided for.
The master servicer or the trustee will make or cause to be made draws
on the letter of credit bank under each letter of credit. Subject to any
differences as will be described in the related prospectus supplement, letters
of credit may cover all or any of the following amounts, in each case up to a
maximum amount set forth in the letter of credit:
(1) For any mortgage asset that became a liquidated asset
during the related Prepayment Period, other than mortgage assets as to
which amounts paid or payable under any related hazard insurance
instrument, including the letter of credit as described in (2) below,
are not sufficient either to restore the mortgaged property or to pay
the outstanding principal balance of the mortgage asset plus accrued
interest, an amount which, together with all Liquidation Proceeds,
Insurance Proceeds, and other collections on the liquidated loan, net
of amounts payable or reimbursable therefrom to the master servicer for
related unpaid servicing fees and unreimbursed servicing expenses, will
equal the sum of (A) the unpaid principal balance of the liquidated
asset, plus accrued interest at the applicable interest rate net of the
rates at which the servicing fee and retained interest are calculated,
plus (B) the amount of related servicing expenses, if any, not
reimbursed to the master servicer from Liquidation Proceeds, Insurance
Proceeds and other collections on the liquidation asset, which shall be
paid to the master servicer;
(2) For each mortgage asset that is delinquent and as to
which the mortgaged property has suffered damage, other than physical
damage caused by hostile or warlike action in time of war or peace, by
any weapons of war, by any insurrection or rebellion, or by any nuclear
reaction or nuclear radiation or nuclear contamination whether
controlled or uncontrolled, or by any action taken by any governmental
authority in response to any of the foregoing, and for which any
amounts paid or payable under the related primary hazard insurance
policy or any special hazard insurance policy are not sufficient to pay
either of the following amounts, an amount which, together with all
Insurance Proceeds paid or payable under the related primary hazard
insurance policy or any special hazard insurance policy, net, if the
proceeds are not to be applied to restore the mortgaged property, of
all amounts payable or reimbursable therefrom to the master servicer
for related unpaid servicing fees and unreimbursed servicing expenses,
will be equal to the lesser of (A) the amount required to restore the
mortgaged property and (B) the sum of (1) the unpaid principal balance
of the mortgage asset plus accrued interest at the applicable interest
rate net of the rates at which the servicing fees and retained
interest, if any, are calculated, plus (2) the amount of related
servicing expenses, if any, not reimbursed to the master servicer from
Insurance Proceeds paid under the related primary hazard insurance
policy or any special hazard insurance policy; and
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(3) For any mortgage asset that has been subject to
bankruptcy proceedings as described above, the amount of any debt
service reduction or the amount by which the principal balance of the
mortgage asset has been reduced by the bankruptcy court.
If the related prospectus supplement so provides, upon payment by the
letter of credit bank with respect to a liquidated asset, or a payment of the
full amount owing on a mortgage asset as to which the mortgaged property has
been damaged, as described in (2)(B) above, the liquidated asset will be removed
from the related trust fund in accordance with the terms set forth in the
related prospectus supplement and will no longer be subject to the agreement.
Unless otherwise provided in the related prospectus supplement, mortgage assets
that have been subject to bankruptcy proceedings, or as to which payment under
the letter of credit has been made for the purpose of restoring the related
mortgaged property, as described in (2)(A) above, will remain part of the
related trust fund. The maximum dollar coverages provided under any letter of
credit will each be reduced to the extent of related unreimbursed draws
thereunder.
In the event that the bank that has issued a letter of credit ceases to
be a duly organized commercial bank, or its debt obligations are rated lower
than the highest rating on any class of the securities on the date of issuance
by the rating agency or agencies, the master servicer or trustee will use its
best reasonable efforts to obtain or cause to be obtained, as to each letter of
credit, a substitute letter of credit issued by a commercial bank that meets
these requirements and providing the same coverage; provided, however, that, if
the fees charged or collateral required by the successor bank shall be more than
the fees charged or collateral required by the predecessor bank, each component
of coverage thereunder may be reduced proportionately to a level as results in
the fees and collateral being not more than the fees then charged and collateral
then required by the predecessor bank.
MORTGAGE POOL INSURANCE POLICY
As to any series of securities to be covered by a mortgage pool
insurance policy with respect to any realized losses on liquidated loans, the
master servicer will exercise its best reasonable efforts to maintain or cause
to be maintained the mortgage pool insurance policy in full force and effect,
unless coverage thereunder has been exhausted through payment of claims. The
master servicer will agree to pay the premiums for each mortgage pool insurance
policy on a timely basis unless, as described in the related prospectus
supplement, the payment of those fees is otherwise provided.
The master servicer will present or cause to be presented claims to the
insurer under each mortgage pool insurance policy. Mortgage pool insurance
policies, however, are not blanket policies against loss, since claims
thereunder may be made only upon satisfaction of certain conditions, as
described in the next paragraph and, if applicable, in the related prospectus
supplement.
Mortgage pool insurance policies do not cover losses arising out of the
matters excluded from coverage under the primary mortgage insurance policy, or
losses due to a failure to pay or denial of a claim under a primary mortgage
insurance policy, irrespective of the reason therefor.
Mortgage pool insurance policies in general provide that no claim may
validly be presented thereunder with respect to a mortgage loan unless:
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o an acceptable primary mortgage insurance policy, if the
initial loan-to-value ratio of the mortgage loan
exceeded 80%, has been kept in force until the
loan-to-value ratio is reduced to 80%;
o premiums on the primary hazard insurance policy have
been paid by the insured and real estate taxes and
foreclosure, protection and preservation expenses have
been advanced by or on behalf of the insured, as
approved by the insurer;
o if there has been physical loss or damage to the
mortgaged property, it has been restored to its
physical condition at the time the mortgage loan became
insured under the mortgage pool insurance policy,
subject to reasonable wear and tear; and
o the insured has acquired good and merchantable title to
the mortgaged property, free and clear of all liens and
encumbrances, except permitted encumbrances, including
any right of redemption by or on behalf of the
mortgagor, and if required by the insurer, has sold the
property with the approval of the insurer.
Assuming the satisfaction of these conditions, the insurer has the
option to either (a) acquire the property securing the defaulted mortgage loan
for a payment equal to the principal balance of the defaulted mortgage loan plus
accrued and unpaid interest at the interest rate on the mortgage loan to the
date of acquisition and expenses described above advanced by or on behalf of the
insured, on condition that the insurer must be provided with good and
merchantable title to the mortgaged property, unless the property has been
conveyed under the terms of the applicable primary mortgage insurance policy, or
(b) pay the amount by which the sum of the principal balance of the defaulted
mortgage loan and accrued and unpaid interest at the interest rate to the date
of the payment of the claim and the expenses exceed the proceeds received from a
sale of the mortgaged property which the insurer has approved. In both (a) and
(b), the amount of payment under a mortgage pool insurance policy will be
reduced by the amount of the loss paid under the primary mortgage insurance
policy.
Unless earlier directed by the insurer, a claim under a mortgage pool
insurance policy must be filed (a) in the case when a primary mortgage insurance
policy is in force, within a specified number of days (typically, 60 days) after
the claim for loss has been settled or paid thereunder, or after acquisition by
the insured or a sale of the property approved by the insurer, whichever is
later, or (b) in the case when a primary mortgage insurance policy is not in
force, within a specified number of days (typically, 60 days) after acquisition
by the insured or a sale of the property approved by the insurer. A claim must
be paid within a specified period (typically, 30 days) after the claim is made
by the insured.
The amount of coverage under each mortgage pool insurance policy will
generally be reduced over the life of the securities of any series by the
aggregate dollar amount of claims paid less the aggregate of the net amounts
realized by the insurer upon disposition of all acquired properties. The amount
of claims paid includes certain expenses incurred by the master servicer as well
as accrued interest on delinquent mortgage loans to the date of payment of the
claim. Accordingly, if
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aggregate net claims paid under a mortgage pool insurance policy reach the
applicable policy limit, coverage thereunder will be exhausted and any further
losses will be borne by securityholders of the related series. SEE "LEGAL
ASPECTS OF MORTGAGE ASSETS--FORECLOSURE ON MORTGAGES" AND "--REPOSSESSION WITH
RESPECT TO MANUFACTURED HOUSING CONTRACTS".
If an insurer under a mortgage pool insurance policy ceases to be a
private mortgage guaranty insurance company duly qualified as such under
applicable laws and approved as an insurer by Freddie Mac or Fannie Mae and
having a claims-paying ability acceptable to the rating agency or agencies, the
master servicer will use its best reasonable efforts to obtain or cause to be
obtained from another qualified insurer a replacement insurance policy
comparable to the mortgage pool insurance policy with a total coverage equal to
the then outstanding coverage of the mortgage pool insurance policy; provided,
however, that if the cost of the replacement policy is greater than the cost of
the original mortgage pool insurance policy, the coverage of the replacement
policy may be reduced to the level that its premium rate does not exceed the
premium rate on the original mortgage pool insurance policy. However, if the
insurer ceases to be a qualified insurer solely because it ceases to be approved
as an insurer by Freddie Mac or Fannie Mae, the master servicer will review, or
cause to be reviewed, the financial condition of the insurer with a view towards
determining whether recoveries under the mortgage pool insurance policy are
jeopardized for reasons related to the financial condition of the insurer. If
the master servicer determines that recoveries are so jeopardized, it will
exercise its best reasonable efforts to obtain from another qualified insurer a
replacement policy, subject to the same cost limitation.
Because each mortgage pool insurance policy will require that the
property subject to a defaulted mortgage loan be restored to its original
condition prior to claiming against the insurer, the policy will not provide
coverage against hazard losses. As set forth in the immediately following
paragraph, the primary hazard insurance policies covering the mortgage loans
typically exclude from coverage physical damage resulting from a number of
causes and, even when the damage is covered, may afford recoveries that are
significantly less than the full replacement cost of the losses. Further, a
special hazard insurance policy, or a letter of credit that covers special
hazard realized losses, will not cover all risks, and the coverage thereunder
will be limited in amount. These hazard risks will, as a result, be uninsured
and will therefore be borne by securityholders.
SPECIAL HAZARD INSURANCE POLICY
As to any series of securities to be covered by an insurance instrument
that does not cover losses that are attributable to physical damage to the
mortgaged properties of a type that is not covered by standard hazard insurance
policies, in other words, special hazard realized losses, the related prospectus
supplement may provide that the master servicer will exercise its best
reasonable efforts to maintain or cause to be maintained a special hazard
insurance policy in full force and effect covering the special hazard amount,
unless coverage thereunder has been exhausted through payment of claims;
provided, however, that the master servicer will be under no obligation to
maintain the policy if any insurance instrument covering the series as to any
realized losses on liquidated loans is no longer in effect. The master servicer
will agree to pay the premiums on each special hazard insurance policy on a
timely basis unless, as described in the related prospectus supplement, payment
of those premiums is otherwise provided for.
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Each special hazard insurance policy will, subject to the limitations
described in the next paragraph, protect holders of securities of the related
series from
o loss by reason of damage to mortgaged properties caused by
certain hazards, including earthquakes and mudflows, not insured
against under the primary hazard insurance policies or a flood
insurance policy if the property is in a designated flood area,
and
o loss from partial damage caused by reason of the application of
the co-insurance clause contained in the primary hazard insurance
policies.
Special hazard insurance policies usually will not cover losses
occasioned by normal wear and tear, war, civil insurrection, governmental
actions, errors in design, nuclear or chemical reaction or contamination, faulty
workmanship or materials, flood, if the property is located in a designated
flood area, and other risks.
Subject to the foregoing limitations, each special hazard insurance
policy will provide that, when there has been damage to property securing a
defaulted mortgage asset acquired by the insured and to the extent the damage is
not covered by the related primary hazard insurance policy or flood insurance
policy, the insurer will pay the lesser of:
(1) the cost of repair to the property and
(2) upon transfer of the property to the insurer, the unpaid
principal balance of the mortgage asset at the time of
acquisition of the property by foreclosure, deed in lieu of
foreclosure or repossession, plus accrued interest to the date
of claim settlement and expenses incurred by or on behalf of the
master servicer with respect to the property.
The amount of coverage under the special hazard insurance policy will
be reduced by the sum of (a) the unpaid principal balance plus accrued interest
and certain expenses paid by the insurer, less any net proceeds realized by the
insurer from the sale of the property, plus (b) any amount paid as the cost of
repair of the property.
Restoration of the property with the proceeds described under clause
(1) of the immediately preceding paragraph will satisfy the condition under an
insurance instrument providing coverage as to credit, or other non-hazard risks,
that the property be restored before a claim thereunder may be validly presented
with respect to the defaulted mortgage asset secured by the property. The
payment described under clause (2) of the immediately preceding paragraph will
render unnecessary presentation of a claim in respect of the mortgage loan under
an insurance instrument providing coverage as to credit, or other non-hazard
risks, as to any realized losses on a liquidated loan. Therefore, so long as the
insurance instrument providing coverage as to credit, or other non-hazard risks,
remains in effect, the payment by the insurer of either of the above alternative
amounts will not affect the total insurance proceeds paid to securityholders,
but will affect the relative amounts of coverage remaining under any special
hazard insurance policy and any credit insurance instrument.
The sale of a mortgaged property must be approved by the insurer under
any special hazard insurance policy and funds received by the insured in excess
of the unpaid principal balance of the
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mortgage asset plus interest thereon to the date of sale plus expenses incurred
by or on behalf of the master servicer with respect to the property, not to
exceed the amount actually paid by the insurer, must be refunded to the insurer
and, to that extent, coverage under the special hazard insurance policy will be
restored. If aggregate claim payments under a special hazard insurance policy
reach the policy limit, coverage thereunder will be exhausted and any further
losses will be borne by securityholders.
A claim under a special hazard insurance policy generally must be filed
within a specified number of days, typically 60 days, after the insured has
acquired good and merchantable title to the property, and a claim payment is
payable within a specified number of days, typically 30 days, after a claim is
accepted by the insurer. Special hazard insurance policies provide that no claim
may be paid unless primary hazard insurance policy premiums, flood insurance
premiums, if the property is located in a federally designated flood area, and,
as approved by the insurer, real estate property taxes, property protection and
preservation expenses and foreclosure or repossession costs have been paid by or
on behalf of the insured, and unless the insured has maintained the primary
hazard insurance policy and, if the property is located in a federally
designated flood area, flood insurance, as required by the special hazard
insurance policy.
If a special hazard insurance policy is canceled or terminated for any
reason, other than the exhaustion of total policy coverage, the master servicer
will use its best reasonable efforts to obtain or cause to be obtained from
another insurer a replacement policy comparable to that special hazard insurance
policy with a total coverage that is equal to the then existing coverage of the
replaced special hazard insurance policy; provided, however, that if the cost of
the replacement policy is greater than the cost of that special hazard insurance
policy, the coverage of the replacement policy may be reduced to a level so that
its premium rate does not exceed the premium rate on that special hazard
insurance policy.
Since each special hazard insurance policy is designed to permit full
recoveries as to any realized losses on liquidated loans under a credit
insurance instrument in circumstances in which recoveries would otherwise be
unavailable because property has been damaged by a cause not insured against by
a primary hazard insurance policy and thus would not be restored, each agreement
governing the trust fund will provide that, if the related credit insurance
instrument shall have lapsed or terminated or been exhausted through payment of
claims, the master servicer will be under no further obligation to maintain the
special hazard insurance policy.
BANKRUPTCY BOND
As to any series of securities to be covered by a bankruptcy bond with
respect to actions that may be taken by a bankruptcy court in connection with a
mortgage asset, the master servicer will exercise its best reasonable efforts to
maintain or cause to be maintained the bankruptcy bond in full force and effect,
unless coverage thereunder has been exhausted through payment of claims. The
master servicer will pay or cause to be paid the premiums for each bankruptcy
bond on a timely basis, unless, as described in the related prospectus
supplement, payment of those premiums is otherwise provided for. Subject to the
limit of the dollar amount of coverage provided, each bankruptcy bond will cover
certain losses resulting from an extension of the maturity of a mortgage asset,
or a reduction by the bankruptcy court of the principal balance of or the
interest rate on a mortgage asset, and the unpaid interest on the amount of a
principal reduction during the pendency
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of a proceeding under the Bankruptcy Code. SEE "LEGAL ASPECTS OF MORTGAGE
ASSETS--FORECLOSURE ON MORTGAGES" AND "--REPOSSESSION WITH RESPECT TO
MANUFACTURED HOUSING CONTRACTS".
FINANCIAL GUARANTEE INSURANCE
Financial guarantee insurance, if any, with respect to a series of
securities will be provided by one or more insurance companies. The financial
guarantee insurance will guarantee, with respect to one or more classes of
securities of a series, timely distributions of interest only, timely
distributions of interest and ultimate distribution of principal or timely
distributions of interest and distributions of principal on the basis of a
schedule of principal distributions set forth in or determined in the manner
specified in the related prospectus supplement. If so specified in the related
prospectus supplement, the financial guarantee insurance will also guarantee
against any payment made to a securityholder that is subsequently recovered as a
voidable preference payment under federal bankruptcy law. A copy of the
financial guarantee insurance policy for a series, if any, will be filed with
the Commission as an exhibit to a Current Report on Form 8-K to be filed with
the Commission within 15 days of issuance of the securities of the related
series.
RESERVE FUND
If so provided in the related prospectus supplement, the depositor will
deposit or cause to be deposited in an account, a reserve fund, any combination
of cash, one or more irrevocable letters of credit or one or more permitted
investments in specified amounts, or any other instrument satisfactory to the
rating agency or agencies, which will be applied and maintained in the manner
and under the conditions specified in the prospectus supplement. In the
alternative or in addition to a deposit, the prospectus supplement for a
Senior/Subordinate Series may provide that, a reserve fund be funded through
application of all or a portion of amounts otherwise payable on the subordinate
securities. Amounts in a reserve fund may be distributed to securityholders, or
applied to reimburse the master servicer for outstanding advances, or may be
used for other purposes, in the manner specified in the related prospectus
supplement. A reserve fund will typically not be deemed to be part of the
related trust fund.
Amounts deposited in any reserve fund for a series will be invested in
permitted investments by, or at the direction of, the master servicer or any
other person named in the related prospectus supplement.
OVERCOLLATERALIZATION
If so specified in the related prospectus supplement, interest
collections on the mortgage assets may exceed interest payments on the
securities for the related distribution date. The excess interest may be
deposited into a reserve fund or applied as an additional payment of principal
on one or more classes of the securities of the related series. If excess
interest is applied as principal payments on the securities, the effect will be
to reduce the principal balance of the securities relative to the outstanding
balance of the mortgage loans, thereby creating overcollateralization and
additional protection to the securityholders, as specified in the related
prospectus supplement. If so provided in the related prospectus supplement,
overcollateralization may also be provided on the date of issuance of the
securities by the issuance of securities in an initial aggregate principal
amount which is less than the aggregate principal amount of the mortgage assets
in the related trust fund.
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CROSS-SUPPORT FEATURES
If the trust fund assets for a series are divided into separate asset
groups, the beneficial ownership of which is evidenced by a separate class or
classes of a series, credit support may be provided by a cross-support feature
which requires that distributions be made on senior securities evidencing the
beneficial ownership of one asset group prior to distributions on subordinate
securities evidencing the beneficial ownership interest in another asset group
within the trust fund. The related prospectus supplement for a series which
includes a cross-support feature will describe the manner and conditions for
applying that cross-support feature. As to any trust fund that includes a
cross-support feature, only assets of the trust fund will be used to provide
cross-support, and cross- support will be provided only to securities issued by
the trust fund. A trust fund will not provide a cross-support feature that
benefits securities issued by any other trust fund, and a trust fund will not
receive cross-support from any other trust fund.
OTHER FINANCIAL OBLIGATIONS RELATED TO THE SECURITIES
SWAPS AND YIELD SUPPLEMENT AGREEMENTS
The trustee on behalf of a trust fund may enter into interest rate
swaps and related caps, floors and collars to minimize the risk of
securityholders from adverse changes in interest rates, which are collectively
referred to as swaps, and other yield supplement agreements or similar yield
maintenance arrangements that do not involve swap agreements or other notional
principal contracts, which are collectively referred to as yield supplement
agreements.
An interest rate swap is an agreement between two parties to exchange a
stream of interest payments on an agreed hypothetical or "notional" principal
amount. No principal amount is exchanged between the counterparties to an
interest rate swap. In the typical swap, one party agrees to pay a fixed rate on
a notional principal amount, while the counterparty pays a floating rate based
on one or more reference interest rates including the London Interbank Offered
Rate, or LIBOR, a specified bank's prime rate or U.S. Treasury Bill rates.
Interest rate swaps also permit counterparties to exchange a floating rate
obligation based upon one reference interest rate, such as LIBOR, for a floating
rate obligation based upon another referenced interest rate, such as U.S.
Treasury Bill rates.
Yield supplement agreements may be entered into to supplement the
interest rate or other rates on one or more classes of the securities of any
series. Additionally, agreements relating to other types of derivative products
that are designed to provide credit enhancement to the related series may be
entered into by a trustee and one or more counterparties. The terms of any
derivative product agreement and any counterparties will be described in the
accompanying prospectus supplement.
There can be no assurance that the trustee will be able to enter into
or offset swaps or enter into yield supplement agreements or derivative product
agreements at any specific time or at prices or on other terms that are
advantageous. In addition, although the terms of the swaps and yield supplement
agreements may provide for termination under various circumstances, there can be
no assurance that the trustee will be able to terminate a swap or yield
supplement agreement when it would be economically advantageous to the trust
fund to do so.
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PURCHASE OBLIGATIONS
Some types of trust assets and some classes of securities of any
series, as specified in the accompanying prospectus supplement, may be subject
to a purchase obligation that would become applicable on one or more specified
dates, or upon the occurrence of one or more specified events, or on demand made
by or on behalf of the applicable securityholders. A purchase obligation may be
in the form of a conditional or unconditional purchase commitment, liquidity
facility, remarketing agreement, maturity guaranty, put option or demand
feature. The terms and conditions of each purchase obligation, including the
purchase price, timing and payment procedure, will be described in the
accompanying prospectus supplement. A purchase obligation relating to trust
assets may apply to those trust assets or to the related securities. Each
purchase obligation may be a secured or unsecured obligation of the provider
thereof, which may include a bank or other financial institution or an insurance
company. Each purchase obligation will be evidenced by an instrument delivered
to the trustee for the benefit of the applicable securityholders of the related
series. As specified in the accompanying prospectus supplement, each purchase
obligation relating to trust assets will be payable solely to the trustee for
the benefit of the securityholders of the related series. Other purchase
obligations may be payable to the trustee or directly to the holders of the
securities to which that obligation relate.
DESCRIPTION OF PRIMARY INSURANCE POLICIES
Each mortgage loan will be covered by a primary hazard insurance policy
and, if so specified in the prospectus supplement, a primary mortgage insurance
policy.
PRIMARY MORTGAGE INSURANCE POLICIES
Although the terms and conditions of primary mortgage insurance
policies differ, each primary mortgage insurance policy will generally cover
losses up to an amount equal to the excess of the unpaid principal amount of a
defaulted mortgage loan, plus accrued and unpaid interest thereon and approved
expenses, over a specified percentage of the value of the related mortgaged
property.
As conditions to the filing or payment of a claim under a primary
mortgage insurance policy, the insured will typically be required, in the event
of default by the borrower, to:
o advance or discharge (1) hazard insurance premiums and (2) as
necessary and approved in advance by the insurer, real estate
taxes, property protection and preservation expenses and
foreclosure and related costs,
o in the event of any physical loss or damage to the mortgaged
property, have the mortgaged property restored to at least its
condition at the effective date of the primary mortgage insurance
policy, ordinary wear and tear excepted, and
o tender to the insurer good and merchantable title to, and
possession of, the mortgaged property.
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Multifamily loans, commercial loans and mixed-use loans will not be
covered by primary mortgage insurance policies, regardless of the related
loan-to-value ratio.
PRIMARY HAZARD INSURANCE POLICIES
Each servicing agreement will require the master servicer to cause the
borrower on each mortgage loan to maintain a primary hazard insurance policy
providing for coverage of the standard form of fire insurance policy with
extended coverage customary in the state in which the mortgaged property is
located. The primary hazard coverage will be in general in an amount equal to
the lesser of the principal balance owing on the mortgage loan and the amount
necessary to fully compensate for any damage or loss to the improvements on the
mortgaged property on a replacement cost basis, but in either case not less than
the amount necessary to avoid the application of any co-insurance clause
contained in the hazard insurance policy. The ability of the master servicer to
assure that hazard insurance proceeds are appropriately applied may be dependent
upon its being named as an additional insured under any primary hazard insurance
policy and under any flood insurance policy referred to in the paragraph below,
and upon the borrower furnishing information to the master servicer in respect
of a claim. All amounts collected by the master servicer under any primary
hazard insurance policy, except for amounts to be applied to the restoration or
repair of the mortgaged property or released to the borrower in accordance with
the master servicer's normal servicing procedures, and subject to the terms and
conditions of the related Mortgage and mortgage note, will be deposited in the
collection account. The agreement will provide that the master servicer may
satisfy its obligation to cause each borrower to maintain a hazard insurance
policy by the master servicer's maintaining a blanket policy insuring against
hazard losses on the mortgage loans. If the blanket policy contains a deductible
clause, the master servicer will deposit in the collection account all sums that
would have been deposited in the collection account but for that clause. The
master servicer also is required to maintain a fidelity bond and errors and
omissions policy with respect to its officers and employees that provides
coverage against losses that may be sustained as a result of an officer's or
employee's misappropriation of funds or errors and omissions in failing to
maintain insurance, subject to limitations as to amount of coverage, deductible
amounts, conditions, exclusions and exceptions.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements of the property by
fire, lightning, explosion, smoke, windstorm and hail, and riot, strike and
civil commotion, subject to the conditions and exclusions specified in each
policy. Although the policies relating to the mortgage loans will be
underwritten by different insurers under different state laws in accordance with
different applicable state forms, and therefore will not contain identical terms
and conditions, the basic terms thereof are dictated by respective state laws,
and most hazard insurance policies typically do not cover any physical damage
resulting from the following: war, revolution, governmental actions, floods and
other water-related causes, earth movement, including earthquakes, landslides
and mudflows, nuclear reactions, wet or dry rot, vermin, rodents, insects or
domestic animals, theft and, in some cases, vandalism. This list is merely
indicative of the kinds of uninsured risks and is not intended to be
all-inclusive. When a mortgaged property is located at origination in a
federally designated flood area and flood insurance is available, each agreement
will require the master servicer to cause the borrower to acquire and maintain
flood insurance in an amount equal in general to the lesser of (1) the amount
necessary to fully compensate for any damage or loss to the improvements which
are part of the mortgaged
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property on a replacement cost basis and (2) the maximum amount of insurance
available under the federal flood insurance program, whether or not the area is
participating in the program.
The hazard insurance policies covering the mortgaged properties
typically contain a co- insurance clause that in effect requires the insured at
all times to carry insurance of a specified percentage, generally 80% to 90%, of
the full replacement value of the improvements on the property in order to
recover the full amount of any partial loss. If the insured's coverage falls
below this specified percentage, the co-insurance clause generally provides that
the insurer's liability in the event of partial loss does not exceed the lesser
of (1) the replacement cost of the improvements less physical depreciation and
(2) the proportion of the loss as the amount of insurance carried bears to the
specified percentage of the full replacement cost of the improvements.
The master servicer will not require that a hazard or flood insurance
policy be maintained for any cooperative loan. Generally, the cooperative is
responsible for maintenance of hazard insurance for the property owned by the
cooperative, and the tenant-stockholders of that cooperative do not maintain
individual hazard insurance policies. However, if a cooperative and the related
borrower on a cooperative note do not maintain hazard insurance or do not
maintain adequate coverage or any insurance proceeds are not applied to the
restoration of the damaged property, damage to the related borrower's
cooperative apartment or the cooperative's building could significantly reduce
the value of the collateral securing the cooperative note.
Since the amount of hazard insurance the master servicer will cause to
be maintained on the improvements securing the mortgage loans declines as the
principal balances owing thereon decrease, and since residential properties have
historically appreciated in value over time, hazard insurance proceeds collected
in connection with a partial loss may be insufficient to restore fully the
damaged property. The terms of the mortgage loans provide that borrowers are
required to present claims to insurers under hazard insurance policies
maintained on the mortgaged properties. The master servicer, on behalf of the
trustee and securityholders, is obligated to present or cause to be presented
claims under any blanket insurance policy insuring against hazard losses on
mortgaged properties. However, the ability of the master servicer to present or
cause to be presented these claims is dependent upon the extent to which
information in this regard is furnished to the master servicer by borrowers.
FHA INSURANCE
The Federal Housing Administration is responsible for administering
various federal programs, including mortgage insurance, authorized under The
Housing Act and the United States Housing Act of 1937, as amended. If so
provided in the related prospectus supplement, a number of the mortgage loans
will be insured by the FHA.
There are two primary FHA insurance programs that are available for
multifamily mortgage loans. Sections 221(d)(3) and (d)(4) of the Housing Act
allow HUD to insure mortgage loans that are secured by newly constructed and
substantially rehabilitated multifamily rental projects. Section 244 of the
Housing Act provides for co-insurance of such mortgage loans made under Sections
221 (d)(3) and (d)(4) by HUD/FHA and a HUD-approved co-insurer. Generally the
term of such a mortgage loan may be up to 40 years and the ratio of the loan
amount to property replacement cost can be up to 90%.
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Section 223(f) of the Housing Act allows HUD to insure mortgage loans
made for the purchase or refinancing of existing apartment projects which are at
least three years old. Section 244 also provides for co-insurance of mortgage
loans made under Section 223(f). Under Section 223(f), the loan proceeds cannot
be used for substantial rehabilitation work, but repairs may be made for up to,
in general, the greater of 15% of the value of the project or a dollar amount
per apartment unit established from time to time by HUD. In general the loan
term may not exceed 35 years and a loan to value ratio of no more than 85% is
required for the purchase of a project and 70% for the refinancing of a project.
HUD has the option, in most cases, to pay insurance claims in cash or
in debentures issued by HUD. Presently, claims are being paid in cash, and
claims have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debenture interest rate. The master servicer will be obligated to purchase any
debenture issued in satisfaction of a defaulted FHA insured mortgage loan
serviced by it for an amount equal to the principal amount of that debenture.
The master servicer will be required to take steps as are reasonably
necessary to keep FHA insurance in full force and effect.
Some of the mortgage loans contained in a trust fund may be Title I
loans as described below and in the related prospectus supplement. The
regulations, rules and procedures promulgated by the FHA under Title I contain
the requirements under which lenders approved for participation in the Title I
Program may obtain insurance against a portion of losses incurred with respect
to eligible loans that have been originated and serviced in accordance with FHA
regulations, subject to the amount of insurance coverage available in such Title
I lender's FHA reserve, as described below and in the related prospectus
supplement. In general, an insurance claim against the FHA may be denied or
surcharged if the Title I loan to which it relates does not strictly satisfy the
requirements of the National Housing Act and FHA regulations but FHA regulations
permit the Secretary of the Department of Housing and Urban Development, subject
to statutory limitations, to waive a Title I Lender's noncompliance with FHA
regulations if enforcement would impose an injustice on the lender.
Unless otherwise specified in the related prospectus supplement, the
master servicer will either serve as or contract with the person specified in
the prospectus supplement to serve as the administrator for FHA claims pursuant
to an FHA claims administration agreement. The FHA claims administrator will be
responsible for administering, processing and submitting FHA claims with respect
to the Title I loans. The securityholders will be dependent on the FHA claims
administrator to (1) make claims on the Title I loans in accordance with FHA
regulations and (2) remit all FHA insurance proceeds received from the FHA in
accordance with the related agreement. The securityholders' rights relating to
the receipt of payment from and the administration, processing and submission of
FHA claims by any FHA claims administrator is limited and governed by the
related agreement and the FHA claims administration agreement and these
functions are obligations of the FHA claims administrator, but not the FHA.
Under Title I, the FHA maintains an FHA insurance coverage reserve
account for each Title I lender. The amount in each Title I lender's FHA reserve
is a maximum of 10% of the amounts disbursed, advanced or expended by a Title I
lender in originating or purchasing eligible loans
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registered with the FHA for Title I insurance, with certain adjustments
permitted or required by FHA regulations. The balance of such FHA reserve is the
maximum amount of insurance claims the FHA is required to pay to the related
Title I lender. Mortgage loans to be insured under Title I will be registered
for insurance by the FHA. Following either the origination or transfer of loans
eligible under Title I, the Title I lender will submit such loans for FHA
insurance coverage within its FHA reserve by delivering a transfer of note
report or by an electronic submission to the FHA in the form prescribed under
the FHA regulations. The increase in the FHA insurance coverage for such loans
in the Title I lender's FHA reserve will occur on the date following the receipt
and acknowledgment by the FHA of the transfer of note report for such loans. The
insurance available to any trust fund will be subject to the availability, from
time to time, of amounts in each Title I lender's FHA reserve, which will
initially be limited to the amount specified in the related prospectus
supplement.
