<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 15, 2000
REGISTRATION NO. 333-46210
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
PRE-EFFECTIVE AMENDMENT NO. 1
TO REGISTRATION STATEMENT
ON FORM S-3 UNDER
THE SECURITIES ACT OF 1933
----------------
UNION PLANTERS HOME EQUITY CORP.
(Registrant)
(Exact name of registrant as specified in its charter)
DELAWARE APPLIED FOR
(State of Incorporation) (I.R.S. Employee I.D. No.)
7130 GOODLETT FARMS PARKWAY
CORDOVA, TENNESSEE 38018
(901) 580-6000
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
-----------------------
NORMAN J. BURGLIN Copy to:
7130 GOODLETT FARMS PARKWAY KEVIN J. BUCKLEY
CORDOVA, TENNESSEE 38018 HUNTON & WILLIAMS
(901) 580-6046 RIVERFRONT PLAZA, EAST TOWER
(901) 580-2468 (TELECOPY) 951 EAST BYRD STREET
(Name, address, including zip code RICHMOND, VIRGINIA 23219-4074
and telephone number, including area code, (804) 788-8200
of agent for service) (804) 788-8218 (TELECOPY)
-----------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
FROM TIME TO TIME AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
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, check the following box. [x]
-----------------------
CALCULATION OF REGISTRATION FEE
================================================================================
PROPOSED PROPOSED
MAXIMUM MAXIMUM
OFFERING AGGREGATE AMOUNT OF
TITLE OF SECURITIES AMOUNT TO BE PRICE OFFERING REGISTRATION
BEING REGISTERED REGISTERED* PER UNIT* PRICE* FEE**
--------------------------------------------------------------------------------
Mortgage Pass-Through $1,000,000 100% $1,000,000 $264
Certificates and
Collateralized
Mortgage Bonds
================================================================================
* Estimated solely for calculating the registration fee pursuant to
Rule 457(a).
** Paid with the initial filing on September 20, 2000.
-----------------------
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.
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 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. [ ]
<PAGE> 2
EXPLANATORY NOTE
This Registration Statement includes a base prospectus and the forms of
prospectus supplement. The forms of prospectus supplement included in this
Registration Statement are meant to be illustrative of the type of disclosure
that might be presented for either a series of certificates or a series of
notes, but is not meant to be, and necessarily cannot be, exhaustive of all
possible features that might exist in a particular series. This form assumes the
possibility of certain types of credit enhancement, but as described in the base
prospectus, the types of credit support may vary from series to series. Each
base prospectus used, in either preliminary or final form, will be accompanied
by the applicable prospectus supplement.
<PAGE> 3
The information in this prospectus supplement and the accompanying 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 supplement and the accompanying 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.
Prospectus Supplement (UNION
(To prospectus dated December __, 2000) PLANTERS
LOGO)
$______________
UPHEC Trust, Series [_____]
Issuer
Union Planters Home Equity Corp.,
Depositor
[Union Planters Bank, National Association],
Seller and Master Servicer
---------------
CLASS CLASS CLASS CLASS
BONDS
Initial Principal Balance
Interest Rate
First Payment Date
Underwriting Discount
---------------
Your trust will consist primarily of a pool of approximately $____________
[fixed-rate] [home equity loans]. [Junior] liens on one- to four-family
residences secure these [home equity loans].
---------------
Before you purchase these securities you should carefully consider the risk
factors beginning on page [S-___] of this prospectus supplement and on page
[____] of the accompanying prospectus.
---------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined that
this prospectus supplement or the accompanying prospectus is accurate or
complete. Any representation to the contrary is a criminal offense.
---------------
[Underwriters]
_______ __, 200_
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE PAGE
<S> <C> <C> <C>
Where to Find Information in Original Combined LTV Ratios.......................17
These Documents.....................................i
Geographic Distribution............................18
Summary of Terms....................................1 Additional Information.........................19
Risk Factors........................................6 Delinquency and Foreclosure Experience.............19
Delinquency Experience.........................20
Description Of The Mortgage Loan Loss Experience...........................21
Loans...............................................9
Description Of The Bonds...........................22
General.............................................9 General........................................22
Available Distribution Amount..................23
Mortgage Loans......................................9 Interest Payments..............................23
Principal Payments ............................25
Missing Mortgage Loan Allocation of Losses; Subordination............25
Documentation.......................................9 [Adjustment to Servicing Fee in
Connection with Prepaid Mortgage
Underwriting Standards.............................10 Loans..........................................26
[Advances......................................27
Characteristics of the Mortgage
Loans..............................................10 Yield, Prepayment and Maturity
Considerations.....................................27
Loan Type..........................................11 Prepayment Considerations and Risks............28
Weighted Average Life of the
Principal Balances as of the bonds..........................................29
Cut off Date.......................................12
Percent of Initial Security Principal
Mortgage Rates as of the Balance Outstanding At the Following
Cut off Date.......................................13 Percentages of CPR.................................32
Original Term to Maturity in Indenture..........................................33
Months.............................................13 General........................................33
Assignment of the Mortgage Loans...............33
Remaining Term to Maturity in Security Account...............................34
Months.............................................14 Servicing and Other Compensation and
Payment of Expenses............................34
Mortgage Loan Occupancy Type.......................14 Reports to bondholders ........................35
Voting Rights .................................35
Year of Origination................................15 Termination....................................35
Year of Scheduled Maturity.........................16
</TABLE>
i
<PAGE> 5
<TABLE>
<S> <C> <C> <C>
The Trustee........................................36
Material Federal Income Tax Consequences...........36
General..........................................36
Taxation of Regular Interests....................37
Use of Proceeds....................................37
Underwriting.......................................38
Ratings............................................38
</TABLE>
ii
<PAGE> 6
WHERE TO FIND INFORMATION IN THESE DOCUMENTS
This prospectus supplement and the accompanying prospectus together
contain complete information about the offering of your series. You are urged to
read both documents completely. In particular, you should read the information
under the heading "Risk Factors," beginning on [page ____] of the accompanying
prospectus.
This supplement begins with several sections describing these bonds:
o the "Summary of Terms" provides important amounts, dates and other
terms of your series;
o the [____________] describes the key structural features of your
series; and
o the "Description of Trust Assets" describes the assets that provide
the source of payment of your series and refers you to the sections
in the accompanying prospectus where you can find further
information about the loans, assets and other collateral for the
bonds.
As you read through these sections, cross references will direct you to
more information in the accompanying prospectus. You can also directly reference
key topics by looking at the table of contents in this prospectus supplement and
the accompanying prospectus.
[We have filed preliminary information regarding your trust's assets
and your bonds with the SEC. The information contained in the prospectus
supplement supersedes all of that preliminary information, which was prepared by
the underwriters for prospective investors based on information provided by the
depositor.]
Until __________ all dealers that effect transactions in the bonds,
whether or not participating in this offering, may be required to deliver a
prospectus and prospectus supplement. This requirement is in addition to the
dealer's obligation to deliver a prospectus and prospectus supplement when
acting as underwriters with respect to their unsold allotments or subscriptions.
You should rely only on the information in this prospectus supplement
and the accompanying prospectus. The issuer has not authorized anyone to provide
you with information that is different.
i
<PAGE> 7
SUMMARY OF TERMS
The following section is only a summary of selected information and
does not provide you with all the information you will need to make your
investment decision. There is more detailed information in this prospectus
supplement and in the accompanying prospectus. To understand all of the terms of
the offering of the bonds, carefully read this entire document and the
accompanying prospectus.
BONDS OFFERED
UPHEC TRUST, SERIES [______]
$[_____________]
--------------------------------------------------------------------------------
Issuer UPHEC Trust, Series [_______]
Seller and Master Servicer Union Planters Bank
Depositor Union Planters Home Equity Corp.
Trustee [_____________]
Cut Off Date [__________], 2000
Closing Date [__________], 2000
[Clearance and Settlement DTC/Cedel/Euroclear]
Listing [We will not apply to list your bonds on any
trading exchange.]
Collateral for your Bonds A pool of approximately $____________ [fixed-rate]
[home equity loans]. [Junior] liens on one- to
four-family residences secure these [home equity
loans]. [Union Planters Bank underwrote the home
equity loans.]
--------------------------------------------------------------------------------
INITIAL CLASS PRINCIPAL RATE % OF TOTAL SERIES PRINCIPAL
----------------------- ---- ---------------------------
BALANCE
-------
Class __
Class __
Class __
1
<PAGE> 8
DENOMINATIONS
The bonds will be issued in minimum denominations of $________ and
integral multiples of $________ in excess of the minimum.
RISK FACTORS
Your investment in the bonds involves many risks. You should carefully
consider all of the matters discussed in this prospectus supplement and in the
accompanying prospectus, including those under the heading "Risk Factors,"
before making any investment decision.
THE TRUST FUND
The trust fund will consist of a pool of [fixed rate] mortgage loans
secured by [first liens and] junior liens on one to four family residential
properties located in [__] different states[, the District of Columbia and the
Virgin Islands].
ISSUER
The issuer is a [common law] trust organized under the laws of the
state of [_____]. The issuer [was][will be] organized on [______], 200_. The
issuer has no assets other than the assets deposited in your trust fund, and the
issuer will have no operations other than as described in this prospectus
supplement and the accompanying prospectus.
THE MORTGAGE LOANS
[As of the cut off date, approximately __% of the mortgage loans are
secured by first liens on the mortgaged property, approximately __% of the
mortgage loans are secured by second liens on the mortgaged property, and
approximately __% of the mortgage loans are secured by third liens on the
mortgaged property.] The mortgage loans will have an initial aggregate principal
balance as of [__________] of approximately $[________]. The mortgage loans have
original terms to maturity of not more than [ ]. The pool of mortgage loans is
expected to have the following approximate characteristics as of the cut off
date:
o total principal balance: [___________]
o average principal balance: [_________]
o weighted average mortgage rate: [_____%]
o weighted average remaining term to maturity: [_____]
See "Description of the Mortgage Loans" in this prospectus supplement and the
prospectus.
2
<PAGE> 9
THE BONDS
This prospectus supplement offers the class __, class __ and class __
bonds.
The bonds will be issued pursuant to the terms of a indenture, dated as
of [___________], among the [_________________________].
The offered bonds will be available [only in book entry form through
the facilities of the Depository Trust Company]. See "Description of the Bonds"
in this prospectus supplement.
PAYMENT DATES
The [25th] day of each month or the next succeeding business day,
beginning in [_______ 200_].
INTEREST AND PRINCIPAL PAYMENTS
The class ____ and class ____ bonds are collectively referred to as
senior bonds because they are senior in right to the class __ bonds for
receiving payments.] The class __ bonds are collectively referred to as
subordinate bonds. [The class __ bonds are interest only bonds and are entitled
only to payments of interest and are not entitled to any principal payments.]