If so provided in the related prospectus supplement the trustee or FHA
claims administrator may accept an assignment of the FHA reserve for the related
Title I loans, notify FHA of such assignment and request that the portion of the
depositor's FHA reserves allocable to the Title I loans be transferred to the
trustee or the FHA claims administrator on the closing date. Alternatively, in
the absence of such provision, the FHA reserves may be retained by the depositor
and, upon an insolvency and receivership of the depositor, the related trustee
will notify FHA and request that the portion of the depositor's FHA reserves
allocable to the Title I loans be transferred to the trustee or the FHA claims
administrator. Although each trustee will request such a transfer of reserves,
FHA is not obligated to comply with such a request, and may determine that it is
not in FHA's interest to permit a transfer of reserves. In addition, FHA has not
specified how insurance reserves would be allocated in a transfer, and there can
be no assurance that any reserve amount, if transferred to the trustee or the
FHA claims administrator, as the case may be, would not be substantially less
than 10% of the outstanding principal amount of the related Title I loans. It is
likely that the depositor, the trustee or the FHA claims administrator would be
the lender of record on other Title I loans, so that any FHA reserves that are
retained, or permitted to be transferred, would become commingled with FHA
reserves available for other Title I loans. FHA also reserves the right to
transfer reserves with "earmarking" (segregating reserves so that they will not
be commingled with the reserves of the transferee) if it is in FHA's interest to
do so.
Under Title I, the FHA will reduce the insurance coverage available in
a Title I lender's FHA reserve with respect to loans insured under that Title I
lender's contract of insurance by (1) the amount of FHA insurance claims
approved for payment related to those loans and (2) the amount of reduction of
the Title I lender's FHA reserve by reason of the sale, assignment or transfer
of loans registered under the Title I lender's contract of insurance. The FHA
insurance coverage also may be reduced for any FHA insurance claims previously
disbursed to the Title I lender that are subsequently rejected by the FHA.
Unlike certain other government loan insurance programs, loans under
Title I (other than loans in excess of $25,000) are not subject to prior review
by the FHA. The FHA disburses insurance proceeds with respect to defaulted loans
for which insurance claims have been filed by a Title I lender prior to any
review of those loans. A Title I lender is required to repurchase a Title I loan
from the FHA that is determined to be ineligible for insurance after insurance
claim payments for such loan have been paid to the lender. Under the FHA
regulations, if the Title I lender's obligation to repurchase the Title I loan
is unsatisfied, the FHA is permitted to offset the unsatisfied obligation
against future insurance claim payments owed by the FHA to such lender. FHA
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regulations permit the FHA to disallow an insurance claim with respect to any
loan that does not qualify for insurance for a period of up to two years after
the claim is made and to require the Title I lender that has submitted the
insurance claim to repurchase the loan.
The proceeds of loans under the Title I Program may be used only for
permitted purposes, including the alteration, repair or improvement of
residential property, the purchase of a manufactured home or lot (or cooperative
interest therein) on which to place the home or the purchase of both a
manufactured home and the lot (or cooperative interest therein) on which the
home is placed.
Subject to certain limitations described below, eligible Title I loans
are generally insured by the FHA for 90% of an amount equal to the sum of
o the net unpaid principal amount and the uncollected interest
earned to the date of default,
o interest on the unpaid loan obligation from the date of default
to the date of the initial submission of the insurance claim,
plus 15 calendar days (the total period not to exceed nine
months) at a rate of 7% per annum,
o uncollected court costs,
o title examination costs,
o fees for required inspections by the lenders or its agents, up to
$75, and
o origination fees up to a maximum of 5% of the loan amount.
Accordingly if sufficient insurance coverage is available in such FHA
reserve, then the Title I lender bears the risk of losses on a Title I loan for
which a claim for reimbursement is paid by the FHA of at least 10% of the unpaid
principal, uncollected interest earned to the date of default, interest from the
date of default to the date of the initial claim submission and certain
expenses.
In general, the FHA will insure home improvement contracts up to
$25,000 for a single family property, with a maximum term of 20 years. The FHA
will insure loans of up to $17,500 for manufactured homes which qualify as real
estate under applicable state law and loans of up to $12,000 per unit for a
$48,000 limit for four units for owner-occupied multifamily homes. If the loan
amount is $15,000 or more, the FHA requires a drive-by appraisal, the current
tax assessment value, or a full Uniform Residential Appraisal Report dated
within 12 months of the closing to verify the property's value. The maximum loan
amount on transactions requiring an appraisal is the amount of equity in the
property shown by the market value determination of the property.
With respect to Title I loans, the FHA regulations do not require that
a borrower obtain title or fire and casualty insurance. However, if the related
mortgaged property is located in a flood hazard area, flood insurance in an
amount at least equal to the loan amount is required. In addition, the FHA
regulations do not require that the borrower obtain insurance against physical
damage arising from earth movement (including earthquakes, landslides and
mudflows). Accordingly, if a
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mortgaged property that secures a Title I loan suffers any uninsured hazard or
casualty losses, holders of the related series of securities that are secured in
whole or in part by such Title I loan may bear the risk of loss to the extent
that such losses are not recovered by foreclosure on the defaulted loans or from
any FHA insurance proceeds. Such loss may be otherwise covered by amounts
available from the credit enhancement provided for the related series of
securities, if specified in the related prospectus supplement.
Following a default on a Title I loan insured by the FHA, the master
servicer may, subject to certain conditions and mandatory loss mitigation
procedures, either commence foreclosure proceedings against the improved
property securing the loan, if applicable, or submit a claim to FHA, but may
submit a claim to FHA after proceeding against the improved property only with
the prior approval of the Secretary of HUD. The availability of FHA Insurance
following a default on a Title I loan is subject to a number of conditions,
including strict compliance with FHA regulations in originating and servicing
the Title I loan. Failure to comply with FHA regulations may result in a denial
of or surcharge on the FHA insurance claim. Prior to declaring a Title I loan in
default and submitting a claim to FHA, the master servicer must take certain
steps to attempt to cure the default, including personal contact with the
borrower either by telephone or in a meeting and providing the borrower with 30
days' written notice prior to declaration of default. FHA may deny insurance
coverage if the borrower's nonpayment is related to a valid objection to faulty
contractor performance. In such event, the master servicer or other entity as
specified in the related prospectus supplement will seek to obtain payment by or
a judgment against the borrower, and may resubmit the claim to FHA following
such a judgment.
VA GUARANTEES
The United States Department of Veterans Affairs is an Executive Branch
Department of the United States, headed by the Secretary of Veterans Affairs.
The VA currently administers a variety of federal assistance programs on behalf
of eligible veterans and their dependents and beneficiaries. The VA administers
a loan guaranty program under which the VA guarantees a portion of loans made to
eligible veterans. If so provided in the prospectus supplement, a number of the
mortgage loans will be guaranteed by the VA.
Under the VA loan guaranty program, a VA loan may be made to any
eligible veteran by an approved private sector mortgage lender. The VA
guarantees payment to the holder of that loan of a fixed percentage of the loan
indebtedness, up to a maximum dollar amount, in the event of default by the
veteran borrower. When a delinquency is reported to the VA and no realistic
alternative to foreclosure is developed by the loan holder or through the VA's
supplemental servicing of the loan, the VA determines, through an economic
analysis, whether the VA will (a) authorize the holder to convey the property
securing the VA loan to the Secretary of Veterans Affairs following termination
or (b) pay the loan guaranty amount to the holder. The decision as to
disposition of properties securing defaulted VA loans is made on a case-by-case
basis using the procedures set forth in 38 U.S.C. Section 3732(c), as amended.
The master servicer will be required to take steps as are reasonably
necessary to keep the VA guarantees in full force and effect.
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LEGAL ASPECTS OF MORTGAGE ASSETS
The following discussion contains general summaries of legal aspects of
loans secured by residential and commercial properties. Because these legal
aspects are governed in part by applicable state law, which laws may differ
substantially from state to state, the summaries do not purport to be complete
nor to reflect the laws of any particular state, nor to encompass the laws of
all states in which the security for the mortgage assets is situated. If there
is a concentration of the mortgage assets included in a trust fund in a
particular state, the prospectus supplement for the related series of securities
will discuss any laws of that state that could materially impact the interest of
the securityholders.
MORTGAGE LOANS
The single-family loans, multifamily loans, commercial loans and
mixed-use loans will be secured by either mortgages, deeds of trust, security
deeds or deeds to secure debt depending upon the type of security instrument
customary to grant a security interest according to the prevailing practice in
the state in which the property subject to that mortgage loan is located. The
filing of a mortgage or a deed of trust creates a lien upon or conveys title to
the real property encumbered by that instrument and represents the security for
the repayment of an obligation that is customarily evidenced by a promissory
note. It is not prior to the lien for real estate taxes and assessments.
Priority with respect to mortgages and deeds of trust depends on their terms and
generally on the order of recording with the applicable state, county or
municipal office. There are two parties to a mortgage, the mortgagor, who is the
borrower/homeowner or the land trustee, 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, title to the property is
held by a land trustee under a land trust agreement, while the
borrower/homeowner is the beneficiary of the land trust; 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 normally has three parties, the trustor, similar to a mortgagor, who may
or may not be the borrower, the beneficiary, similar to a mortgagee, who is the
lender, and the trustee, a third-party grantee. Under a deed of trust, the
trustor grants the property, irrevocably until the debt is paid, in trust,
generally with a power of sale, to the trustee to secure payment of the
obligation. A security deed and a deed to secure debt are special types of deeds
which indicate on their face that they are granted to secure an underlying debt.
By executing a security deed or deed to secure debt, the grantor conveys title
to, as opposed to merely creating a lien upon, the subject property to the
grantee until the time as the underlying debt is repaid. The mortgagee's
authority under a mortgage and the trustee's authority under a deed of trust,
security deed or deed to secure debt are governed by the law of the state in
which the real property is located, the express provisions of the mortgage, deed
of trust, security deed or deed to secure debt and, sometimes, the directions of
the beneficiary.
COOPERATIVE LOANS
The cooperative owns or has a leasehold interest in all the real
property and owns in fee or leases the building and all separate dwelling units
therein. The cooperative is directly responsible for project management and, in
most cases, payment of real estate taxes, other governmental impositions and
hazard and liability insurance. If there is a blanket mortgage on the
cooperative
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apartment building and underlying land, or one or the other, the cooperative, as
project mortgagor, is also responsible for meeting these blanket mortgage
obligations. A blanket mortgage is ordinarily incurred by the cooperative in
connection with either the construction or purchase of the cooperative's
apartment building or the obtaining of capital by the cooperative. There may be
a lease on the underlying land and the cooperative, as lessee, is also
responsible for meeting the rental obligation. The interests of the occupants
under proprietary leases or occupancy agreements as to which the cooperative is
the landlord are generally subordinate to the interests of the holder of the
blanket mortgage and to the interest of the holder of a land lease. If the
cooperative is unable to meet the payment obligations (a) arising under its
blanket mortgage, the mortgagee holding the blanket mortgage could foreclose on
that mortgage and terminate all subordinate proprietary leases and occupancy
agreements or (b) arising under its land lease, the holder of the landlord's
interest under the land lease could terminate it and all subordinate proprietary
leases and occupancy agreements. Also, the blanket mortgage on a cooperative may
provide financing in the form of a mortgage that does not fully amortize, with a
significant portion of principal being due in one final payment at final
maturity. The inability of the cooperative to refinance this mortgage and its
consequent inability to make the final payment could lead to foreclosure by the
mortgagee. Similarly, a land lease has an expiration date and the inability of
the cooperative to extend its term or, in the alternative, to purchase the land
could lead to termination of the cooperative's interest in the property and
termination of all proprietary leases and occupancy agreements. In either event,
foreclosure by the holder of the blanket mortgage or the termination of the
underlying lease could eliminate or significantly diminish the value of any
collateral held by the lender that financed the purchase by an individual
tenant-stockholder of cooperative shares or, in the case of the trust fund, the
collateral securing the cooperative loans.
The cooperative is owned by tenant-stockholders who, through ownership
of stock, shares or membership certificates in the corporation, receive
proprietary leases or occupancy agreements which confer exclusive rights to
occupy specific units. Generally, a tenant-stockholder of a cooperative must
make a monthly payment to the cooperative representing the tenant-stockholder's
pro rata share of the cooperative's payments for its blanket mortgage, real
property taxes, maintenance expenses and other capital or ordinary expenses. An
ownership interest in a cooperative and accompanying occupancy rights is
financed through a cooperative share loan evidenced by a promissory note and
secured by an assignment of and a security interest in the occupancy agreement
or proprietary lease and a security interest in the related cooperative shares.
The lender generally takes possession of the share certificate and a counterpart
of the proprietary lease or occupancy agreement and a financing statement
covering the proprietary lease or occupancy agreement and the cooperative shares
is filed in the appropriate state and local offices to perfect the lender's
interest in its collateral. Upon default of the tenant-stockholder, the lender
may sue for judgment on the promissory note, dispose of the collateral at a
public or private sale or otherwise proceed against the collateral or
tenant-stockholder as an individual as provided in the security agreement
covering the assignment of the proprietary lease or occupancy agreement and the
pledge of cooperative shares as described under "Foreclosure on Cooperative
Shares" below.
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MANUFACTURED HOUSING CONTRACTS
Under the laws of most states, manufactured housing that is not
permanently affixed to its site constitutes personal property and is subject to
the motor vehicle registration laws of the state or other jurisdiction in which
the unit is located. In a few states, where certificates of title are not
required for manufactured homes, security interests are perfected by the filing
of a financing statement under Article 9 of the UCC which has been adopted by
all states. Financing statements are effective for five years and must be
renewed at the end of each five years. The certificate of title laws adopted by
the majority of states provide that ownership of motor vehicles and manufactured
housing shall be evidenced by a certificate of title issued by the motor
vehicles department, or a similar entity, of the state. In the states that have
enacted certificate of title laws, a security interest in a unit of manufactured
housing, so long as it is not attached to land in so permanent a fashion as to
become a fixture, is generally perfected by the recording of the interest on the
certificate of title to the unit in the appropriate motor vehicle registration
office or by delivery of the required documents and payment of a fee to such
office, depending on state law.
The master servicer will be required under the related servicing
agreement to effect the notation or delivery of the required documents and fees,
and to obtain possession of the certificate of title, as appropriate under the
laws of the state in which any manufactured home is registered. If the master
servicer fails, due to clerical errors or otherwise, to effect the notation or
delivery, or files the security interest under the wrong law, for example, under
a motor vehicle title statute rather than under the UCC, in a few states, the
trustee may not have a first priority security interest in the manufactured home
securing a manufactured housing contract. As manufactured homes have become
larger and often have been attached to their sites without any apparent
intention by the borrowers to move them, courts in many states have held that
manufactured homes may become subject to real estate title and recording laws.
As a result, a security interest in a manufactured home could be rendered
subordinate to the interests of other parties claiming an interest in the home
under applicable state real estate law. In order to perfect a security interest
in a manufactured home under real estate laws, the holder of the security
interest must file either a fixture filing under the provisions of the UCC or a
real estate mortgage under the real estate laws of the state where the home is
located. These filings must be made in the real estate records office of the
county where the home is located. Generally, manufactured housing contracts will
contain provisions prohibiting the obligor from permanently attaching the
manufactured home to its site. So long as the obligor does not violate this
agreement, a security interest in the manufactured home will be governed by the
certificate of title laws or the UCC, and the notation of the security interest
on the certificate of title or the filing of a UCC financing statement will be
effective to maintain the priority of the security interest in the manufactured
home. If, however, a manufactured home is permanently attached to its site,
other parties could obtain an interest in the manufactured home that is prior to
the security interest originally retained by the seller and transferred to the
depositor.
The depositor will assign or cause to be assigned a security interest
in the manufactured homes to the trustee, on behalf of the securityholders.
Neither the depositor, the master servicer nor the trustee will amend the
certificates of title to identify the trustee, on behalf of the securityholders,
as the new secured party and, accordingly, the depositor or the mortgage loan
seller will continue to be named as the secured party on the certificates of
title relating to the manufactured homes. In most states, an assignment is an
effective conveyance of a security interest in a manufactured home without
amendment of any lien noted on the related certificate of title and the new
secured party
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succeeds to the depositor's rights as the secured party. However, in several
states there exists a risk that, in the absence of an amendment to the
certificate of title, the assignment of the security interest might not be held
effective against creditors of the depositor or mortgage loan seller.
In the absence of fraud, forgery or permanent affixation of the
manufactured home to its site by the manufactured home owner, or administrative
error by state recording officials, the notation of the lien of the depositor on
the certificate of title or delivery of the required documents and fees will be
sufficient to protect the trustee against the rights of subsequent purchasers of
a manufactured home or subsequent lenders who take a security interest in the
manufactured home. If there are any manufactured homes as to which the depositor
has failed to perfect or cause to be perfected the security interest assigned to
the trust fund, the security interest would be subordinate to subsequent
purchasers for value of manufactured homes and holders of perfected security
interests. There also exists a risk in not identifying the trustee, on behalf of
the securityholders, as the new secured party on the certificate of title that,
through fraud or negligence, the security interest of the trustee could be
released.
If the owner of a manufactured home moves it to a state other than the
state in which the manufactured home initially is registered, under the laws of
most states, the perfected security interest in the manufactured home would
continue for four months after the relocation and thereafter until the owner
re-registers the manufactured home in that state. If the owner were to relocate
a manufactured home to another state and re-register the manufactured home in
the new state, and if the depositor did not take steps to re-perfect its
security interest in the new state, the security interest in the manufactured
home would cease to be perfected. A majority of states generally require
surrender of a certificate of title to re-register a manufactured home.
Accordingly, the depositor must surrender possession if it holds the certificate
of title to the manufactured home or, in the case of manufactured homes
registered in states that provide for notation of lien, the depositor would
receive notice of surrender if the security interest in the manufactured home is
noted on the certificate of title. Accordingly, the depositor would have the
opportunity to re-perfect its security interest in the manufactured home in the
state of relocation. In states that do not require a certificate of title for
registration of a manufactured home, re-registration could defeat perfection.
Similarly, when an obligor under a manufactured housing conditional sales
contract sells a manufactured home, the obligee must surrender possession of the
certificate of title or it will receive notice as a result of its lien noted
thereon and accordingly will have an opportunity to require satisfaction of the
related manufactured housing conditional sales contract before release of the
lien. Under each related servicing agreement, the master servicer will be
obligated to take those steps, at the master servicer's expense, as are
necessary to maintain perfection of security interests in the manufactured
homes.
Under the laws of most states, liens for repairs performed on a
manufactured home take priority even over a perfected security interest. The
depositor will obtain the representation of the mortgage loan seller that it has
no knowledge of any liens of that type with respect to any manufactured home
securing a manufactured home loan. However, liens could arise at any time during
the term of a manufactured home loan. No notice will be given to the trustee or
securityholders in the event a lien for repairs arises.
HOME IMPROVEMENT CONTRACTS
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The home improvement contracts, other than those home improvement
contracts that are unsecured or secured by mortgages on real estate, generally
are "chattel paper" or constitute "purchase money security interests", each as
defined in the UCC. Pursuant to the UCC, the sale of chattel paper is treated in
a manner similar to perfection of a security interest in chattel paper. Under
the related agreement, the depositor will transfer physical possession of the
contracts to the trustee or a designated custodian or may retain possession of
the contracts as custodian for the trustee. In addition, the depositor will make
an appropriate filing of a UCC-1 financing statement in the appropriate states
to give notice of the trustee's ownership of the contracts. The contracts will
not be stamped or otherwise marked to reflect their assignment from the
depositor to the trustee. Therefore, if through negligence, fraud or otherwise,
a subsequent purchaser were able to take physical possession of the contracts
without notice of such assignment, the trustee's interest in the contracts could
be defeated.
The contracts that are secured by the home improvements financed
thereby grant to the originator of the contracts a purchase money security
interest in such home improvements to secure all or part of the purchase price
of the home improvements and related services. A financing statement generally
is not required to be filed to perfect a purchase money security interest in
consumer goods. Such purchase money security interests are assignable. In
general, a purchase money security interest grants to the holder a security
interest that has priority over a conflicting security interest in the same
collateral and the proceeds of such collateral. However, to the extent that the
collateral subject to a purchase money security interest becomes a fixture, in
order for the related purchase money security interest to take priority over a
conflicting interest in the fixture, the holder's interest in such home
improvement must generally be perfected by a timely fixture filing. In general,
under the UCC, a security interest does not exist under the UCC in ordinary
building material incorporated into an improvement on land. Home improvement
contracts that finance lumber, bricks, other types of ordinary building material
or other goods that are deemed to lose such characterization, upon incorporation
of the materials into the related property, will not be secured by a purchase
money security interest in the home improvement being financed.
So long as the home improvement has not become subject to the real
estate law, a creditor can repossess a home improvement securing a contract by
voluntary surrender, "self-help" repossession that is "peaceful", i.e., without
breach of the peace, or, in the absence of voluntary surrender and the ability
to repossess without breach of the peace, judicial process. The holder of a
contract must give the debtor a number of days' notice, which varies from 10 to
30 days or more depending on the state, prior to commencement of any
repossession. The UCC and consumer protection laws in most states restrict
repossession sales, including requiring prior notice to the debtor and
commercial reasonableness in effecting such a sale. The law in most states also
requires that the debtor be given notice of any sale prior to resale of the
related property so that the debtor may redeem it at or before such resale.
Under the laws applicable in most states, a creditor is entitled to
obtain a deficiency judgment from a debtor for any deficiency on repossession
and resale of the property securing the debtor's loan. However, some states
impose prohibitions or limitations on deficiency judgments and in many cases the
defaulting borrower would have no assets with which to pay a judgment.
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Other statutory provisions, including federal and state bankruptcy and
insolvency laws and general equity principles, may limit or delay the ability of
a lender to repossess and resell collateral or enforce a deficiency judgment.
FORECLOSURE ON MORTGAGES
Foreclosure of a deed of trust is generally accomplished by a
non-judicial trustee's sale under a specific provision in the deed of trust,
which authorizes the trustee to sell the property upon any default by the
borrower under the terms of the note or deed of trust. In several states, the
trustee must record a notice of default and send a copy to the borrower-trustor
and to any person who has recorded a request for a copy of a notice of default
and notice of sale. In addition, the trustee in several states must provide
notice to any other individual having an interest in the real property,
including any junior lienholder. The trustor, borrower, or any 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. Generally, state law controls the amount
of foreclosure expenses and costs, including attorneys' fees, that may be
recovered by a lender. If the deed of trust is not reinstated, 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 newspapers. In addition, several state laws
require that a copy of the notice of sale be posted on the property, recorded
and sent to all parties having an interest in the real property.
An action to foreclose a mortgage is an action to recover the mortgage
debt by enforcing the mortgagee's rights under the mortgage and in the mortgaged
property. It is regulated by statutes and rules and subject throughout to the
court's equitable powers. A mortgagor is usually bound by the terms of the
mortgage note and the mortgage as made and cannot be relieved from its own
default. However, since a foreclosure action is equitable in nature and is
addressed to a court of equity, the court may relieve a mortgagor of a default
and deny the mortgagee foreclosure on proof that the mortgagor's default was
neither willful nor in bad faith and that the mortgagee's action established a
waiver of fraud, bad faith, oppressive or unconscionable conduct warranted a
court of equity to refuse affirmative relief to the mortgagee. A court of equity
may relieve the mortgagor from an entirely technical default where the default
was not willful.
A foreclosure action or sale in accordance with a power of sale is
subject to most of the delays and expenses of other lawsuits if defenses or
counterclaims are interposed, sometimes requiring up to several years to
complete. Moreover, recent judicial decisions suggest that a non- collusive,
regularly conducted foreclosure sale or sale in accordance with a power of sale
may be challenged as a fraudulent conveyance, regardless of the parties' intent,
if a court determines that the sale was for less than fair consideration and the
sale occurred while the mortgagor was insolvent and within one year, or within
the state statute of limitations if the trustee in bankruptcy elects to proceed
under state fraudulent conveyance law, of the filing of bankruptcy. Similarly, a
suit against the debtor on the mortgage note may take several years.
In 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 potential third party purchasers at the
sale 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 the
foreclosure sale. Rather, it is common
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for the lender to purchase the property from the trustee or referee for an
amount equal to the principal amount of the mortgage or deed of trust plus
accrued and unpaid interest and the expenses of foreclosure. Thereafter, the
lender will assume the burdens of ownership, including obtaining casualty
insurance, paying taxes and making repairs at its own expense as are necessary
to render the property suitable for sale. Depending upon market conditions, the
ultimate proceeds of the sale of the property may not equal the lender's
investment in the property. Any loss may be reduced by the receipt of any
mortgage insurance proceeds.
A junior mortgagee may not foreclose on the property securing a junior
mortgage unless it forecloses subject to the senior mortgages, in which case it
must either pay the entire amount due on the senior mortgages to the senior
mortgagees prior to or at the time of the foreclosure sale or undertake the
obligation to make payments on the senior mortgages if the mortgagor is in
default thereunder. In either event the amounts expended will be added to the
balance due on the junior loan, and may be subrogated to the rights of the
senior mortgagees. In addition, if the foreclosure of a junior mortgage triggers
the enforcement of a due-on-sale clause in a senior mortgage, the junior
mortgagee may be required to pay the full amount of the senior mortgages to the
senior mortgagees.
Accordingly, with respect to those mortgage loans which are junior mortgage
loans, if the lender purchases the property, the lender's title will be subject
to all senior liens and claims and some governmental liens. The proceeds
received by the referee or trustee from the sale are applied first to the costs,
fees and expenses of sale, real estate taxes and then in satisfaction of the
indebtedness secured by the mortgage or deed of trust under which the sale was
conducted. Any remaining proceeds are generally payable to the holders of junior
mortgages or deeds of trust and other liens and claims in order of their
priority, whether or not the borrower is in default. Any additional proceeds are
generally payable to the mortgagor or trustor. The payment of the proceeds to
the holders of junior mortgages may occur in the foreclosure action of the
senior mortgagee or may require the institution of separate legal proceedings.
If the master servicer were to foreclose on any junior lien it would do
so subject to any related senior lien. In order for the debt related to the
junior mortgage loan to be paid in full at the sale, a bidder at the foreclosure
sale of the junior mortgage loan would have to bid an amount sufficient to pay
off all sums due under the junior mortgage loan and the senior lien or purchase
the mortgaged property subject to the senior lien. If proceeds from a
foreclosure or similar sale of the mortgaged property are insufficient to
satisfy all senior liens and the junior mortgage loan in the aggregate, the
trust fund as the holder of the junior lien and, accordingly, holders of one or
more classes of related securities bear (1) the risk of delay in distributions
while a deficiency judgment against the borrower is obtained and (2) the risk of
loss if the deficiency judgment is not realized upon. Moreover, deficiency
judgments may not be available in a jurisdiction. In addition, liquidation
expenses with respect to defaulted junior mortgage loans do not vary directly
with the outstanding principal balance of the loans at the time of default.
Therefore, assuming that the master servicer took the same steps in realizing
upon a defaulted junior mortgage loan having a small remaining principal balance
as it would in the case of a defaulted junior mortgage loan having a large
remaining principal balance, the amount realized after expenses of liquidation
would be smaller as a percentage of the outstanding principal balance of the
small junior mortgage loan than would be the case with the defaulted junior
mortgage loan having a large remaining principal balance.
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In foreclosure, courts have imposed general equitable principles. The
equitable principles are generally designed to relieve the borrower from the
legal effect of its 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 a few 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
a lender to foreclose if the default under the mortgage instrument is not
monetary, for example, the borrower's failure to adequately maintain the
property or the borrower's execution of a second mortgage or deed of trust
affecting the property. Finally, a few 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 minimums.
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 protection to the borrower.
FORECLOSURE ON MORTGAGED PROPERTIES LOCATED IN THE COMMONWEALTH OF PUERTO RICO
Under the laws of the Commonwealth of Puerto Rico the foreclosure of a
real estate mortgage usually follows an ordinary civil action filed in the
Superior Court for the district where the mortgaged property is located. If the
defendant does not contest the action filed, a default judgment is rendered for
the plaintiff and the mortgaged property is sold at public auction, after
publication of the sale for two weeks, by posting written notice in three public
places in the municipality where the auction will be held, in the tax collection
office and in the public school of the municipality where the mortgagor resides,
if known. If the residence of the mortgagor is not known, publication in one of
the newspapers of general circulation in the Commonwealth of Puerto Rico must be
made at least once a week for two weeks. There may be as many as three public
sales of the mortgaged property.
If the defendant contests the foreclosure, the case may be tried and judgment
rendered based on the merits of the case.
There are no redemption rights after the public sale of a foreclosed
property under the laws of the Commonwealth of Puerto Rico. Commonwealth of
Puerto Rico law provides for a summary proceeding for the foreclosure of a
mortgage, but it is very seldom used because of concerns regarding the validity
of these actions. The process may be expedited if the mortgagee can obtain the
consent of the defendant to the execution of a deed in lieu of foreclosure.
Under Commonwealth of Puerto Rico law, in the case of the public sale
upon foreclosure of a mortgaged property that (1) is subject to a mortgage loan
that was obtained for a purpose other than the financing or refinancing of the
acquisition, construction or improvement of the property and (2) is occupied by
the mortgagor as his principal residence, the mortgagor of the property has a
right to be paid the first $1,500 from the proceeds obtained on the public sale
of the property. The mortgagor can claim this sum of money from the mortgagee at
any time prior to the public sale or up to one year after the sale. This payment
would reduce the amount of sales proceeds available to satisfy the mortgage loan
and may increase the amount of the loss.
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FORECLOSURE ON COOPERATIVE SHARES
The cooperative shares and proprietary lease or occupancy agreement
owned by the tenant- stockholder and pledged to the lender are, in almost all
cases, subject to restrictions on transfer as set forth in the cooperative's
certificate of incorporation and by-laws, as well as in the proprietary lease or
occupancy agreement, and may be canceled by the cooperative for failure by the
tenant- stockholder to pay rent or other obligations or charges owed by the
tenant-stockholder, including mechanics' liens against the cooperative apartment
building incurred by the tenant-stockholder. Typically, rent and other
obligations and charges arising under a proprietary lease or occupancy agreement
that are owed to the cooperative are made liens upon the shares to which the
proprietary lease or occupancy agreement relates. In addition, the proprietary
lease or occupancy agreement generally permits the cooperative to terminate the
lease or agreement in the event the tenant- stockholder fails to make payments
or defaults in the performance of covenants required thereunder.
Typically, the lender and the cooperative enter into a recognition agreement
that, together with any lender protection provisions contained in the
proprietary lease, establishes the rights and obligations of both parties in the
event of a default by the tenant-stockholder on its obligations under the
proprietary lease or occupancy agreement. A default by the tenant-stockholder
under the proprietary lease or occupancy agreement will usually constitute a
default under the security agreement between the lender and the
tenant-stockholder.
The recognition agreement generally provides that, in the event that
the tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the cooperative will take no action to terminate the lease or
agreement until the lender has been provided with notice of and an opportunity
to cure the default. The recognition agreement typically provides that if the
proprietary lease or occupancy agreement is terminated, the cooperative will
recognize the lender's lien against proceeds from a sale of the cooperative
apartment, subject, however, to the cooperative's right to sums due under the
proprietary lease or occupancy agreement or that have become liens on the shares
relating to the proprietary lease or occupancy agreement. The total amount owed
to the cooperative by the tenant-stockholder, which the lender generally cannot
restrict and does not monitor, could reduce the value of the collateral below
the outstanding principal balance of the cooperative loan and accrued and unpaid
interest thereon.
Recognition agreements also provide that in the event of a foreclosure
on a cooperative loan, the lender must obtain the approval or consent of the
cooperative as required by the proprietary lease before transferring the
cooperative shares or assigning the proprietary lease. Generally, the lender is
not limited in any rights it may have to dispossess the tenant-stockholders.
Under the laws applicable in most states, foreclosure on the
cooperative shares is accomplished by a sale in accordance with the provisions
of Article 9 of the UCC and the security agreement relating to those shares.
Article 9 of the UCC requires that a sale be conducted in a "commercially
reasonable" manner. Whether a foreclosure sale has been conducted in a
commercially reasonable manner will depend on the facts in each case. In
determining commercial reasonableness, a court will look to the notice given the
debtor and the method, manner, time, place and terms of the foreclosure.
Generally, a sale conducted according to the usual practice of banks selling
similar collateral will be considered reasonably conducted.
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Article 9 of the UCC provides that the proceeds of the sale will be
applied first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the cooperative corporation to receive sums due under
the proprietary lease or occupancy agreement. If there are proceeds remaining,
the lender must account to the tenant-stockholder for the surplus. Conversely,
if a portion of the indebtedness remains unpaid, the tenant-stockholder is
generally responsible for the deficiency. SEE "--ANTI-DEFICIENCY LEGISLATION AND
OTHER LIMITATIONS ON LENDERS" BELOW.
REPOSSESSION WITH RESPECT TO MANUFACTURED HOUSING CONTRACTS
Repossession of manufactured housing is governed by state law. A few
states have enacted legislation that requires that the debtor be given an
opportunity to cure its default (typically 30 days to bring the account current)
before repossession can commence. Unless as a manufactured home has not become
so attached to real estate that it would be treated as a part of the real estate
under the law of the state where it is located, repossession of the manufactured
home in the event of a default by the obligor will generally be governed by the
UCC. Article 9 of the UCC provides the statutory framework for the repossession
of manufactured housing. While the UCC as adopted by the various states may vary
in minimal ways, the general repossession procedure established by the UCC is as
follows:
o Except in those states where the debtor must receive
notice of the right to cure a default, repossession can
commence immediately upon default without prior notice.