[The class __ bonds are principal only bonds and are entitled only to payments
of principal and are not entitled to any interest payments.] The trustee will
pay the monies it receives on the mortgage loans to make payments on the bonds
in the following order of priority:
o [interest on each class of senior bonds [other than the class PO
bonds, which receive no interest payments];
o the principal payment amount to the senior bonds then entitled to
receive payments of principal in the manner, amount, order and
priority described in this prospectus supplement, [but not to the
[________] bonds, which receive no principal payments];
o any deferred amounts payable to the [________] bonds, as described
in this prospectus supplement; and
o interest on and then principal of each class of subordinate bonds,
paid in sequential order.]
[Under some circumstances described later in this prospectus
supplement, payments that would otherwise be made on the subordinate bonds may
be paid instead to the senior bonds. See "Description of the Bonds" in this
prospectus supplement.]
CREDIT ENHANCEMENT
Credit enhancement for the senior bonds will be provided by the
subordinate bonds. The rights of holders of the subordinate bonds to receive
payments will be junior to the rights of the
3
<PAGE> 10
holders of the senior bonds as described in this prospectus supplement. See
"Description of the Bonds -- Allocation of Losses; Subordination" in this
prospectus supplement.
RATINGS
Before the bonds are issued, the bonds must receive a rating of "[___]"
by [____________________] and "[___]" by [_________]. A security rating is not a
recommendation to buy, sell or hold bonds and may be subject to revision or
withdrawal at any time. See "Ratings" in this prospectus supplement.
ADVANCES
On or prior to each payment date, the master servicer will advance the
following amount to the trust:
o [delinquent scheduled payments of principal of or interest on
mortgage loans];
o [delinquent payments of taxes, insurance premiums and other escrowed
items to the extent the master servicer considers those amounts to
be recoverable];
o [liquidation related expenses]; and
o [foreclosure advances].
See "Description of the Bonds -- Advances" in this prospectus supplement.
OPTIONAL TERMINATION
On any date on which the aggregate principal balance of the mortgage
loans remaining in the trust fund is less than [___]% of the original amount,
the master servicer may purchase all of the mortgage loans, terminate the trust
fund and pay the proceeds of the sale of the mortgage loans on the termination
to the holders of the outstanding bonds in the order and amounts described in
this prospectus supplement. See "indenture -- Termination" in this prospectus
supplement.
LEGAL INVESTMENT
The [class __ bonds] [will] [will not] constitute mortgage related
securities for purposes of the Secondary Mortgage Market Enhancement Act of 1984
[for so long as they are rated in one of the two highest rating categories by
one or more nationally recognized statistical rating organizations]. See "Legal
Investment" in this prospectus supplement and in the prospectus.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
[The assets of the trust fund will be treated as a real estate mortgage
investment conduit, or REMIC, for federal income tax purposes. Hunton &
Williams, tax counsel to the depositor, will provide a legal opinion that,
assuming compliance with all provisions of the indenture, the assets of the
trust fund will qualify as a REMIC under the Internal Revenue Code. See
"Material Federal Income Tax Consequences" in this prospectus supplement and in
the prospectus].
4
<PAGE> 11
[The [________] bonds will be regular interests in the REMIC, taxable
as debt obligations under the Internal Revenue Code. Interest paid or accrued on
the bonds, including any original issue discount, will be taxable to you in
accordance with the accrual method of accounting, regardless of your usual
method of accounting. The [________] bonds will constitute the "residual
interest" in the REMIC. See "Material Federal Income Tax Consequences" in this
prospectus supplement and in the prospectus.]
[Hunton & Williams, tax counsel to the depositor, is of the opinion
that the trust fund will be treated as a partnership for federal income tax
purposes and will not be treated as a taxable mortgage pool or as a publicly
traded partnership taxable as a corporation. As a partnership, the partnership
trust fund will not be subject to federal income tax. The bonds will be treated
as indebtedness for federal income tax purposes. See "Material Federal Income
Tax Consequences --- Partnership Trust Funds" and "--- Taxation of Partnership
Bondholders."]
5
<PAGE> 12
RISK FACTORS
The following risk factors, which you should carefully consider, along
with the risk factors noted in the accompanying prospectus describe the
principal risk factors related to an investment in the offered bonds. You should
also consider the information in the prospectus about risk factors.
CIRCUMSTANCES BEYOND THE DEPOSITOR'S CONTROL WILL AFFECT THE YIELD ON YOUR BONDS
The yield to maturity on the bonds will depend, among other things, on
how often the borrowers make principal payments on the mortgage loans and the
allocation of principal payments to reduce the principal balance of some classes
of bonds.
Whether you purchase a bond at a premium or a discount also affects
your yield to maturity. For example, if you purchase a bond at a premium and
principal payments occur at a rate faster than you had anticipated, your actual
yield to maturity will be lower than you had assumed at the time of purchase. On
the other hand, if you purchase a bond at a discount and principal payments
occur at a rate slower than you had anticipated, your actual yield to maturity
will be lower than you had assumed at the time of purchase.
HOW JUNIOR LIEN MORTGAGE ASSETS COULD ADVERSELY IMPACT THE YIELD AND PREPAYMENTS
ON YOUR BONDS
Your trust may contain mortgage assets secured by junior liens and the
senior liens may not be included in your trust. A decline in residential real
estate values could reduce the value of a mortgaged property securing a junior
lien mortgage asset to below that of all liens on the mortgaged property.
Because mortgage assets secured by junior liens are subordinate to the rights
under senior liens, a decline would adversely affect the position of the junior
lienholder before having any affect on the position of the senior lienholder.
Interest rates, the condition of the mortgaged property and other factors may
also reduce the value of the mortgaged property. As a result, the loan to value
ratio may rise. This increase will reduce the likelihood that, in the event of a
default by the obligor, liquidation or other proceeds will be sufficient to
repay amounts owing on the junior lien mortgage asset. This could adversely
impact your bonds.
Other factors may influence the prepayment rate of junior lien mortgage
assets. These include the amounts of, and interest on, the senior mortgage loan
and the use of senior lien mortgage loans as long term financing for home
purchases and junior lien mortgage loans as shorter term financing. Accordingly,
junior lien mortgage assets may experience a higher rate of prepayments than
senior lien mortgage loans. Any future limitations on the rights of obligors to
deduct interest payments on junior lien mortgage assets for federal income tax
purposes may increase the rate of prepayments on junior lien mortgage assets.
This could adversely impact the yield and delay payments on your bonds.
6
<PAGE> 13
[HIGH LOAN TO VALUE RATIOS COULD ADVERSELY IMPACT YOUR BONDS
Some mortgage loans currently have high loan to value ratios, including
ratios of more than 100% in some cases. Therefore, a mortgaged property may not
fully secure the related mortgage loan. Even if a mortgaged property provides
adequate security for its mortgage loan, substantial delays encountered during
liquidation could result in shortfalls in payments.]
THE MASTER SERVICER HAS LIMITED EXPERIENCE SERVICING HOME EQUITY LOANS
The master servicer began servicing home equity loans in November of
1999. Prior to then, the master servicer did not have home equity loans in its
servicing portfolio. Because of this, the master servicer does not have
significant historical loss and delinquency data on its home equity loan
portfolio that may be referred to for purposes of estimating the future
delinquency and loss experience of home equity loans similar to the home equity
loans being sold to the trust. This lack of historical data will limit your
ability to assess the master servicer's ability to service properly the home
equity loans in the trust.
STATE LAW MAY LIMIT YOUR RECOVERY ON DEFAULTED ASSETS
Applicable state laws may limit the master servicer's ability to
repossess or foreclose on and liquidate the mortgaged properties or may limit
the amount realized upon any liquidation to less than the amount due. See "Legal
Aspects of Mortgage Loans" in the prospectus.
THE CONCENTRATION OF MORTGAGES IN THE STATES OF [___________________] COULD HAVE
AN ADVERSE IMPACT ON YOUR BONDS
There is a high concentration of mortgaged properties in the states of
[__________________]. See "Description of the Mortgage Loans -- Characteristics
of the Mortgage Loans -- Geographic Distribution" in this prospectus supplement.
If economic conditions cause sufficiently high defaults, delinquencies or
liquidation losses to occur in any of these states, the credit support provided
to your bonds by the subordinate bonds could be reduced or eliminated and you
may experience a loss.
MISSING MORTGAGE LOAN DOCUMENTS MAY LIMIT THE MASTER SERVICER'S ABILITY TO
EXERCISE ITS OBLIGATIONS WITH RESPECT TO THE LOANS
Some of the mortgage loan files are incomplete or may be defective in
other respects. In particular, some of the mortgage loan files are missing one
or more of the following documents:
o [the original mortgage notes];
o [the original or certified copy of the mortgage or deed of trust];
o [evidence of title insurance];
o [intervening assignments]; and
o [a complete chain of endorsements].
7
<PAGE> 14
The absence of the documents may inhibit the master servicer's ability
to exercise some remedies for delinquent or defaulted loans, including the
ability to do the following:
o enforce a borrower's obligations under the related mortgage loan;
and
o foreclose on defaulted mortgage loans.
However, the seller is obligated to repurchase a mortgage loan if
specified required documents, such as the original mortgage note, mortgage, or
title insurance policy, have not been delivered and if a material adverse effect
would result from the failure to deliver the documents. See "Description of the
Mortgage Loans -- Missing Mortgage Loan Documentation" in this prospectus
supplement.
[THE LACK OF A RECORDED ASSIGNMENT COULD ADVERSELY IMPACT THE DEPOSITOR'S LIEN
POSITION WITH RESPECT TO THE MORTGAGES
Union Planters Bank will provide the trustee with assignments of the
mortgages in blank but is not required to record assignments of transfer of the
mortgages in the applicable real property records. If Union Planters Bank were
to sell or transfer any mortgage loan to another person before recording the
assignments to the trust fund, the other person may have rights superior to
those of the trust fund.]
LACK OF A GUARANTEE COULD ADVERSELY IMPACT PAYMENTS ON YOUR BONDS
Payments on the bonds are payable solely from amounts collected with
respect to the mortgage loans. [Include discussion of risks associated with a
lack of a guarantee.]
[LACK OF LISTING ON A TRADING EXCHANGE COULD REDUCE YOUR ABILITY TO RESELL YOUR
BONDS]
[We do not intend to list your bonds on any trading exchange.
Accordingly, your bonds may not become as freely marketable as if we had
obtained a listing on a trading exchange, and a secondary market for your bonds
is less likely to develop. As a result, you may not be able to resell your bonds
so easily, and, if you do resell your bonds, the price you obtain may not be as
favorable to you as it would have been had we listed your bonds on a trading
exchange.]
8
<PAGE> 15
DESCRIPTION OF THE MORTGAGE LOANS
GENERAL
The trust fund will consist primarily of a pool of [fixed rate]
[adjustable rate] one- to four-family [junior lien] home equity mortgage loans.
MORTGAGE LOANS
Each mortgage loan is evidenced by a promissory note or mortgage note
and secured by a mortgage, deed of trust or other similar security instrument
creating a first lien or junior lien on a one to four family residential
property. All percentages of the mortgage loans described in this prospectus
supplement are approximate percentages, except as otherwise indicated, by
aggregate principal balance as of the cut off date.
The mortgage loans to be included in the trust fund will have been
originated or acquired by [Union Planters Bank], the asset seller and will
generally comply with the underwriting criteria described in this prospectus
supplement. The depositor will purchase the mortgage loans to be included in the
mortgage pool on or before the closing date from the asset seller pursuant to
the sales agreement, to be dated as of [____________], between the asset seller
and the depositor. The depositor will cause the mortgage loans to be
[assigned][pledged] to the trustee, pursuant to indenture, dated as of
[____________], by and among the depositor, the trustee and the master servicer.
[Union Planters Bank], as master servicer will service the mortgage loans,
pursuant to the servicing agreement.
Under the sales agreement, the asset seller will make specified
representations, warranties and covenants to the depositor relating to, among
other things, the due execution and enforceability of the sales agreement and
specified characteristics of the mortgage loans, and will be obligated to
repurchase or substitute for any mortgage loans as to which there exists
deficient documentation, if a deficiency results in a materially adverse effect
on the bondholders, or an uncured material breach of any representation,
warranty or covenant. Under the indenture the depositor will assign all its
right, title and interest in the representations, warranties and covenants,
including the asset seller's repurchase or substitution obligation, to the
trustee for the benefit of bondholders. In the event any representations and
warranties with respect to the mortgage loans are materially incorrect, the
asset seller will have an obligation to repurchase or substitute for the
mortgage loans. The asset seller is selling the mortgage loans without recourse
and, accordingly, will have no obligations with respect to the bonds other than
pursuant to the representations, warranties, covenants and repurchase
obligations. See "Description of the Agreements -- Representations and
Warranties; Repurchases" in the prospectus.
MISSING MORTGAGE LOAN DOCUMENTATION
Many of the mortgage loan files are incomplete or otherwise deficient.
See "Risk Factors -- Missing Mortgage Loan Documents May Limit the Master
Servicer's Ability to Exercise its
9
<PAGE> 16
Obligations with Respect to the Loans" in this prospectus supplement. In
particular, some of the mortgage loan files may be missing:
o [the original mortgage note, although a lost note affidavit is
available for each of the mortgage loans];
o [the original mortgage or a certified copy evidencing recordation];
or
o [a title insurance policy, a copy , or similar evidence of title
insurance].
Some mortgage loan files are also missing other documents or may be
defective in other respects. For example, some mortgage loan files have one or
more missing intervening assignments or lack a complete chain of endorsements.
[The absence of an original mortgage note, mortgage, or other documents
may limit the ability of the master servicer to enforce a mortgagor's
obligations under the related mortgage loans and to foreclose on defaulted
mortgage loans.] Under the sales agreement, the asset seller will be obligated
to repurchase a mortgage loan as to which the required documents, such as the
original mortgage note, mortgage, intervening assignments or title insurance
policy, have not been delivered, or that were otherwise deficient, but only to
the extent a material adverse effect on the bondholders resulted from the
failure to deliver the documents.
UNDERWRITING STANDARDS
[underwriting standards specific to the assets]
CHARACTERISTICS OF THE MORTGAGE LOANS
As of the cut off date, the mortgage loans had the following
characteristics:
o mortgage rates ranging from [_____] per annum to [_____] per annum;
o a weighted average mortgage rate of approximately [______] per
annum;
o outstanding principal balances ranging from [____] to [_______];
o an average outstanding principal balance of approximately [_______];
o original terms to scheduled maturity ranging from [_______] months
to [_______] months;
o a weighted average original term to scheduled maturity of
approximately [_______] months;
10
<PAGE> 17
o remaining terms to scheduled maturity ranging from [_______] months
to [_______] months;
o a weighted average remaining term to scheduled maturity of
approximately [_______] months;
o as of the cut off date, approximately [_______] of the mortgage
loans were [_______] to [_______] days delinquent, and no mortgage
loan was more than [_______] days delinquent; and
o [____] mortgage loans were secured by first liens, [___] mortgage
loans were secured by second liens, and [___] mortgage loans were
secured by third liens.
With respect to mortgage loans as to which appraisals are available,
the combined loan to value ratios or combined LTV at origination range from
[_______] to [_______], with a weighted average combined LTV at origination of
approximately [_______]. Approximately [_______] of the mortgage loans, by cut
off date principal balance do not have appraisals that are readily available. As
a result, the mortgage loans are included in the not available category in the
combined LTV table below.
As of the cut off date, the mortgage loans have the characteristics set
forth in the following tables. Asterisks (*) in the following tables indicate
values of less than [_______]. The percentage totals may not sum due to
rounding.
LOAN TYPE
PERCENT BY
AGGREGATE AGGREGATE
PRINCIPAL PRINCIPAL
NUMBER OF BALANCE AS OF BALANCE AS OF
LOAN TYPE MORTGAGE LOANS THE CUT OFF DATE THE CUT OFF DATE
--------- -------------- ---------------- ----------------
11
<PAGE> 18
PRINCIPAL BALANCES AS OF THE CUT OFF DATE
PERCENT BY
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
PRINCIPAL BALANCE MORTGAGE BALANCE AS OF BALANCE AS OF
AS OF THE CUT OFF DATE LOANS THE CUT OFF DATE THE CUT OFF DATE
---------------------- --------- ---------------- ----------------
average principal balance: approximately $__________
12
<PAGE> 19
MORTGAGE RATES AS OF THE CUT OFF DATE
PERCENT BY
AGGREGATE AGGREGATE
PRINCIPAL PRINCIPAL
NUMBER OF BALANCE AS OF BALANCE AS OF
MORTGAGE RATE MORTGAGE LOANS THE CUT OFF DATE THE CUT OFF DATE
------------- --------------- ---------------- ----------------
weighted average mortgage rate: approximately _______%
ORIGINAL TERM TO MATURITY IN MONTHS
PERCENT BY
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
ORIGINAL TERM TO MORTGAGE BALANCE AS OF BALANCE AS OF
MATURITY IN MONTHS LOANS THE CUT OFF DATE THE CUT OFF DATE
------------------ --------- ---------------- ----------------
weighted average original term to maturity: approximately _____ months
13
<PAGE> 20
REMAINING TERM TO MATURITY IN MONTHS
PERCENT BY
AGGREGATE AGGREGATE
REMAINING TERM NUMBER OF PRINCIPAL PRINCIPAL
TO MATURITY MORTGAGE BALANCE AS OF BALANCE AS OF
IN MONTHS LOANS THE CUT OFF DATE THE CUT OFF DATE
-------------- --------- ---------------- ----------------
weighted average remaining term to maturity: approximately ____ months
MORTGAGE LOAN OCCUPANCY TYPE
PERCENT BY
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
MORTGAGE LOAN MORTGAGE BALANCE AS OF BALANCE AS OF
OCCUPANCY TYPE LOANS THE CUT OFF DATE THE CUT OFF DATE
-------------- --------- ---------------- ----------------
14
<PAGE> 21
YEAR OF ORIGINATION
PERCENT BY
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
MORTGAGE BALANCE AS OF BALANCE AS OF
YEAR OF ORIGINATION LOANS THE CUT OFF DATE THE CUT OFF DATE
------------------- --------- ---------------- ----------------
1960......................
1965......................
1968.....................
1970.....................
1971.....................
1972.....................
1973.....................
1974.....................
1975.....................
1976.....................
1977.....................
1978.....................
1979.....................
1980.....................
1981.....................
1982.....................
1983.....................
1984.....................
1985.....................
1986.....................
1987.....................
1988.....................
1989.....................
1990.....................
1991.....................
1992.....................
1993.....................
1994.....................
1995.....................
1996.....................
1997.....................
1998.....................
1999.....................
15
<PAGE> 22
YEAR OF SCHEDULED MATURITY
PERCENT BY
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
MORTGAGE BALANCE AS OF BALANCE AS OF
YEAR OF ORIGINATION LOANS THE CUT OFF DATE THE CUT OFF DATE
------------------- --------- ---------------- ----------------
2000.....................
2001.....................
2002.....................
2003.....................
2004.....................
2005.....................
2006.....................
2007.....................
2008.....................
2009.....................
2010.....................
2011.....................
2012.....................
2013.....................
2014.....................
2015.....................
2016.....................
2017.....................
2018.....................
2019.....................
2020.....................
2021.....................
2022.....................
2023.....................
2024.....................
2025.....................
2026.....................
2027.....................
2028.....................
2029.....................
Total...............
16
<PAGE> 23
ORIGINAL COMBINED LTV RATIOS
PERCENT BY
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
MORTGAGE BALANCE AS OF BALANCE AS OF
ORIGINAL COMBINED LTV RATIO(%) LOANS THE CUT OFF DATE THE CUT OFF DATE
------------------------------ --------- ---------------- ----------------
00.01- 10.00.................
10.01- 20.00.................
30.01- 40.00.................
40.01- 50.00.................
50.01- 60.00.................
60.01- 70.00.................
70.01- 80.00.................
80.01- 90.00.................
90.01- 95.00.................
95.01-100.00.................
100.01-105.00.................
105.01-110.00.................
110.01-115.00.................
115.01-120.00.................
Greater than 120..............
Not Available.................
Total...............
weighted average original combined LTV ratio: approximately _____%
Original combined LTV ratio is a fraction, expressed as a percentage,
the numerator of which is the principal balance of the related mortgage loan and
all mortgage loans senior to such mortgage loan on the date of its origination,
and the denominator of which is generally the lesser of:
o the appraised value of the related mortgaged property as determined
by an appraisal obtained in connection with the origination of the
mortgage loan; and
o the sale price of the mortgaged property at the time of the
origination.
There can be no assurance that the value determined through an
appraisal or otherwise of a mortgaged property determined after origination of
the related mortgage loan will be equal to or greater than the value determined
through an appraisal or otherwise obtained in connection with the origination.
As a result, there can be no assurance that the loan to value ratio for any
mortgage loan determined at any time following origination will be lower than
the original combined LTV ratio, notwithstanding any positive amortization of
the mortgage loan. The combined LTV ratios at origination range from
[___________], with a weighted average combined LTV at origination of
approximately [_______]. Approximately [______] of the mortgage loans by cut off
date principal balance do not have appraisals that are readily available and are
not included in the weighted average original combined LTV calculation.
17
<PAGE> 24
GEOGRAPHIC DISTRIBUTION
PERCENT BY
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
MORTGAGE BALANCE AS OF BALANCE AS OF
STATE LOANS THE CUT OFF DATE THE CUT OFF DATE
----- ---------- ---------------- ----------------
Alabama............
Alaska.............
Arizona............
Arkansas...........
California.........
Colorado...........
Connecticut........
Delaware...........
District of Columbia
Florida............
Georgia............
Hawaii.............
Idaho..............
Illinois...........
Indiana............
Iowa...............
Kansas.............
Kentucky...........
Louisiana..........
Maryland...........
Massachusetts......
Michigan...........
Minnesota..........
Mississippi........
Missouri...........
Montana............
Nebraska...........
Nevada.............
New Hampshire
New Jersey.........
New Mexico.........
New York...........
North Carolina.....
Ohio...............
Oklahoma...........
Oregon.............
Pennsylvania.......
Rhode Island.......
South Carolina.....
18
<PAGE> 25
South Dakota.......