Repossession may be effected either through self- help
pursuant to a peaceable retaking without court order,
voluntary repossession or through judicial process by
means of repossession under a court-issued writ of
replevin. The self-help or voluntary repossession
methods are more commonly employed, and are
accomplished simply by retaking possession of the
manufactured home. In cases in which the debtor objects
or raises a defense to repossession, a court order must
be obtained from the appropriate state court, and the
manufactured home must then be repossessed in
accordance with that order. Whether the method employed
is self-help, voluntary repossession or judicial
repossession, the repossession can be accomplished
either by an actual physical removal of the
manufactured home to a secure location for
refurbishment and resale or by removing the occupants
and their belongings from the manufactured home and
maintaining possession of the manufactured home on the
location where the occupants were residing. Various
factors may affect whether the manufactured home is
physically removed or left on location, such as the
nature and term of the lease of the site on which it is
located and the condition of the unit. In many cases,
leaving the manufactured home on location is preferable
if the home is already set up because the expenses of
retaking and redelivery will be saved. However, in
those cases where the home is left on location,
expenses for site rentals will usually be incurred.
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o Once repossession has been achieved, preparation for
the subsequent disposition of the manufactured home can
commence. The disposition may be by public or private
sale provided the method, manner, time, place and terms
of the sale are commercially reasonable.
o Sale proceeds are to be applied first to repossession
expenses like those expenses incurred in retaking,
storage, preparing for sale including refurbishing
costs and selling, and then to satisfaction of the
indebtedness. While several states impose prohibitions
or limitations on deficiency judgments if the net
proceeds from resale do not cover the full amount of
the indebtedness, the remainder may be sought from the
debtor in the form of a deficiency judgment in those
states that do not prohibit or limit deficiency
judgments. The deficiency judgment is a personal
judgment against the debtor for the shortfall.
Occasionally, after resale of a manufactured home and
payment of all expenses and indebtedness, there is a
surplus of funds. In that case, the UCC requires the
party suing for the deficiency judgment to remit the
surplus to the debtor. Because the defaulting owner of
a manufactured home generally has very little capital
or income available following repossession, a
deficiency judgment may not be sought in many cases or,
if obtained, will be settled at a significant discount
in light of the defaulting owner's strained financial
condition.
RIGHTS OF REDEMPTION WITH RESPECT TO MORTGAGE LOANS
In several states, after sale in accordance with a deed of trust or
foreclosure of a mortgage, the trustor or mortgagor and foreclosed junior
lienors are given a statutory period in which to redeem the property from the
foreclosure sale. The right of redemption should be distinguished from the
equity of redemption, which is a nonstatutory right that must be exercised prior
to the foreclosure sale. In several states, redemption may occur only upon
payment of the entire principal balance of the loan, 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 right of redemption would defeat the title of any
purchaser acquired at a public sale. Consequently, the practical effect of a
right of redemption is to force the lender to retain the property and pay the
expenses of ownership and maintenance of the property until the redemption
period has expired. In several states, there is no right to redeem property
after a trustee's sale under a deed of trust.
NOTICE OF SALE; REDEMPTION RIGHTS WITH RESPECT TO MANUFACTURED HOUSING CONTRACTS
While state laws do not usually require notice to be given to debtors
prior to repossession, many states do require delivery of a notice of default
and of the debtor's right to cure defaults before repossession of a manufactured
home. The law in most states also requires that the debtor be given notice of
sale prior to the resale of the home so that the owner may redeem at or before
resale. In addition, the sale must comply with the requirements of the UCC.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
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Several states have imposed statutory prohibitions that limit the
remedies of a beneficiary under a deed of trust or a mortgagee under a mortgage.
In several states, statutes limit the right of the beneficiary or mortgagee to
obtain a deficiency judgment against the borrower following foreclosure or sale
under a deed of trust. A deficiency judgment is a personal judgment against the
former borrower equal in most cases to the difference between the net amount
realized upon the public sale of the real property and the amount due to the
lender. Other statutes require the beneficiary or mortgagee to exhaust the
security afforded under a deed of trust or mortgage by foreclosure in an attempt
to satisfy the full debt before bringing a personal action against the borrower.
Finally, other statutory provisions limit any deficiency judgment against the
former borrower following a judicial sale to the excess of the outstanding debt
over the fair market value of the property at the time of the public sale. The
purpose of these statutes is generally to prevent a beneficiary or a mortgagee
from obtaining a large deficiency judgment against the former borrower as a
result of low or no bids at the judicial sale.
In addition to laws limiting or prohibiting deficiency judgments,
numerous other statutory provisions, including the federal bankruptcy laws and
state laws affording relief to debtors, may interfere with or affect the ability
of the secured mortgage lender to realize upon collateral or enforce a
deficiency judgment. For example, with respect to federal bankruptcy law, the
filing of a petition acts as a stay against the enforcement of remedies of
collection of a debt. Moreover, a court with federal bankruptcy jurisdiction may
permit a debtor through his or her Chapter 13 rehabilitative plan to cure a
monetary default with respect to 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 (provided
no sale of the property had yet occurred) prior to the filing of the debtor's
Chapter 13 petition. Several 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 have also indicated that
the terms of a mortgage loan secured by property of the debtor may be modified
if the borrower has filed a petition under Chapter 13. These courts have
suggested that the modifications may include reducing the amount of each monthly
payment, changing the rate of interest, altering the repayment schedule 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. Federal
bankruptcy law and limited case law indicate that the foregoing modifications
could not be applied to the terms of a loan secured by property that is the
principal residence of the debtor. In all cases, the secured creditor is
entitled to the value of its security plus post-petition interest, attorneys'
fees and costs to the extent the value of the security exceeds the debt.
The Bankruptcy Reform Act of 1994 established the National Bankruptcy
Review Commission for purposes of analyzing the nation's bankruptcy laws and
making recommendations to Congress for legislative changes to the bankruptcy
laws. A similar commission was involved in developing the Bankruptcy Code. The
NBRC delivered its report to Congress, the President of the United States and
the Chief Justice of the Supreme Court on October 20, 1997. Among other topics,
high leverage loans were addressed in the NBRC's report. Despite several
ambiguities, the NBRC's report appears to recommend that Congress amend
Bankruptcy Code section 1322(b)(2) by treating a claim secured only by a junior
security interest in a debtor's principal residence as protected only to
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the extent that the claim was secured when the security interest was made if the
value of the property securing the junior security interest is less than that
amount. However, the express language of the report implies that a claim secured
only by a junior security interest in a debtor's principal residence may not be
modified to reduce the claim below the appraised value of the property at the
time the security interest was made. A strong dissent by some members of the
NBRC recommends that the protections of Bankruptcy Code section 1322(b)(2) be
extended to creditors principally secured by the debtor's principal residence.
Additionally, the NBRC's report recommends that a creditor's secured claim in
real property should be determined by the property's fair market value, less
hypothetical costs of sale. The standard advocated by this recommendation would
not apply to mortgages on the primary residence of a Chapter 11 or 13 debtor who
retains the residence if the mortgages are protected from modification such as
those senior mortgages not subject to modification under Bankruptcy Code
Sections 1322(b)(2) and 1123(b)(5). The final NBRC report may ultimately lead to
substantive changes to the existing Bankruptcy Code, such as reducing
outstanding loan balances to the appraised value of a debtor's principal
residence at the time the security interest in the property was taken, which
could affect the mortgage loans included in a trust fund and the enforcement of
rights therein.
Several tax liens arising under the Code, may provide priority over 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 single family mortgage loans by numerous federal and state consumer
protection laws. These laws include the Federal Truth-in-Lending Act, Regulation
Z, Real Estate Settlement Procedures Act, Regulation X, Equal Credit Opportunity
Act, Regulation B, Fair Credit Billing Act, Fair Housing Act, Fair Credit
Reporting Act and related statutes. These federal laws impose specific statutory
liabilities upon lenders who originate mortgage loans and who fail to comply
with the provisions of the law. This liability may affect assignees of the
mortgage loans. In particular, the originators' failure to comply with
requirements of the Federal Truth-in-Lending Act, as implemented by Regulation
Z, could subject both originators and assignees of the obligations to monetary
penalties and could result in obligors' rescinding loans against either
originators or assignees.
In addition, the mortgage loans included in a trust fund may also be
subject to the Home Ownership and Equity Protection Act of 1994, if the mortgage
loans were originated on or after October 1, 1995, are not mortgage loans made
to finance the purchase of the mortgaged property and have interest rates or
origination costs in excess of prescribed levels. The Homeownership Act requires
additional disclosures, specifies the timing of the disclosures and limits or
prohibits inclusion of specific provisions in mortgages subject to the
Homeownership Act. Remedies available to the mortgagor include monetary
penalties, as well as recission rights if the appropriate disclosures were not
given as required or if the particular mortgage includes provisions prohibited
by law. The Homeownership Act also provides that any purchaser or assignee of a
mortgage covered by the Homeownership Act is subject to all of the claims and
defenses to loan payment, whether under the Federal Truth-in-Lending Act, as
amended by the Homeownership Act or other law, which the borrower could assert
against the original lender unless the purchaser or assignee did not know and
could not with reasonable diligence have determined that the mortgage loan was
subject to the provisions of the Homeownership Act. The maximum damages that may
be recovered under the Homeownership Act from an assignee is the remaining
amount of indebtedness plus the total amount paid by the borrower in connection
with the mortgage loan.
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FOR COOPERATIVE LOANS
Generally, Article 9 of the UCC governs foreclosure on cooperative
shares and the related proprietary lease or occupancy agreement. Several courts
have interpreted Section 9-504 of the UCC to prohibit a deficiency award unless
the creditor establishes that the sale of the collateral, which, in the case of
a cooperative loan, would be the shares of the cooperative and the related
proprietary lease or occupancy agreement, was conducted in a commercially
reasonable manner.
JUNIOR MORTGAGES
The mortgage loans may be secured by junior mortgages or deeds of
trust, which are junior to senior mortgages or deeds of trust which are not part
of the trust fund. The rights of the securityholders as the holders of a junior
deed of trust or a junior mortgage are subordinate in lien priority and in
payment priority to those of the holder of the senior mortgage or deed of trust,
including the prior rights of the senior mortgagee or beneficiary to receive and
apply hazard insurance and condemnation proceeds and, upon default of the
mortgagor, to cause a foreclosure on the property. Upon completion of the
foreclosure proceedings by the holder of the senior mortgage or the sale in
accordance with the deed of trust, the junior mortgagee's or junior
beneficiary's lien will be extinguished unless the junior lienholder satisfies
the defaulted senior loan or asserts its subordinate interest in a property in
foreclosure proceedings. SEE "--FORECLOSURE ON MORTGAGES".
Furthermore, the terms of the junior mortgage or deed of trust are
subordinate to the terms of the senior mortgage or deed of trust. If there is a
conflict between the terms of the senior mortgage or deed of trust and the
junior mortgage or deed of trust, the terms of the senior mortgage or deed of
trust will govern generally. Upon a failure of the mortgagor or trustor to
perform any of its obligations, the senior mortgagee or beneficiary, subject to
the terms of the senior mortgage or deed of trust, may have the right to perform
the obligation itself. Generally, all sums so expended by the mortgagee or
beneficiary become part of the indebtedness secured by the mortgage or deed of
trust. To the extent a senior mortgagee expends sums, these sums will generally
have priority over all sums due under the junior mortgage.
HOME EQUITY LINE OF CREDIT LOANS
The form of credit line trust deed or mortgage generally used by most
institutional lenders which make home equity line of credit loans typically
contains a 'future advance' clause, which provides, in essence, that additional
amounts advanced to or on behalf of the borrower by the beneficiary or lender
are to be secured by the deed of trust or mortgage. Any amounts so advances
after the cut-off date with respect to any Mortgage will not be included in the
trust fund. The priority of the lien securing any advance made under the clause
may depend in most states on whether the deed of trust or mortgage is called and
recorded as a credit line deed of trust or mortgage. If the beneficiary or
lender advances additional amounts, the advance is entitled to receive the same
priority as amounts initially advanced under the trust deed or mortgage,
notwithstanding the fact that there may be junior trust deeds or mortgages and
other liens which intervene between the date of recording of the trust deed or
mortgage and the date of the future advance, and notwithstanding that the
beneficiary or lender had actual knowledge of the intervening junior trust deeds
or mortgages and other liens at the time of the advance. In most states, the
trust deed or mortgage liens securing mortgage loans of the type which includes
home equity credit lines applies retroactively to the date
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of the original recording of the trust deed or mortgage, provided that the total
amount of advances under the home equity credit line does not exceed the maximum
specified principal amount of the recorded trust deed or mortgage, except as to
advances made after receipt by the lender of a written notice of lien from a
judgment lien creditor of the trustor.
CONSUMER PROTECTION LAWS WITH RESPECT TO MANUFACTURED HOUSING CONTRACTS AND HOME
IMPROVEMENT CONTRACTS
Numerous federal and state consumer protection laws impose substantial
requirements upon creditors involved in consumer finance. These laws include the
Federal Truth-in-Lending Act, Regulation Z, the Equal Credit Opportunity Act,
Regulation B, the Fair Credit Reporting Act, the Real Estate Settlement
Procedures Act, Regulation X, the Fair Housing Act and related statutes. These
laws can impose specific statutory liabilities upon creditors who fail to comply
with their provisions. This liability may affect an assignee's ability to
enforce a contract. In particular, the originators' failure to comply with
requirements of the Federal Truth-in-Lending Act, as implemented by Regulation
Z, could subject both originators and assignees of the obligations to monetary
penalties and could result in obligors' rescinding the contracts against either
the originators or assignees. Further, if the manufactured housing contracts or
home improvement contracts are deemed High Cost Loans within the meaning of the
Homeownership Act, they would be subject to the same provisions of the
Homeownership Act as mortgage loans as described in "--Anti- Deficiency
Legislation and Other Limitations on Lenders" above.
Manufactured housing contracts and home improvement contracts often
contain provisions obligating the obligor to pay late charges if payments are
not timely made. Federal and state law may specifically limit the amount of late
charges that may be collected. Unless the prospectus supplement indicates
otherwise, under the related servicing agreement, late charges will be retained
by the master servicer as additional servicing compensation, and any inability
to collect these amounts will not affect payments to securityholders.
Courts have imposed general equitable principles upon repossession and
litigation involving deficiency balances. These equitable principles are
generally designed to relieve a consumer from the legal consequences of a
default.
In several cases, consumers have asserted that the remedies provided to
secured parties under the UCC and related laws violate the due process
protections provided under the 14th Amendment to the Constitution of the United
States. For the most part, courts have upheld the notice provisions of the UCC
and related laws as reasonable or have found that the repossession and resale by
the creditor does not involve sufficient state action to afford constitutional
protection to consumers.
The so-called Holder-in-Due-Course Rule of the Federal Trade Commission
has the effect of subjecting a seller, and related creditors and their
assignees, in a consumer credit transaction and any assignee of the creditor to
all claims and defenses which the debtor in the transaction could assert against
the seller of the goods. Liability under the FTC Rule is limited to the amounts
paid by a debtor on the contract, and the holder of the contract may also be
unable to collect amounts still due thereunder.
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Most of the manufactured housing contracts and home improvement
contracts in a trust fund will be subject to the requirements of the FTC Rule.
Accordingly, the trustee, as holder of the manufactured housing contracts or
home improvement contracts, will be subject to any claims or defenses that the
purchaser of the related home or manufactured home may assert against the seller
of the home or manufactured home, subject to a maximum liability equal to the
amounts paid by the obligor on the manufactured housing contract or home
improvement contract. If an obligor is successful in asserting this type of
claim or defense, and if the mortgage loan seller had or should have had
knowledge of that claim or defense, the master servicer will have the right to
require the mortgage loan seller to repurchase the manufactured housing contract
or home improvement contract because of a breach of its mortgage loan seller's
representation and warranty that no claims or defenses exist that would affect
the obligor's obligation to make the required payments under the manufactured
housing contract or home improvement contract. The mortgage loan seller would
then have the right to require the originating dealer to repurchase the
manufactured housing contract from it and might also have the right to recover
from the dealer for any losses suffered by the mortgage loan seller with respect
to which the dealer would have been primarily liable to the obligor.
OTHER LIMITATIONS
In addition to the laws limiting or prohibiting deficiency judgments,
numerous other statutory provisions including federal bankruptcy laws and
related state laws may interfere with or affect the ability of a lender to
realize upon collateral or enforce a deficiency judgment. For example, in a
Chapter 13 proceeding under the federal bankruptcy law, a court may prevent a
lender from repossessing a home, and as part of the rehabilitation plan reduce
the amount of the secured indebtedness to the market value of the home at the
time of bankruptcy, as determined by the court, leaving the party providing
financing as a general unsecured creditor for the remainder of the indebtedness.
A bankruptcy court may also reduce the monthly payments due under a contract or
change the rate of interest and time of repayment of the indebtedness.
ENFORCEABILITY OF PROVISIONS
The mortgage loans in a trust fund will in most cases 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 without
the prior consent of the lender. The enforceability of these clauses has been
impaired in various ways in several states by statute or decisional law. The
ability of lenders and their assignees and transferees to enforce due-on-sale
clauses was addressed by the Garn-St Germain Depository Institutions Act of
1982. This legislation, subject to exceptions, preempts state constitutional,
statutory and case law that prohibits the enforcement of due-on-sale clauses.
The Garn-St Germain Act does encourage lenders to permit assumptions of loans at
the original rate of interest or at another rate less than the average of the
original rate and the market rate.
The Garn-St Germain Act also sets forth nine specific instances in
which a mortgage lender covered by the Garn-St Germain Act, including federal
savings and loan associations and federal savings banks, may not exercise a
due-on-sale clause, even though a transfer of the property may have occurred.
These include intra-family transfers, some transfers by operation of law, leases
of fewer than three years and the creation of a junior encumbrance. Regulations
promulgated under the Garn-St Germain Act also prohibit the imposition of a
prepayment penalty upon the acceleration of a loan in accordance with a
due-on-sale clause.
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The inability to enforce a due-on-sale clause may result in a mortgage
loan bearing an interest rate below the current market rate being assumed by a
new home buyer rather than being paid off, which may have an impact upon the
average life of the mortgage loans related to a series and the number of
mortgage loans that may be outstanding until maturity.
TRANSFER OF MANUFACTURED HOMES UNDER MANUFACTURED HOUSING CONTRACTS
Generally, manufactured housing contracts contain provisions
prohibiting the sale or transfer of the related manufactured homes without the
consent of the obligee on the contract and permitting the acceleration of the
maturity of the contracts by the obligee on the contract upon any sale or
transfer that is not consented to. The master servicer will, to the extent it
has knowledge of the conveyance or proposed conveyance, exercise or cause to be
exercised its rights to accelerate the maturity of the related manufactured
housing contract through enforcement of due-on-sale clauses, subject to
applicable state law. The transfer may be made by a delinquent obligor in order
to avoid a repossession proceeding with respect to a manufactured home.
In the case of a transfer of a manufactured home as to which the master
servicer desires to accelerate the maturity of the related manufactured housing
contract, the master servicer's ability to do so will depend on the
enforceability under state law of the due-on-sale clause. The Garn-St Germain
Act preempts, subject to exceptions and conditions, state laws prohibiting
enforcement of due-on-sale clauses applicable to the manufactured homes.
Consequently, the master servicer may be prohibited from enforcing a due-on-sale
clause in respect of those manufactured homes.
PREPAYMENT CHARGES AND PREPAYMENTS
The regulations of the Federal Home Loan Bank Board, predecessor to the
Office of Thrift Supervision, prohibit the imposition of a prepayment penalty or
equivalent fee for or in connection with the acceleration of a loan by exercise
of a due-on-sale clause. A mortgagee to whom a prepayment in full has been
tendered may be compelled to give either a release of the mortgage or an
instrument assigning the existing mortgage to a refinancing lender.
LEASES AND RENTS
Mortgages that encumber income-producing property often contain an
assignment of rents and leases and/or may be accompanied by a separate
assignment of rents and leases, pursuant to which the borrower assigns to the
lender the borrower's right, title and interest as landlord under each lease and
the income derived therefrom, and, unless rents are to be paid directly to the
lender, retains a revocable license to collect the rents for so long as there is
no default. If the borrower defaults, the license terminates and the lender is
entitled to collect the rents. Local law may require that the lender take
possession of the property and/or obtain a court-appointed receiver before
becoming entitled to collect the rents. In addition, if bankruptcy or similar
proceedings are commenced by or in respect of the borrower, the lender's ability
to collect the rents may be adversely affected. In the event of borrower
default, the amount of rent the lender is able to collect from the tenants can
significantly affect the value of the lender's security interest.
SUBORDINATE FINANCING
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When the mortgagor encumbers mortgaged property with one or more junior
liens, the senior lender is subjected to additional risk. First, the mortgagor
may have difficulty servicing and repaying multiple loans. In addition, if the
junior loan permits recourse to the mortgagor, as junior loans often do, and the
senior loan does not, a mortgagor may be more likely to repay sums due on the
junior loan than those on the senior loan. Second, acts of the senior lender
that prejudice the junior lender or impair the junior lender's security may
create a superior equity in favor of the junior lender. For example, if the
mortgagor and the senior lender agree to an increase in the principal amount of
or the interest rate payable on the senior loan, the senior lender may lose its
priority to the extent an existing junior lender is harmed or the mortgagor is
additionally burdened. Third, if the mortgagor defaults on the senior loan or
any junior loan, or both, the existence of junior loans and actions taken by
junior lenders can impair the security available to the senior lender and can
interfere with or delay the taking of action by the senior lender. Moreover, the
bankruptcy of a junior lender may operate to stay foreclosure or similar
proceeds by the senior lender.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980 provides that state usury limitations shall not apply to
certain types of residential first mortgage loans originated by certain lenders
after March 31, 1980. A similar federal statute was in effect with respect to
mortgage loans made during the first three months of 1980. The statute
authorized any state to reimpose interest rate limits by adopting before April
1, 1983 a law or constitutional provision that expressly rejects application of
the federal law. In addition, even where Title V is not so rejected, any state
is authorized by the law to adopt a provision limiting discount points or other
charges on mortgage loans covered by Title V. Several states have taken action
to reimpose interest rate limits or to limit discount points or other charges.
The depositor has been advised by counsel that a court interpreting
Title V would hold that mortgage loans originated on or after January 1, 1980
are subject to federal preemption. Therefore, in a state that has not taken the
requisite action to reject application of Title V or to adopt a provision
limiting discount points or other charges prior to origination of the mortgage
loans, any such limitation under the state's usury law would not apply to the
mortgage loans.
In any state in which application of Title V has been expressly
rejected or a provision limiting discount points or other charges is adopted, no
mortgage loans originated after the date of that state action will be eligible
for inclusion in a trust fund if the mortgage loans bear interest or provide for
discount points or charges in excess of permitted levels. No mortgage loan
originated prior to January 1, 1980 will bear interest or provide for discount
points or charges in excess of permitted levels.
Title V also provides that state usury limitations do not apply to any
loan that is secured by a first lien on specific kinds of manufactured housing
if certain conditions are met, including the terms of any prepayments, late
charges and deferral fees and requiring a 30-day notice period prior to
instituting any action leading to repossession of or foreclosure with respect to
the related unit. Title V authorized any state to reimpose limitations on
interest rates and finance charges by adopting before April 1, 1983 a law or
constitutional provision which expressly rejects application of the federal law.
Fifteen states adopted such a law prior to the April 1, 1983 deadline. In
addition, even where Title V was not so rejected, any state is authorized by the
law to adopt a provision limiting
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discount points or other charges on loans covered by Title V. In any state in
which application of Title V was expressly rejected or a provision limiting
discount points or other charges has been adopted, no manufactured housing
contract which imposes finance charges or provides for discount points or
charges in excess of permitted levels has been included in the trust fund.
ALTERNATIVE MORTGAGE INSTRUMENTS
ARM Loans and home equity revolving credit loans originated by
non-federally chartered lenders have historically been subject to a variety of
restrictions. These restrictions differed from state to state, resulting in
difficulties in determining whether a particular alternative mortgage instrument
originated by a state-chartered lender complied with applicable law. These
difficulties were simplified substantially as a result of the enactment of Title
VIII of the Garn-St Germain Act. Title VIII provides that, notwithstanding any
state law to the contrary,
o state-chartered banks may originate alternative mortgage
instruments, including ARM Loans, in accordance with regulations
promulgated by the Comptroller of the Currency with respect to
origination of alternative mortgage instruments by national
banks,
o state-chartered credit unions may originate alternative mortgage
instruments in accordance with regulations promulgated by the
National Credit Union Administration with respect to origination
of alternative mortgage instruments by federal credit unions, and
o all other non-federally chartered housing creditors, including,
without limitation, state-chartered savings and loan
associations, savings banks and mutual savings banks and mortgage
banking companies may originate alternative mortgage instruments
in accordance with the regulations promulgated by the Federal
Home Loan Bank Board, predecessor to the Office of Thrift
Supervision, with respect to origination of alternative mortgage
instruments by federal savings and loan associations.
Title VIII further provides that any state may reject applicability of
the provisions of Title VIII by adopting prior to October 15, 1985 a law or
constitutional provision expressly rejecting the applicability of these
provisions. Several states have taken this type of action.
The depositor has been advised by counsel that a court interpreting
Title VIII would hold that ARM Loans and home equity revolving credit loans that
were originated by state-chartered lenders before the date of enactment of any
state law or constitutional provision rejecting applicability of Title VIII
would not be subject to state laws imposing restrictions or prohibitions on the
ability of state-chartered lenders to originate alternative mortgage
instruments.
The Alternative Mortgage Transactions Parity Act permits the collection
of prepayment charges in connection with some types of eligible mortgage loans,
preempting any contrary state law prohibitions. However, some states, such as
Virginia, may not recognize the preemptive authority of the Parity Act.
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All of the ARM Loans and home equity revolving credit loans in a trust
fund that were originated by a state-chartered lender after the enactment of a
state law or constitutional provision rejecting the applicability of Title VIII
will have complied with applicable state law. All of the ARM Loans and home
equity revolving credit loans in a trust fund that were originated by federally
chartered lenders or that were originated by state-chartered lenders prior to
enactment of a state law or constitutional provision rejecting the applicability
of Title VIII will have been originated in compliance with all applicable
federal regulations.
FORMALDEHYDE LITIGATION WITH RESPECT TO MANUFACTURED HOMES
A number of lawsuits are pending in the United States alleging personal
injury from exposure to the chemical formaldehyde, which is present in many
building materials including components of manufactured housing such as plywood
flooring and wall paneling. Some of these lawsuits are pending against
manufacturers of manufactured housing, suppliers of component parts, and related
persons in the distribution process. The depositor is aware of a limited number
of cases in which plaintiffs have won judgments in these lawsuits.
Under the FTC Rule, which is described above under "Consumer Protection
Laws", the holder of any loan or contract secured by a manufactured home with
respect to which a formaldehyde claim has been successfully asserted may be
liable to the obligor for the amount paid by the obligor on the related loan or
contract and may be unable to collect amounts still due under the loan or
contract. The successful assertion of this type of claim will constitute a
breach of a representation or warranty of the mortgage loan seller, and the
securityholders would suffer a loss only to the extent that:
o the mortgage loan seller breached its obligation to repurchase
the loan or contract in the event an obligor is successful in
asserting the claim, and
o the mortgage loan seller, the depositor or the trustee were
unsuccessful in asserting any claim of contribution or
subrogation on behalf of the securityholders against the
manufacturer or other persons who were directly liable to the
plaintiff for the damages.
Typical products liability insurance policies held by manufacturers and
component suppliers of manufactured homes may not cover liabilities arising from
formaldehyde in manufactured housing, with the result that recoveries from the
manufacturers, suppliers or other persons may be limited to their corporate
assets without the benefit of insurance.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940,
as amended, a borrower who enters military service after the origination of that
borrower's mortgage loan, including a borrower who was in reserve status and is
called to active duty after origination of the mortgage loan, may not be charged
interest, including fees and charges, above an annual rate of 6% during the
period of that borrower's active duty status unless a court orders otherwise
upon application of the lender. The Relief Act applies to borrowers who are
members of the Army, Navy, Air Force, Marines, National Guard, Reserves, Coast
Guard, and officers of the U.S. Public Health Service assigned to duty with the
military. Because the Relief Act applies to borrowers who enter
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military service, including reservists who are called to active duty, after
origination of the related mortgage loan no information can be provided as to
the number of loans that may be affected by the Relief Act. Application of the
Relief Act would adversely affect, for an indeterminate period of time, the
ability of the master servicer to collect full amounts of interest on the
applicable mortgage loans. Any shortfalls in interest collections resulting from
the application of the Relief Act would result in a reduction of the amounts
distributable to the holders of the related series of securities, and would not
be covered by advances or, unless specified in the related prospectus
supplement, any form of credit support provided in connection with the
securities. In addition, the Relief Act imposes limitations that would impair
the ability of the master servicer to foreclose on an affected mortgage loan,
cooperative loan or enforce rights under a manufactured housing contract during
the borrower's period of active duty status, and, sometimes, during an
additional three month period thereafter. Thus, if the Relief Act applies to any
mortgage asset that goes into default, there may be delays in payment and losses
incurred by the related securityholders.
ENVIRONMENTAL LEGISLATION
Under the federal Comprehensive Environmental Response, Compensation
and Liability Act, as amended, and under several state laws, a secured party
which takes a deed-in-lieu of foreclosure, purchases a mortgaged property at a
foreclosure sale, or operates a mortgaged property may become liable for the
costs of cleaning up hazardous substances regardless of whether they have
contaminated the property. CERCLA imposes strict as well as joint and several
liability on several classes of potentially responsible parties, including
current owners and operators of the property who did not cause or contribute to
the contamination. Furthermore, liability under CERCLA is not limited to the
original or unamortized principal balance of a loan or to the value of the
property securing a loan. Lenders may be held liable under CERCLA as owners or
operators unless they qualify for the secured creditor exemption to CERCLA. This
exemption exempts from the definition of owners and operators those who, without
participating in the management of a facility, hold indicia of ownership
primarily to protect a security interest in the facility. What constitutes
sufficient participation in the management of a property securing a loan or the
business of a borrower to render the exemption unavailable to a lender has been
a matter of interpretation by the courts. CERCLA has been interpreted to impose
liability on a secured party even absent foreclosure where the party
participated in the financial management of the borrower's business to a degree
indicating a capacity to influence waste disposal decisions. However, court
interpretations of the secured creditor exemption have been inconsistent. In
addition, when lenders foreclose and become owners of collateral property,
courts are inconsistent as to whether that ownership renders the secured
creditor exemption unavailable. Other federal and state laws may impose
liability on a secured party which takes a deed-in-lieu of foreclosure,
purchases a mortgaged property at a foreclosure sale, or operates a mortgaged
property on which contaminants other than CERCLA hazardous substances are
present, including petroleum, agricultural chemicals, hazardous wastes,
asbestos, radon, and lead- based paint. Environmental cleanup costs may be
substantial. It is possible that the cleanup costs could become a liability of a
trust fund and reduce the amounts otherwise distributable to the holders of the
related series of securities. Moreover, there are federal statutes and state
statutes that impose an environmental lien for any cleanup costs incurred by the
state on the property that is the subject of the cleanup costs. All subsequent
liens on a property generally are subordinated to an environmental lien and in
some states even prior recorded liens are subordinated to environmental liens.
In the latter states, the security interest of the trust fund in a related
parcel of real property that is subject to an environmental lien could be
adversely affected.
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Traditionally, many residential mortgage lenders have not taken steps
to evaluate whether contaminants are present with respect to any mortgaged
property prior to the origination of the mortgage loan or prior to foreclosure
or accepting a deed-in-lieu of foreclosure. Accordingly, the master servicer has
not made and will not make these kinds of evaluations prior to the origination
of the mortgage loans. Neither the master servicer nor any replacement servicer
will be required by any servicing agreement to undertake any environmental
evaluations prior to foreclosure or accepting a deed-in-lieu of foreclosure. The
master servicer will not make any representations or warranties or assume any
liability with respect to the absence or effect of contaminants on any related
real property or any casualty resulting from the presence or effect of
contaminants. The master servicer will not be obligated to foreclose on related
real property or accept a deed-in-lieu of foreclosure if it knows or reasonably
believes that there are material contaminated conditions on a property. A
failure so to foreclose may reduce the amounts otherwise available to
securityholders of the related series.
FORFEITURES IN DRUG AND RICO PROCEEDINGS
Federal law provides that property owned by persons convicted of
drug-related crimes or of criminal violations of the Racketeer Influenced and
Corrupt Organizations statute can be seized by the government if the property
was used in or purchased with the proceeds of these crimes. Under procedures
contained in the Comprehensive Crime Control Act of 1984 the government may
seize the property even before conviction. The government must publish notice of
the forfeiture proceeding and may give notice to all parties "known to have an
alleged interest in the property", including the holders of mortgage loans.
A lender may avoid forfeiture of its interest in the property if it
establishes that: (1) its mortgage was executed and recorded before commission
of the crime upon which the forfeiture is based, or (2) the lender was at the
time of execution of the mortgage "reasonably without cause to believe" that the
property was used in or purchased with the proceeds of illegal drug or RICO
activities.
NEGATIVE AMORTIZATION LOANS
A recent case decided by the United States Court of Appeals, First
Circuit, held that state restrictions on the compounding of interest are not
preempted by the provisions of the Depository Institutions Deregulation and
Monetary Control Act of 1980 and as a result, a mortgage loan that provided for
negative amortization violated New Hampshire's requirement that first mortgage
loans provide for computation of interest on a simple interest basis. The
holding was limited to the effect of DIDMC on state laws regarding the
compounding of interest and the court did not address the applicability of the
Alternative Mortgage Transaction Parity Act of 1982, which authorizes lender to
make residential mortgage loans that provide for negative amortization. The
First Circuit's decision is binding authority only on Federal District Courts in
Maine, New Hampshire, Massachusetts, Rhode Island and Puerto Rico.
INSTALLMENT CONTRACTS
The trust fund may also consist of installment sales contracts. Under
an installment sales contract the seller, referred to in this section as the
"lender", retains legal title to the property and
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enters into an agreement with the purchaser, referred to in this section as the
"borrower", for the payment of the purchase price, plus interest, over the term
of such contract. Only after full performance by the borrower of the installment
contract is the lender obligated to convey title to the property to the
purchaser. As with mortgage or deed of trust financing, during the effective
period of the installment contract the borrower is generally responsible for
maintaining the property in good condition and for paying real estate taxes,
assessments and hazard insurance premiums associated with the property.
The method of enforcing the rights of the lender under an installment
contract varies on a state-by-state basis depending upon the extent to which
state courts are willing or able pursuant to state statute to enforce the
contract strictly according to its terms. The terms of installment contracts
generally provide that upon a default by the borrower, the borrower loses his or
her right to occupy the property, the entire indebtedness is accelerated and the
buyer's equitable interest in the property is forfeited. The lender in such a
situation is not required to foreclose in order to obtain title to the property,
although in some cases a quiet title action is pursued if the borrower has filed
the installment contract in local land records and an ejectment action may be
necessary to recover possession. In a few states, particularly in cases of
borrower default during the early years of an installment contract, the courts
will permit ejectment of the buyer and a forfeiture of his or her interest in
the property. However, most state legislatures have enacted provisions by
analogy to mortgage law protecting borrowers under installment contracts from
the harsh consequences of forfeiture. Under such statutes a judicial or
nonjudicial foreclosure may be required, the lender may be required to give
notice of default and the borrower may be granted some grace period during which
the installment contract may be reinstated upon full payment of the defaulted
amount and the borrower may have a post-foreclosure statutory redemption right.
In other states courts in equity may permit a borrower with significant
investment in the property under an installment contract for the sale of real
estate to share in the proceeds of sale of the property after the indebtedness
is repaid or may otherwise refuse to enforce the forfeiture clause.
Nevertheless, generally the lender's procedures for obtaining possession and
clear title under an installment contract in a given state are simpler and less
time consuming and costly than are the procedures for foreclosing and obtaining
clear title to a property subject to one or more liens.
FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following discussion is the opinion of Thacher Proffitt & Wood,
counsel to the depositor, with respect to the material federal income tax
consequences of the purchase, ownership and disposition of the securities
offered under this prospectus and the prospectus supplement. This discussion is
for securityholders that hold the securities as capital assets within the
meaning of Section 1221 of the Code and does not purport to discuss all federal
income tax consequences that may be applicable to the individual circumstances
of banks, insurance companies, foreign investors, tax-exempt organizations,
dealers in securities or currencies, mutual funds, real estate investment
trusts, S corporations, estates and trusts, securityholders that hold the
securities as part of a hedge, straddle or, an integrated or conversion
transaction, or securityholders whose functional currency is not the United
States dollar.
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The authorities on which this discussion and the opinion referred to
below are based are subject to change or differing interpretations which could
apply retroactively. Prospective investors should note that no rulings have been
or will be sought from the IRS with respect to any of the federal income tax
consequences discussed below, and no assurance can be given that the IRS will
not take contrary positions. Taxpayers and preparers of tax returns should be
aware that under applicable Treasury regulations a provider of advice on
specific issues of law is not considered an income tax return preparer unless
the advice (1) is given with respect to events that have occurred at the time
the advice is rendered and is not given with respect to the consequences of
contemplated actions, and (2) is directly relevant to the determination of an
entry on a tax return. Accordingly, it is suggested that taxpayers consult their
own tax advisors and tax return preparers regarding the preparation of any item
on a tax return, even where the anticipated tax treatment has been discussed in
this prospectus. In addition to the federal income tax consequences described in
this prospectus, potential investors should consider the state and local tax
consequences, if any, of the purchase, ownership and disposition of the
securities. SEE "STATE AND OTHER TAX CONSEQUENCES."
The following discussion addresses securities of five general types:
o REMIC Certificates representing interests in a trust fund, or a
portion thereof, that the trustee will elect to have treated as a
REMIC under the REMIC Provisions of the Code,
o Notes representing indebtedness of an owner trust for federal
income tax purposes,
o Grantor Trust Certificates representing interests in a Grantor
Trust Fund as to which no REMIC or FASIT election will be made,
o Partnership Certificates representing interests in a Partnership
Trust Fund which is treated as a partnership for federal income
tax purposes, and
o Debt Certificates representing indebtedness of a Partnership
Trust Fund for federal income tax purposes.
o FASIT Securities representing interests in a trust fund, or a
portion thereof, that the trustee will elect to have treated as a
FASIT under the FASIT Provisions of the Code.
The prospectus supplement for each series of certificates will indicate whether
one or more REMIC of FASIT elections will be made for the related trust fund and
will identify all regular interests and residual interests in the REMIC or
REMICs or the "regular interests," "high yield regular interests" or "ownership
interests" in the FASIT, as the case may be. For purposes of this tax
discussion, references to a securityholder or a holder are to the beneficial
owner of a security.
The following discussion is based in part upon the OID Regulations and
in part upon REMIC Regulations. The OID Regulations do not adequately address
issues relevant to the offered securities. As described at "Taxation of Owners
of REMIC Regular Certificates--Original Issue Discount," in some instances the
OID Regulations provide that they are not applicable to securities like the
offered securities.
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REMICS
CLASSIFICATION OF REMICS. On or prior to the date of the related
prospectus supplement with respect to the issuance of each series of REMIC
Certificates, counsel to the depositor will provide its opinion that, assuming
compliance with all provisions of the related pooling and servicing agreement,
for federal income tax purposes, the related trust fund or each applicable
portion of the related trust fund will qualify as a REMIC and the offered REMIC
Certificates will be considered to evidence ownership of REMIC Regular
Certificates or REMIC Residual Certificates in that REMIC within the meaning of
the REMIC Provisions.
If an entity electing to be treated as a REMIC fails to comply with one
or more of the ongoing requirements of the Code for status as a REMIC during any
taxable year, the Code provides that the entity will not be treated as a REMIC
for that year and for later years. In that event, the entity may be taxable as a
corporation under Treasury regulations, and the related REMIC Certificates may
not be accorded the status or given the tax treatment described under "Taxation
of Owners of REMIC Regular Certificates" and "Taxation of Owners of REMIC
Residual Certificates". Although the Code authorizes the Treasury Department to
issue regulations providing relief in the event of an inadvertent termination of
REMIC status, these regulations have not been issued. If these regulations are
issued, relief in the event of an inadvertent termination may be accompanied by
sanctions, which may include the imposition of a corporate tax on all or a
portion of the REMIC's income for the period in which the requirements for
status as a REMIC are not satisfied. The pooling and servicing agreement with
respect to each REMIC will include provisions designed to maintain the trust
fund's status as a REMIC under the REMIC Provisions. It is not anticipated that
the status of any trust fund as a REMIC will be inadvertently terminated.
CHARACTERIZATION OF INVESTMENTS IN REMIC CERTIFICATES. Except as
provided in the following sentence, the REMIC Certificates will be real estate
assets within the meaning of Section 856(c)(4)(A) of the Code and assets
described in Section 7701(a)(19)(C) of the Code in the same proportion as the
assets of the REMIC underlying the certificates. If 95% or more of the assets of
the REMIC qualify for either of the treatments described in the previous
sentence at all times during a calendar year, the REMIC Certificates will
qualify for the corresponding status in their entirety for that calendar year.
Interest, including original issue discount, on the REMIC Regular Certificates
and income allocated to the class of REMIC Residual Certificates will be
interest described in Section 856(c)(3)(B) of the Code to the extent that the
certificates are treated as real estate assets within the meaning of Section
856(c)(4)(A) of the Code. In addition, the REMIC Regular Certificates will be
qualified mortgages within the meaning of Section 860G(a)(3) of the Code if
transferred to another REMIC on its startup day in exchange for regular or
residual interests of that REMIC. The determination as to the percentage of the
REMIC's assets that constitute assets described in these sections of the Code
will be made for each calendar quarter based on the average adjusted basis of
each category of the assets held by the REMIC during the calendar quarter. The
Trustee will report those determinations to certificateholders in the manner and
at the times required by Treasury regulations.
The assets of the REMIC will include mortgage loans, payments on
mortgage loans held prior to the distribution of these payments to the REMIC
Certificates and any property acquired by foreclosure held prior to the sale of
this property, and may include amounts in reserve accounts. It is unclear
whether property acquired by foreclosure held prior to the sale of this property
and amounts
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in reserve accounts would be considered to be part of the mortgage loans, or
whether these assets otherwise would receive the same treatment as the mortgage
loans for purposes of all of the Code sections discussed in the immediately
preceding paragraph. The related prospectus supplement will describe the
mortgage loans that may not be treated entirely as assets described in the
sections of the Code discussed in the immediately preceding paragraph. The REMIC
Regulations do provide, however, that cash received from payments on mortgage
loans held pending distribution is considered part of the mortgage loans for
purposes of Section 856(c)(4)(A) of the Code. Furthermore, foreclosure property
will qualify as real estate assets under Section 856(c)(4)(A) of the Code.
TIERED REMIC STRUCTURES. For a series of REMIC Certificates, two or
more separate elections may be made to treat designated portions of the related
trust fund as REMICs for federal income tax purposes, creating a tiered REMIC
structure. As to each series of REMIC Certificates that is a tiered REMIC
structure, in the opinion of counsel to the depositor, assuming compliance with
all provisions of the related pooling and servicing agreement, each of the
REMICs in that series will qualify as a REMIC and the REMIC Certificates issued
by these REMICs will be considered to evidence ownership of REMIC Regular
Certificates or REMIC Residual Certificates in the related REMIC within the
meaning of the REMIC Provisions.
Solely for purposes of determining whether the REMIC Certificates will
be real estate assets within the meaning of Section 856(c)(4)(A) of the Code,
and loans secured by an interest in real property under Section 7701(a)(19)(C)
of the Code, and whether the income on the certificates is interest described in
Section 856(c)(3)(B) of the Code, all of the REMICs in that series will be
treated as one REMIC.
TAXATION OF OWNERS OF REMIC REGULAR CERTIFICATES.
General. Except as described in "Taxation of Owners of REMIC Residual
Certificates--Possible Pass-Through of Miscellaneous Itemized Deductions," REMIC
Regular Certificates will be treated for federal income tax purposes as debt
instruments issued by the REMIC and not as ownership interests in the REMIC or
its assets. Moreover, holders of REMIC Regular Certificates that ordinarily
report income under a cash method of accounting will be required to report
income for REMIC Regular Certificates under an accrual method.
Original Issue Discount. A REMIC Regular Certificate may be issued with
original issue discount within the meaning of Section 1273(a) of the Code. Any
holder of a REMIC Regular Certificate issued with original issue discount will
be required to include original issue discount in income as it accrues, in
accordance with the constant yield method, in advance of the receipt of the cash
attributable to that income if the original issue discount exceeds a DE MINIMIS
amount. In addition, Section 1272(a)(6) of the Code provides special rules
applicable to REMIC Regular Certificates and other debt instruments issued with
original issue discount. Regulations have not been issued under that section.
The Code requires that a reasonable Prepayment Assumption be used for
mortgage loans held by a REMIC in computing the accrual of original issue
discount on REMIC Regular Certificates issued by that REMIC, and that
adjustments be made in the amount and rate of accrual of that discount to
reflect differences between the actual prepayment rate and the Prepayment
Assumption.
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The Prepayment Assumption is to be determined in a manner prescribed in Treasury
regulations; as noted in the preceding paragraph, those regulations have not
been issued. The committee report indicates that the regulations will provide
that the Prepayment Assumption used for a REMIC Regular Certificate must be the
same as that used in pricing the initial offering of the REMIC Regular
Certificate. The Prepayment Assumption used in reporting original issue discount
for each series of REMIC Regular Certificates will be consistent with this
standard and will be disclosed in the related prospectus supplement. However,
none of the depositor, the master servicer or the trustee will make any
representation that the mortgage loans will in fact prepay at a rate conforming
to the Prepayment Assumption or at any other rate.
The original issue discount, if any, on a REMIC Regular Certificate
will be the excess of its stated redemption price at maturity over its issue
price. The issue price of a particular class of REMIC Regular Certificates will
be the first cash price at which a substantial amount of REMIC Regular
Certificates of that class is sold, excluding sales to bond houses, brokers and
underwriters. If less than a substantial amount of a class of REMIC Regular
Certificates is sold for cash on or prior to the closing date, the issue price
for that class will be the fair market value of that class on the closing date.
Under the OID Regulations, the stated redemption price of a REMIC Regular
Certificate is equal to the total of all payments to be made on the certificate
other than qualified stated interest. Qualified stated interest is interest that
is unconditionally payable at least annually during the entire term of the
instrument at a single fixed rate, a qualified floating rate, an objective rate,
a combination of a single fixed rate and one or more qualified floating rates or
one qualified inverse floating rate, or a combination of qualified floating
rates that does not operate in a manner that accelerates or defers interest
payments on the REMIC Regular Certificate.
In the case of REMIC Regular Certificates bearing adjustable interest
rates, the determination of the total amount of original issue discount and the
timing of the inclusion thereof will vary according to the characteristics of
the REMIC Regular Certificates. If the original issue discount rules apply to
the certificates in a particular series, the related prospectus supplement will
describe the manner in which these rules will be applied with respect to the
certificates in that series that bear an adjustable interest rate in preparing
information returns to the certificateholders and the IRS.
The first interest payment on a REMIC Regular Certificate may be made
more than one month after the date of issuance, which is a period longer than
the subsequent monthly intervals between interest payments. Assuming the accrual
period for original issue discount is each monthly period that ends on the day
prior to each distribution date, as a consequence of this long first accrual
period some or all interest payments may be required to be included in the
stated redemption price of the REMIC Regular Certificate and accounted for as
original issue discount. Because interest on REMIC Regular Certificates must in
any event be accounted for under an accrual method, applying this analysis would
result in only a slight difference in the timing of the inclusion in income of
the yield on the REMIC Regular Certificates.
If the accrued interest to be paid on the first distribution date is
computed for a period that begins prior to the closing date, a portion of the
purchase price paid for a REMIC Regular Certificate will reflect the accrued
interest. In these cases, information returns to the certificateholders and the
IRS will take the position that the portion of the purchase price paid for the
interest accrued for periods prior to the closing date is part of the overall
cost of the REMIC Regular Certificate, and not
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a separate asset the cost of which is recovered entirely out of interest
received on the next distribution date, and that portion of the interest paid on
the first distribution date in excess of interest accrued for a number of days
corresponding to the number of days from the closing date to the first
distribution date should be included in the stated redemption price of the REMIC
Regular Certificate. However, the OID Regulations state that all or a portion of
the accrued interest may be treated as a separate asset the cost of which is
recovered entirely out of interest paid on the first distribution date. It is
unclear how an election to do so would be made under the OID Regulations and
whether this election could be made unilaterally by a certificateholder.
Notwithstanding the general definition of original issue discount,
original issue discount on a REMIC Regular Certificate will be considered to be
de minimis if it is less than 0.25% of the stated redemption price of the REMIC
Regular Certificate multiplied by its weighted average life. For this purpose,
the weighted average life of a REMIC Regular Certificate is computed as the sum
of the amounts determined, as to each payment included in the stated redemption
price of the REMIC Regular Certificate, by multiplying (1) the number of
complete years from the issue date until that payment is expected to be made,
presumably taking into account the Prepayment Assumption, by (2) a fraction, the
numerator of which is the amount of the payment, and the denominator of which is
the stated redemption price at maturity of the REMIC Regular Certificate. Under
the OID Regulations, original issue discount of only a de minimis amount, other
than de minimis original issue discount attributable to a teaser interest rate
or an initial interest holiday, will be included in income as each payment of
stated principal is made, based on the product of the total amount of the de
minimis original issue discount attributable to that certificate and a fraction,
the numerator of which is the amount of the principal payment and the
denominator of which is the outstanding stated principal amount of the REMIC
Regular Certificate. The OID Regulations also would permit a certificateholder
to elect to accrue de minimis original issue discount into income currently
based on a constant yield method. SEE "TAXATION OF OWNERS OF REMIC REGULAR
CERTIFICATES--MARKET DISCOUNT" FOR A DESCRIPTION OF THIS ELECTION UNDER THE OID
REGULATIONS.
If original issue discount on a REMIC Regular Certificate is in excess
of a de minimis amount, the holder of the certificate must include in ordinary
gross income the sum of the daily portions of original issue discount for each
day during its taxable year on which it held the REMIC Regular Certificate,
including the purchase date but excluding the disposition date. In the case of
an original holder of a REMIC Regular Certificate, the daily portions of
original issue discount will be determined as described in the following
paragraph.
An accrual period is a period that ends on the day prior to a
distribution date and begins on the first day following the immediately
preceding accrual period, except that the first accrual period begins on the
closing date. As to each accrual period, a calculation will be made of the
portion of the original issue discount that accrued during the accrual period.
The portion of original issue discount that accrues in any accrual period will
equal the excess of (1) the sum of (a) the present value, as of the end of the
accrual period, of all of the distributions remaining to be made on the REMIC
Regular Certificate in future periods and (b) the distributions made on the
REMIC Regular Certificate during the accrual period of amounts included in the
stated redemption price, over (2) the adjusted issue price of the REMIC Regular
Certificate at the beginning of the accrual period. The present value of the
remaining distributions referred to in the preceding sentence will be calculated
assuming that distributions on the REMIC Regular Certificate will be received in
future periods based on the mortgage loans being prepaid at a rate equal to the
Prepayment Assumption, using a discount rate
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equal to the original yield to maturity of the certificate and taking into
account events, including actual prepayments, that have occurred before the
close of the accrual period. For these purposes, the original yield to maturity
of the certificate will be calculated based on its issue price and assuming that
distributions on the certificate will be made in all accrual periods based on
the mortgage loans being prepaid at a rate equal to the Prepayment Assumption.
The adjusted issue price of a REMIC Regular Certificate at the beginning of any
accrual period will equal the issue price of the certificate, increased by the
aggregate amount of original issue discount that accrued with respect to the
certificate in prior accrual periods, and reduced by the amount of any
distributions made on the certificate in prior accrual periods of amounts
included in the stated redemption price. The original issue discount accruing
during any accrual period will be allocated ratably to each day during the
accrual period to determine the daily portion of original issue discount for
that day.
If a REMIC Regular Certificate issued with original issue discount is
purchased at a cost, excluding any portion of the cost attributable to accrued
qualified stated interest, less than its remaining stated redemption price, the
purchaser will also be required to include in gross income the daily portions of
any original issue discount for the certificate. However, if the cost of the
certificate is in excess of its adjusted issue price, each daily portion will be
reduced in proportion to the ratio the excess bears to the aggregate original
issue discount remaining to be accrued on the REMIC Regular Certificate. The
adjusted issue price of a REMIC Regular Certificate on any given day equals the
sum of (1) the adjusted issue price or, in the case of the first accrual period,
the issue price, of the certificate at the beginning of the accrual period which
includes that day and (2) the daily portions of original issue discount for all
days during the accrual period prior to that day.
Market Discount. A certificateholder that purchases a REMIC Regular
Certificate at a market discount will recognize gain upon receipt of each
distribution representing stated redemption price. A REMIC Regular Certificate
issued without original issue discount will have market discount if purchased
for less than its remaining stated principal amount and a REMIC Regular
Certificate issued with original issue discount will have market discount if
purchased for less than its adjusted issue price. Under Section 1276 of the
Code, a certificateholder that purchases a REMIC Regular Certificate at a market
discount in excess of a DE MINIMIS amount will be required to allocate the
portion of each distribution representing stated redemption price first to
accrued market discount not previously included in income, and to recognize
ordinary income to that extent. A certificateholder may elect to include market
discount in income currently as it accrues rather than including it on a
deferred basis. If made, the election will apply to all market discount bonds
acquired by the certificateholder on or after the first day of the first taxable
year to which the election applies. In addition, the OID Regulations permit a
certificateholder to elect to accrue all interest and discount in income as
interest, and to amortize premium, based on a constant yield method. If such an
election were made with respect to a REMIC Regular Certificate with market
discount, the certificateholder would be deemed to have made an election to
include currently market discount in income with respect to all other debt
instruments having market discount that the certificateholder acquires during
the taxable year of the election or later taxable years, and possibly previously
acquired instruments. Similarly, a certificateholder that made this election for
a certificate that is acquired at a premium would be deemed to have made an
election to amortize bond premium with respect to all debt instruments having
amortizable bond premium that the certificateholder owns or acquires. Each of
these elections to accrue interest, discount and premium with respect to a
certificate on a constant yield method or as interest would be irrevocable,
except with the approval of the IRS. SEE "TAXATION OF OWNERS OF REMIC REGULAR
CERTIFICATES--PREMIUM" BELOW.
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However, market discount with respect to a REMIC Regular Certificate
will be considered to be de minimis for purposes of Section 1276 of the Code if
the market discount is less than 0.25% of the remaining stated redemption price
of the REMIC Regular Certificate multiplied by the number of complete years to
maturity remaining after the date of its purchase. In interpreting a similar
rule with respect to original issue discount on obligations payable in
installments, the OID Regulations refer to the weighted average maturity of
obligations, and it is likely that the same rule will be applied with respect to
market discount, presumably taking into account the Prepayment Assumption. If
market discount is treated as de minimis under this rule, it appears that the
actual discount would be treated in a manner similar to original issue discount
of a de minimis amount. This treatment would result in discount being included
in income at a slower rate than discount would be required to be included in
income using the method described above. SEE "TAXATION OF OWNERS OF REMIC
REGULAR CERTIFICATES-- ORIGINAL ISSUE DISCOUNT" ABOVE.
Section 1276(b)(3) of the Code specifically authorizes the Treasury
Department to issue regulations providing for the method for accruing market
discount on debt instruments, the principal of which is payable in more than one
installment. Until regulations are issued by the Treasury Department, the rules
described in the committee report apply. The committee report indicates that in
each accrual period market discount on REMIC Regular Certificates should accrue,
at the certificateholder's option:
(1) on the basis of a constant yield method,
(2) in the case of a REMIC Regular Certificate issued without
original issue discount, in an amount that bears the same ratio
to the total remaining market discount as the stated interest
paid in the accrual period bears to the total amount of stated
interest remaining to be paid on the REMIC Regular Certificate
as of the beginning of the accrual period, or
(3) in the case of a REMIC Regular Certificate issued with original
issue discount, in an amount that bears the same ratio to the
total remaining market discount as the original issue discount
accrued in the accrual period bears to the total original issue
discount remaining on the REMIC Regular Certificate at the
beginning of the accrual period.
Moreover, the Prepayment Assumption used in calculating the accrual of
original issue discount is also used in calculating the accrual of market
discount. Because the regulations referred to in this paragraph have not been
issued, it is not possible to predict what effect these regulations might have
on the tax treatment of a REMIC Regular Certificate purchased at a discount in
the secondary market.
To the extent that REMIC Regular Certificates provide for monthly or
other periodic distributions throughout their term, the effect of these rules
may be to require market discount to be includible in income at a rate that is
not significantly slower than the rate at which the discount would accrue if it
were original issue discount. Moreover, in any event a holder of a REMIC Regular
Certificate generally will be required to treat a portion of any gain on the
sale or exchange of the certificate as ordinary income to the extent of the
market discount accrued to the date of disposition under one of these methods,
less any accrued market discount previously reported as ordinary income.
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Further, under Section 1277 of the Code a holder of a REMIC Regular
Certificate may be required to defer a portion of its interest deductions for
the taxable year attributable to any indebtedness incurred or continued to
purchase or carry a REMIC Regular Certificate purchased with market discount.
For these purposes, the de minimis rule applies. Any such deferred interest
expense would not exceed the market discount that accrues during the taxable
year and is, in general, allowed as a deduction not later than the year in which
the market discount is includible in income. If a holder elects to include
market discount in income currently as it accrues on all market discount
instruments acquired by the holder in that taxable year or later taxable years,
the interest deferral rule will not apply.
Premium. A REMIC Regular Certificate purchased at a cost, excluding any
portion of the cost attributable to accrued qualified stated interest, greater
than its remaining stated redemption price will be considered to be purchased at
a premium. The holder of a REMIC Regular Certificate may elect under Section 171
of the Code to amortize the premium under the constant yield method over the
life of the certificate. If made, the election will apply to all debt
instruments having amortizable bond premium that the holder owns or subsequently
acquires. Amortizable premium will be treated as an offset to interest income on
the related debt instrument, rather than as a separate interest deduction. The
OID Regulations also permit certificateholders to elect to include all interest,
discount and premium in income based on a constant yield method, further
treating the certificateholder as having made the election to amortize premium
generally. The committee report states that the same rules that apply to accrual
of market discount, which rules will require use of a Prepayment Assumption in
accruing market discount with respect to REMIC Regular Certificates without
regard to whether the certificates have original issue discount, will also apply
in amortizing bond premium under Section 171 of the Code. SEE "TAXATION OF
OWNERS OF REMIC REGULAR CERTIFICATES--MARKET DISCOUNT" ABOVE.
Realized Losses. Under Section 166 of the Code, both corporate holders
of the REMIC Regular Certificates and noncorporate holders of the REMIC Regular
Certificates that acquire the certificates in connection with a trade or
business should be allowed to deduct, as ordinary losses, any losses sustained
during a taxable year in which their certificates become wholly or partially
worthless as the result of one or more realized losses on the mortgage loans.
However, it appears that a noncorporate holder that does not acquire a REMIC
Regular Certificate in connection with a trade or business will not be entitled
to deduct a loss under Section 166 of the Code until the holder's certificate
becomes wholly worthless, i.e., until its outstanding principal balance has been
reduced to zero, and that the loss will be characterized as a short-term capital
loss.
Each holder of a REMIC Regular Certificate will be required to accrue
interest and original issue discount with respect to the certificate, without
giving effect to any reduction in distributions attributable to defaults or
delinquencies on the mortgage loans or the certificate underlying the REMIC
Certificates, as the case may be, until it can be established the reduction
ultimately will not be recoverable. As a result, the amount of taxable income
reported in any period by the holder of a REMIC Regular Certificate could exceed
the amount of economic income actually realized by that holder in the period.
Although the holder of a REMIC Regular Certificate eventually will recognize a
loss or reduction in income attributable to previously accrued and included
income that as the result of a realized loss ultimately will not be realized,
the law is unclear with respect to the timing and character of this loss or
reduction in income.
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TAXATION OF OWNERS OF REMIC RESIDUAL CERTIFICATES
General. Although a REMIC is a separate entity for federal income tax
purposes, a REMIC is not subject to entity-level taxation, except with regard to
prohibited transactions and some other transactions. Rather, the taxable income
or net loss of a REMIC is generally taken into account by the holder of the
REMIC Residual Certificates. Accordingly, the REMIC Residual Certificates will
be subject to tax rules that differ significantly from those that would apply if
the REMIC Residual Certificates were treated for federal income tax purposes as
direct ownership interests in the mortgage loans or as debt instruments issued
by the REMIC. SEE "--PROHIBITED TRANSACTIONS TAX AND OTHER TAXES" BELOW
A holder of a REMIC Residual Certificate generally will be required to
report its daily portion of the taxable income or, subject to the limitations
noted in this discussion, the net loss of the REMIC for each day during a
calendar quarter that the holder owned the REMIC Residual Certificate. For this
purpose, the taxable income or net loss of the REMIC will be allocated to each
day in the calendar quarter ratably using a 30 days per month/90 days per
quarter/360 days per year convention unless otherwise disclosed in the related
prospectus supplement. The daily amounts so allocated will then be allocated
among the REMIC Residual Certificateholders in proportion to their respective
ownership interests on that day. Any amount included in the gross income or
allowed as a loss of any REMIC Residual Certificateholder by virtue of this
paragraph will be treated as ordinary income or loss. The taxable income of the
REMIC will be determined under the rules described below in "Taxable Income of
the REMIC" and will be taxable to the REMIC Residual Certificateholders without
regard to the timing or amount of cash distributions by the REMIC. Ordinary
income derived from REMIC Residual Certificates will be portfolio income for
purposes of the taxation of taxpayers subject to limitations under Section 469
of the Code on the deductibility of passive losses.
A holder of a REMIC Residual Certificate that purchased the certificate
from a prior holder of that certificate also will be required to report on its
federal income tax return amounts representing its daily share of the taxable
income, or net loss, of the REMIC for each day that it holds the REMIC Residual
Certificate. Those daily amounts generally will equal the amounts of taxable
income or net loss. The committee report indicates that some modifications of
the general rules may be made, by regulations, legislation or otherwise to
reduce, or increase, the income of a REMIC Residual Certificateholder that
purchased the REMIC Residual Certificate from a prior holder of the certificate
at a price greater than, or less than, the adjusted basis, the REMIC Residual
Certificate would have had in the hands of an original holder of the
certificate. The REMIC Regulations, however, do not provide for any such
modifications.
Any payments received by a holder of a REMIC Residual Certificate in
connection with the acquisition of the REMIC Residual Certificate will be taken
into account in determining the income of the holder for federal income tax
purposes. Although it appears likely that any of these payments would be
includible in income immediately upon its receipt, the IRS might assert that
these payments should be included in income over time according to an
amortization schedule or according to another method. Because of the uncertainty
concerning the treatment of these payments, holders of REMIC Residual
Certificates should consult their tax advisors concerning the treatment of these
payments for income tax purposes.
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The amount of income REMIC Residual Certificateholders will be required
to report, or the tax liability associated with the income, may exceed the
amount of cash distributions received from the REMIC for the corresponding
period. Consequently, REMIC Residual Certificateholders should have other
sources of funds sufficient to pay any federal income taxes due as a result of
their ownership of REMIC Residual Certificates or unrelated deductions against
which income may be offset, subject to the rules relating to excess inclusions,
and noneconomic residual interests discussed at "-Noneconomic REMIC Residual
Certificates". The fact that the tax liability associated with the income
allocated to REMIC Residual Certificateholders may exceed the cash distributions
received by the REMIC Residual Certificateholders for the corresponding period
may significantly adversely affect the REMIC Residual Certificateholders'
after-tax rate of return. This disparity between income and distributions may
not be offset by corresponding losses or reductions of income attributable to
the REMIC Residual Certificateholder until subsequent tax years and, then, may
not be completely offset due to changes in the Code, tax rates or character of
the income or loss.
Taxable Income of the REMIC. The taxable income of the REMIC will equal
the income from the mortgage loans and other assets of the REMIC plus any
cancellation of indebtedness income due to the allocation of realized losses to
REMIC Regular Certificates, less the deductions allowed to the REMIC for
interest, including original issue discount and reduced by any premium on
issuance, on the REMIC Regular Certificates, whether or not offered by the
prospectus, amortization of any premium on the mortgage loans, bad debt losses
with respect to the mortgage loans and, except as described below, for
servicing, administrative and other expenses.
For purposes of determining its taxable income, the REMIC will have an
initial aggregate basis in its assets equal to the sum of the issue prices of
all REMIC Certificates, or if a class of REMIC Certificates is not sold
initially, their fair market values. The aggregate basis will be allocated among
the mortgage loans and the other assets of the REMIC in proportion to their
respective fair market values. The issue price of any offered REMIC Certificates
will be determined in the manner described above under "--Taxation of Owners of
REMIC Regular Certificates--Original Issue Discount." The issue price of a REMIC
Certificate received in exchange for an interest in the mortgage loans or other
property will equal the fair market value of the interests in the mortgage loans
or other property. Accordingly, if one or more classes of REMIC Certificates are
retained initially rather than sold, the Trustee may be required to estimate the
fair market value of the interests in order to determine the basis of the REMIC
in the mortgage loans and other property held by the REMIC.
Subject to possible application of the de minimis rules, the method of
accrual by the REMIC of original issue discount income and market discount
income with respect to mortgage loans that it holds will be equivalent to the
method for accruing original issue discount income for holders of REMIC Regular
Certificates. However, a REMIC that acquires loans at a market discount must
include the market discount in income currently, as it accrues, on a constant
yield basis. See "--Taxation of Owners of REMIC Regular Certificates" above,
which describes a method for accruing discount income that is analogous to that
required to be used by a REMIC as to mortgage loans with market discount that it
holds.