Tennessee..........
Texas..............
Utah...............
Virginia...........
Virgin Islands.....
Washington.........
Wisconsin..........
Wyoming............
Total....
No more than approximately [_______] of the mortgage loans are secured by
mortgaged properties located in any one zip code.
ADDITIONAL INFORMATION
The description in this prospectus supplement of the mortgage loans is
based upon the trust fund as expected to be constituted at the close of business
on the cut off date. Prior to the issuance of the bonds, a mortgage loan may be
prepaid or may be removed from the trust fund as a result of incomplete
documentation or otherwise, if the depositor deems the removal necessary or
appropriate. A limited number of other assets may be included in the trust fund
prior to the issuance of the bonds unless including the mortgage loans would
materially alter the characteristics of the trust fund 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
trust fund as it will be constituted at the time the bonds are issued.
A current report on form 8-K will be available to purchasers of the
bonds and will be filed, together with specified exhibits, with the securities
and exchange commission within fifteen days after the initial issuance of the
bonds. In the event mortgage loans are removed from or added to the trust fund
as set forth in the preceding paragraph, the removal or addition will be noted
on a form 8-K.
DELINQUENCY AND FORECLOSURE EXPERIENCE
The following tables set forth information concerning the delinquency
and loss experience, including pending foreclosures, on one- to four-family,
first lien or junior lien home equity loans included in the master servicer's
servicing portfolio. The indicated periods of delinquency are based on the
number of days past due on a contractual basis. No mortgage loan is considered
delinquent for these purposes until 31 days past due on a contractual basis.
19
<PAGE> 26
DELINQUENCY EXPERIENCE*
AS OF AS OF AS OF AS OF
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1999 2000 2000 2000
BY NO. OF BY NO. OF BY NO. OF BY NO. OF
LOANS LOANS LOANS LOANS
----- ----- ----- -----
Total portfolio....... 677 2,472 7,437 12,854
Period of delinquency
30 to 59 days....... 0 2 22 93
Percent of portfolio 0.00% 0.08% 0.30% 0.72%
60 to 89 days....... 0 0 4 21
Percent of portfolio 0.00% 0.00% 0.05% 0.16%
90 days or more..... 0 0 5 17
Percent of portfolio 0.00% 0.00% 0.07% 0.13%
Total delinquent loans 0 2 31 131
Percent of portfolio 0.00% 0.08% 0.42% 1.02%
Bankruptcies.......... 0 0 0 0
Percent of portfolio 0.00% 0.00% 0.00% 0.00%
Foreclosures.......... 0 0 0 0
Percent of portfolio 0.00% 0.00% 0.00% 0.00%
-------------
* Percentages are presented on the basis of the number of mortgage loans
serviced.
There can be no assurance that the delinquency and foreclosure
experience of the home equity loans comprising the trust will correspond to the
delinquency and foreclosure experience of the master servicer's mortgage
portfolio set forth in the foregoing tables. The aggregate delinquency and
foreclosure experience on the mortgage loans comprising the trust will depend on
the results obtained over the life of the trust.
20
<PAGE> 27
LOAN LOSS EXPERIENCE
AT OR FOR AT OR FOR
THE TWELVE MONTHS THE THREE MONTHS
ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------ -------------------
1999 2000
---- ----
(DOLLARS IN THOUSANDS)
Number of mortgage
loans........................ 677 12,854
Number of mortgage loans
foreclosed................... 0 0
Mortgage loans foreclosed as a
percentage of total Master
Servicer serviced mortgage
loans........................ 0.00% 0.00%
Mortgage loans foreclosed as a
percentage of average number
of mortgage loans............ 0.00% 0.00%
Average outstanding principal
balance of mortgage
loans........................ $30,996,445 $532,091,330
Net losses from mortgage loan
foreclosures:
Total dollars......... $0 $0
As a percentage of
average principal
balance of mortgage
loans............... 0.00% 0.00%
The data presented in the foregoing tables are for illustrative
purposes only, and there is no assurance that the delinquency and loan loss
experience of the home equity loans in your trust will be similar to that set
forth above. The delinquency and loan loss experience of mortgage loans
historically has been sharply affected by downturns in regional or local
economic conditions. For instance, a downturn was experienced in areas dependent
on the oil and gas industry in the 1980s, causing increased levels of
delinquencies and loan losses on mortgage loans in affected areas. Regional and
local economic conditions are often volatile, and no predictions can be made
regarding their effects on future economic losses upon mortgage loan losses.
Information regarding the geographic location, at origination, of the mortgaged
properties is set forth under "Description of the Mortgage Loans" in this
prospectus supplement.
In particular, the foregoing data generally represents the master
servicer's experience servicing home equity loans underwritten pursuant to
particular underwriting standards, which may differ from the underwriting
standards used to originate the home equity loans in your trust. Further, this
data reflects the master servicer's experience servicing home equity loans
during historic economic conditions that may not reflect future conditions.
Accordingly, the performance of the home equity loans in your trust and the
master servicer's servicing experience with respect thereto may differ
materially from the historical servicing data presented in this prospectus
supplement.
21
<PAGE> 28
THE HOME EQUITY LOAN MARKET AND SERVICING
The home equity loan market is growing rapidly. The largest growth
usually occurs in a rising interest rate environment, and in cycles that occur
approximately every 7 years. The master servicer's home equity loan portfolio is
diversified geographically. No one state has more than a 15% concentration in
the portfolio. Properties securing home equity loans are located in all states
except Texas and Alabama. Legislation always has a potentially significant
impact on the home equity lending industry. In the year 2000 several states are
considering new legislation regarding "predatory lending practices". The current
result of this legislative effort on the industry is the industry's attempt to
keep fees, costs, and charges reasonable, as well as to deter unethical
activity. The master servicer's philosophy is to remain proactive regarding this
type of legislation. Interest rate fluctuations also play a major role in the
home equity lending industry. As interest rates decline, interest mortgage
credit shifts from home equity lending to more traditional first lien mortgage
lending. Home equity loans become more likely to prepay, and are often replaced
with more traditional first lien mortgage loans. Junior lien loans with high
combined loan-to-value ratios present additional risks, because these loans are
often made based on creditworthiness of the borrower rather than on the value of
the property serving as security. However, the creditworthiness of a borrowers
can change. Employment reductions in particular geographic areas and
irresponsible use of consumer loans affect the performance of a portfolio of
high combined loan-to-value ratio home equity loans. The master servicer's
strategy is to follow strict adherence to servicing guidelines.
DESCRIPTION OF THE BONDS
GENERAL
Material terms of the bonds are disclosed in this section of the
prospectus supplement. The bonds will be issued pursuant to the indenture and
will consist of [__] classes to be designated as the [class __, class __ and
class __ bonds]. The bonds will be issued in book entry form only, and will be
issued in denominations of [______] and integral multiples of [$__] in excess.
The bonds will be freely transferable and exchangeable at the corporate trust
office of the trustee.
The bonds represent in the aggregate the entire beneficial ownership
interest in a trust fund consisting of: (i) the mortgage loans and all payments
under and proceeds in respect received after the cut off date, exclusive of
payments of principal and interest due on or before the cut off date; (ii) any
mortgaged property acquired on behalf of the trust fund through foreclosure or
deed in lieu of foreclosure, upon acquisition an REO property; (iii) funds or
assets as from time to time are deposited in the security account and any
account established in connection with REO property; and (iv) the rights of the
mortgagee under all insurance policies with respect to the mortgage loans.
[The class __ bonds] have a notional principal amount for any payment
date equal to the aggregate of the principal balances of the [non discount]
mortgage loans at the beginning of the related due period or as of the cut off
date in the case of the first payment date.] The security
22
<PAGE> 29
principal balance of any class of bonds outstanding at any time represents the
maximum amount that the holders are entitled to receive as payments allocable to
principal from the cash flow on the mortgage loans. The respective security
principal balances of the classes of bonds will in each case be reduced by the
sum of amounts actually paid on the class that are allocable to principal, and
realized losses, if any, allocated thereto.
[The subordinate bonds and the class __ bonds are not offered by this
prospectus supplement.]
AVAILABLE DISTRIBUTION AMOUNT
The available distribution amount for any payment date will be equal to
the sum of:
o [the aggregate amount of scheduled 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,
o unscheduled payments, including mortgagor prepayments on the
mortgage loans, insurance proceeds, liquidation proceeds and
proceeds from repurchases of and substitution for the mortgage loans
occurring during the preceding calendar month, and
o all advances of scheduled principal and interest made for the
payment date, in each case net of amounts reimbursable therefrom to
the master servicer, including reimbursement of previously
unreimbursed advances. With respect to any payment date, (a) the due
date is deemed to be the first day of the month in which the payment
date occurs and (b) the determination date is the 15th day of the
month in which that payment date occurs or the next immediately
succeeding business day.]
Except as provided in this prospectus supplement and to the extent of
the available distribution amount, on each payment date payments on the bonds
will be applied in the following order of priority:
[INSERT STRUCTURE.]
[Under circumstances described in this prospectus supplement, payments
from the available distribution amount for a payment date that would otherwise
be made on the subordinate bonds may be paid instead on the senior bonds. See
"-- Allocation of Losses; Subordination" in this prospectus supplement.]
INTEREST PAYMENTS
On each payment date, to the extent of funds available, each class of
bonds, [other than the class __ bonds], will be entitled to receive an amount
allocable to interest with respect to the
23
<PAGE> 30
related interest accrual period. The interest payment amount for any class of
bonds, [other than the class __ bonds], will be equal to interest at the
applicable pass through rate accrued on the related security principal balance
[or notional principal amount, as the case may be,] during the related interest
accrual period, subject to reductions described in this prospectus supplement,
and also interest payment amounts, if any, that should have been paid on prior
payment dates but were not.
The interest entitlement described above for each class of bonds[,
other than the class __ bonds], will be reduced by the amount of net interest
shortfall for the payment date. With respect to any payment date, the net
interest shortfall is equal to the sum of:
o the amount of interest which would otherwise have been received with
respect to any mortgage loan that was subject of a relief act
reduction, and
o any net prepayment interest shortfall.
Net interest shortfall on any payment date will be allocated pro rata
among all classes of bonds entitled to receive payments of interest on the
payment date, based on the amount of interest each the class of bonds would
otherwise be entitled to receive on the payment date before taking into account
any reduction in the amounts resulting for the net interest shortfall.
A relief act reduction is a reduction in the amount of monthly interest
payment on a mortgage loan pursuant to the Soldiers' and Sailors' Civil Relief
Act of 1940. See "Legal Aspects of the Mortgage Loans -- Soldiers' and Sailors'
Civil Relief Act" in the Prospectus. With respect to any payment date, the net
prepayment interest shortfall is the aggregate amount of prepayment interest
shortfalls during the calendar month preceding the month of the payment date
that are not offset by the master servicer. A prepayment interest shortfall is
the amount by which interest paid by a borrower in connection with a prepayment
in full of principal on a mortgage loan is less than one month's interest at the
related mortgage rate net of the servicing fee rate and the trustee fee rate on
the principal balance of the mortgage loan.
[The class __ bonds] are principal only bonds, and are not entitled to
payments of interest.]
[The interest accrual period for all classes of bonds [other than the
class __ bonds] is the calendar month preceding the month in which the payment
date occurs.] [Interest on the bonds will be calculated on the basis of a 360
day year consisting of twelve 30 day months.]
If on any payment date the available distribution amount is less than
the full interest entitlement on the senior bonds for the payment date, the
shortfall will be allocated among the holders of all classes of senior bonds
other than the class __ bonds in proportion to the respective amounts of their
interest entitlement for the payment date. These shortfalls could occur, for
example, if delinquencies on the mortgage loans were exceptionally high and were
concentrated in a particular month and advances by the master servicer did not
cover the shortfall. Any
24
<PAGE> 31
shortfall will be carried forward and added to the amount holders of each class
will be entitled to receive on the next payment date. Any amounts so carried
forward will not bear interest.
The pass through rate on your bonds is set forth on the cover hereof.
[The pass through rate on the class __ bonds on each payment date will equal
[________].]
The net mortgage rate on each mortgage loan is equal to [the mortgage
rate minus the servicing fee rate and the trustee fee rate]. The servicing fee
rate is [_______] per annum.
As described in this prospectus supplement, the interest distribution
amount allocable to each class of bonds[, other than the class __ bonds], is
based on the security principal balance [ or, in the case of the class __bonds,
on the notional principal amount].
PRINCIPAL PAYMENTS
All payments and other amounts received in respect of principal of the
mortgage loans will be allocated on the bonds based on [___________________].
Holders of the senior bonds [other than the class __ bonds] will be
entitled to receive on each payment date, in the priority set forth in this
prospectus supplement, a payment allocable to principal and equal to the senior
principal payment amount.
[INSERT PRINCIPAL STRUCTURE]
The principal balance of any mortgage loan as of any due date is equal
to the unpaid principal balance as of the cut off date reduced by all payments
in respect of principal received or advanced from the cut off date through the
due date.
ALLOCATION OF LOSSES; SUBORDINATION
[The subordination provided to the senior bonds by the subordinate
bonds is intended to cover realized losses. Realized losses will be allocated to
each class of subordinate bonds in the reverse order of their numerical
designations, in each case until the security principal balance of the class of
bonds has been reduced to zero, and then to the senior bonds on a pro rata
basis.]
Any allocation of a realized loss to a bond will be made by reducing
the security principal balance, in each case until the security principal
balance of the class has been reduced to zero. In addition, any allocation of a
realized loss to a subordinate certificate may be made by operation of the
payment priority to the senior bonds set forth under "-- Principal Payments" and
any class of subordinate bonds with a higher payment priority.
25
<PAGE> 32
The holders of the bonds will not be entitled to any additional
payments with respect to realized losses from amounts otherwise payable to any
classes of bonds subordinate thereto. However, the allocation of realized losses
to the subordinate bonds on any payment date will increase the senior percentage
applicable to determining the amount of future payments of principal of the
remaining mortgage loans to be paid on the senior bonds.
The senior bonds will bear the entire amount of realized losses that
are not allocated to the subordinate bonds, which losses will be allocated among
all classes of senior bonds, on a pro rata basis. Classes entitled to later
payments of principal may bear a larger share of the realized losses.
Realized loss shall mean [the sum of (a) with respect to each defaulted
mortgage loan for which a foreclosure advance has been made, the excess, if any,
of the aggregate of all advances made with respect to the mortgage loan over all
recoveries, made in respect of the mortgage loan, (b) with respect to the
liquidation of a mortgage loan or related REO property, the excess, if any, of
the principal balance plus accrued interest through the last day of the month of
liquidation over net liquidation proceeds in respect of the mortgage loan or REO
property, and (c) the excess, if any, of
o the aggregate security principal balance of the class __, class __,
class __ and subordinate bonds after giving effect to payments of
principal on a payment date and after taking into account preceding
clauses (a) and (b) over
o the aggregate principal balance of the mortgage loans at the end of
the related due period.]
In order to maximize the likelihood of payment in full of the interest
payment amount for the senior bonds, and senior principal payment amount, on
each payment date, holders of senior bonds have a right to payments of the
available distribution amount that is prior to the rights of the holders of the
subordinate bonds, to the extent necessary to satisfy the interest payment
amount for the senior bonds and senior principal payment amount.
[ADJUSTMENT TO SERVICING FEE IN CONNECTION WITH PREPAID MORTGAGE LOANS
When a borrower prepays a mortgage loan between due dates, the borrower
may be required to pay interest on the amount prepaid only to the date of
prepayment. Full and partial principal prepayments by borrowers received during
a calendar month will be paid to bondholders on the payment date in the month
following the month of receipt. The servicing fee for any month will be reduced
by an amount with respect to each mortgage loan prepaid in full sufficient to
pass through to bondholders the full amount of interest to which they would be
entitled in respect of the mortgage loan on the related payment date. If
shortfalls in interest as a result of prepayments in any month exceed the amount
of the servicing fee for the month, the amount of interest available to be paid
to bondholders will be reduced by the amount of the excess. See "Description of
the Bonds -- Interest Payments" in this prospectus supplement.]
26
<PAGE> 33
[ADVANCES
The master servicer is obligated to make the following advances:
o delinquent scheduled payments of principal or interest on mortgage
loans to the extent that the master servicer determines, in its good
faith judgment, that the amounts are recoverable;
o delinquent payments of taxes, insurance premiums and other escrowed
items, to the extent deemed recoverable; and
o liquidation related expenses with respect to defaulted mortgage
loans, to the extent deemed recoverable.
At least two business days prior to each payment date, the master
servicer will either:
o deposit from its own funds the related advance into the security
account;
o cause appropriate entries to be made in the records of the security
account that funds in the security account that are not part of the
available distribution amount for the related payment date are to be
used to make the advance;
o instruct the trustee to use investment earnings on the security
account to defray the master servicer's advance obligation; or
o make or cause to be made the aggregate advance through any
combination of the methods described in the three bullet points
above. Any funds held for future payment and used in accordance with
the second bullet point above must be restored by the master
servicer from its own funds or from early payments collected on the
mortgage loans when they become part of a future available
distribution amount.
Advances are intended to maintain a regular flow of scheduled interest
and principal payments to bondholders rather than to guarantee or insure against
losses.
The master servicer will reimburse itself for advances out of
collections of the late payments in respect of which advances were made. In
addition, upon the determination that a nonrecoverable advance has been made in
respect of a mortgage loan or upon a mortgage loan becoming a liquidated asset,
the master servicer will reimburse itself out of funds in the security account
for unreimbursed amounts advanced by it in respect of the mortgage loan.]
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS
The effective yields to the holders of the bonds will be lower than the
yields otherwise produced by the applicable rate at which interest is passed
through to the holders and the purchase price of the bonds because monthly
payments will not be payable to the holders until
27
<PAGE> 34
the [____] day or the following business day, of the month following the month
in which interest accrues on the mortgage loans, without any additional payment
of interest or earnings in respect of the delay.
Delinquencies on the mortgage loans that are not advanced by or on
behalf of the master servicer, because amounts, if advanced, would be
nonrecoverable, will adversely affect the yield on the bonds. Because of the
priority of payments, shortfalls resulting from delinquencies not so advanced
will be borne first by the subordinate bonds, in reverse order of their
numerical class designations, and then by the senior bonds.
Net interest shortfalls will adversely affect the yields on the bonds.
In addition, although all losses initially will be borne by the subordinate
bonds in the reverse order of their numerical class designations, losses will be
allocated to the bonds in the event that the losses exceed the aggregate
security principal balance of the subordinate bonds. As a result, the yields on
the bonds will depend on the rate and timing of realized losses.
PREPAYMENT CONSIDERATIONS AND RISKS
The rate of principal payments on the bonds, the aggregate amount of
payments on the bonds and the yields to maturity of the bonds 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 rate of
principal prepayments, including for this purpose prepayments resulting from
refinancing, liquidations of the mortgage loans due to defaults, casualties,
condemnations and repurchases by the asset seller or master servicer. The
mortgage loans may be prepaid by the mortgagors at any time. Some mortgage loans
may be subject to prepayment penalties. Prepayment penalties may have the effect
of reducing the amount or the likelihood of prepayment on the related mortgage
loans. [Some mortgage loans may be subject to due on sale provisions, and the
master servicer will enforce due on sale clauses to the extent enforcement is
legally permissible.]
Prepayments, liquidations, and purchases of the mortgage loans,
including any optional purchase by the master servicer of a defaulted mortgage
loan and any optional repurchase of the remaining mortgage loans in connection
with the termination of the trust fund, in each case as described in this
prospectus supplement, will result in payments on the bonds of principal amounts
that would otherwise be distributed over the remaining terms of the mortgage
loans. Because the rate of payment of principal on the mortgage loans will
depend on future events and a variety of other factors, no assurance can be
given as to the rate or the rate of principal prepayments. The extent to which
the yield to maturity of the bonds may vary from the anticipated yield will
depend upon the degree to which the timing of payments is sensitive to
prepayments, liquidations, and purchases of the mortgage loans. Further, an
investor should consider the risk that, in the case of any bonds purchased at a
discount, a slower than anticipated rate of principal payments, including
prepayments, repurchases, defaults, and liquidations, on the mortgage loans
could result in an actual yield to the investor that is lower than the
anticipated
28
<PAGE> 35
yield and, in the case of any bonds purchased at a premium, a faster 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.
The rate of principal payments, including prepayments, repurchases,
defaults, and liquidations, on pools of mortgage loans may vary significantly
over time and may be influenced by a variety of economic, geographic, and other
factors, including changes in mortgagors' housing needs, job transfers,
unemployment, mortgagors' net equity in the mortgaged properties, and servicing
decisions. In general, if prevailing interest rates were to fall significantly
below the mortgage rates on the mortgage loans, the mortgage loans could be
subject to higher prepayment rates than if prevailing interest rates were to
remain at or above the mortgage rates on the mortgage loans. Conversely, if
prevailing interest rates were to rise significantly, the rate of prepayments on
the mortgage loans would generally be expected to decrease. No assurances can be
given as to the rate of prepayments on the mortgage loans in stable or changing
interest rate environments.
[As described in this prospectus supplement under "Description of the
Bonds -- Principal Payments," the senior accelerated distribution percentage of
all principal prepayments will be distributed initially to the senior bonds then
entitled to receive principal payments. This allocation may result in all or a
disproportionate percentage of the principal prepayments being paid to holders
of some classes of senior bonds and none or less than their pro rata share of
the principal prepayments being paid to holders of the subordinate bonds during
the periods of time described in the definition of senior accelerated
distribution percentage.]
The timing of changes in the rate of prepayments on the mortgage loans
may significantly affect an investor's actual yield to maturity, even if the
average rate of principal payments is consistent with an investor's expectation.
In general, the earlier a prepayment of principal on the mortgage loans, the
greater the effect on an investor's yield to maturity. The effect on an
investor's yield as a result 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 bonds may not be offset by a subsequent like
decrease or increase in the rate of principal payments.