A mortgage loan will be deemed to have been acquired with either
discount or premium to the extent that the REMIC's basis in the mortgage loan is
either less than or greater than its stated redemption price. Any discount will
be includible in the income of the REMIC as it accrues, in
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advance of receipt of the cash attributable to the income, under a method
similar to the method described above for accruing original issue discount on
the REMIC Regular Certificates. It is anticipated that each REMIC will elect
under Section 171 of the Code to amortize any premium on the mortgage loans.
Premium on any mortgage loan to which the election applies may be amortized
under a constant yield method, presumably taking into account a Prepayment
Assumption. This election would not apply to any mortgage loan originated on or
before September 27, 1985, premium on which should be allocated among the
principal payments on that mortgage loan and be deductible by the REMIC as those
payments become due or upon the prepayment of the mortgage loan.
A REMIC will be allowed deductions for interest, including original
issue discount, on the REMIC Regular Certificates, whether or not offered by
this prospectus, equal to the deductions that would be allowed if these REMIC
Regular Certificates were indebtedness of the REMIC. Original issue discount
will be considered to accrue for this purpose as described above under
"--Taxation of Owners of REMIC Regular Certificates--Original Issue Discount,"
except that the de minimis rule and the adjustments for subsequent holders of
these REMIC Regular Certificates will not apply.
Issue premium is the excess of the issue price of a REMIC Regular
Certificate over its stated redemption price. If a class of REMIC Regular
Certificates is issued with issue premium, the net amount of interest deductions
that are allowed the REMIC in each taxable year for the REMIC Regular
Certificates of that class will be reduced by an amount equal to the portion of
the issue premium that is considered to be amortized or repaid in that year.
Although the matter is not entirely clear, it is likely that issue premium would
be amortized under a constant yield method in a manner analogous to the method
of accruing original issue discount described above under "--Taxation of Owners
of REMIC Regular Certificates--Original Issue Discount."
Subject to the exceptions described in the following sentences, the
taxable income of a REMIC will be determined in the same manner as if the REMIC
were an individual having the calendar year as its taxable year and using the
accrual method of accounting. However, no item of income, gain, loss or
deduction allocable to a prohibited transaction will be taken into account. SEE
"--PROHIBITED TRANSACTIONS TAX AND OTHER TAXES" BELOW.
Further, the limitation on miscellaneous itemized deductions imposed on
individuals by Section 67 of the Code, allowing these deductions only to the
extent they exceed in the aggregate two percent of the taxpayer's adjusted gross
income, will not be applied at the REMIC level and the REMIC will be allowed
deductions for servicing, administrative and other non-interest expenses in
determining its taxable income. These expenses will be allocated as a separate
item to the holders of REMIC Certificates, subject to the limitation of Section
67 of the Code. If the deductions allowed to the REMIC exceed its gross income
for a calendar quarter, the excess will be the net loss for the REMIC for that
calendar quarter. SEE "--POSSIBLE PASS-THROUGH OF MISCELLANEOUS ITEMIZED
DEDUCTIONS" BELOW.
Basis Rules, Net Losses and Distributions. The adjusted basis of a
REMIC Residual Certificate will be equal to the amount paid for the REMIC
Residual Certificate, increased by amounts included in the income of the REMIC
Residual Certificateholder and decreased, but not below zero, by distributions
made, and by net losses allocated, to the REMIC Residual Certificateholder.
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A REMIC Residual Certificateholder is not allowed to take into account
any net loss for any calendar quarter to the extent the net loss exceeds the
REMIC Residual Certificateholder's adjusted basis in its REMIC Residual
Certificate as of the close of the calendar quarter, determined without regard
to the net loss. Any loss that is not currently deductible 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 Certificate. The ability of REMIC Residual Certificateholders to deduct
net losses may be subject to additional limitations under the Code, as to which
REMIC Residual Certificateholders should consult their tax advisors.
Any distribution on a REMIC Residual Certificate will be treated as a
non-taxable return of capital to the extent it does not exceed the holder's
adjusted basis in the REMIC Residual Certificate. To the extent a distribution
on a REMIC Residual Certificate exceeds this adjusted basis, it will be treated
as gain from the sale of the REMIC Residual Certificate. Holders of REMIC
Residual Certificates may be entitled to distributions early in the term of the
related REMIC under circumstances in which their bases in the REMIC Residual
Certificates will not be sufficiently large that the distributions will be
treated as nontaxable returns of capital. Their bases in the REMIC Residual
Certificates will initially equal the amount paid for the REMIC Residual
Certificates and will be increased by the REMIC Residual Certificateholders'
allocable shares of taxable income of the REMIC. However, these bases increases
may not occur until the end of the calendar quarter, or perhaps the end of the
calendar year, with respect to which the REMIC taxable income is allocated to
the REMIC Residual Certificateholders. To the extent the REMIC Residual
Certificateholders' initial bases are less than the distributions to the REMIC
Residual Certificateholders, and increases in initial bases either occur after
the distributions or, together with their initial bases, are less than the
amount of the distributions, gain will be recognized by the REMIC Residual
Certificateholders on these distributions and will be treated as gain from the
sale of their REMIC Residual Certificates.
The effect of these rules is that a REMIC Residual Certificateholder
may not amortize its basis in a REMIC Residual Certificate, but may only recover
its basis through distributions, through the deduction of any net losses of the
REMIC or upon the sale of its REMIC Residual Certificate. SEE "--SALES OF REMIC
CERTIFICATES" BELOW.
For a discussion of possible modifications of these rules that may
require adjustments to income of a holder of a REMIC Residual Certificate other
than an original holder in order to reflect any difference between the cost of
the REMIC Residual Certificate to the REMIC Residual Certificateholder and the
adjusted basis the REMIC Residual Certificate would have in the hands of an
original holder. SEE "--TAXATION OF OWNERS OF REMIC RESIDUAL
CERTIFICATES--GENERAL" ABOVE.
EXCESS INCLUSIONS. Any excess inclusions with respect to a REMIC
Residual Certificate will be subject to federal income tax in all events.
In general, the excess inclusions with respect to a REMIC Residual
Certificate for any calendar quarter will be the excess, if any, of
(1) the daily portions of REMIC taxable income allocable to the REMIC
Residual Certificate over
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(2) the sum of the daily accruals for each day during the quarter
that the REMIC Residual Certificate was held by the REMIC
Residual Certificateholder.
The daily accruals of a REMIC Residual Certificateholder will be
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
Certificate at the beginning of the calendar quarter and 120% of the long-term
Federal rate in effect on the closing date. For this purpose, the adjusted issue
price of a REMIC Residual Certificate as of the beginning of any calendar
quarter will be equal to the issue price of the REMIC Residual Certificate,
increased by the sum of the daily accruals for all prior quarters and decreased,
but not below zero, by any distributions made with respect to the REMIC Residual
Certificate before the beginning of that quarter. The issue price of a REMIC
Residual Certificate is the initial offering price to the public, excluding bond
houses and brokers, at which a substantial amount of the REMIC Residual
Certificates were sold. The long-term Federal rate is an average of current
yields on Treasury securities with a remaining term of greater than nine years,
computed and published monthly by the IRS. Although it has not done so, the
Treasury has authority to issue regulations that would treat the entire amount
of income accruing on a REMIC Residual Certificate as an excess inclusion if the
REMIC Residual Certificates are considered to have significant value.
For REMIC Residual Certificateholders, an excess inclusion:
(1) will not be permitted to be offset by deductions, losses or loss
carryovers from other activities,
(2) will be treated as unrelated business taxable income to an
otherwise tax-exempt organization and
(3) will not be eligible for any rate reduction or exemption under
any applicable tax treaty with respect to the 30% United States
withholding tax imposed on distributions to REMIC Residual
Certificateholders that are foreign investors. SEE, HOWEVER,
"--FOREIGN INVESTORS IN REMIC CERTIFICATES," BELOW.
Furthermore, for purposes of the alternative minimum tax, excess
inclusions will not be permitted to be offset by the alternative tax net
operating loss deduction and alternative minimum taxable income may not be less
than the taxpayer's excess inclusions. The latter rule has the effect of
preventing nonrefundable tax credits from reducing the taxpayer's income tax to
an amount lower than the alternative minimum tax on excess inclusions.
In the case of any REMIC Residual Certificates held by a real estate
investment trust, the aggregate excess inclusions with respect to the REMIC
Residual Certificates, as reduced, but not below zero, by the real estate
investment trust taxable income, will be allocated among the shareholders of the
trust in proportion to the dividends received by the shareholders from the
trust, and any amount so allocated will be treated as an excess inclusion with
respect to a REMIC Residual Certificate as if held directly by the shareholder.
"Real estate investment trust taxable income" is defined by Section 857(b)(2) of
the Code, and as used in the prior sentence does not include any net capital
gain. Treasury regulations yet to be issued could apply a similar rule to
regulated investment companies, common trust funds and cooperatives; the REMIC
Regulations currently do not address this subject.
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Noneconomic REMIC Residual Certificates. Under the REMIC Regulations,
transfers of noneconomic REMIC Residual Certificates will be disregarded for all
federal income tax purposes if "a significant purpose of the transfer was to
enable the transferor to impede the assessment or collection of tax." If the
transfer is disregarded, the purported transferor will continue to remain liable
for any taxes due with respect to the income on the noneconomic REMIC Residual
Certificate. The REMIC Regulations provide that a REMIC Residual Certificate is
"noneconomic" unless, based on the Prepayment Assumption and on any required or
permitted clean up calls, or required liquidation provided for in the REMIC's
organizational documents, the present value of the expected future
distributions, discounted using the applicable Federal rate for obligations
whose term ends on the close of the last quarter in which excess inclusions are
expected to accrue with respect to the REMIC Residual Certificate, on the REMIC
Residual Certificate equals at least the present value of the expected tax on
the anticipated excess inclusions, and the transferor reasonably expects that
the transferee will receive distributions with respect to the REMIC Residual
Certificate at or after the time the taxes accrue on the anticipated excess
inclusions in an amount sufficient to satisfy the accrued taxes. Accordingly,
all transfers of REMIC Residual Certificates that may constitute noneconomic
residual interests will be subject to restrictions under the terms of the
related pooling and servicing agreement that are intended to reduce the
possibility of a transfer of REMIC Residual Certificates being disregarded.
These restrictions will require each party to a transfer to provide an affidavit
that no purpose of the transfer is to impede the assessment or collection of
tax, including representations as to the financial condition of the prospective
transferee, for which the transferor is also required to make a reasonable
investigation to determine the transferee's historic payment of its debts and
ability to continue to pay its debts as they come due in the future. Prior to
purchasing a REMIC Residual Certificate, a prospective purchaser should consider
the possibility that a purported transfer of the REMIC Residual Certificate by
that prospective purchaser to another purchaser at a future date may be
disregarded in accordance with the rule described in the first sentence of this
paragraph, which would result in the retention of tax liability by the
purchaser.
The related prospectus supplement will disclose whether offered REMIC
Residual Certificates may be considered noneconomic residual interests under the
REMIC Regulations; provided, however, that any disclosure that a REMIC Residual
Certificate will not be considered noneconomic will be based upon assumptions,
and the depositor will make no representation that a REMIC Residual Certificate
will not be considered noneconomic for purposes of the rules described in the
preceding paragraph. SEE "--FOREIGN INVESTORS IN REMIC CERTIFICATES--REMIC
RESIDUAL CERTIFICATES" BELOW FOR ADDITIONAL RESTRICTIONS APPLICABLE TO TRANSFERS
OF REMIC RESIDUAL CERTIFICATES TO FOREIGN PERSONS.
Mark-to-Market Rules. In general, all securities owned by a dealer,
except to the extent that the dealer has specifically identified a security as
held for investment, must be marked to market in accordance with the applicable
Code provision and the related regulations. However, the IRS recently issued
regulations which provide that for purposes of this mark-to-market requirement a
REMIC Residual Certificate acquired after January 4, 1995 is not treated as a
security and thus may not be marked to market. Prospective purchasers of a REMIC
Residual Certificate should consult their tax advisors regarding the possible
application of the mark-to-market requirement to REMIC Residual Certificates.
POSSIBLE PASS-THROUGH OF MISCELLANEOUS ITEMIZED DEDUCTIONS. Fees and
expenses of a REMIC generally will be allocated to the holders of the related
REMIC Residual Certificates. The
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applicable Treasury regulations indicate, however, that in the case of a REMIC
that is similar to a single class grantor trust, all or a portion of these fees
and expenses should be allocated to the holders of the related REMIC Regular
Certificates. Except as stated in the related prospectus supplement, these fees
and expenses will be allocated to holders of the related REMIC Residual
Certificates in their entirety and not to the holders of the related REMIC
Regular Certificates.
With respect to REMIC Residual Certificates or REMIC Regular
Certificates the holders of which receive an allocation of fees and expenses in
accordance with the preceding discussion, if any holder thereof is an
individual, estate or trust, or a pass-through entity beneficially owned by one
or more individuals, estates or trusts,
o an amount equal to the individual's, estate's or trust's share of
the fees and expenses will be added to the gross income of the
holder, and
o the individual's, estate's or trust's share of the fees and
expenses will be treated as a miscellaneous itemized deduction
allowable subject to the limitation of Section 67 of the Code.
Section 67 of the Code permits these deductions only to the extent they
exceed in the aggregate two percent of a taxpayer's adjusted gross income. In
addition, Section 68 of the Code provides that the amount of itemized deductions
otherwise allowable for an individual whose adjusted gross income exceeds a
specified amount will be reduced by the lesser of (1) 3% of the excess of the
individual's adjusted gross income over that amount or (2) 80% of the amount of
itemized deductions otherwise allowable for the taxable year. The amount of
additional taxable income reportable by REMIC Certificateholders that are
subject to the limitations of either Section 67 or Section 68 of the Code may be
substantial. Furthermore, in determining the alternative minimum taxable income
of a holder of a REMIC Certificate that is an individual, estate or trust, or a
pass-through entity beneficially owned by one or more individuals, estates or
trusts, no deduction will be allowed for the holder's allocable portion of
servicing fees and other miscellaneous itemized deductions of the REMIC, even
though an amount equal to the amount of the fees and other deductions will be
included in the holder's gross income. Accordingly, these REMIC Certificates may
not be appropriate investments for individuals, estates, or trusts, or
pass-through entities beneficially owned by one or more individuals, estates or
trusts. Prospective investors should consult with their own tax advisors prior
to making an investment in the certificates.
SALES OF REMIC CERTIFICATES. If a REMIC Certificate is sold, the
selling Certificateholder will recognize gain or loss equal to the difference
between the amount realized on the sale and its adjusted basis in the REMIC
Certificate. The adjusted basis of a REMIC Regular Certificate generally will
be:
o equal the cost of the REMIC Regular Certificate to the
certificateholder,
o increased by income reported by such certificateholder with
respect to the REMIC Regular Certificate, including original
issue discount and market discount income, and
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o reduced, but not below zero, by distributions on the REMIC
Regular Certificate received by the certificateholder and by any
amortized premium.
The adjusted basis of a REMIC Residual Certificate will be determined
as described under "--Taxation of Owners of REMIC Residual Certificates--Basis
Rules, Net Losses and Distributions." Except as provided in the following four
paragraphs, gain or loss from the sale of a REMIC Certificate will be capital
gain or loss, provided the REMIC Certificate is held as a capital asset within
the meaning of Section 1221 of the Code.
Gain from the sale of a REMIC Regular Certificate that might otherwise
be capital gain will be treated as ordinary income to the extent the gain does
not exceed the excess, if any, of (1) the amount that would have been includible
in the seller's income with respect to the REMIC Regular Certificate assuming
that income had accrued thereon at a rate equal to 110% of the applicable
Federal rate, determined as of the date of purchase of the REMIC Regular
Certificate, over (2) the amount of ordinary income actually includible in the
seller's income prior to the sale. In addition, gain recognized on the sale of a
REMIC Regular Certificate by a seller who purchased the REMIC Regular
Certificate at a market discount will be taxable as ordinary income in an amount
not exceeding the portion of the discount that accrued during the period the
REMIC Certificate was held by the holder, reduced by any market discount
included in income under the rules described above under "--Taxation of Owners
of REMIC Regular Certificates--Market Discount" and "--Premium."
REMIC Certificates will be evidences of indebtedness within the meaning
of Section 582(c)(1) of the Code, so that gain or loss recognized from the sale
of a REMIC Certificate by a bank or thrift institution to which this section
applies will be ordinary income or loss.
A portion of any gain from the sale of a REMIC Regular Certificate that
might otherwise be capital gain may be treated as ordinary income to the extent
that the certificate is held as part of a conversion transaction within the
meaning of Section 1258 of the Code. A conversion transaction includes a
transaction in which the taxpayer has taken two or more positions in the same or
similar property that reduce or eliminate market risk, if substantially all of
the taxpayer's return is attributable to the time value of the taxpayer's net
investment in the transaction. The amount of gain so realized in a conversion
transaction that is recharacterized as ordinary income generally will not exceed
the amount of interest that would have accrued on the taxpayer's net investment
at 120% of the appropriate applicable Federal rate at the time the taxpayer
enters into the conversion transaction, subject to appropriate reduction for
prior inclusion of interest and other ordinary income items from the
transaction.
Finally, a taxpayer may elect to have net capital gain taxed at
ordinary income rates rather than capital gains rates in order to include the
net capital gain in total net investment income for the taxable year, for
purposes of the rule that limits the deduction of interest on indebtedness
incurred to purchase or carry property held for investment to a taxpayer's net
investment income.
Except as may be provided in Treasury regulations yet to be issued, if
the seller of a REMIC Residual Certificate reacquires the REMIC Residual
Certificate, or acquires any other residual interest in a REMIC or any similar
interest in a taxable mortgage pool, as defined in Section 7701(i) of the Code,
during the period beginning six months before, and ending six months after, the
date of
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the sale, such sale will be subject to the wash sale rules of Section 1091 of
the Code. In that event, any loss realized by the REMIC Residual
Certificateholder on the sale will not be deductible, but instead will be added
to the REMIC Residual Certificateholder's adjusted basis in the newly- acquired
asset.
PROHIBITED TRANSACTIONS AND OTHER POSSIBLE REMIC TAXES. In the event a
REMIC engages in a prohibited transaction, the Code imposes a 100% tax on the
income derived by the REMIC from the prohibited transaction. A prohibited
transaction may occur upon the disposition of a mortgage loan, the receipt of
income from a source other than a mortgage loan or other permitted investments,
the receipt of compensation for services, or gain from the disposition of an
asset purchased with the payments on the mortgage loans for temporary investment
pending distribution on the REMIC Certificates. It is not anticipated that any
REMIC will engage in any prohibited transactions in which it would recognize a
material amount of net income.
In addition, a contribution to a REMIC made after the day on which the
REMIC issues all of its interests could result in the imposition on the REMIC of
a tax equal to 100% of the value of the contributed property. Each pooling and
servicing agreement will include provisions designed to prevent the acceptance
of any contributions that would be subject to this tax.
REMICs also are subject to federal income tax at the highest corporate
rate on net income from foreclosure property, determined by reference to the
rules applicable to real estate investment trusts. Net income from foreclosure
property generally means gain from the sale of a 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.
It is not anticipated that any REMIC will recognize net income from foreclosure
property subject to federal income tax.
To the extent permitted by then applicable laws, any tax resulting from
a prohibited transaction, tax resulting from a contribution made after the
closing date, tax on net income from foreclosure property or state or local
income or franchise tax that may be imposed on the REMIC will be borne by the
related master servicer or trustee in either case out of its own funds, provided
that the master servicer or the trustee has sufficient assets to do so, and
provided that the tax arises out of a breach of the master servicer's or the
trustee's obligations under the related pooling and servicing agreement and in
respect of compliance with applicable laws and regulations. Any of these taxes
not borne by the master servicer or the trustee will be charged against the
related trust fund resulting in a reduction in amounts payable to holders of the
related REMIC Certificates.
TAX AND RESTRICTIONS ON TRANSFERS OF REMIC RESIDUAL CERTIFICATES TO
CERTAIN Organizations. If a REMIC Residual Certificate is transferred to a
disqualified organization, a tax would be imposed in an amount equal to the
product of:
o the present value, discounted using the applicable Federal rate
for obligations whose term ends on the close of the last quarter
in which excess inclusions are expected to accrue with respect to
the REMIC Residual Certificate, of the total anticipated excess
inclusions with respect to the REMIC Residual Certificate for
periods after the transfer and
o the highest marginal federal income tax rate applicable to
corporations.
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The anticipated excess inclusions must be determined as of the date
that the REMIC Residual Certificate is transferred and must be based on events
that have occurred up to the time of the transfer, the Prepayment Assumption and
any required or permitted clean up calls or required liquidation provided for in
the REMIC's organizational documents. The tax would be imposed on the transferor
of the REMIC Residual Certificate, except that where the transfer is through an
agent for a disqualified organization, the tax would instead be imposed on the
agent. However, a transferor of a REMIC Residual Certificate would in no event
be liable for the tax with respect to a transfer if the transferee furnishes to
the transferor an affidavit that the transferee is not a disqualified
organization and, as of the time of the transfer, the transferor does not have
actual knowledge that the affidavit is false. Moreover, an entity will not
qualify as a REMIC unless there are reasonable arrangements designed to ensure
that
o residual interests in the entity are not held by disqualified
organizations and
o information necessary for the application of the tax described
herein will be made available. Restrictions on the transfer of
REMIC Residual Certificates and other provisions that are
intended to meet this requirement will be included in the pooling
and servicing agreement, and will be discussed more fully in any
prospectus supplement relating to the offering of any REMIC
Residual Certificate.
In addition, if a pass-through entity includes in income excess
inclusions with respect to a REMIC Residual Certificate, and a disqualified
organization is the record holder of an interest in the entity, then a tax will
be imposed on the entity equal to the product of (1) the amount of excess
inclusions on the REMIC Residual Certificate that are allocable to the interest
in the pass-through entity held by the disqualified organization and (2) the
highest marginal federal income tax rate imposed on corporations. A pass-through
entity will not be subject to this tax for any period, however, if each record
holder of an interest in the pass-through entity furnishes to the pass-through
entity
o the holder's social security number and a statement under
penalties of perjury that the social security number is that of
the record holder or
o a statement under penalties of perjury that the record holder is
not a disqualified organization. Notwithstanding the preceding
two sentences, in the case of a REMIC Residual Certificate held
by an electing large partnership, as defined in Section 775 of
the Code, all interests in the partnership shall be treated as
held by disqualified organizations, without regard to whether the
record holders of the partnership furnish statements described in
the preceding sentence, and the amount that is subject to tax
under the second preceding sentence is excluded from the gross
income of the partnership allocated to the partners, in lieu of
allocating to the partners a deduction for the tax paid by the
partnership.
For these purposes, a disqualified organization means:
o the United States, any State or political subdivision thereof,
any foreign government, any international organization, or any
agency or instrumentality of the foregoing, not
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including, however, instrumentalities described in Section
168(h)(2)(D) of the Code or the Federal Home Loan Mortgage
Corporation,
o any organization, other than a cooperative described in Section
521 of the Code, that is exempt from federal income tax, unless
it is subject to the tax imposed by Section 511 of the Code or
o any organization described in Section 1381(a)(2)(C) of the Code.
For these purposes, a pass-through entity means any regulated
investment company, real estate investment trust, trust, partnership or other
entity described in Section 860E(e)(6)(B) of the Code. In addition, a person
holding an interest in a pass-through entity as a nominee for another person
will, with respect to the interest, be treated as a pass-through entity.
TERMINATION. A REMIC will terminate immediately after the distribution
date following receipt by the REMIC of the final payment in respect of the
mortgage loans or upon a sale of the REMIC's assets following the adoption by
the REMIC of a plan of complete liquidation. The last distribution on a REMIC
Regular Certificate will be treated as a payment in retirement of a debt
instrument. In the case of a REMIC Residual certificate, if the last
distribution on the REMIC Residual Certificate is less than the REMIC Residual
Certificateholder's adjusted basis in the Certificate, the REMIC Residual
Certificateholder should, but may not, be treated as realizing a loss equal to
the amount of the difference, and the loss may be treated as a capital loss.
REPORTING AND OTHER ADMINISTRATIVE MATTERS. Solely for purposes of the
administrative provisions of the Code, the REMIC will be treated as a
partnership and REMIC Residual Certificateholders will be treated as partners.
The Trustee or other party specified in the related prospectus supplement will
file REMIC federal income tax returns on behalf of the related REMIC, and under
the terms of the related Agreement, will either (1) be irrevocably appointed by
the holders of the largest percentage interest in the related REMIC Residual
Certificates as their agent to perform all of the duties of the tax matters
person with respect to the REMIC in all respects or (2) will be designated as
and will act as the tax matters person with respect to the related REMIC in all
respects and will hold at least a nominal amount of REMIC Residual Certificates.
The Trustee, as the tax matters person or as agent for the tax matters
person, subject to notice requirements and various restrictions and limitations,
generally will have the authority to act on behalf of the REMIC and the REMIC
Residual Certificateholders in connection with the administrative and judicial
review of items of income, deduction, gain or loss of the REMIC, as well as the
REMIC's classification. REMIC Residual Certificateholders generally will be
required to report such REMIC items consistently with their treatment on the
REMIC's tax return and may be bound by a settlement agreement between the
Trustee, as either tax matters person or as agent for the tax matters person,
and the IRS concerning any REMIC item subject to that settlement agreement.
Adjustments made to the REMIC tax return may require a REMIC Residual
Certificateholder to make corresponding adjustments on its return, and an audit
of the REMIC's tax return, or the adjustments resulting from an audit, could
result in an audit of a REMIC Residual Certificateholder's return. Any person
that holds a REMIC Residual Certificate as a nominee for another person may be
required to furnish the REMIC, in a manner to be provided in Treasury
regulations, with the name and address of the person and other information.
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Reporting of interest income, including any original issue discount,
with respect to REMIC Regular Certificates is required annually, and may be
required more frequently under Treasury regulations. These information reports
generally are required to be sent to individual holders of REMIC regular
interests and the IRS; holders of REMIC Regular Certificates that are
corporations, trusts, securities dealers and some other non-individuals will be
provided interest and original issue discount income information and the
information set forth in the following paragraph upon request in accordance with
the requirements of the applicable regulations. The information must be provided
by the later of 30 days after the end of the quarter for which the information
was requested, or two weeks after the receipt of the request. The REMIC must
also comply with rules requiring a REMIC Regular Certificate issued with
original issue discount to disclose on its face the amount of original issue
discount and the issue date, and requiring the information to be reported to the
IRS. Reporting with respect to the REMIC Residual Certificates, including
income, excess inclusions, investment expenses and relevant information
regarding qualification of the REMIC's assets will be made as required under the
Treasury regulations, generally on a quarterly basis.
The REMIC Regular Certificate information reports will include a
statement of the adjusted issue price of the REMIC Regular Certificate at the
beginning of each accrual period. In addition, the reports will include
information required by regulations with respect to computing the accrual of any
market discount. Because exact computation of the accrual of market discount on
a constant yield method would require information relating to the holder's
purchase price that the REMIC may not have, Treasury regulations only require
that information pertaining to the appropriate proportionate method of accruing
market discount be provided. SEE "--TAXATION OF OWNERS OF REMIC REGULAR
CERTIFICATES--MARKET DISCOUNT."
The responsibility for complying with the foregoing reporting rules
will be borne by the Trustee or other party designated in the related prospectus
supplement.
BACKUP WITHHOLDING WITH RESPECT TO REMIC CERTIFICATES. Payments of
interest and principal, as well as payments of proceeds from the sale of REMIC
Certificates, may be subject to the backup withholding tax under Section 3406 of
the Code at a rate of 31% if recipients of the payments fail to furnish to the
payor information including their taxpayer identification numbers, or otherwise
fail to establish an exemption from the backup withholding 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 payments that is required to supply
information but that does not do so in the proper manner.
FOREIGN INVESTORS IN REMIC CERTIFICATES. A REMIC Regular
Certificateholder that is not a United States Person and is not subject to
federal income tax as a result of any direct or indirect connection to the
United States in addition to its ownership of a REMIC Regular Certificate, will
not be subject to United States federal income or withholding tax in respect of
a distribution on a REMIC Regular Certificate, provided that the holder complies
to the extent necessary with identification requirements including delivery of a
statement signed by the certificateholder under penalties of perjury, certifying
that the certificateholder is not a United States Person and providing the name
and address of the certificateholder. The IRS may assert that the foregoing tax
exemption should not apply with respect to a REMIC Regular Certificate held by a
REMIC Residual Certificateholder that owns directly or indirectly a 10% or
greater interest in the REMIC Residual Certificates. If the holder does not
qualify for exemption, distributions of interest, including
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distributions in respect of accrued original issue discount, to the holder may
be subject to a tax rate of 30%, subject to reduction under any applicable tax
treaty.
In addition, the foregoing rules will not apply to exempt a United
States shareholder of a controlled foreign corporation from taxation on the
United States shareholder's allocable portion of the interest income received by
the controlled foreign corporation.
Further, it appears that a REMIC Regular Certificate would not be
included in the estate of a non-resident alien individual and would not be
subject to United States estate taxes. However, it is suggested that
certificateholders who are non-resident alien individuals consult their tax
advisors concerning this question.
Except as stated in the related prospectus supplement, transfers of
REMIC Residual Certificates to investors that are not United States Persons will
be prohibited under the related pooling and servicing agreement.
NEW WITHHOLDING REGULATIONS
The IRS has issued new regulations which make certain modifications to
the withholding, backup withholding and information reporting rules described
above. The new regulations attempt to unify certification requirements and
modify reliance standards. These regulations will generally be effective for
payments made after December 31, 2000, subject to transition rules. Prospective
investors are urged to consult their tax advisors regarding these regulations.
NOTES
On or prior to the date of the related prospectus supplement with
respect to the proposed issuance of each series of notes, counsel to the
depositor will provide its opinion that, assuming compliance with all provisions
of the indenture, owner trust agreement and other related documents, for federal
income tax purposes (1) the notes will be treated as indebtedness and (2) the
issuer, as created under the owner trust agreement, will not be characterized as
an association or publicly traded partnership taxable as a corporation or as a
taxable mortgage pool. For purposes of this tax discussion, references to a
noteholder or a holder are to the beneficial owner of a note.
STATUS AS REAL PROPERTY LOANS
Notes held by a domestic building and loan association will not
constitute "loans . . . secured by an interest in real property" within the
meaning of Code section 7701(a)(19)(C)(v); and notes held by a real estate
investment trust will not constitute real estate assets within the meaning of
Code section 856(c)(4)(A) and interest on notes will not be considered "interest
on obligations secured by mortgages on real property" within the meaning of Code
section 856(c)(3)(B).
TAXATION OF NOTEHOLDERS
Notes generally will be subject to the same rules of taxation as REMIC
Regular Certificates issued by a REMIC, except that (1) income reportable on the
notes is not required to be reported under the accrual method unless the holder
otherwise uses the accrual method and (2) the special
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rule treating a portion of the gain on sale or exchange of a REMIC Regular
Certificate as ordinary income is inapplicable to the notes. SEE "--REMICS
--TAXATION OF OWNERS OF REMIC REGULAR CERTIFICATES" AND "-- SALES OF REMIC
CERTIFICATES."
GRANTOR TRUST FUNDS
CLASSIFICATION OF GRANTOR TRUST FUNDS
On or prior to the date of the related prospectus supplement with
respect to the proposed issuance of each series of Grantor Trust Certificates,
counsel to the depositor will provide its opinion that, assuming compliance with
all provisions of the related pooling and servicing agreement, the related
Grantor Trust Fund will be classified as a grantor trust under subpart E, part I
of subchapter J of Chapter 1 of the Code and not as a partnership or an
association taxable as a corporation.
CHARACTERIZATION OF INVESTMENTS IN GRANTOR TRUST CERTIFICATES
GRANTOR TRUST FRACTIONAL INTEREST CERTIFICATES. In the case of Grantor
Trust Fractional Interest Certificates, except as disclosed in the related
prospectus supplement, counsel to the depositor will provide its opinion that
Grantor Trust Fractional Interest Certificates will represent interests in
"loans . . . secured by an interest in real property" within the meaning of
Section 7701(a)(19)(C)(v) of the Code; "obligation[s] (including any
participation or certificate of beneficial ownership therein) which . . .[are]
principally secured by an interest in real property" within the meaning of
Section 860G(a)(3) of the Code; and real estate assets within the meaning of
Section 856(c)(4)(A) of the Code. In addition, counsel to the depositor will
deliver its opinion that interest on Grantor Trust Fractional Interest
Certificates will to the same extent 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.
The assets constituting certain Grantor Trust Funds may include buydown
mortgage loans. The characterization of an investment in buydown mortgage loans
will depend upon the precise terms of the related buydown agreement, but to the
extent that the buydown mortgage loans are secured by a bank account or other
personal property, they may not be treated in their entirety as assets described
in the preceding paragraph. No directly applicable precedents exist with respect
to the federal income tax treatment or the characterization of investments in
buydown mortgage loans. Accordingly, holders of Grantor Trust Certificates
should consult their own tax advisors with respect to the characterization of
investments in Grantor Trust Certificates representing an interest in a Grantor
Trust Fund that includes buydown mortgage loans.