WEIGHTED AVERAGE LIFE OF THE BONDS
Weighted average life refers to the average amount of time from the
date of issuance of a bond until each dollar of principal of the bond will be
repaid to the investor. The weighted average life of the bonds will be
influenced by the rate at which principal payments, including scheduled
payments, principal prepayments, liquidations, and payments made pursuant to any
applicable policies of insurance, on the mortgage loans are made. Principal
payments on the mortgage loans may be in the form of scheduled amortization or
prepayments for this purpose, the term prepayment includes prepayments and
liquidations due to a default or other dispositions of the mortgage loans.
29
<PAGE> 36
[The table entitled percent of initial security principal balance
outstanding at the respective percentages of [CPR] sets forth below indicate the
weighted average life of the bonds and sets forth the percentage of the initial
principal amount of the bonds that would be outstanding after each of the dates
shown at the indicated constant prepayment rates, or CPR. The tables have been
prepared on the basis of the following assumptions regarding the characteristics
of the mortgage loans: [_______]
30
<PAGE> 37
AMORTIZED
WEIGHTED REMAINING ORIGINAL
AGGREGATE AVERAGE MONTHS TERM TO TERM TO
MORTGAGE LOAN PRINCIPAL GROSS SINCE MATURITY MATURITY
POOL NUMBER BALANCE MORTGAGE RATE ORIGINATION (MONTHS) (MONTHS)
------------- -------------- ------------- ----------- -------- --------
1............
2............
3............
4............
5............
6............
7............
8............
9............
10...........
11...........
12...........
13...........
14...........
15...........
16...........
17...........
18...........
19...........
20...........
Based on the foregoing assumptions, the following table indicates the
weighted average life of the bonds and sets forth the percentages of the initial
security principal balance of the bonds that would be outstanding after the
payment date in [___] of each of the years indicated, at various percentages of
[CPR]. Neither [CPR] 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 actual prepayment
experience and the balance of the mortgage loans that prepay may increase or
decrease the percentage of initial security principal balance and weighted
average life shown in the following tables. The variations may occur even if the
average prepayment experience of all the mortgage loans is the same as any of
the specified assumptions.
31
<PAGE> 38
PERCENT OF INITIAL SECURITY PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF CPR
CLASS __ BONDS
AT THE FOLLOWING
PERCENTAGE OF [CPR]
------------------------------------------------
[ ] DATE __% __% __% __% __% __% __%
--------------- ------ ------ ------ ------ ------ ------ -----
Initial percent..............
___ 25, 2001...............
___ 25, 2002...............
___ 25, 2003...............
___ 25, 2004...............
___ 25, 2005...............
___ 25, 2006...............
___ 25, 2007...............
___ 25, 2008...............
___ 25, 2009...............
___ 25, 2010...............
___ 25, 2011...............
___ 25, 2012...............
___ 25, 2013...............
___ 25, 2014...............
___ 25, 2015...............
___ 25, 2016...............
___ 25, 2017...............
___ 25, 2018...............
___ 25, 2019...............
___ 25, 2020...............
___ 25, 2021...............
___ 25, 2022...............
___ 25, 2023...............
weighted average life
(years)(+)...................
----------
+ The weighted average life of the bonds is determined by multiplying
the amount of each payment of principal by the number of years from the date of
issuance to the related payment date, adding the results and dividing the sum by
the total principal payments on the bonds.
32
<PAGE> 39
INDENTURE
GENERAL
The bonds will be issued pursuant to a indenture to be dated as of
__________, 200_, by and between the depositor and the trustee [, which
incorporates by reference the depositor's standard terms to indenture September
2000 edition]. The following discussion, when read in conjunction with the
prospectus, describes the material provisions of the indenture. When particular
provisions or terms used in the indenture are referred to, the actual
provisions, including definitions of terms, are incorporated by reference as
part of the summaries. We recommend that you read the indenture in its entirety
for a complete and detailed discussion of the terms of your bonds.
Reference is made to the prospectus for important information in
addition to that set forth in this prospectus supplement regarding the terms and
conditions of the indenture and the bonds. The depositor will provide to any
bondholder, without charge, upon written request, a copy of the indenture
without exhibits. Requests should be addressed to Union Planters Home Equity
Corp., 7130 Goodlett Farms Parkway, Cordova, Tennessee 38018, Attention:
President.
ASSIGNMENT OF THE MORTGAGE LOANS
On or prior to the closing date, the depositor will assign or cause to
be assigned the mortgage loans, without recourse, to the trustee for the benefit
of the bondholders. Prior to the closing date, the depositor will, as to each
mortgage loan, deliver to the trustee or the custodian, among other things, the
following documents collectively referred to as the mortgage file:
o the original or, if accompanied by a lost note affidavit, a copy of
the mortgage note, duly endorsed, which transferred the mortgage
loan, without recourse, in blank or to the order of trustee;
o the original mortgage or a certified copy, and any intervening
assignments , or certified copies of the intervening assignments, in
each case with evidence of recording;
o an assignment of the mortgage, duly executed, which transferred the
mortgage loan, in blank or to the order of the trustee, in
recordable form;
o originals or certified copies of all assumption, modification and
substitution agreements in those instances where the terms or
provisions of the mortgage or mortgage note have been modified or
the mortgage or mortgage note has been assumed; and
o the originals or certificate of a lender's title insurance policy
issued on the date of the origination of the mortgage loan or, with
respect to each mortgage loan not covered
33
<PAGE> 40
by a lender's title insurance policy, an attorney's opinion of title
given by an attorney licensed to practice law in the jurisdiction
where the mortgaged property is located. The servicing agreement
will not require the depositor to cause the assignments of mortgage
described above to be submitted for recording in the real property
records of the jurisdiction in which the related mortgaged property
is located unless the long term unsecured debt rating of the asset
seller declines below the level indicated in the servicing
agreement.
SECURITY ACCOUNT
The master servicer is required to deposit on a daily basis all amounts
received with respect to the mortgage loans, net of its servicing compensation,
into a separate account, the security account maintained with trustee.
Interest or other income earned on funds in the security account will be paid
to the master servicer as additional servicing compensation, and some interest
or other income earned on funds in the payment account which is an account held
by the trustee for the benefit of the bondholders, as defined in the indenture
will be paid to the trustee as additional trustee compensation. See "Description
of the Trust Funds -- Assets" and "Description of the Agreements -- Security
Account and Other Collection Accounts" in the prospectus.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The principal compensation to be paid to the master servicer in respect
of its master servicing activities will be the servicing fee. The servicing fee
will be payable monthly only from amounts received in respect of interest on
each mortgage loan, will accrue at the servicing fee rate and will be computed
on the basis of the same principal amount and for the same period respecting
which any related interest payment on the mortgage loan is computed. The
servicing fee rate equals [_______] per annum.
As additional servicing compensation, the master servicer is entitled
to retain all prepayment penalties and late payment charges, to the extent
collected from mortgagors, together with some interest or other income earned on
funds held in the security account. The servicing standard requires the master
servicer to, among other things, diligently service and administer the mortgage
loans on behalf of the trustee and in the best interests of the bondholders, but
without regard to the master servicer's right to receive the additional
servicing compensation. The master servicer is obligated to pay some ongoing
expenses associated with the trust fund and incurred by the master servicer in
connection with its responsibilities under the indenture. See "Description of
the Agreements -- Retained Interest; Servicing Compensation and Payment of
Expenses" in the prospectus for information regarding other possible
compensation payable to the master servicer and for information regarding
expenses payable by the master servicer and "Material Federal Income Tax
Consequences" in this prospectus supplement regarding the taxes payable by the
master servicer.
34
<PAGE> 41
REPORTS TO BONDHOLDERS
On each payment date the trustee shall furnish to each bondholder, to
the depositor, to the master servicer and to the rating agency a statement
setting forth the information with respect to the mortgage loans and the bonds
required pursuant to the indenture. In addition, within a reasonable period of
time after each calendar year, the trustee shall furnish to each person who at
any time during the calendar year was the holder of a certificate a statement
containing the information with respect to the bonds required pursuant to the
indenture, aggregated for the calendar year or portion during which the person
was a bondholder. See "Description of the Bonds -- Reports to Bondholders" in
the prospectus.
VOTING RIGHTS
At all times during the term of the indenture, __% of the voting rights
shall be allocated among the class __, class __ and class __ bondholders in
proportion to the security principal balances of their bonds. Voting rights
allocated to the class __, class __ and class __ bondholders will be allocated
among the bondholders] in proportion to the percentage interests evidenced by
their bonds. The class __ and class __ bondholders are each entitled to __% of
the voting rights.
TERMINATION
The obligations created by the indenture will terminate following the
earliest of the final payment or other liquidation of the last mortgage loan or
REO property subject thereto, and the purchase of all of the assets of the trust
fund by the master servicer. Written notice of termination of the indenture will
be given to each bondholder, and the final payment will be made only upon
surrender and cancellation of the bonds at the office of the certificate
registrar specified in the notice of termination.
Any purchase by the master servicer of all the mortgage loans and other
assets in the trust fund is required to be made at a price equal to the greater
of (1) the aggregate fair market value of all the mortgage loans and REO
properties then included in the trust fund, as mutually determined by the master
servicer and the trustee, and (2) the excess of (a) the sum of:
o the aggregate purchase price of all the mortgage loans then
included in the trust fund, and
o the fair market value of all REO properties then included in the
trust fund, as determined by an appraiser mutually agreed upon by
the master servicer and the trustee, over (b) the aggregate of
amounts payable or reimbursable to the master servicer under the
servicing agreement.
In no event shall the termination price be less than an amount equal
to,
35
<PAGE> 42
o the then outstanding security principal balance of all then
outstanding classes of bonds, plus accrued and unpaid interest,
reduced by
o any losses or shortfalls otherwise allocable to any class of bonds
on the date of termination.
The payment of any termination price shall be made in the same order of
priority set forth under "Description of the Bonds" above. The purchase will
effect early retirement of the then outstanding bonds, but the right of the
master servicer to effect the termination is subject to the requirement that the
aggregate principal balance of the mortgage loans then in the trust fund is less
than [__]% of the aggregate principal balance of the mortgage loans as of the
cut off date.
THE TRUSTEE
[____________________] is the trustee under the indenture. The mailing
address of the trustee is [________________________________].
The principal compensation to be paid to the trustee in respect of its
trustee activities will be the trustee fee. The trustee fee will be payable
monthly only from amounts received in respect of interest on each mortgage loan,
will accrue at the trustee fee rate and will be computed on the basis of the
same principal amount and for the same period respecting which any related
interest payment on the mortgage loan is computed. The trustee fee rate with
respect to each mortgage loan equals [___]% per annum. The trustee will also be
entitled to the investment earnings on funds on deposit in the payment account
as specified in the indenture].
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The indenture provides that the assets of the trust fund will be
treated as a real estate mortgage investment conduit, or REMIC, for federal
income tax purposes. The class __ bonds, the class __ bonds, the subordinate
bonds and the class __ bonds will represent regular interests in the REMIC. The
class [R] bonds will represent the residual interest in the REMIC.
Hunton & Williams, tax counsel to the depositor, is of the opinion
that, assuming compliance with the indenture, for federal income tax purposes,
the assets of the trust fund will qualify as a REMIC within the meaning of
section 860D of the Internal Revenue Code of 1986, as amended.
36
<PAGE> 43
TAXATION OF REGULAR INTERESTS
In the opinion of Hunton & Williams, a holder of the bonds will be
treated for federal income tax purposes as owning a regular interest in a REMIC.
A REMIC regular interest generally is treated for federal income tax purposes as
an ordinary debt instrument. See "Material Federal Income Tax Consequences --
REMIC Securities" in the prospectus.
The bonds will be treated as assets described in section 7701(a)(19)(C)
of the Internal Revenue Code and as real estate assets under section
856(c)(4)(A) of the Internal Revenue Code, generally in the same proportion that
the assets in the trust fund would be so treated. In addition, interest on the
bonds will be treated as interest on obligations secured by mortgages on real
property under section 856(c)(3)(B) of the Internal Revenue Code, generally to
the extent that the bonds are treated as real estate assets under section
856(c)(4)(A) of the Internal Revenue Code. See "Material Federal Income Tax
Consequences -- REMIC Securities" in the prospectus.
It is not anticipated that the trust fund will engage in any
transactions that would subject it to the prohibited transactions tax as defined
in section 860F(a)(2) of the Internal Revenue Code, the contributions tax as
defined in section 860G(d) of the Internal Revenue Code or the tax on net income
from foreclosure property as defined in section 860G(c) of the Internal Revenue
Code. However, in the event that any tax is imposed on the trust fund, the tax
will be borne:
o by the trustee, if the trustee has breached its obligations with
respect to REMIC compliance under the agreement,
o the master servicer, if the master servicer has breached its
obligations with respect to REMIC compliance under the agreement,
and
o otherwise by the trust fund, with a resulting reduction in amounts
otherwise payable to holders of the bonds. See "Material Federal
Income Tax Consequences" in the prospectus.
The responsibility for filing annual federal information returns and
other reports will be borne by the trustee. See "Material Federal Income Tax
Consequences -- Reporting and Tax Administration" in the prospectus.
For further information regarding the federal income tax consequences
of investing in the bonds, see "Material Federal Income Tax Consequences --
REMIC Securities" in the prospectus.
USE OF PROCEEDS
Substantially all of the net proceeds to be received from the sale of
the bonds will be used to purchase the mortgage loans and to pay other expenses
connected with pooling the mortgage loans and issuing the bonds.
37
<PAGE> 44
UNDERWRITING
The depositor has entered into an underwriting agreement dated
[_______] with [________________] the underwriter, to which the asset seller is
also a party. Subject to the terms and conditions set forth in the underwriting
agreement, the depositor has agreed to sell to the underwriter and the
underwriter has agreed to purchase the bonds.
The underwriting agreement provides that the obligations of the
underwriter are subject to the conditions precedent and that the underwriter
will be obligated to purchase all of the bonds if any of the bonds are
purchased.
The depositor and the asset seller have agreed to indemnify the
underwriter against the civil liabilities, including liabilities under the
Securities Act of 1933, as amended, to the extent and under the circumstances
set forth in the underwriting agreement.
The underwriter intends to make a secondary market in the bonds, but
has no obligation to do so. Currently, no secondary market for the bonds exists.
We cannot assure, nor can you assume, that a market will develop, or, if one
does develop, that it will continue to operate in the future or provide you with
a sufficient level of liquidity for your investment.
The depositor estimates that its aggregate expenses in connection with
the issuance and offering of the bonds, excluding underwriting discounts and
commissions, will be approximately [_______].
RATINGS
It is a condition to their issuance that the bonds be rated [__] by
[___________], and [___] by [______________]. [__] and [___] are referred to as
the rating agencies.
The ratings on mortgage backed securities address the likelihood of the
receipt by you of all payments on the underlying assets to which you are
entitled. Ratings address the structural, legal and issuer related aspects
associated with the bonds, including the nature of the underlying assets.
Ratings on securities do not represent any assessment of the likelihood that
principal prepayments will be made by borrowers with respect to the underlying
assets or of the degree to which the rate of prepayments might differ from that
originally anticipated. As a result, the ratings do not address the possibility
that you might suffer a lower than anticipated yield in the event of rapid
prepayments of the mortgage loans or in the event that the trust fund is
terminated prior to the latest final scheduled payment date. In addition, the
ratings do not address the possibility that, in the event of the bankruptcy of
the depositor, the issuance and sale of the bonds might be recharacterized as a
financing and that, as a result of a recharacterization, payments on your bonds
may be delayed or altered.
38
<PAGE> 45
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.
The depositor will request only [_________] to rate the bonds. There
can be no assurance as to whether any rating agency not requested to rate the
bonds will nonetheless issue a rating and, if so, what that rating would be. A
rating assigned to the bonds by a rating agency that has not been requested by
the depositor to do so may be lower than the rating assigned by a rating agency
pursuant to the depositor's request.
39
<PAGE> 46
The information in this prospectus supplement and the accompanying 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 supplement and the accompanying 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.
Prospectus Supplement (UNION
(To prospectus dated December __, 2000) PLANTERS
LOGO)
$_____________
UPHEC Trust, Series [_____]
Issuer
Union Planters Home Equity Corp.,
Depositor
[Union Planters Bank, National Association],
Seller and Master Servicer
---------------
CLASS CLASS CLASS CLASS
CERTIFICATES
Initial Balance
Pass Through Rate
First Distribution Date
Underwriting Discount
---------------
Your trust will consist primarily of a pool of approximately $____________
[fixed-rate] [home equity loans]. [Junior] liens on one- to four-family
residences secure these [home equity loans].
---------------
Before you purchase these certificates you should carefully consider the risk
factors beginning on page [S-___] of this prospectus supplement and on page
[____] of the accompanying prospectus.
---------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined that
this prospectus supplement or the accompanying prospectus is accurate or
complete. Any representation to the contrary is a criminal offense.
---------------
[Underwriters]
_______ __, 200_
<PAGE> 47
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE PAGE
<S> <C> <C>
Where to Find Information in Original Combined LTV Ratios...................17
These Documents.............................i
Geographic Distribution........................18
Summary of Terms............................1 Additional Information.....................19
Risk Factors................................6 Delinquency and Foreclosure Experience.........19
Delinquency Experience.....................20
Description Of The Mortgage Loan Loss Experience.......................21
Loans.......................................9
Description Of The Certificates................22
General.....................................9 General....................................22
Available Distribution Amount..............23
Mortgage Loans..............................9 Interest Distributions.....................23
Principal Distributions....................25
Missing Mortgage Loan Allocation of Losses; Subordination........25
Documentation..............................10 [Adjustment to Servicing Fee in
Connection with Prepaid Mortgage
Underwriting Standards.....................10 Loans......................................26
[Advances..................................27
Characteristics of the Mortgage
Loans......................................10 Yield, Prepayment and Maturity
Considerations.................................28
Loan Type..................................11 Prepayment Considerations and Risks........28
Weighted Average Life of the
Principal Balances as of the Certificates...............................30
Cut off Date...............................12
Percent of Initial Certificate Principal
Mortgage Rates as of the Balance Outstanding At the Following
Cut off Date...............................13 Percentages of CPR.............................32
Original Term to Maturity in Pooling and Servicing Agreement................33
Months.....................................13 General....................................33
Assignment of the Mortgage Loans...........33
Remaining Term to Maturity in Certificate Account........................34
Months.....................................14 Servicing and Other Compensation and
Payment of Expenses........................34
Mortgage Loan Occupancy Type...............14 Reports to Certificateholders .............35
Voting Rights .............................35
Year of Origination........................15 Termination................................35
Year of Scheduled Maturity.................16
</TABLE>
i
<PAGE> 48
<TABLE>
<S> <C> <C>
The Trustee................................36
Material Federal Income Tax
Consequences...............................36
General..................................36
Taxation of Regular Interests............37
Use of Proceeds............................38
Underwriting...............................38
Ratings....................................38
</TABLE>
ii
<PAGE> 49
WHERE TO FIND INFORMATION IN THESE DOCUMENTS
This prospectus supplement and the accompanying prospectus together
contain complete information about the offering of your series. You are urged to
read both documents completely. In particular, you should read the information
under the heading "Risk Factors," beginning on [page ____] of the accompanying
prospectus.
This supplement begins with several sections describing these
certificates:
o the "Summary of Terms" provides important amounts, dates and
other terms of your series;
o the [____________] describes the key structural features of
your series; and
o the "Description of Trust Assets" describes the assets that
provide the source of payment of your series and refers you to
the sections in the accompanying prospectus where you can find
further information about the loans, assets and other
collateral for the certificates.
As you read through these sections, cross references will direct you to
more information in the accompanying prospectus. You can also directly reference
key topics by looking at the table of contents in this prospectus supplement and
the accompanying prospectus.
[We have filed preliminary information regarding your trust's assets
and your certificates with the SEC. The information contained in the prospectus
supplement supersedes all of that preliminary information, which was prepared by
the underwriters for prospective investors based on information provided by the
depositor.]
Until __________ all dealers that effect transactions in the
certificates, whether or not participating in this offering, may be required to
deliver a prospectus and prospectus supplement. This requirement is in addition
to the dealer's obligation to deliver a prospectus and prospectus supplement
when acting as underwriters with respect to their unsold allotments or
subscriptions.
You should rely only on the information in this prospectus supplement
and the accompanying prospectus. The issuer has not authorized anyone to provide
you with information that is different.
i
<PAGE> 50
SUMMARY OF TERMS
The following section is only a summary of selected information and
does not provide you with all the information you will need to make your
investment decision. There is more detailed information in this prospectus
supplement and in the accompanying prospectus. To understand all of the terms of
the offering of the certificates, carefully read this entire document and the
accompanying prospectus.
CERTIFICATES OFFERED
UPHEC TRUST, SERIES [______]
$[_____________]
<TABLE>
<S> <C>
----------------------------------------------------------------------------------------------
Issuer UPHEC Trust, Series [_______]
Seller and Master Servicer Union Planters Bank
Depositor Union Planters Home Equity Corp.
Trustee [_____________]
Cut Off Date [__________], 2000
Closing Date [__________], 2000
[Clearance and Settlement DTC/Cedel/Euroclear]
Listing [We will not apply to list your certificates on any
trading exchange.]
Collateral for your certificates A pool of approximately $____________ [fixed-rate]
[home equity loans]. [Junior] liens on one- to
four-family residences secure these [home equity
loans]. [Union Planters Bank underwrote the home
equity loans.]
----------------------------------------------------------------------------------------------
</TABLE>
INITIAL CLASS PRINCIPAL RATE % OF TOTAL SERIES PRINCIPAL
BALANCE ---- ---------------------------
-----------------------
Class __
Class __
Class __
1
<PAGE> 51
DENOMINATIONS
The certificates will be issued in minimum denominations of $________
and integral multiples of $________ in excess of the minimum.