GRANTOR TRUST STRIP CERTIFICATES. Even if Grantor Trust Strip
Certificates evidence an interest in a Grantor Trust Fund consisting of mortgage
loans that are "loans . . . secured by an interest in real property" within the
meaning of Section 7701(a)(19)(C)(v) of the Code, and real estate assets within
the meaning of Section 856(c)(4)(A) of the Code, and the interest on the
mortgage loans is "interest on obligations secured by mortgages on real
property" within the meaning of Section 856(c)(3)(B) of the Code, it is unclear
whether the Grantor Trust Strip Certificates, and income from the Grantor Trust
Certificates will be characterized the same way. However, the policies
underlying these sections, to encourage or require investments in mortgage loans
by thrift institutions and real estate investment trusts, suggest that this
characterization is appropriate. Counsel to the depositor will not
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deliver any opinion on these questions. It is suggested that prospective
purchasers to which the characterization of an investment in Grantor Trust Strip
Certificates is material consult their tax advisors regarding whether the
Grantor Trust Strip Certificates, and the income therefrom, will be so
characterized.
The Grantor Trust Strip Certificates will be "obligation[s] (including
any participation or certificate of beneficial ownership therein) which . .
.[are] principally secured by an interest in real property" within the meaning
of Section 860G(a)(3)(A) of the Code.
TAXATION OF OWNERS OF GRANTOR TRUST FRACTIONAL INTEREST CERTIFICATES.
Holders of a particular series of Grantor Trust Fractional Interest Certificates
generally will be required to report on their federal income tax returns their
shares of the entire income from the mortgage loans, including amounts used to
pay reasonable servicing fees and other expenses, and will be entitled to deduct
their shares of any reasonable servicing fees and other expenses. Because of
stripped interests, market or original issue discount, or premium, the amount
includible in income on account of a Grantor Trust Fractional Interest
Certificate may differ significantly from the amount distributable on the same
certificate representing interest on the mortgage loans. Under Section 67 of the
Code, an individual, estate or trust holding a Grantor Trust Fractional Interest
Certificate directly or through some pass-through entities will be allowed a
deduction for the reasonable servicing fees and expenses only to the extent that
the aggregate of the holder's miscellaneous itemized deductions exceeds two
percent of the holder's adjusted gross income. In addition, Section 68 of the
Code provides that the amount of itemized deductions otherwise allowable for an
individual whose adjusted gross income exceeds a specified amount will be
reduced by the lesser of (1) 3% of the excess of the individual's adjusted gross
income over the amount or (2) 80% of the amount of itemized deductions otherwise
allowable for the taxable year. The amount of additional taxable income
reportable by holders of Grantor Trust Fractional Interest Certificates who are
subject to the limitations of either Section 67 or Section 68 of the Code may be
substantial. Further, certificateholders other than corporations subject to the
alternative minimum tax may not deduct miscellaneous itemized deductions in
determining the holder's alternative minimum taxable income. Although it is not
entirely clear, it appears that in transactions in which multiple classes of
Grantor Trust Certificates, including Grantor Trust Strip Certificates, are
issued, the fees and expenses should be allocated among the classes of Grantor
Trust Certificates using a method that recognizes that each class benefits from
the related services. In the absence of statutory or administrative
clarification as to the method to be used, it is intended to base information
returns or reports to the IRS and certificateholders on a method that allocates
the expenses among classes of Grantor Trust Certificates with respect to each
period on the distributions made to each class during that period.
The federal income tax treatment of Grantor Trust Fractional Interest
Certificates of any series will depend on whether they are subject to the
stripped bond rules of Section 1286 of the Code. Grantor Trust Fractional
Interest Certificates may be subject to those rules if (1) a class of Grantor
Trust Strip Certificates is issued as part of the same series of certificates or
(2) the depositor or any of its affiliates retains, for its own account or for
purposes of resale, a right to receive a specified portion of the interest
payable on the mortgage loans. Further, the IRS has ruled that an unreasonably
high servicing fee retained by a seller or servicer will be treated as a
retained ownership interest in mortgages that constitutes a stripped coupon. For
purposes of determining what constitutes reasonable servicing fees for various
types of mortgages the IRS has established safe harbors. The servicing fees paid
with respect to the mortgage loans for a series of Grantor Trust
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Certificates may be higher than those safe harbors and, accordingly, may not
constitute reasonable servicing compensation. The related prospectus supplement
will include information regarding servicing fees paid to the master servicer,
any subservicer or their respective affiliates necessary to determine whether
the safe harbor rules apply.
IF STRIPPED BOND RULES APPLY. If the stripped bond rules apply, each
Grantor Trust Fractional Interest Certificate will be treated as having been
issued with original issue discount within the meaning of Section 1273(a) of the
Code, subject, however, to the discussion in the sixth following paragraph
regarding the possible treatment of stripped bonds as market discount bonds and
the discussion regarding DE MINIMIS market discount. SEE "--TAXATION OF OWNERS
OF GRANTOR TRUST FRACTIONAL INTEREST CERTIFICATES-- DISCOUNT" BELOW.
Under the stripped bond rules, the holder of a Grantor Trust Fractional
Interest Certificate, whether a cash or accrual method taxpayer, will be
required to report interest income from its Grantor Trust Fractional Interest
Certificate for each month in an amount equal to the income that accrues on the
certificate in that month calculated under a constant yield method, in
accordance with the rules of the Code relating to original issue discount.
The original issue discount on a Grantor Trust Fractional Interest
Certificate will be the excess of the certificate's stated redemption price over
its issue price. The issue price of a Grantor Trust Fractional Interest
Certificate as to any purchaser will be equal to the price paid by the purchaser
for the Grantor Trust Fractional Interest Certificate. The stated redemption
price of a Grantor Trust Fractional Interest Certificate will be the sum of all
payments to be made on the certificate, other than qualified stated interest, if
any, as well as the certificate's share of reasonable servicing fees and other
expenses. SEE "--TAXATION OF OWNERS OF GRANTOR TRUST FRACTIONAL INTEREST
CERTIFICATES-- STRIPPED BOND RULES DO NOT APPLY" FOR A DEFINITION OF QUALIFIED
STATED INTEREST.
In general, the amount of the income that accrues in any month would
equal the product of the holder's adjusted basis in the Grantor Trust Fractional
Interest Certificate at the beginning of the month, see "Sales of Grantor Trust
Certificates", and the yield of the Grantor Trust Fractional Interest
Certificate to the holder. This yield is equal to a rate that, compounded based
on the regular interval between distribution dates and used to discount the
holder's share of future payments on the mortgage loans, causes the present
value of those future payments to equal the price at which the holder purchased
the certificate. In computing yield under the stripped bond rules, a
certificateholder's share of future payments on the mortgage loans will not
include any payments made in respect of any ownership interest in the mortgage
loans retained by the depositor, the master servicer, any subservicer or their
respective affiliates, but will include the certificateholder's share of any
reasonable servicing fees and other expenses.
To the extent the Grantor Trust Fractional Interest Certificates
represent an interest in any pool of debt instruments the yield on which may be
affected by reason of prepayments, Section 1272(a)(6) of the Code requires (1)
the use of a reasonable Prepayment Assumption in accruing original issue
discount and (2) adjustments in the accrual of original issue discount when
prepayments do not conform to the Prepayment Assumption. It is unclear whether
those provisions would be applicable to the Grantor Trust Fractional Interest
Certificates that do not represent an interest in any pool of debt instruments
the yield on which may be affected by reason of prepayments, or whether use of a
reasonable Prepayment Assumption may be required or permitted
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without reliance on these rules. It is also uncertain, if a Prepayment
Assumption is used, whether the assumed prepayment rate would be determined
based on conditions at the time of the first sale of the Grantor Trust
Fractional Interest Certificate or, for a particular holder, at the time of
purchase of the Grantor Trust Fractional Interest Certificate by that holder. It
is suggested that Certificateholders consult their own tax advisors concerning
reporting original issue discount with respect to Grantor Trust Fractional
Interest Certificates and, in particular, whether a Prepayment Assumption should
be used in reporting original issue discount.
In the case of a Grantor Trust Fractional Interest Certificate acquired
at a price equal to the principal amount of the mortgage loans allocable to the
certificate, the use of a Prepayment Assumption generally would not have any
significant effect on the yield used in calculating accruals of interest income.
In the case, however, of a Grantor Trust Fractional Interest Certificate
acquired at a price less than or greater than the principal amount of the
certificate, that is, at a discount or a premium, the use of a reasonable
Prepayment Assumption would increase or decrease the yield, and thus accelerate
or decelerate, respectively, the reporting of income.
If a Prepayment Assumption is not used, then when a mortgage loan
prepays in full, the holder of a Grantor Trust Fractional Interest Certificate
acquired at a discount or a premium generally will recognize ordinary income or
loss equal to the difference between the portion of the prepaid principal amount
of the mortgage loan that is allocable to the certificate and the portion of the
adjusted basis of the certificate that is allocable to the certificateholder's
interest in the mortgage loan. If a Prepayment Assumption is used, it appears
that no separate item of income or loss should be recognized upon a prepayment.
Instead, a prepayment should be treated as a partial payment of the stated
redemption price of the Grantor Trust Fractional Interest Certificate and
accounted for under a method similar to that described for taking account of
original issue discount on REMIC Regular Certificates. It is unclear whether any
other adjustments would be required to reflect differences between an assumed
prepayment rate and the actual rate of prepayments. SEE "--REMICS--TAXATION OF
OWNERS OF REMIC REGULAR CERTIFICATES--ORIGINAL ISSUE DISCOUNT."
It is intended to base information reports or returns to the IRS and
certificateholders in transactions subject to the stripped bond rules on a
Prepayment Assumption that will be disclosed in the related prospectus
supplement and on a constant yield computed using a representative initial
offering price for each class of certificates. However, none of the depositor,
the master servicer or the trustee will make any representation that the
mortgage loans will in fact prepay at a rate conforming to the Prepayment
Assumption or any other rate and certificateholders should bear in mind that the
use of a representative initial offering price will mean that the information
returns or reports, even if otherwise accepted as accurate by the IRS, will in
any event be accurate only as to the initial certificateholders of each series
who bought at that price.
Under Treasury regulation Section 1.1286-1, stripped bonds may to be
treated as market discount bonds and any purchaser of a stripped bond treated as
a market discount bond is to account for any discount on the bond as market
discount rather than original issue discount. This treatment only applies,
however, if immediately after the most recent disposition of the bond by a
person stripping one or more coupons from the bond and disposing of the bond or
coupon (1) there is no, or only a de minimis amount of, original issue discount
or (2) the annual stated rate of interest payable on the original bond is no
more than one percentage point lower than the gross interest rate payable on the
original mortgage loan, before subtracting any servicing fee or any stripped
coupon. If interest
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payable on a Grantor Trust Fractional Interest Certificate is more than one
percentage point lower than the gross interest rate payable on the mortgage
loans, the related prospectus supplement will disclose that fact. If the
original issue discount or market discount on a Grantor Trust Fractional
Interest Certificate determined under the stripped bond rules is less than 0.25%
of the stated redemption price multiplied by the weighted average maturity of
the mortgage loans, then that original issue discount or market discount will be
considered to be de minimis. Original issue discount or market discount of only
a de minimis amount will be included in income in the same manner as de minimis
original issue and market discount described in "--Characteristics of
Investments in Grantor Trust Certificates-- If Stripped Bond Rules Do Not Apply"
and "--Market Discount" below.
IF STRIPPED BOND RULES DO NOT APPLY. Subject to the discussion below on
original issue discount, if the stripped bond rules do not apply to a Grantor
Trust Fractional Interest Certificate, the certificateholder will be required to
report its share of the interest income on the mortgage loans in accordance with
the certificateholder's normal method of accounting. The original issue discount
rules will apply to a Grantor Trust Fractional Interest Certificate to the
extent it evidences an interest in mortgage loans issued with original issue
discount.
The original issue discount, if any, on the mortgage loans will equal
the difference between the stated redemption price of the mortgage loans and
their issue price. Under the OID Regulations, the stated redemption price is
equal to the total of all payments to be made on the mortgage loan other than
qualified stated interest. Qualified stated interest is interest that is
unconditionally payable at least annually at a single fixed rate, a qualified
floating rate, an objective rate, a combination of a single fixed rate and one
or more qualified floating rates or one qualified inverse floating rate, or a
combination of qualified floating rates that does not operate in a manner that
accelerates or defers interest payments on the mortgage loan. In general, the
issue price of a mortgage loan will be the amount received by the borrower from
the lender under the terms of the mortgage loan, less any points paid by the
borrower, and the stated redemption price of a mortgage loan will equal its
principal amount, unless the mortgage loan provides for an initial below-market
rate of interest or the acceleration or the deferral of interest payments. The
determination as to whether original issue discount will be considered to be de
minimis will be calculated using the same test described in the REMIC
discussion. SEE "--TAXATION OF OWNERS OF REMIC REGULAR CERTIFICATES--ORIGINAL
ISSUE DISCOUNT" ABOVE.
In the case of mortgage loans bearing adjustable or variable interest
rates, the related prospectus supplement will describe the manner in which the
rules will be applied with respect to those mortgage loans by the master
servicer or the trustee in preparing information returns to the
certificateholders and the IRS.
If original issue discount is in excess of a de minimis amount, all
original issue discount with respect to a mortgage loan will be required to be
accrued and reported in income each month, based on a constant yield. Section
1272(a)(6) of the Code requires that a Prepayment Assumption be made in
computing yield with respect to any pool of debt instruments the yield on which
may be affected by reason of prepayments. Accordingly, for certificates backed
by these pools, it is intended to base information reports and returns to the
IRS and certificateholders on the use of a Prepayment Assumption. However, in
the case of certificates not backed by these pools, it currently is not intended
to base the reports and returns on the use of a Prepayment Assumption. It is
suggested that
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certificateholders consult their own tax advisors concerning whether a
Prepayment Assumption should be used in reporting original issue discount with
respect to Grantor Trust Fractional Interest Certificates. Certificateholders
should refer to the related prospectus supplement with respect to each series to
determine whether and in what manner the original issue discount rules will
apply to mortgage loans in the series.
A purchaser of a Grantor Trust Fractional Interest Certificate that
purchases the Grantor Trust Fractional Interest Certificate at a cost less than
the certificate's allocable portion of the aggregate remaining stated redemption
price of the mortgage loans held in the related trust fund will also be required
to include in gross income the certificate's daily portions of any original
issue discount with respect to the mortgage loans. However, the daily portion
will be reduced, if the cost of the Grantor Trust Fractional Interest
Certificate to the purchaser is in excess of the certificate's allocable portion
of the aggregate adjusted issue prices of the mortgage loans held in the related
trust fund, approximately in proportion to the ratio the excess bears to the
certificate's allocable portion of the aggregate original issue discount
remaining to be accrued on the mortgage loans. The adjusted issue price of a
mortgage loan on any given day equals the sum of (1) the adjusted issue price,
or, in the case of the first accrual period, the issue price, of the mortgage
loan at the beginning of the accrual period that includes that day and (2) the
daily portions of original issue discount for all days during the accrual period
prior to that day. The adjusted issue price of a mortgage loan at the beginning
of any accrual period will equal the issue price of the mortgage loan, increased
by the aggregate amount of original issue discount with respect to the mortgage
loan that accrued in prior accrual periods, and reduced by the amount of any
payments made on the mortgage loan in prior accrual periods of amounts included
in its stated redemption price.
In addition to its regular reports, the master servicer or the trustee,
except as provided in the related prospectus supplement, will provide to any
holder of a Grantor Trust Fractional Interest Certificate such information as
the holder may reasonably request from time to time with respect to original
issue discount accruing on Grantor Trust Fractional Interest Certificates. SEE
"GRANTOR TRUST REPORTING" BELOW.
MARKET DISCOUNT. If the stripped bond rules do not apply to the Grantor
Trust Fractional Interest Certificate, a certificateholder may be subject to the
market discount rules of Sections 1276 through 1278 of the Code to the extent an
interest in a mortgage loan is considered to have been purchased at a market
discount, that is, in the case of a mortgage loan issued without original issue
discount, at a purchase price less than its remaining stated redemption price,
or in the case of a mortgage loan issued with original issue discount, at a
purchase price less than its adjusted issue price. If market discount is in
excess of a de minimis amount, the holder generally will be required to include
in income in each month the amount of the discount that has accrued through the
month that has not previously been included in income, but limited, in the case
of the portion of the discount that is allocable to any mortgage loan, to the
payment of stated redemption price on the mortgage loan that is received by, or,
in the case of accrual basis certificateholders, due to, the trust fund in that
month. A certificateholder may elect to include market discount in income
currently as it accrues under a constant yield method based on the yield of the
certificate to the holder rather than including it on a deferred basis under
rules similar to those described in "--Taxation of Owners of REMIC Regular
Certificates--Market Discount" above.
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Section 1276(b)(3) of the Code authorized the Treasury Department to
issue regulations providing for the method for accruing market discount on debt
instruments, the principal of which is payable in more than one installment.
Until regulations are issued by the Treasury Department, rules described in the
committee report will apply. Under those rules, in each accrual period market
discount on the mortgage loans should accrue, at the certificateholder's option:
(1) on the basis of a constant yield method, (2) in the case of a mortgage loan
issued without original issue discount, in an amount that bears the same ratio
to the total remaining market discount as the stated interest paid in the
accrual period bears to the total stated interest remaining to be paid on the
mortgage loan as of the beginning of the accrual period, or (3) in the case of a
mortgage loan issued with original issue discount, in an amount that bears the
same ratio to the total remaining market discount as the original issue discount
accrued in the accrual period bears to the total original issue discount
remaining at the beginning of the accrual period. The Prepayment Assumption, if
any, used in calculating the accrual of original issue discount is to be used in
calculating the accrual of market discount. The effect of using a Prepayment
Assumption could be to accelerate the reporting of the discount income. Because
the regulations referred to in this paragraph have not been issued, it is not
possible to predict what effect the regulations might have on the tax treatment
of a mortgage loan purchased at a discount in the secondary market.
Because the mortgage loans will provide for periodic payments of stated
redemption price, the market discount may be required to be included in income
at a rate that is not significantly slower than the rate at which the discount
would be included in income if it were original issue discount.
Market discount with respect to mortgage loans may be considered to be
de minimis and, if so, will be includible in income under de minimis rules
similar to those described above in "--REMICs--Taxation of Owners of REMIC
Regular Certificates--Original Issue Discount" with the exception that it is
less likely that a Prepayment Assumption will be used for purposes of these
rules with respect to the mortgage loans.
Further, under the rules described in "--REMICs--Taxation of Owners of
REMIC Regular Certificates--Market Discount," above, any discount that is not
original issue discount and exceeds a de minimis amount may require the deferral
of interest expense deductions attributable to accrued market discount not yet
includible in income, unless an election has been made to report market discount
currently as it accrues. This rule applies without regard to the origination
dates of the mortgage loans.
PREMIUM. If a certificateholder is treated as acquiring the underlying
mortgage loans at a premium, that is, at a price in excess of their remaining
stated redemption price, the certificateholder may elect under Section 171 of
the Code to amortize using a constant yield method the portion of the premium
allocable to mortgage loans originated after September 27, 1985. Amortizable
premium is treated as an offset to interest income on the related debt
instrument, rather than as a separate interest deduction. However, premium
allocable to mortgage loans originated before September 28, 1985 or to mortgage
loans for which an amortization election is not made, should be allocated among
the payments of stated redemption price on the mortgage loan and be allowed as a
deduction as these payments are made, or, for a certificateholder using the
accrual method of accounting, when the payments of stated redemption price are
due.
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It is unclear whether a Prepayment Assumption should be used in
computing amortization of premium allowable under Section 171 of the Code. If
premium is not subject to amortization using a Prepayment Assumption and a
mortgage loan prepays in full, the holder of a Grantor Trust Fractional Interest
Certificate acquired at a premium should recognize a loss, equal to the
difference between the portion of the prepaid principal amount of the mortgage
loan that is allocable to the certificate and the portion of the adjusted basis
of the certificate that is allocable to the mortgage loan. If a Prepayment
Assumption is used to amortize this premium, it appears that this loss would be
unavailable. Instead, if a Prepayment Assumption is used, a prepayment should be
treated as a partial payment of the stated redemption price of the Grantor Trust
Fractional Interest Certificate and accounted for under a method similar to that
described for taking account of original issue discount on REMIC Regular
Certificates. It is unclear whether any other adjustments would be required to
reflect differences between the Prepayment Assumption used, and the actual rate
of prepayments. SEE "REMICS--TAXATION OF OWNERS OF REMIC REGULAR
CERTIFICATES--ORIGINAL ISSUE DISCOUNT."
TAXATION OF OWNERS OF GRANTOR TRUST STRIP CERTIFICATES. The stripped
coupon rules of Section 1286 of the Code will apply to the Grantor Trust Strip
Certificates. Except as described above in "Characterization of Investments in
Grantor Trust Certificates--If Stripped Bond Rules Apply," no regulations or
published rulings under Section 1286 of the Code have been issued and
uncertainty exists as to how it will be applied to securities like the Grantor
Trust Strip Certificates. Accordingly, it is suggested that holders of Grantor
Trust Strip Certificates consult their own tax advisors concerning the method to
be used in reporting income or loss with respect to the certificates.
The OID Regulations do not apply to stripped coupons, although they
provide general guidance as to how the original issue discount sections of the
Code will be applied. In addition, the discussion below is subject to the
discussion under "--Application of Contingent Payment Rules" and assumes that
the holder of a Grantor Trust Strip Certificate will not own any Grantor Trust
Fractional Interest Certificates.
Under the stripped coupon rules, it appears that original issue
discount will be required to be accrued in each month on the Grantor Trust Strip
Certificates based on a constant yield method. In effect, each holder of Grantor
Trust Strip Certificates would include as interest income in each month an
amount equal to the product of the holder's adjusted basis in the Grantor Trust
Strip Certificate at the beginning of that month and the yield of the Grantor
Trust Strip Certificate to the holder. The yield would be calculated based on
the price paid for that Grantor Trust Strip Certificate by its holder and the
payments remaining to be made thereon at the time of the purchase, plus an
allocable portion of the servicing fees and expenses to be paid with respect to
the mortgage loans. SEE "CHARACTERIZATION OF INVESTMENTS IN GRANTOR TRUST
CERTIFICATES--STRIPPED BOND RULES APPLY" ABOVE.
As noted, Section 1272(a)(6) of the Code requires that a Prepayment
Assumption be used in computing the accrual of original issue discount with
respect to some categories of debt instruments, and that adjustments be made in
the amount and rate of accrual of the discount when prepayments do not conform
to the Prepayment Assumption. To the extent the Grantor Trust Strip Certificates
represent an interest in any pool of debt instruments the yield on which may be
affected by reason of prepayments, those provisions apply to Grantor Trust Strip
Certificates. It is unclear whether those provisions would be applicable to the
Grantor Trust Strip Certificates that do not represent an
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interest in any such pool, or whether use of a Prepayment Assumption may be
required or permitted in the absence of these provisions. It is also uncertain,
if a Prepayment Assumption is used, whether the assumed prepayment rate would be
determined based on conditions at the time of the first sale of the Grantor
Trust Strip Certificate or, with respect to any subsequent holder, at the time
of purchase of the Grantor Trust Strip Certificate by that holder.
The accrual of income on the Grantor Trust Strip Certificates will be
significantly slower if a Prepayment Assumption is permitted to be made than if
yield is computed assuming no prepayments.
It currently is intended to base information returns or reports to the IRS and
certificateholders on the Prepayment Assumption disclosed in the related
prospectus supplement and on a constant yield computed using a representative
initial offering price for each class of certificates. However, none of the
depositor, the master servicer or the trustee will make any representation that
the mortgage loans will in fact prepay at a rate conforming to the Prepayment
Assumption or at any other rate and certificateholders should bear in mind that
the use of a representative initial offering price will mean that the
information returns or reports, even if otherwise accepted as accurate by the
IRS, will in any event be accurate only as to the initial certificateholders of
each series who bought at that price. Prospective purchasers of the Grantor
Trust Strip Certificates should consult their own tax advisors regarding the use
of the Prepayment Assumption.
It is unclear under what circumstances, if any, the prepayment of a
mortgage loan will give rise to a loss to the holder of a Grantor Trust Strip
Certificate. If a Grantor Trust Strip Certificate is treated as a single
instrument rather than an interest in discrete mortgage loans and the effect of
prepayments is taken into account in computing yield with respect to the Grantor
Trust Strip Certificate, it appears that no loss may be available as a result of
any particular prepayment unless prepayments occur at a rate faster than the
Prepayment Assumption. However, if a Grantor Trust Strip Certificate is treated
as an interest in discrete mortgage loans, or if the Prepayment Assumption is
not used, then, when a mortgage loan is prepaid, the holder of a Grantor Trust
Strip Certificate should be able to recognize a loss equal to the portion of the
adjusted issue price of the Grantor Trust Strip Certificate that is allocable to
the mortgage loan.
POSSIBLE APPLICATION OF CONTINGENT PAYMENT RULES. The coupon stripping
rules' general treatment of stripped coupons is to regard them as newly issued
debt instruments in the hands of each purchaser. To the extent that payments on
the Grantor Trust Strip Certificates would cease if the mortgage loans were
prepaid in full, the Grantor Trust Strip Certificates could be considered to be
debt instruments providing for contingent payments. Under the OID Regulations,
debt instruments providing for contingent payments are not subject to the same
rules as debt instruments providing for noncontingent payments. Regulations were
promulgated on June 14, 1996, regarding contingent payment debt instruments, the
"Contingent Payment Regulations", but it appears that Grantor Trust Strip
Certificates, to the extent subject to Section 1272(a)(6) of the Code as
described above, or due to their similarity to other mortgage-backed securities,
such as REMIC regular interests and debt instruments subject to Section
1272(a)(6) of the Code, that are expressly excepted from the application of the
Contingent Payment Regulations, are or may be excepted from these regulations.
Like the OID Regulations, the Contingent Payment Regulations do not specifically
address securities, like the Grantor Trust Strip Certificates, that are subject
to the stripped bond rules of Section 1286 of the Code.
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If the contingent payment rules under the Contingent Payment
Regulations were to apply, the holder of a Grantor Trust Strip Certificate would
be required to apply the noncontingent bond method. Under the noncontingent bond
method, the issuer of a Grantor Trust Strip Certificate determines a projected
payment schedule on which interest will accrue. Holders of Grantor Trust Strip
Certificates are bound by the issuer's projected payment schedule. The projected
payment schedule consists of all noncontingent payments and a projected amount
for each contingent payment based on the projected yield of the Grantor Trust
Strip Certificate.
The projected amount of each payment is determined so that the
projected payment schedule reflects the projected yield. The projected amount of
each payment must reasonably reflect the relative expected values of the
payments to be received by the holder of a Grantor Trust Strip Certificate. The
projected yield referred to above is a reasonable rate, not less than the
applicable Federal rate that, as of the issue date, reflects general market
conditions, the credit quality of the issuer, and the terms and conditions of
the mortgage loans. The holder of a Grantor Trust Strip Certificate would be
required to include as interest income in each month the adjusted issue price of
the Grantor Trust Strip Certificate at the beginning of the period multiplied by
the projected yield, and would add to, or subtract from, the income any
variation between the payment actually received in that month and the payment
originally projected to be made in that month.
Assuming that a Prepayment Assumption were used, if the Contingent
Payment Regulations or their principles were applied to Grantor Trust Strip
Certificates, the amount of income reported with respect thereto would be
substantially similar to that described under "Taxation of Owners of Grantor
Trust Strip Certificates". Certificateholders should consult their tax advisors
concerning the possible application of the contingent payment rules to the
Grantor Trust Strip Certificates.
SALES OF GRANTOR TRUST CERTIFICATES. Any gain or loss equal to the
difference between the amount realized on the sale or exchange of a Grantor
Trust Certificate and its adjusted basis recognized on the sale or exchange of a
Grantor Trust Certificate by an investor who holds the Grantor Trust Certificate
as a capital asset 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 Certificate
generally will 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 with respect to the Grantor Trust Certificate.
Gain or loss from the sale of a Grantor Trust Certificate may be
partially or wholly ordinary and not capital in some circumstances. Gain
attributable to accrued and unrecognized market discount will be treated as
ordinary income, as will gain or loss recognized by banks and other financial
institutions subject to Section 582(c) of the Code. Furthermore, a portion of
any gain that might otherwise be capital gain may be treated as ordinary income
to the extent that the Grantor Trust Certificate is held as part of a conversion
transaction within the meaning of Section 1258 of the Code. A conversion
transaction generally is one in which the taxpayer has taken two or more
positions in the same or similar property that reduce or eliminate market risk,
if substantially all of the taxpayer's return is attributable to the time value
of the taxpayer's net investment in the transaction. The amount of gain realized
in a conversion transaction that is recharacterized as ordinary income generally
will not exceed the amount of interest that would have accrued on the
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taxpayer's net investment at 120% of the appropriate applicable Federal rate at
the time the taxpayer enters into the conversion transaction, subject to
appropriate reduction for prior inclusion of interest and other ordinary income
items from the transaction. Finally, a taxpayer may elect to have net capital
gain taxed at ordinary income rates rather than capital gains rates in order to
include the net capital gain in total net investment income for that taxable
year, for purposes of the rule that limits the deduction of interest on
indebtedness incurred to purchase or carry property held for investment to a
taxpayer's net investment income.
GRANTOR TRUST REPORTING. The master servicer or the trustee will
furnish to each holder of a Grantor Trust Fractional Interest Certificate with
each distribution a statement setting forth the amount of the distribution
allocable to principal on the underlying mortgage loans and to interest thereon
at the related pass-through rate. In addition, the master servicer or the
trustee will furnish, within a reasonable time after the end of each calendar
year, to each holder of a Grantor Trust Certificate who was a holder at any time
during that year, information regarding the amount of any servicing compensation
received by the master servicer and subservicer and any other customary factual
information as the master servicer or the trustee deems necessary or desirable
to enable holders of Grantor Trust Certificates to prepare their tax returns and
will furnish comparable information to the IRS as and when required by law to do
so. Because the rules for accruing discount and amortizing premium with respect
to the Grantor Trust Certificates are uncertain in various respects, there is no
assurance the IRS will agree with the trust fund's information reports of these
items of income and expense. Moreover, these information reports, even if
otherwise accepted as accurate by the IRS, will in any event be accurate only as
to the initial certificateholders that bought their certificates at the
representative initial offering price used in preparing the reports.
Except as disclosed in the related prospectus supplement, the
responsibility for complying with the foregoing reporting rules will be borne by
the master servicer or the trustee.
BACKUP WITHHOLDING. In general, the rules described in
"--REMICS--Backup Withholding with Respect to REMIC Certificates" will also
apply to Grantor Trust Certificates.
FOREIGN INVESTORS. In general, the discussion with respect to REMIC
Regular Certificates in "REMICS--Foreign Investors in REMIC Certificates"
applies to Grantor Trust Certificates except that Grantor Trust Certificates
will, except as disclosed in the related prospectus supplement, be eligible for
exemption from U.S. withholding tax, subject to the conditions described in the
discussion, only to the extent the related mortgage loans were originated after
July 18, 1984 and only to the extent such mortgage loans have not been converted
to real property.
To the extent that interest on a Grantor Trust Certificate would be
exempt under Sections 871(h)(1) and 881(c) of the Code from United States
withholding tax, and the Grantor Trust Certificate is not held in connection
with a certificateholder's trade or business in the United States, the Grantor
Trust Certificate will not be subject to United States estate taxes in the
estate of a non- resident alien individual.
PARTNERSHIP TRUST FUNDS
CLASSIFICATION OF PARTNERSHIP TRUST FUNDS. With respect to each series
1of Partnership Certificates, counsel to the depositor will provide its opinion
that the trust fund will not be a taxable
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mortgage pool or an association, or publicly traded partnership, taxable as a
corporation for federal income tax purposes. This opinion will be based on the
assumption that the terms of the related pooling and servicing agreement and
related documents will be complied with, and on counsel's conclusions that the
nature of the income of the trust fund will exempt it from the rule that certain
publicly traded partnerships are taxable as corporations.
If the trust fund were taxable as a corporation for federal income tax
purposes, the trust fund would be subject to corporate income tax on its taxable
income. The trust fund's taxable income would include all its income on the
related mortgage loans, possibly reduced by its interest expense on any
outstanding debt securities. Any corporate income tax could materially reduce
cash available to make distributions on the Partnership Certificates and
certificateholders could be liable for any tax that is unpaid by the trust fund.
CHARACTERIZATION OF INVESTMENTS IN PARTNERSHIP CERTIFICATES. For
federal income tax purposes,
(1) Partnership Certificates held by a thrift institution taxed as a
domestic building and loan association will not constitute "loans
... secured by an interest in real property" within the meaning
of Code Section 7701(a)(19)(C)(v);
(2) Partnership Certificates held by a real estate investment trust
will constitute real estate assets within the meaning of Code
Section 856(c)(4)(A) and interest on Partnership Certificates
will be treated as "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), based on the real estate
investments trust's proportionate interest in the assets of the
Partnership Trust Fund based on capital accounts; and
(3) Partnership Certificates held by a regulated investment company
will not constitute Government securities within the meaning of
Code Section 851(b)(3)(A)(i).
TAXATION OF OWNERS OF PARTNERSHIP CERTIFICATES
TREATMENT OF THE PARTNERSHIP TRUST FUND AS A PARTNERSHIP. If specified
in the prospectus supplement, the depositor will agree, and the
certificateholders will agree by their purchase of Certificates, to treat the
Partnership Trust Fund as a partnership for purposes of federal and state income
tax, franchise tax and any other tax measured in whole or in part by income,
with the assets of the partnership being the assets held by the Partnership
Trust Fund, the partners of the partnership being the certificateholders,
including the depositor. However, the proper characterization of the arrangement
involving the Partnership Trust Fund, the Partnership Certificates and the
depositor is not clear, because there is no authority on transactions closely
comparable to that contemplated in the prospectus.
A variety of alternative characterizations are possible. For example,
because one or more of the classes of Partnership Certificates have certain
features characteristic of debt, the Partnership Certificates might be
considered debt of the depositor or the Partnership Trust Fund. Any alternative
characterization would not result in materially adverse tax consequences to
Certificateholders as compared to the consequences from treatment of the
Partnership Certificates as equity in a
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partnership. The following discussion assumes that the Partnership Certificates
represent equity interests in a partnership.
PARTNERSHIP TAXATION. As a partnership, the Partnership Trust Fund will
not be subject to federal income tax. Rather, each Certificateholder will be
required to separately take into account the holder's allocated share of income,
gains, losses, deductions and credits of the Partnership Trust Fund. It is
anticipated that the Partnership Trust Fund's income will consist primarily of
interest earned on the mortgage loans, including appropriate adjustments for
market discount, original issue discount and bond premium, as described above
under "-- Grantor Trust Funds -- Taxation of Owners of Grantor Trust Fractional
Interest Certificates - If Stripped Bond Ruled Do Not Apply--", "-- Market
Discount" and "--Premium", and any gain upon collection or disposition of
mortgage loans. The Partnership Trust Fund's deductions will consist primarily
of interest accruing with respect to any outstanding debt securities, servicing
and other fees, and losses or deductions upon collection or disposition of any
outstanding debt securities.
The tax items of a partnership are allocable to the partners in
accordance with the Code, Treasury regulations and the partnership agreement,
which will include a pooling and servicing agreement and related documents. The
pooling and servicing agreement will provide, in general, that the
Certificateholders will be allocated taxable income of the Partnership Trust
Fund for each due period equal to the sum of (1) the interest that accrues on
the Partnership Certificates in accordance with their terms for the due period,
including interest accruing at the applicable pass-through rate for the due
period and interest on amounts previously due on the Partnership Certificates
but not yet distributed; (2) any Partnership Trust Fund income attributable to
discount on the mortgage loans that corresponds to any excess of the principal
amount of the Partnership Certificates over their initial issue price; and (3)
any other amounts of income payable to the certificateholders for the due
period. The allocation will be reduced by any amortization by the Partnership
Trust Fund of premium on mortgage loans that corresponds to any excess of the
issue price of Partnership Certificates over their principal amount. All
remaining taxable income of the Partnership Trust Fund will be allocated to the
depositor. Based on the economic arrangement of the parties, this approach for
allocating Partnership Trust Fund income should be permissible under applicable
Treasury regulations, although no assurance can be given that the IRS would not
require a greater amount of income to be allocated to certificateholders.
Moreover, even under that method of allocation, certificateholders may be
allocated income equal to the entire pass-through rate plus the other items
described under that method even though the Trust Fund might not have sufficient
cash to make current cash distributions of these amounts. Thus, cash basis
holders will in effect be required to report income from the Partnership
Certificates on the accrual basis and certificateholders may become liable for
taxes on Partnership Trust Fund income even if they have not received cash from
the Partnership Trust Fund to pay these taxes.
All of the taxable income allocated to a certificateholder that is a
pension, profit sharing or employee benefit plan or other tax-exempt entity,
including an individual retirement account, will constitute unrelated business
taxable income generally taxable to that holder under the Code.
A share of expenses of the Partnership Trust Fund, including fees of
the master servicer but not interest expense, allocable to an individual, estate
or trust certificateholder would be miscellaneous itemized deductions subject to
the limitations described above under "--Grantor Trust Funds-- Taxation of
Owners of Grantor Trust Fractional Interest Certificates." Accordingly,
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deductions for these expenses might be disallowed to the individual in whole or
in part and might result in that holder being taxed on an amount of income that
exceeds the amount of cash actually distributed to the holder over the life of
the Partnership Trust Fund.
Discount income or premium amortization with respect to each mortgage
loan would be calculated in a manner similar to the description under "--
Grantor Trust Funds -- Taxation of Owners of Grantor Trust Fractional Interest
Certificates - If Stripped Bond Rules Do Not Apply." Notwithstanding this
description, it is intended that the Partnership Trust Fund will make all tax
calculations relating to income and allocations to certificateholders on an
aggregate basis for all mortgage loans held by the Partnership Trust Fund rather
than on a mortgage loan-by-mortgage loan basis. If the IRS were to require that
these calculations be made separately for each mortgage loan, the Partnership
Trust Fund might be required to incur additional expense, but it is believed
that there would not be a material adverse effect on certificateholders.
DISCOUNT AND PREMIUM. Unless indicated otherwise in the applicable
prospectus supplement, it is not anticipated that the mortgage loans will have
been issued with original issue discount and, therefore, the Partnership Trust
Fund should not have original issue discount income. However, the purchase price
paid by the Partnership Trust Fund for the mortgage loans may be greater or less
than the remaining principal balance of the mortgage loans at the time of
purchase. If so, the mortgage loans will have been acquired at a premium or
discount, as the case may be. As stated in the previous paragraph, the
Partnership Trust Fund intends to make any calculation of original issue
discount on an aggregate basis, but might be required to recompute it on a
mortgage loan-by-mortgage loan basis. SEE "--GRANTOR TRUST FUNDS -- TAXATION OF
OWNERS OF GRANTOR TRUST FRACTIONAL INTEREST CERTIFICATES -- MARKET DISCOUNT" AND
"PREMIUM."
If the Partnership Trust Fund acquires the mortgage loans at a market
discount or premium, the Partnership Trust Fund will elect to include any
discount in income currently as it accrues over the life of the mortgage loans
or to offset any premium against interest income on the mortgage loans. As
stated in the second preceding paragraph, a portion of the market discount
income or premium deduction may be allocated to certificateholders.
SECTION 708 TERMINATION. Under Section 708 of the Code, the Partnership
Trust Fund will be deemed to terminate for federal income tax purposes if 50% or
more of the capital and profits interests in the Partnership Trust Fund are sold
or exchanged within a 12-month period. A 50% or greater transfer would cause a
deemed contribution of the assets of a Partnership Trust Fund, the old
partnership, to a new Partnership Trust Fund, the new partnership, in exchange
for interests in the new partnership. These interests would be deemed
distributed to the partners of the old partnership in liquidation thereof, which
would not constitute a sale or exchange.
DISPOSITION OF CERTIFICATES. Generally, capital gain or loss will be
recognized on a sale of Partnership Certificates in an amount equal to the
difference between the amount realized and the seller's tax basis in the
Partnership Certificates sold. A certificateholder's tax basis in an Partnership
Certificate will generally equal the holder's cost increased by the holder's
share of Partnership Trust Fund income includible in income and decreased by any
distributions received with respect to the Partnership Certificate. In addition,
both the tax basis in the Partnership Certificates and the amount realized on a
sale of an Partnership Certificate would include the holder's share of any
liabilities of the Partnership Trust Fund. A holder acquiring Partnership
Certificates at different prices may be
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required to maintain a single aggregate adjusted tax basis in such Partnership
Certificates, and, upon sale or other disposition of some of the Partnership
Certificates, allocate a portion of the aggregate tax basis to the Partnership
Certificates sold, rather than maintaining a separate tax basis in each
Partnership Certificate for purposes of computing gain or loss on a sale of that
Partnership Certificate.
Any gain on the sale of an Partnership Certificate attributable to the
holder's share of unrecognized accrued market discount on the mortgage loans
would generally be treated as ordinary income to the holder and would give rise
to special tax reporting requirements. The Partnership Trust Fund does not
expect to have any other assets that would give rise to such special reporting
considerations. Thus, to avoid those special reporting requirements, the
Partnership Trust Fund will elect to include market discount in income as it
accrues.
If a certificateholder is required to recognize an aggregate amount of
income, not including income attributable to disallowed itemized deductions,
over the life of the Partnership Certificates that exceeds the aggregate cash
distributions with respect thereto, the excess will generally give rise to a
capital loss upon the retirement of the Partnership Certificates.
ALLOCATIONS BETWEEN TRANSFERORS AND TRANSFEREES. In general, the
Partnership Trust Fund's taxable income and losses will be determined each due
period and the tax items for a particular due period will be apportioned among
the certificateholders in proportion to the principal amount of Partnership
Certificates owned by them as of the close of the last day of such due period.
As a result, a holder purchasing Partnership Certificates may be allocated tax
items which will affect its tax liability and tax basis attributable to periods
before the actual transaction.
The use of a due period convention may not be permitted by existing
regulations. If a due period convention is not allowed or only applies to
transfers of less than all of the partner's interest, taxable income or losses
of the Partnership Trust Fund might be reallocated among the certificateholders.
The depositor will be authorized to revise the Partnership Trust Fund's method
of allocation between transferors and transferees to conform to a method
permitted by future regulations.
SECTION 731 DISTRIBUTIONS. In the case of any distribution to a
certificateholder, no gain will be recognized to that certificateholder to the
extent that the amount of any money distributed with respect to the Partnership
Certificate exceeds the adjusted basis of the certificateholder's interest in
the Partnership Certificate. To the extent that the amount of money distributed
exceeds the certificateholder's adjusted basis, gain will be currently
recognized. In the case of any distribution to a certificateholder, no loss will
be recognized except upon a distribution in liquidation of a certificateholder's
interest. Any gain or loss recognized by a certificateholder will be capital
gain or loss.
SECTION 754 ELECTION. In the event that a certificateholder sells its
Partnership Certificates at a profit, the purchasing certificateholder will have
a higher basis in the Partnership Certificates than the selling
certificateholder had. An opposite result will follow if the Partnership
Certificate is sold at a loss. The tax basis of the Partnership Trust Fund's
assets would not be adjusted to reflect that higher or lower basis unless the
Partnership Trust Fund were to file an election under Section 754 of the Code.
In order to avoid the administrative complexities that would be involved in
keeping
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accurate accounting records, as well as potentially onerous information
reporting requirements, the Partnership Trust Fund will not make such election.
As a result, a certificateholder might be allocated a greater or lesser amount
of Partnership Trust Fund income than would be appropriate based on their own
purchase price for Partnership Certificates.
ADMINISTRATIVE MATTERS. The trustee is required to keep or have kept
complete and accurate books of the Partnership Trust Fund. Such books will be
maintained for financial reporting and tax purposes on an accrual basis and the
fiscal year of the Partnership Trust Fund will be the calendar year. The trustee
will file a partnership information return, IRS Form 1065, with the IRS for each
taxable year of the Partnership Trust Fund and will report each
certificateholder's allocable share of items of Partnership Trust Fund income
and expense to holders and the IRS on Schedule K-1. The trustee will provide the
Schedule K-1 information to nominees that fail to provide the Partnership Trust
Fund with the information statement described below and the nominees will be
required to forward this information to the beneficial owners of the Partnership
Certificates. Generally, holders must file tax returns that are consistent with
the information return filed by the Partnership Trust Fund or be subject to
penalties unless the holder notifies the IRS of all such inconsistencies.
Under Section 6031 of the Code, any person that holds Partnership
Certificates as a nominee at any time during a calendar year is required to
furnish the Partnership Trust Fund with a statement containing information on
the nominee, the beneficial owners and the Partnership Certificates so held.
Such information includes (1) the name, address and taxpayer identification
number of the nominee and (2) as to each beneficial owner (x) the name, address
and identification number of that person, (y) whether that person is a United
States Person, a tax-exempt entity or a foreign government, an international
organization, or any wholly-owned agency or instrumentality of either of the
foregoing, and (z) information relating to Partnership Certificates that were
held, bought or sold on behalf of that person throughout the year. In addition,
brokers and financial institutions that hold Partnership Certificates through a
nominee are required to furnish directly to the trustee information as to
themselves and their ownership of Partnership Certificates. A clearing agency
registered under Section 17A of the Exchange Act is not required to furnish any
information statement to the Partnership Trust Fund. The information referred to
above for any calendar year must be furnished to the Partnership Trust Fund on
or before the following January 31. Nominees, brokers and financial institutions
that fail to provide the Partnership Trust Fund with the information described
above may be subject to penalties.
The depositor will be designated as the tax matters partner in the
pooling and servicing agreement and will be responsible for representing the
certificateholders in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire until three years after the date on which the
partnership information return is filed. Any adverse determination following an
audit of the return of the Partnership Trust Fund by the appropriate taxing
authorities could result in an adjustment of the returns of the
certificateholders, and a certificateholder may be precluded from separately
litigating a proposed adjustment to the items of the Partnership Trust Fund. An
adjustment could also result in an audit of a certificateholder's returns and
adjustments of items not related to the income and losses of the Partnership
Trust Fund.
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TAX CONSEQUENCES TO FOREIGN CERTIFICATEHOLDERS. It is not clear whether
the Partnership Trust Fund would be considered to be engaged in a trade or
business in the United States for purposes of federal withholding taxes with
respect to non-United States Persons, because there is no clear authority
dealing with that issue under facts substantially similar to those in this case.
Although it is not expected that the Partnership Trust Fund would be engaged in
a trade or business in the United States for these purposes, the Partnership
Trust Fund will withhold as if it were so engaged in order to protect the
Partnership Trust Fund from possible adverse consequences of a failure to
withhold. The Partnership Trust Fund expects to withhold on the portion of its
taxable income that is allocable to foreign certificateholders pursuant to
Section 1446 of the Code as if this income were effectively connected to a U.S.
trade or business, at a rate of 35% for foreign holders that are taxable as
corporations and 39.6% for all other foreign holders. Amounts withheld will be
deemed distributed to the foreign certificateholders. Subsequent adoption of
Treasury regulations or the issuance of other administrative pronouncements may
require the Partnership Trust Fund to change its withholding procedures. In
determining a holder's withholding status, the Partnership Trust Fund may rely
on IRS Form W-8, IRS Form W-9 or the holder's certification of nonforeign status
signed under penalties of perjury.
Each foreign holder might be required to file a U.S. individual or
corporate income tax return, including, in the case of a corporation, the branch
profits tax, on its share of the Partnership Trust Fund's income. Each foreign
holder must obtain a taxpayer identification number from the IRS and submit that
number to the Partnership Trust Fund on Form W-8 in order to assure appropriate
crediting of the taxes withheld. A foreign holder generally would be entitled to
file with the IRS a claim for refund with respect to taxes withheld by the
Partnership Trust Fund, taking the position that no taxes were due because the
Partnership Trust Fund was not engaged in a U.S. trade or business. However,
interest payments made or accrued to a certificateholder who is a foreign person
generally will be considered guaranteed payments to the extent such payments are
determined without regard to the income of the Partnership Trust Fund. If these
interest payments are properly characterized as guaranteed payments, then the
interest will not be considered portfolio interest. As a result,
certificateholders who are foreign persons will be subject to United States
federal income tax and withholding tax at a rate of 30 percent, unless reduced
or eliminated pursuant to an applicable treaty. In that event, a foreign holder
would only be entitled to claim a refund for that portion of the taxes in excess
of the taxes that should be withheld with respect to the guaranteed payments.
BACKUP WITHHOLDING. Distributions made on the Partnership Certificates
and proceeds from the sale of the Partnership Certificates will be subject to a
backup withholding tax of 31% if the certificateholder fails to comply with
certain identification procedures, unless the holder is an exempt recipient
under applicable provisions of the Code.
It is suggested that prospective purchasers consult their tax advisors
with respect to the tax consequences to them of the purchase, ownership and
disposition of REMIC Certificates, Notes, Grantor Trust Certificates and
Partnership Certificates, including the tax consequences under state, local,
foreign and other tax laws and the possible effects of changes in federal or
other tax laws.
FASIT SECURITIES
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General. The FASIT Provisions were enacted by the Small Business Job
Protection Act of 1996 and create a new elective statutory vehicle for the
issuance of mortgage-backed and asset- backed securities. Although the FASIT
Provisions became effective on September 1, 1997, no Treasury regulations or
other administrative guidance has been issued with respect to the FASIT
Provisions. Accordingly, definitive guidance cannot be provided with respect to
many aspects of the tax treatment of holders of FASIT securities. With respect
to each series of FASIT securities, the related prospectus supplement will
provide a detailed discussion regarding the federal income tax consequences
associated with the particular transaction.
STATE AND OTHER TAX CONSEQUENCES
In addition to the federal income tax consequences described in
"Federal Income Tax Consequences", potential investors should consider the state
and local tax consequences of the acquisition, ownership, and disposition of the
securities offered hereunder. State tax law may differ substantially from the
corresponding federal tax law, and the discussion described under "Federal
Income Tax Consequences" does not purport to describe any aspect of the tax laws
of any state or other jurisdiction. Therefore, prospective investors should
consult their own tax advisors with respect to the various tax consequences of
investments in the securities offered hereunder.
CONSIDERATIONS FOR BENEFIT PLAN INVESTORS
INVESTORS AFFECTED
A federal law called the Employee Retirement Income Security Act of
1974, as amended, the Code and a variety of state laws may affect your decision
whether to invest in the securities if you are investing for:
o a pension or other employee benefit plan of employers in the
private sector that are regulated under ERISA, referred to as an
ERISA plan,
o an individual retirement account or annuity, called an IRA, or a
pension or other benefit plan for self-employed individuals,
called a Keogh plan,
o a pension and other benefit plan for the employees of state and
local governments, called a government plan, or
o an insurance company general or separate account, a bank
collective investment fund or other pooled investment vehicle
which includes the assets of ERISA plans, IRAs, Keogh plans,
and/or government plans.
A summary of the effects of those laws follows.
FIDUCIARY STANDARDS FOR ERISA PLANS AND RELATED INVESTMENT VEHICLES
ERISA imposes standards of fiduciary conduct on those who are
responsible for operating ERISA plans or investing their assets. These standards
include requirements that fiduciaries act prudently in making investment
decisions and diversify investments so as to avoid large losses unless
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under the circumstances it is clearly prudent not to do so. If you are a
fiduciary of an ERISA plan, you are subject to these standards in deciding
whether to invest the plan's assets in securities. You may find the full text of
the applicable standards of fiduciary conduct in section 404 of ERISA. If you
are a fiduciary of an ERISA Plan, you should consult with your advisors
concerning your investment decision in the context of section 404 of ERISA.
PROHIBITED TRANSACTION ISSUES FOR ERISA PLANS, KEOGH PLANS, IRAS AND RELATED
INVESTMENT VEHICLES
GENERAL. Transactions involving the assets of an ERISA plan, a
Keogh plan or an IRA, called prohibited transactions, may result in the
imposition of excise taxes and, in the case of an ERISA plan, civil money
penalties and certain other extraordinary remedies. A prohibited transaction
occurs when a person with a pre-existing relationship to an ERISA plan, a Keogh
plan or IRA, known as a party in interest or a disqualified person, engages in a
transaction involving the assets of the plan or IRA. You may find the laws
applicable to prohibited transactions in section 406 of ERISA and section 4975
of the Code. There are statutory and regulatory prohibited transaction
exemptions, as well as administrative exemptions granted by the United States
Department of Labor.
Prohibited transactions exemptions waive the excise taxes, civil money penalties
and other remedies for certain prohibited transactions which are structured to
satisfy prescribed conditions.
PURCHASE AND SALE OF SECURITIES. If an ERISA plan, a Keogh plan, an IRA
or a related investment vehicle acquires securities from, or sells securities
to, a party in interest or a disqualified person, a prohibited transaction may
occur. In such a case, the party in interest or disqualified person might be
liable for excise taxes unless a prohibited transaction exemption is available.
Where a prohibited transaction involves an ERISA plan or related investment
vehicle, the fiduciary who causes or permits the prohibited transaction may also
be liable for civil money penalties.
TRANSACTIONS INCIDENTAL TO THE OPERATION OF THE TRUST. Transactions
involving the assets of the trust may also give rise to prohibited transactions
to the extent that an investment in securities causes the assets of a trust to
be considered assets, commonly known as plan assets, of an ERISA plan, a Keogh
plan, an IRA or a related investment vehicle. Whether an investment in
securities will cause a trust's assets to be treated as plan assets depends on
whether the securities are debt or equity investments for purposes of ERISA. The
United States Department of Labor has issued regulations, commonly known as the
plan asset regulations, which define debt and equity investments. The plan asset
regulations appear at 29 C.F.R. ss.2510.3-101.
Under the plan asset regulations, a trust's assets will not be plan
assets of an ERISA plan, Keogh plan, IRA or related investment vehicle that
purchases securities if the securities are considered debt. For this purpose,
the securities will be debt only if they are treated as indebtedness under
applicable local law and do not have any substantial equity features. The term
substantial equity features has no definition under the plan asset regulations.
In the absence of such a definition, we cannot assure you that the securities,
either when they are issued or at any later date, will have no substantial
equity features. The prospectus supplement for a particular offering of
securities may tell you whether we believe the securities should be treated as
debt for ERISA purposes.
To the extent that the securities do not constitute debt for purposes
of ERISA, they will constitute equity investments. In this case, an ERISA plan,
Keogh plan, IRA or related investment
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vehicle that acquires securities would also acquire an undivided interest in
each asset of the trust unless (1) the trust is an operating company or a
venture capital operating company as defined in the plan asset regulations, (2)
the securities are publicly offered securities as defined in the plan asset
regulations or (3) benefit plan investors as defined in the plan asset
regulations do not own 25% or more of the securities or any other class of
equity security issued by the trust. If the securities may be treated as an
equity investment under the plan asset regulations, the prospectus supplement
may tell you whether we believe any of these exceptions will apply.
POSSIBLE EXEMPTIVE RELIEF
The United States Department of Labor has issued prohibited transaction
exemptions, which conditionally waive excise taxes and civil money penalties
that might otherwise apply to a type of transactions.
CLASS EXEMPTIONS. The United States Department of Labor has issued
Prohibited Transaction Class Exemptions, or PTCEs, which provide exemptive
relief to parties to any transaction which satisfies the conditions of the
exemption. A partial listing of the PTCEs which may be available for investments
in securities follows. Each of these exemptions is available only if specified
conditions are satisfied and may provide relief for some, but not all, of the
prohibited transactions that a particular transaction may cause. The prospectus
supplement for a particular offering of securities may tell you whether the
securities themselves satisfy the conditions of these exemptions. You should
consult with your advisors regarding the specific scope, terms and conditions of
an exemption as it applies to you, as an investor, before relying on that
exemption's availability.
CLASS EXEMPTIONS FOR PURCHASES AND SALES OF SECURITIES. The following
exemptions may apply to a purchase or sale of securities between an ERISA plan,
a Keogh plan, an IRA or related investment vehicle, on the one hand, and a party
in interest or disqualified person, on the other hand:
o PTCE 84-14, which exempts certain transactions approved on behalf
of the plan by a qualified professional asset manager, or QPAM.
o PTCE 86-128, which exempts certain transactions between a plan
and certain broker-dealers.
o PTCE 90-1, which exempts certain transactions entered into by
insurance company pooled separate accounts in which plans have
made investments.
o PTCE 91-38, which exempts certain transactions entered into by
bank collective investment funds in which plans have made
investments.
o PTCE 96-23, which exempts certain transaction approved on behalf
of a plan by an in-house investment manager, or INHAM.
These exemptions do not expressly address prohibited transactions that might
result from transactions incidental to the operation of a trust. We cannot
assure you that a purchase or sale of securities in reliance on one of these
exemptions will not give rise to indirect, non-exempt prohibited transactions.
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CLASS EXEMPTIONS FOR PURCHASES AND SALES OF SECURITIES AND TRANSACTIONS
INCIDENTAL TO THE OPERATION OF THE TRUST. The following exemptions may apply to
a purchase or sale of securities between an ERISA plan, a Keogh plan, an IRA or
related investment vehicle, on the one hand, and a party in interest or
disqualified person, on the other hand, and may also apply to prohibited
transactions that may result from transactions incident to the operation of the
trust:
o PTCE 95-60, which exempts certain transactions involving
insurance company general accounts.
o PTCE 83-1, which exempts certain transactions involving the
purchase of pass- through certificates in mortgage pool
investment trusts from, and the sale of such certificates to, the
pool sponsor, as well as transactions in connection with the
servicing and operation of the pool.
ADMINISTRATIVE EXEMPTION FOR OFFERINGS MANAGED BY CERTAIN UNDERWRITERS.
The DOL has also issued exemptions to several underwriters of securities, for
specific offerings in which that underwriter or any person directly or
indirectly, through one or more intermediaries, controlling, controlled by or
under common control with that underwriter is an underwriter, placement agent or
a manager or co-manager of the underwriting syndicate or selling group where the
trust and the offered certificates meet specified conditions. This is called the
Underwriters' Exemption. An amendment to the Underwriters' Exemptions may be
found at 62 Fed. Reg. 39021 (July 21, 1997). The Underwriters' Exemptions, as
amended, provides a partial exemption for transactions involving certificates
representing a beneficial interest in a trust and entitling the holder to
pass-through payments of principal, interest and/or other payments with respect
to the trust's assets. When applicable, the Underwriters' Exemptions applies to
the initial purchase, holding and subsequent resale of certificates, and certain
transactions incidental to the servicing and operation of the assets of such a
trust.
In order for the Underwriters' Exemptions to be available to a purchase
of securities, the trust's assets must consist solely of certain types of
assets, including obligations that bear interest or are purchased at a discount
and which are secured by single-family residential, multi-family residential and
commercial property (including certain obligations secured by leasehold
interests on commercial property); fractional undivided interests in any of
these obligations; property which had secured any of these obligations;
undistributed cash; rights under any insurance policies, third-party guarantees,
contracts of suretyship or other credit support arrangements with respect to any
of the these obligations; and a pre-funding account.
CONDITIONS FOR PRE-FUNDING ACCOUNTS. If the trust includes a
pre-funding account, the following conditions also apply:
o The ratio of the amount allocated to the pre-funding account to
the total principal amount of the securities being offered must
be less than or equal to 25%.
o All additional obligations transferred to the trust after the
closing date of the offering of securities must meet the same
terms and conditions of eligibility for inclusion in the trust as
the obligations placed in the trust at or prior to the
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closing date, and these terms and conditions must have been
approved by Standard & Poor's Structured Rating Group, Moody's
Investors Service, Inc. or Fitch, Inc., called the Exemption
Rating Agencies. These terms and conditions may be changed if the
changes receive prior approval of either an Exemption Rating
Agency or a majority vote of outstanding certificateholders.
o After the transfer of additional obligations to the trust, the
securities must have a credit rating from one of the Exemption
Rating Agencies at least a high as the rating assigned at the
time of the initial issuance of the securities.
o The use of pre-funding does not, in and of itself, cause a
reduction of 100 basis points or more in the weighted average
annual percentage interest rate of all of the obligations
included in the trust between the time of initial issuance of the
securities and the end of the pre-funding period.
o Either the characteristics of the obligations added to the trust
during the pre- funding period must be monitored by an
independent insurer or other independent credit support provider,
or an independent accountant must furnish a letter, prepared
using the same type of procedures as were applicable to the
obligations which were transferred to the trust as of the closing
date of the initial offering of securities, stating whether or
not the characteristics of the additional obligations conform to
the characteristics described in the prospectus or prospectus
supplement.
o The pre-funding period must end no later than three months, or 90
days if later, after the closing date of the initial issuance of
securities, or earlier in certain circumstances if the unused
balance in the pre-funding account falls below a specified
minimum level or an event of default occurs.
o Amounts transferred to any pre-funding account and/or capitalized
interest account used in connection with the pre-funding may be
invested only in investments which are described in the pooling
and servicing agreement, are permitted by the Exemption Rating
Agencies rating the securities and have been rated, or the
obligor has been rated, in one of the three highest generic
rating categories by one of the Exemption Rating Agencies or else
are either direct obligations of, or obligations fully guaranteed
as to timely payment of principal and interest by, the United
States or any agency or instrumentality thereof, provided that
such obligations are backed by the full faith and credit of the
United States.
o The prospectus or prospectus supplement must describe the
duration of the pre- funding period.
o The trustee, or any agent with which the trustee contracts to
provide trust services, must be a substantial financial
institution or trust company experienced in trust activities and
familiar with its duties, responsibilities and liabilities with
ERISA and the trustee, as legal owner of the assets of the trust,
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must enforce all the rights created in favor of Securityholders
of the trust, including ERISA plans.
ADDITIONAL CONDITIONS FOR THE UNDERWRITERS' EXEMPTION. If the
requirements applicable to the trust and pre-funding account are met, the
Underwriters' Exemption will apply to a particular transaction only if the
transaction meets the following additional conditions:
o The acquisition of securities by an ERISA Plan, a Keogh Plan, an
IRA or a related investment vehicle is on terms, including price,
that are at least as favorable to the buyer as they would be in
an arm's-length transaction with an unrelated party.
o The rights and interests evidenced by the securities acquired by
the ERISA Plan, Keogh Plan, IRA or related investment vehicle are
not subordinated to the rights and interests evidenced by other
securities of the same trust.
o The securities acquired by the ERISA Plan, Keogh Plan, IRA or
related investment vehicle have received a rating that is in one
of three highest generic rating categories from the Exemption
Rating Agencies.
o The trustee of the trust is not an affiliate of the trust
sponsor, any servicer, any underwriter, any insurer or any
obligor with respect to obligations or receivables constituting
more than 5% of the aggregate unamortized principal balance of
the assets in the trust, determined on the date of initial
issuance of securities, or any affiliate of any of these
entities.
o The sum of all payments made to and retained by the
underwriter(s) or selling agents must represent not more than
reasonable compensation for underwriting the securities; the sum
of all payments made to and retained by the sponsor pursuant to
the assignment of the assets to the trust must represent not more
than the fair market value of such obligations; and the sum of
all payments made to and retained by all servicers must represent
not more than reasonable compensation for such persons' services
and reimbursement of such person's reasonable expenses in
connection with such services.
o The investing ERISA plan, Keogh plan, IRA or related investment
vehicle must be an accredited investor as defined in Rule
501(a)(1) of Regulation D of the Commission under the Securities
Act of 1933, as amended.
LIMITS ON SCOPE OF THE UNDERWRITERS' EXEMPTIONS. The Underwriters'
Exemptions will not provide complete exemptive relief even where a trust
satisfies all of the conditions applicable to the trust and all of the general
conditions are met. It does not provide relief for the purchase of securities
from, or the sale of securities to, a party in interest or disqualified person
where the party in interest or disqualified person is a fiduciary of the
purchaser or seller in which the fiduciary receives consideration for its
personal account from any party other than the purchaser or the seller.
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The Underwriters' Exemptions also will not provide exemptive relief for
the purchase and holding of securities by a fiduciary on behalf of a plan
sponsored by the trust's sponsor, the trustee, any insurer, any servicer, any
obligor with respect to obligations or receivables included in the trust
constituting more than 5% of the aggregate unamortized principal balance of the
assets in the trust, determined on the date of initial issuance of the
securities, and any affiliate of any of these entities. The Underwriters'
Exemptions generally provides exemptive relief in other cases for the purchase
of securities from, or the sale of securities to, a party in interest or
disqualified person where the party in interest or disqualified person is a
fiduciary of the purchaser or seller and is also an obligor with respect to 5%
or less of the fair market value of obligations or receivables contained in the
trust or an affiliate only when the following additional conditions are met:
o The purchaser or seller is not an ERISA plan, an IRA or a Keogh
plan that is sponsored by an underwriter or selling agent, a
trust's sponsor, the trustee, any insurer, any servicer or any
obligor with respect to obligations or receivables included in
the trust constituting more than 5% of the aggregate unamortized
principal balance of the assets in the trust, determined on the
date of initial issuance of the securities, or any affiliate of
any of these entities.
o Solely in the case of initial issuance of securities, at least
50% of each class of securities issued by the trust is acquired
by persons independent of the underwriters or selling agents, the
trust's sponsor, the trustee, any insurer, any servicer, any
obligor with respect to obligations or receivables included in
the trust constituting more than 5% of the aggregate unamortized
principal balance of the assets in the trust, determined on the
date of initial issuance of the securities, and any affiliate of
any of these entities.
o The purchaser's investment in each class of securities issued by
the trust does not exceed 25% of all of the securities in such
class outstanding at the time of the issuance.
o Immediately after the acquisition, no more than 25% of the
purchaser's assets are invested in securities issued by trusts
containing assets sold or serviced by an entity that has
discretionary authority over the purchaser or renders investment
advice to the purchaser for a fee.
The Underwriters' Exemptions provide relief for transactions in connection with
the servicing, operation and management of a trust only if:
o The transactions are carried out in accordance with the terms of
a binding pooling and servicing agreement.
o The pooling and servicing agreement is provided to, or fully
described in the prospectus or offering memorandum provided to,
investing ERISA plans, Keogh plans, IRAs and related investment
vehicles before they purchase securities issued by the trust.
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STATUTORY EXEMPTION FOR INSURANCE COMPANY GENERAL ACCOUNTS. In addition
to the PTCEs and the Underwriters' Exemptions, a temporary statutory exemption
may be available if you are investing on behalf of an insurance company general
account that includes plan assets. This exemption appears in section 401(c) of
ERISA. Section 401(c) of ERISA requires the United States Department of Labor to
issue regulations defining when an insurance company general account will be
deemed to include plan assets and, hence, be subject to the ERISA prohibited
transaction rules. Generally, until 18 months after the issuance of such
regulations, no person will be subject to liability for prohibited transactions
that result from the inclusion of plan assets in an insurance company general
account. If you are investing on behalf of an insurance company general account,
section 401(c) generally provides an exemption for your purchases and sales of
securities, as well as prohibited transactions resulting from transactions
incident to the operation of the trust, until 18 months after the issuance of
regulations. This will be the case as long as you have not acted to avoid the
regulations or committed a breach of fiduciary responsibilities which would also
constitute a violation of federal or state criminal law. If you are investing on
behalf of an insurance company general account, we cannot assure that the
purchase or sale of securities, the continued holding of securities previously
purchased, or transactions incidental to the operation of the trust, more than
18 months after the issuance of final regulations would qualify for further
statutory exemptive relief.
CONSULTATION WITH COUNSEL
There can be no assurance that any DOL exemption will apply with
respect to any particular Plan that acquires the securities or, even if all the
conditions specified therein were satisfied, that any such exemption would apply
to transactions involving the trust fund. Prospective Plan investors should
consult with their legal counsel concerning the impact of ERISA and the Code and
the potential consequences to their specific circumstances prior to making an
investment in the securities. Neither the Depositor, the Trustee, the Servicer
nor any of their respective affiliates will make any representation to the
effect that the securities satisfy all legal requirements with respect to the
investment therein by Plans generally or any particular Plan or to the effect
that the securities are an appropriate investment for Plans generally or any
particular Plan.
GOVERNMENT PLANS
Government plans are generally not subject to the fiduciary
standards of ERISA or the prohibited transaction rules of ERISA or the Code.
However, many states have enacted laws which established standards of fiduciary
conduct, legal investment rules, or other requirements for investment
transactions involving the assets of government plans. If you are considering
investing in securities on behalf of a government plan, you should consult with
your advisors regarding the requirements of applicable state law.
REQUIRED DEEMED REPRESENTATIONS OF INVESTORS
If so provided in the prospectus supplement for a series, a purchaser
of the one or more classes of the related securities may be required to
represent or may be deemed to have represented that either (a) it is not an
ERISA Plan, an IRA or a Keogh Plan and is not purchasing such securities by or
on behalf of or with plan assets of an ERISA Plan, an IRA or a Keogh Plan or (b)
the purchase of any such securities by or on behalf of or with plan assets of an
ERISA Plan, an IRA or a Keogh Plan is permissible under applicable law, will not
result in any non-exempt prohibited transaction
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under ERISA or Section 4975 of the Code and will not subject the Servicer, the
Depositor or the Trustee to any obligation in addition to those undertaken in
the related Agreement. A fiduciary of a Plan or any person investing plan assets
to purchase securities must make its own determination that the conditions for
purchase will be satisfied with respect to such securities.
THIS DISCUSSION IS A GENERAL DISCUSSION OF SOME OF THE RULES WHICH
APPLY TO ERISA PLANS, KEOGH PLANS, IRAS, GOVERNMENT PLANS AND THEIR RELATED
INVESTMENT VEHICLES. PRIOR TO MAKING AN INVESTMENT IN SECURITIES, PROSPECTIVE
PLAN INVESTORS SHOULD CONSULT WITH THEIR LEGAL AND OTHER ADVISORS CONCERNING THE
IMPACT OF ERISA AND THE CODE AND, PARTICULARLY IN THE CASE OF GOVERNMENT PLANS
AND RELATED INVESTMENT VEHICLES, ANY ADDITIONAL STATE LAW CONSIDERATIONS, AND
THE POTENTIAL CONSEQUENCES IN THEIR SPECIFIC CIRCUMSTANCES.
LEGAL INVESTMENT
The prospectus supplement for each series of securities will specify
which classes of securities of the series, if any, will constitute mortgage
related securities for purposes of the Secondary Mortgage Market Enhancement Act
of 1984. Any class of securities that is not rated in one of the two highest
rating categories by one or more nationally recognized statistical rating
agencies or that represents an interest in a trust fund that includes junior
mortgage loans will not constitute mortgage related securities for purposes of
SMMEA Mortgage related securities are legal investments to the same extent that,
under applicable law, obligations issued by or guaranteed as to principal and
interest by the United States or any agency or instrumentality thereof
constitute legal investments for persons, trusts, corporations, partnerships,
associations, business trusts and business entities, including depository
institutions, insurance companies and pension funds created pursuant to or
existing under the laws of the United States or of any state, the authorized
investments of which are subject to state regulation. Under SMMEA, if a state
enacted legislation prior to October 3, 1991 specifically limiting the legal
investment authority of any entities with respect to mortgage related
securities, the securities would constitute legal investments for entities
subject to that legislation only to the extent provided in that legislation.
SMMEA provides, however, that in no event will the enactment of any legislation
of this kind affect the validity of any contractual commitment to purchase, hold
or invest in mortgage related securities, or require the sale or other
disposition of such securities, so long as that contractual commitment was made
or the securities were acquired prior to the enactment of that legislation.
SMMEA also amended the legal investment authority of federally
chartered depository institutions as follows: federal savings and loan
associations and federal savings banks may invest in, sell or otherwise deal
with mortgage related securities without limitation as to the percentage of
their assets represented thereby, federal credit unions may invest in those
securities, and national banks may purchase those securities for their own
account without regard to the limitations generally applicable to investment
securities set forth in 12 U.S.C. 24 (Seventh), subject in each case to
regulations as the applicable federal regulatory authority may prescribe.
On April 23, 1998, the Federal Financial Institutions Examination
Council issued a revised supervisory policy statement applicable to all
depository institutions, setting forth guidelines for investments in high-risk
mortgage securities. The 1998 policy statement has been adopted by the Federal
Reserve Board, the Office of the Comptroller of the Currency, the FDIC, the
National Credit
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Union Administration and the Office of Thrift Supervision with an effective date
of May 26, 1998. The 1998 policy statement rescinds a 1992 policy statement that
had required, prior to purchase, a depository institution to determine whether a
mortgage derivative product that it is considering acquiring is high-risk, and,
if so, that the proposed acquisition would reduce the institution's overall
interest rate risk. The 1998 policy statement eliminates former constraints on
investing in certain high-risk mortgage derivative products and substitutes
broader guidelines for evaluating and monitoring investment risk.
On December 1, 1998, the Office of Thrift Supervision issued Thrift
Bulletin 13a, entitled, "Management of Interest Rate Risk, Investment
Securities, and Derivatives Activities", which is applicable to thrift
institutions regulated by the OTS. Thrift Bulletin 13a has an effective date of
December 1, 1998. One of the primary purposes of Thrift Bulletin 13a is to
require thrift institutions, prior to taking any investment position, to (1)
conduct a pre-purchase portfolio sensitivity analysis for any significant
transaction involving securities or financial derivatives and (2) conduct a
pre-purchase price sensitivity analysis of any complex security or financial
derivative. For the purposes of Thrift Bulletin 13a, complex security includes
among other things any collateralized mortgage obligation or REMIC security,
other than any plain vanilla mortgage pass-through security, that is, securities
that are part of a single class of securities in the related pool, that are
non-callable and do not have any special features. Accordingly, the offered
securities may be viewed as complex securities. The OTS recommends that while a
thrift institution should conduct its own in-house pre- acquisition analysis, it
may rely on an analysis conducted by an independent third-party as long as
management understands the analysis and its key assumptions. Further, Thrift
Bulletin 13a recommends that the use of complex securities with high price
sensitivity be limited to transactions and strategies that lower a thrift
institution's portfolio interest rate risk. Thrift Bulletin 13a warns that an
investment in complex securities by thrift institutions that do not have
adequate risk measurement, monitoring and control systems may be viewed by the
OTS examiners as an unsafe and unsound practice.
Prospective investors in the securities, including in particular the
classes of securities that do not constitute mortgage related securities for
purposes of SMMEA should consider the matters discussed in the following
paragraph.
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase securities or to purchase
securities representing more than a specified percentage of the investor's
assets. INVESTORS SHOULD CONSULT THEIR OWN LEGAL ADVISORS IN DETERMINING WHETHER
AND TO WHAT EXTENT THE SECURITIES CONSTITUTE LEGAL INVESTMENTS FOR THOSE
INVESTORS OR ARE SUBJECT TO INVESTMENT, CAPITAL OR OTHER RESTRICTIONS, AND, IF
APPLICABLE, WHETHER SMMEA HAS BEEN OVERRIDDEN IN ANY JURISDICTION RELEVANT TO
THAT INVESTOR.
METHODS OF DISTRIBUTION
The securities offered hereby and by the related prospectus supplements
will be offered in series through one or more of the methods described in the
paragraph below. The prospectus supplement prepared for each series will
describe the method of offering being utilized for that series and will state
the net proceeds to the depositor from the sale.
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The depositor intends that securities will be offered through the
following methods from time to time and that offerings may be made concurrently
through more than one of these methods or that an offering of the securities of
a particular series may be made through a combination of two or more of these
methods. These methods are as follows:
1. By negotiated firm commitment or best efforts underwriting
and public re-offering by underwriters;
2. By placements by the depositor with institutional investors
through dealers; and
3. By direct placements by the depositor with institutional
investors.
If underwriters are used in a sale of any securities, other than in
connection with an underwriting on a best efforts basis, the securities will be
acquired by the underwriters for their own account and may be resold from time
to time in one or more transactions, including negotiated transactions, at fixed
public offering prices or at varying prices to be determined at the time of sale
or at the time of commitment therefor. The underwriters may be broker-dealers
affiliated with the depositor whose identities and relationships to the
depositor will be as set forth in the related prospectus supplement. The
managing underwriter or underwriters with respect to the offer and sale of the
securities of a particular series will be set forth on the cover of the
prospectus supplement relating to the series and the members of the underwriting
syndicate, if any, will be named in the prospectus supplement.
In connection with the sale of the securities offered, underwriters may
receive compensation from the depositor or from purchasers of such securities in
the form of discounts, concessions or commissions. Underwriters and dealers
participating in the distribution of the securities may be deemed to be
underwriters in connection with the securities, and any discounts or commissions
received by them from the depositor and any profit on the resale of offered
securities by them may be deemed to be underwriting discounts and commissions
under the Securities Act of 1933, as amended.
It is anticipated that the underwriting agreement pertaining to the
sale of offered securities of any series will provide that the obligations of
the underwriters will be subject to conditions precedent, that the underwriters
will be obligated to purchase all the securities if any are purchased, other
than in connection with an underwriting on a best efforts basis, and that, in
limited circumstances, the depositor will indemnify the several underwriters and
the underwriters will indemnify the depositor against certain civil liabilities,
including liabilities under the Securities Act of 1933 or will contribute to
payments required to be made in respect thereof.
The prospectus supplement with respect to any series offered by
placements through dealers will contain information regarding the nature of the
offering and any agreements to be entered into between the depositor and
purchasers of offered securities of the series.
The depositor anticipates that the securities offered hereby will be
sold primarily to institutional investors or sophisticated non-institutional
investors. Purchasers of offered securities, including dealers, may, depending
on the facts and circumstances of such purchases, be deemed to be underwriters
within the meaning of the Securities Act of 1933 in connection with reoffers and
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sales by them of the offered securities. Holders of offered securities should
consult with their legal advisors in this regard prior to any reoffer or sale.
LEGAL MATTERS
Certain legal matters in connection with the securities will be passed
upon for the depositor by Thacher Proffitt & Wood, New York, New York.
FINANCIAL INFORMATION
The depositor has determined that its financial statements are not
material to the offering made hereby. Any prospective purchaser that desires to
review financial information concerning the depositor will be provided by the
depositor on request with a copy of the most recent financial statements of the
depositor.
RATING
It is a condition to the issuance of any class of securities that they
shall have been rated not lower than investment grade, that is, in one of the
four highest rating categories, by at least one nationally recognized
statistical rating organization.
Any ratings on the securities address the likelihood of receipt by the
holders thereof of all collections on the underlying mortgage assets to which
such holders are entitled. These ratings address the structural, legal and
issuer-related aspects associated with the securities, the nature of the
underlying mortgage assets and the credit quality of the guarantor, if any. The
ratings do not represent any assessment of the likelihood of principal
prepayments by borrowers or of the degree by which prepayments might differ from
those originally anticipated. As a result, securityholders might suffer a lower
than anticipated yield, and, in addition, holders of Strip Securities in extreme
cases might fail to recoup their initial investments.
AVAILABLE INFORMATION
The depositor is subject to the informational requirements of the
Securities Exchange Act of 1934 and in accordance therewith files reports and
other information with the Securities and Exchange Commission. Reports and other
information filed by the depositor can be inspected and copied at the public
reference facilities maintained by the Commission at its Public Reference
Section, 450 Fifth Street, N.W., Washington, D.C. 20549, and its Regional
Offices located as follows: Chicago Regional Office, 500 West Madison, 14th
Floor, Chicago, Illinois 60661; New York Regional Office, Seven World Trade
Center, New York, New York 10048. Copies of this material can also be obtained
from the Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates and electronically through the
Commission's Electronic Data Gathering, Analysis and Retrieval System at the
Commission's Web site (http:\\www.sec.gov). The depositor does not intend to
send any financial reports to securityholders.
This prospectus does not contain all of the information set forth in
the registration statement, of which this prospectus forms a part, and exhibits
thereto which the depositor has filed with the Commission under the securities
Act of 1933 and to which reference is hereby made.
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INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
There are incorporated into this prospectus by reference all documents
and reports filed or caused to be filed by the depositor with respect to a trust
fund under Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of
1934, prior to the termination of the offering of securities offered hereby
evidencing interest in a trust fund. The depositor 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 offered
hereby, a copy of any or all documents or reports incorporated herein by
reference, in each case to the extent those documents or reports relate to one
or more of the classes of those offered securities, other than the exhibits to
those documents (unless the exhibits are specifically incorporated by reference
in the documents). Requests to the depositor should be directed in writing to
its principal executive office at 1100 Town & Country Road, Orange, California
92868, Attention: Secretary, or by telephone at (714) 541-5378. The depositor
has determined that its financial statements are not material to the offering of
any securities offered hereby.
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GLOSSARY
ACCRUAL SECURITIES: A class of securities as to which accrued interest or a
portion thereof will not be distributed but rather will be added to the
principal balance of the security on each distribution date in the manner
described in the related prospectus supplement.
APPLICABLE FEDERAL RATE: A rate based on the average of current yields on
Treasury securities, which rate is computed and published monthly by the IRS.
ARM LOAN: A mortgage loan with an interest rate that adjusts periodically, with
a corresponding adjustment in the amount of the monthly payment, to equal the
sum of a fixed percentage amount and an index.
CALL CLASS: The holder of a non-offered class of securities that has the right,
at its discretion, to terminate the related trust fund on and effect early
retirement of the securities of such series in the manner described under
"Description of the Securities--Termination" in this prospectus.
CERCLA: The Comprehensive Environmental Response, Compensation and Liability
Act, as amended.
CLEAN-UP CALL: The right of the party entitled to effect a termination of a
trust fund upon the aggregate principal balance of the outstanding trust fund
assets for the series at that time being less than the percentage, as specified
in the related prospectus supplement, of the aggregate principal balance of the
trust fund assets at the cut-off date for that series and which percentage will
be between 25% and 0%.
CLOSING DATE: With respect to any series of securities, the date on which the
securities are issued.
CODE: The Internal Revenue Code of 1986, as amended.
COMMISSION: The Securities and Exchange Commission.
CPR: The Constant Prepayment Rate model, which assumes that the outstanding
principal balance of a pool of mortgage loans prepays at a specified constant
annual rate. In generating monthly cash flows, this rate is converted to an
equivalent constant monthly rate.
CRIME CONTROL ACT: The Comprehensive Crime Control Act of 1984.
DIDMC: The Depository Institutions Deregulation and Monetary Control Act of
1980.
DOL: The U.S. Department of Labor.
DOL REGULATIONS: The regulations promulgated by the U.S. Department of Labor at
29 C.F.R. ss.2510. 3-101
DUE PERIOD: The second day of the month immediately preceding the month in which
the distribution date occurs, or the day after the cut-off date in the case of
the first Due Period, and
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ending on the first day of the month of the related distribution date, unless
the prospectus supplement specifies otherwise.
EQUITY CERTIFICATES: Where the issuer is an owner trust, the certificates
evidencing ownership of the trust fund.
ERISA PERMITTED INVESTMENTS: The types of investments permitted by the rating
agencies named in the Underwriter's Exemption issued by the DOL in which funds
in a pre-funding account may be invested.
FASIT: A financial asset securitization investment trust as defined in Sections
860H through 860L of the Code.
FASIT PROVISIONS: Sections 860H through 860L of the Code.
FASIT SECURITIES: Securities evidencing interests in a trust fund as to which a
FASIT election has been made.
FTC RULE: The "Holder in the Due Course" Rule of the Federal Trade Commission.
GARN-ST. GERMAIN ACT: The Garn-St. Germain Depositor Institutions Act of 1982.
GRANTOR TRUST CERTIFICATE: A certificate representing an interest in a Grantor
Trust Fund.
GRANTOR TRUST FRACTIONAL CERTIFICATE: A Grantor Trust Certificate representing
an undivided equitable ownership interest in the principal of the mortgage loans
constituting the related Grantor Trust Fund, together with interest on the
Grantor Trust Certificates at a pass-through rate.
GRANTOR TRUST STRIP CERTIFICATE: A certificate representing ownership of all or
a portion of the difference between interest paid on the mortgage loans
constituting the related Grantor Trust Fund (net of normal administration fees
and any retained interest of the depositor) and interest paid to the holders of
Grantor Trust Fractional Interest Certificates issued with respect to the
Grantor Trust Fund. A Grantor Trust Strip Certificate may also evidence a
nominal ownership interest in the principal of the mortgage loans constituting
the related Grantor Trust Fund.
GRANTOR TRUST FUND: A trust fund as to which no REMIC election will be made and
which qualifies as a grantor trust within the meaning of Subpart E, part I,
subchapter J of Chapter 1 of the Code.
HIGH COST LOAN: A mortgage loan subject to the Home Ownership and Equity
Protection Act of 1994.
HIGH LTV LOAN: Mortgage loans with loan-to-value ratios in excess of 80% and as
high as 150% and which are not insured by a primary insurance policy.
HOMEOWNERSHIP ACT: The Home Ownership and Equity Protection Act of 1994.
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INSURANCE PROCEEDS: Proceeds received with respect to a mortgage loan under any
hazard insurance policy, special insurance policy, primary insurance policy, FHA
insurance policy, VA guarantee, bankruptcy bond or mortgage pool insurance
policy, to the extent such proceeds are not applied to the restoration of the
property or released to the mortgagor in accordance with normal servicing
procedures.
LIQUIDATED LOAN: A defaulted mortgage loan that is finally liquidated, through
foreclosure sale or otherwise.
LIQUIDATION PROCEEDS: All amounts, other than Insurance Proceeds, received and
retained in connection with the liquidation of a defaulted mortgage loan, by
foreclosure or otherwise.
LOCKOUT DATE: The date of expiration of the Lockout Period with respect to a
mortgage loan.
LOCKOUT PERIOD: The period specified in a mortgage note during which prepayment
of the mortgage loan is prohibited.
MORTGAGE: The mortgage, deed of trust or similar instrument securing a mortgage
loan.
NBRC: The National Bankruptcy Review Commission.
NCUA: The National Credit Union Administration.
NONRECOVERABLE ADVANCE: An advance made or to be made with respect to a mortgage
loan which the master servicer determines is not ultimately recoverable from
Related Proceeds.
OID REGULATIONS: The rules governing original issue discount that are set forth
in Sections 1271-1273 and 1275 of the Code and in the related Treasury
regulations.
PARTNERSHIP CERTIFICATE: A certificate representing an interest in a Partnership
Trust Fund.
PARTNERSHIP TRUST FUND: A trust fund as to which no REMIC election will be made
and which qualifies as a partnership within the meaning of subchapter K of
Chapter 1 of the Code.
PLANS: Employee pension and welfare benefit plans subject to ERISA and
tax-qualified retirement plans described in Section 401(a) of the Code or
Individual Retirement Accounts described in Section 408 of the Code.
PREPAYMENT ASSUMPTION: With respect to a REMIC Regular Certificate or a Grantor
Trust Certificate, the assumption as to the rate of prepayments of the principal
balances of mortgage loans held by the trust fund used in pricing the initial
offering of that security.
PREPAYMENT PERIOD: The calendar month immediately preceding the month in which
the distribution date occurs, unless the prospectus supplement specifies
otherwise.
PTCE: Prohibited Transaction Class Exemption
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PURCHASE PRICE: As to any mortgage loan, an amount equal to the sum of (1) the
unpaid principal balance of the mortgage loan, (2) unpaid accrued interest on
the Stated Principal Balance at the rate at which interest accrues on the
mortgage loan, net of the servicing fee and any retained interest, from the date
as to which interest was last paid to the calendar month in which the relevant
purchase is to occur, (3) any unpaid servicing fees and unreimbursed servicing
expenses payable or reimbursable to the master servicer with respect to that
mortgage loan, (4) any unpaid retained interest with respect to that mortgage
loan, (5) any realized losses incurred with respect to that mortgage loan and
(6) if applicable, any expenses reasonably incurred or to be incurred by the
master servicer or the trustee in respect of the breach or defect giving rise to
a purchase obligation.
RECORD DATE: The last business day of the month preceding the month in which a
distribution date occurs, unless the prospectus supplement specifies otherwise.
RELATED PROCEEDS: Recoveries on a mortgage loan related to amounts which the
master servicer has previously advanced to the related trust fund.
RELIEF ACT: The Soldiers' and Sailors' Civil Relief Act of 1940.
REMIC: A real estate mortgage investment conduit as defined in Sections 860A
through 860G of the Code.
REMIC CERTIFICATES: Certificates evidencing interests in a trust fund as to
which a REMIC election has been made.
REMIC PROVISIONS: Sections 860A through 860G of the Code.
REMIC REGULAR CERTIFICATE: A REMIC Certificate designated as a regular interest
in the related REMIC.
REMIC RESIDUAL CERTIFICATE: A REMIC Certificate designated as a residual
interest in the related REMIC.
REMIC REGULATIONS: The REMIC Provisions and the related Treasury regulations.
RETAINED INTEREST: A portion of the interest payments on a trust fund asset that
may be retained by the depositor or any previous owner of the asset.
RICO: The Racketeer Influenced and Corrupt Organizations statute.
SAIF: The Savings Association Insurance Fund.
SCHEDULED PRINCIPAL BALANCE: As to any mortgage loan or manufactured housing
contract, the unpaid principal balance thereof as of the date of determination,
reduced by the principal portion of all monthly payments due but unpaid as of
the date of determination.
SENIOR/SUBORDINATE SERIES: A series of securities of which one or more classes
is senior in right of payment to one or more other classes to the extent
described in the related prospectus supplement.
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SINGLE FAMILY PROPERTIES: One- to four-family residential properties including
detached and attached dwellings, townhouses, rowhouses, individual condominium
units, individual units in planned-unit developments and individual units in de
minimus planned-unit developments.
SPECIAL HAZARD SUBORDINATION AMOUNT: The amount of any Special Hazard Realized
Loss that is allocated to the subordinate securities of a series.
STATED PRINCIPAL BALANCE: As to any mortgage loan or manufactured housing
contract, the principal balance of the mortgage loan or manufactured housing
contract as of the cut-off date, after application of all scheduled principal
payments due on or before the cut-off date, whether or not received, reduced by
all amounts, including advances by the master servicer, allocable to principal
that are distributed to securityholders on or before the date of determination,
and as further reduced to the extent that any realized loss thereon has been, or
had it not been covered by a form of credit support, would have been, allocated
to one or more classes of securities on or before the determination date.
STRIP SECURITIES: A class of securities which are entitled to (a) principal
distributions, with disproportionate, nominal or no interest distributions, or
(b) interest distributions, with disproportionate, nominal or no principal
distributions.
STRIPPED INTEREST: The distributions of interest on a Strip Security with no or
a nominal principal balance.
UNITED STATES PERSON: A citizen or resident of the United States; a corporation
or partnership, including an entity treated as a corporation or partnership for
federal income tax purposes, created or organized in, or under the laws of, the
United States or any state thereof or the District of Columbia, except, in the
case of a partnership, to the extent provided in Treasury regulations; an estate
whose income is subject to United States federal income tax regardless of its
source; or a trust if a court within the United States is able to exercise
primary supervision over the administration of the trust and one or more United
States persons have the authority to control all substantial decisions of the
trust. To the extent prescribed in regulations by the Secretary of the Treasury,
which have not yet been issued, a trust which was in existence on August 20,
1996, other than a trust treated as owned by the grantor under subpart E of part
I of subchapter J of chapter 1 of the Code, and which was treated as a United
States person on August 20, 1996 may elect to continue to be treated as a United
States person notwithstanding the previous sentence.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
The expenses expected to be incurred in connection with the issuance
and distribution of the Securities being registered, other than underwriting
compensation, are as set forth below. All such expenses, except for the filing
fee, are estimated.
SEC Registration Fee................................... $264.00
Printing and Engraving Fees............................ 20,000.00*
Legal Fees and Expenses................................ 150,000.00*
Accounting Fees and Expenses........................... 50,000.00*
Trustee Fees and Expenses.............................. 20,000.00*
Rating Agency Fees..................................... 75,000.00*
Miscellaneous.......................................... 15,000.00*
-----------
Total............................................. $330,264.00
===========
---------
* Based on the offering of a single series of Securities.
Item 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under Section 8(b) of the proposed form of Underwriting Agreement, the
Underwriters are obligated under certain circumstances to indemnify certain
controlling persons of Long Beach Securities Corp. (the "Depositor") against
certain liabilities, including liabilities under the Securities Act of 1933.
Subsection (a) of Section 145 of the General Corporation Law of
Delaware empowers a corporation to indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no cause to believe his conduct was unlawful.
Subsection (b) of Section 145 of the General Corporation Law of
Delaware empowers a corporation to indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed action
or suit by or in the right of the corporation to procure a judgment in its favor
by reason of the fact that such person acted in any of the capacities set forth
above, against expenses (including attorneys' fees) actually and reasonably
incurred by him in con nection with the defense or settlement of such action or
suit if he acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the corporation and except that no
indemnification may be made in respect of any claim, issue or matter as to which
such person
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shall have been adjudged to be liable to the corporation unless and only to the
extent that the Court of Chancery or the court in which such action or suit was
brought shall determine upon application that, despite the adjudication of
liability but in view of all circumstances of the case, such person is fairly
and reasonably entitled to indemnity for such expenses which the Court of
Chancery or such other court shall deem proper.
Section 145 further provides that to the extent a director, officer,
employee or agent of a corporation has been successful on the merits or
otherwise in the defense of any action, suit or proceeding referred to in
subsections (a) and (b), or in the defense of any claim, issue or matter
therein, he shall be indemnified against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection therewith; that
indemnification and advancement of expenses provided by, or granted pursuant to,
Section 145 shall not be deemed exclusive of any other rights to which the
indemnified party may be entitled; and empowers the corporation to purchase and
maintain insurance on behalf of a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him
and incurred by him in any such capacity, or arising out of his status as such,
whether or not the corporation would have the power to indemnify him against
such liabilities under Section 145.
The By-Laws of the Depositor provide, in effect, that to the extent and
under the circumstances permitted by subsections (a) and (b) of Section 145 of
the General Corporation Law of Delaware, the Depositor (i) shall indemnify and
hold harmless each person who was or is a party or is threatened to be made a
party to any action, suit or proceeding described in subsections (a) and (b) by
reason of the fact that he is or was a director or officer, or his testator or
intestate is or was a director or officer of the Depositor against expenses,
judgments, fines and amounts paid in settlement, and (ii) shall indemnify and
hold harmless each person who was or is a party or is threat ened to be made a
party to any such action, suit or proceeding if such person is or was serving at
the request of the Depositor as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise.
Pursuant to Section 145 of the General Corporation Law of Delaware,
liability insurance is maintained covering directors and principal officers of
the Depositor.
The Pooling and Servicing Agreement or Trust Agreement with respect to
each series of Certificates and the Servicing Agreement, Indenture and Trust
Agreement with respect to each series of Notes will provide that no director,
officer, employee or agent of the Depositor is liable to the Trust Fund or the
Securityholders, except for such person's own willful misfeasance, bad faith or
gross negligence in the performance of duties or reckless disregard of
obligations and duties. The Pooling and Servicing Agreement or Trust Agreement
with respect to each series of Certificates and the Servicing Agreement,
Indenture and Trust Agreement with respect to each series of Notes will further
provide that, with the exceptions stated above, a director, officer, employee or
agent of the Depositor is entitled to be indemnified against any loss, liability
or expense incurred in connection with legal action relating to such Pooling and
Servicing Agreement, Trust Agreement, Servicing Agreement, Indenture or Trust
Agreement and related Securities other than such expenses related to particular
Mortgage Loans.
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<PAGE>
Item 16. EXHIBITS.
1.1 Form of Underwriting Agreement.
3.1 Certificate of Incorporation of the Registrant.
3.2 By-laws of the Registrant.
4.1 Form of Pooling and Servicing Agreement, for a series
consisting of Senior and Subordinate Certificates.
4.2 Form of Pooling and Servicing Agreement, for a series
of Certificates with various combinations of credit
support.
4.3 Form of Servicing Agreement, for a series consisting
of Mortgage-Backed Notes.
4.4 Form of Trust Agreement, for a series consisting of
Mortgage-Backed Notes.
4.5 Form of Indenture, for a series consisting of
Mortgage-Backed Notes.
5.1 Opinion of Thacher Proffitt & Wood with respect to
legality.
8.1 Opinion of Thacher Proffitt & Wood with respect to
certain tax matters (included as part of Exhibit
5.1).
23.1 Consent of Thacher Proffitt & Wood (included as part
of Exhibits 5.1 and 8.1).
24.1 Power of Attorney.
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<PAGE>
Item 17. UNDERTAKINGS.
A. UNDERTAKING PURSUANT TO RULE 415.
The Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post- effective amendment to this Registration Statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933; (ii) to reflect in the prospectus any facts or
events arising after the effective date of the Registration Statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental change in the
information set forth in the Registration Statement; (iii) to include
any material information with respect to the plan of distribution not
previously disclosed in the Registration Statement or any material
change of such information in the Registration Statement;
PROVIDED, HOWEVER, that paragraphs (i) and (ii) do not apply if the
information required to be included in the post-effective amendment is
contained in periodic reports filed by the Registrant pursuant to
Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that
are incorporated by reference in the Registration Statement.
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
B. UNDERTAKING IN CONNECTION WITH INCORPORATION BY REFERENCE OF CERTAIN
FILINGS UNDER THE SECURITIES EXCHANGE ACT OF 1934.
The Registrant hereby undertakes that, for purposes of determining any
liability under the Securities Act of 1933, each filing of the Registrant's
annual report pursuant to Section 13(a) or Section 15(d) of the Securities
Exchange Act of 1934 that is incorporated by reference in the Registration
Statement shall be deemed to be a new Registration Statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
C. UNDERTAKING IN RESPECT OF INDEMNIFICATION.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions described in Item 15 above,
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification
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against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted against
the Registrant by such director, officer or controlling person in connection
with the securities being registered, the Registrant will, unless in the opinion
of its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by the
final adjudication of such issues.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
Long Beach Securities Corp. certifies that it has reasonable grounds to believe
that it meets all of the requirements for filing on Form S-3 and has duly caused
this Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Orange, State of California, on the
18th day of July, 2000.
LONG BEACH SECURITIES CORP.
By: /s/ Craig J. Chapman
--------------------------
Name: Craig J. Chapman
Title: President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
/s/Craig J. Chapman Director and President July 18, 2000
------------------------------------ (Principal Executive Officer)
Craig J. Chapman
/s/Phillip Goodeve Senior Vice President July 18, 2000
------------------------------------ (Principal Financial Officer)
Phillip Goodeve
/s/Troy Gotschall Director and Executive Vice President July 18, 2000
------------------------------------ (Chief Operating Officer)
Troy Gotschall
/s/Elizabeth A. Wood Director and Senior Vice President July 18, 2000
------------------------------------
Elizabeth A. Wood
/s/Art Den-Heyer Controller July 18, 2000
------------------------------------
Art Den-Heyer
</TABLE>
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<PAGE>
EXHIBIT INDEX
-------------
Exhibit
Number
------
5.1 Opinion of Thacher Proffitt & Wood with respect to legality.
8.1 Opinion of Thacher Proffitt & Wood with respect to certain tax matters
(included as part of Exhibit 5.1).
23.1 Consent of Thacher Proffitt & Wood (included as part of Exhibits 5.1
and 8.1).
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