RISK FACTORS
Your investment in the certificates involves many risks. You should
carefully consider all of the matters discussed in this prospectus supplement
and in the accompanying prospectus, including those under the heading "Risk
Factors," before making any investment decision.
THE TRUST FUND
The trust fund will consist of a pool of [fixed rate] mortgage loans
secured by [first liens and] junior liens on one to four family residential
properties located in [__] different states[, the District of Columbia and the
Virgin Islands].
ISSUER
The issuer is a [common law] trust organized under the laws of the
state of [_____]. The issuer [was][will be] organized on [______], 200_. The
issuer has no assets other than the assets deposited in your trust fund, and the
issuer will have no operations other than as described in this prospectus
supplement and the accompanying prospectus.
THE MORTGAGE LOANS
[As of the cut off date, approximately __% of the mortgage loans are
secured by first liens on the mortgaged property, approximately __% of the
mortgage loans are secured by second liens on the mortgaged property, and
approximately __% of the mortgage loans are secured by third liens on the
mortgaged property.] The mortgage loans will have an initial aggregate principal
balance as of [__________] of approximately $[________]. The mortgage loans have
original terms to maturity of not more than [ ]. The pool of mortgage loans is
expected to have the following approximate characteristics as of the cut off
date:
o total principal balance: [___________]
o average principal balance: [_________]
o weighted average mortgage rate: [_____%]
o weighted average remaining term to maturity: [_____]
See "Description of the Mortgage Loans" in this prospectus supplement and the
prospectus.
2
<PAGE> 52
THE CERTIFICATES
This prospectus supplement offers the class __, class __ and class __
certificates.
The certificates will be issued pursuant to the terms of a pooling and
servicing agreement, dated as of [___________], among the
[_________________________].
The offered certificates will be available [only in book entry form
through the facilities of the Depository Trust Company]. See "Description of the
Certificates" in this prospectus supplement.
DISTRIBUTION DATES
The [25th] day of each month or the next succeeding business day,
beginning in [_______ 200_].
INTEREST AND PRINCIPAL DISTRIBUTIONS
The class ____ and class ____ certificates are collectively referred to
as senior certificates because they are senior in right to the class __
certificates for receiving distributions.] The class __ certificates are
collectively referred to as subordinate certificates. [The class __ certificates
are interest only certificates and are entitled only to distributions of
interest and are not entitled to any principal distributions. [The class __
certificates are principal only certificates and are entitled only to
distributions of principal and are not entitled to any interest distributions.]
The trustee will distribute the monies it receives on the mortgage loans to make
distributions on the certificates in the following order of priority:
o [interest on each class of senior certificates [other than the
class PO certificates, which receive no interest
distributions];
o the principal distribution amount to the senior certificates
then entitled to receive distributions of principal in the
manner, amount, order and priority described in this
prospectus supplement, [but not to the [________]
certificates, which receive no principal distributions];
o any deferred amounts payable to the [________] certificates,
as described in this prospectus supplement; and
o interest on and then principal of each class of subordinate
certificates, paid in sequential order.]
[Under some circumstances described later in this prospectus
supplement, distributions that would otherwise be made on the subordinate
certificates may be distributed instead to the senior certificates. See
"Description of the Certificates" in this prospectus supplement.]
3
<PAGE> 53
CREDIT ENHANCEMENT
Credit enhancement for the senior certificates will be provided by the
subordinate certificates. The rights of holders of the subordinate certificates
to receive distributions will be junior to the rights of the holders of the
senior certificates as described in this prospectus supplement. See "Description
of the Certificates -- Allocation of Losses; Subordination" in this prospectus
supplement.
RATINGS
Before the certificates are issued, the certificates must receive a
rating of "[___]" by [____________________] and "[___]" by [_________]. A
security rating is not a recommendation to buy, sell or hold securities and may
be subject to revision or withdrawal at any time. See "Ratings" in this
prospectus supplement.
ADVANCES
On or prior to each distribution date, the master servicer will advance
the following amount to the trust:
o [delinquent scheduled payments of principal of or interest on
mortgage loans];
o [delinquent payments of taxes, insurance premiums and other
escrowed items to the extent the master servicer considers
those amounts to be recoverable];
o [liquidation related expenses]; and
o [foreclosure advances].
See "Description of the Certificates -- Advances" in this prospectus supplement.
OPTIONAL TERMINATION
On any date on which the aggregate principal balance of the mortgage
loans remaining in the trust fund is less than [___]% of the original amount,
the master servicer may purchase all of the mortgage loans, terminate the trust
fund and distribute the proceeds of the sale of the mortgage loans on the
termination to the holders of the outstanding certificates in the order and
amounts described in this prospectus supplement. See "Pooling and Servicing
Agreement -- Termination" in this prospectus supplement.
LEGAL INVESTMENT
The [class __ certificates] [will] [will not] constitute mortgage
related securities for purposes of the Secondary Mortgage Market Enhancement Act
of 1984 [for so long as they are rated in one of the two highest rating
categories by one or more nationally recognized statistical rating
organizations]. See "Legal Investment" in this prospectus supplement and in the
prospectus.
4
<PAGE> 54
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
[The assets of the trust fund will be treated as a real estate mortgage
investment conduit, or REMIC, for federal income tax purposes. Hunton &
Williams, tax counsel to the depositor, will provide a legal opinion that,
assuming compliance with all provisions of the pooling and servicing agreement,
the assets of the trust fund will qualify as a REMIC under the Internal Revenue
Code. See "Material Federal Income Tax Consequences" in this prospectus
supplement and in the prospectus].
[The [________] certificates will be regular interests in the REMIC,
taxable as debt obligations under the Internal Revenue Code. Interest paid or
accrued on the certificates, including any original issue discount, will be
taxable to you in accordance with the accrual method of accounting, regardless
of your usual method of accounting. The [________] certificates will constitute
the "residual interest" in the REMIC. See "Material Federal Income Tax
Consequences" in this prospectus supplement and in the prospectus.]
[Hunton & Williams, tax counsel to the depositor, is of the opinion
that the trust fund will be treated as a grantor trust under Subpart E, Part I
of subchapter J of the Internal Revenue Code and not as an association taxable
as a corporation. For federal income tax purposes, the owner of a certificate
will be treated as the beneficial owner of [a pro rata portion] of the principal
and interest payments to be received on the assets of the trust fund. See
"Material Federal Income Tax Consequences --- Non-REMIC Certificates ---
Treatment of the Trust Fund for Federal Income Tax Purposes" and "--- Treatment
of the Non-REMIC Certificates for Federal Income Tax Purposes."]
[Hunton & Williams, tax counsel to the depositor, is of the opinion
that the trust fund will be treated as a partnership for federal income tax
purposes and will not be treated as a taxable mortgage pool or as a publicly
traded partnership taxable as a corporation. As a partnership, the partnership
trust fund will not be subject to federal income tax. Instead, each
certificateholder will be required to separately take into account that holder's
allocated share of income, gains, losses, deductions and credits of the
partnership trust fund. See "Material Federal Income Tax Consequences ---
Partnership Trust Funds" and "--- Taxation of Owners of Partnership
Certificates."]
5
<PAGE> 55
RISK FACTORS
The following risk factors, which you should carefully consider, along
with the risk factors noted in the accompanying prospectus describe the
principal risk factors related to an investment in the offered certificates. You
should also consider the information in the prospectus about risk factors.
CIRCUMSTANCES BEYOND THE DEPOSITOR'S CONTROL WILL AFFECT THE YIELD ON YOUR
CERTIFICATES
The yield to maturity on the certificates will depend, among other
things, on how often the borrowers make principal payments on the mortgage loans
and the allocation of principal distributions to reduce the principal balance of
some classes of certificates.
Whether you purchase a certificate at a premium or a discount also
affects your yield to maturity. For example, if you purchase a certificate at a
premium and principal distributions occur at a rate faster than you had
anticipated, your actual yield to maturity will be lower than you had assumed at
the time of purchase. On the other hand, if you purchase a certificate at a
discount and principal distributions occur at a rate slower than you had
anticipated, your actual yield to maturity will be lower than you had assumed at
the time of purchase.
HOW JUNIOR LIEN MORTGAGE ASSETS COULD ADVERSELY IMPACT THE YIELD AND PREPAYMENTS
ON YOUR SECURITIES
Your trust may contain mortgage assets secured by junior liens and the
senior liens may not be included in your trust. A decline in residential real
estate values could reduce the value of a mortgaged property securing a junior
lien mortgage asset to below that of all liens on the mortgaged property.
Because mortgage assets secured by junior liens are subordinate to the rights
under senior liens, a decline would adversely affect the position of the junior
lienholder before having any affect on the position of the senior lienholder.
Interest rates, the condition of the mortgaged property and other factors may
also reduce the value of the mortgaged property. As a result, the loan to value
ratio may rise. This increase will reduce the likelihood that, in the event of a
default by the obligor, liquidation or other proceeds will be sufficient to
repay amounts owing on the junior lien mortgage asset. This could adversely
impact your influence.
Other factors may influence the prepayment rate of junior lien mortgage
assets. These include the amounts of, and interest on, the senior mortgage loan
and the use of senior lien mortgage loans as long term financing for home
purchases and junior lien mortgage loans as shorter term financing. Accordingly,
junior lien mortgage assets may experience a higher rate of prepayments than
senior lien mortgage loans. Any future limitations on the rights of obligors to
deduct interest payments on junior lien mortgage assets for federal income tax
purposes may increase the rate of prepayments on junior lien mortgage assets.
This could adversely impact the yield and delay payments on your certificates.
6
<PAGE> 56
[HIGH LOAN TO VALUE RATIOS COULD ADVERSELY IMPACT YOUR SECURITIES
Some mortgage loans currently have high loan to value ratios, including
ratios of more than 100% in some cases. Therefore, a mortgaged property may not
fully secure the related mortgage loan. Even if a mortgaged property provides
adequate security for its mortgage loan, substantial delays encountered during
liquidation could result in shortfalls in distributions.]
THE MASTER SERVICER HAS LIMITED EXPERIENCE SERVICING HOME EQUITY LOANS
The master servicer began servicing home equity loans in November of
1999. Prior to then, the master servicer did not have home equity loans in its
servicing portfolio. Because of this, the master servicer does not have
significant historical loss and delinquency data on its home equity loan
portfolio that may be referred to for purposes of estimating the future
delinquency and loss experience of home equity loans similar to the home equity
loans being sold to the trust. This lack of historical data will limit your
ability to assess the master servicer's ability to service properly the home
equity loans in the trust.
STATE LAW MAY LIMIT YOUR RECOVERY ON DEFAULTED ASSETS
Applicable state laws may limit the master servicer's ability to
repossess or foreclose on and liquidate the mortgaged properties or may limit
the amount realized upon any liquidation to less than the amount due. See "Legal
Aspects of Mortgage Loans" in the prospectus.
THE CONCENTRATION OF MORTGAGES IN THE STATES OF [___________________] COULD HAVE
AN ADVERSE IMPACT ON YOUR SECURITIES
There is a high concentration of mortgaged properties in the states of
[__________________]. See "Description of the Mortgage Loans -- Characteristics
of the Mortgage Loans -- Geographic Distribution" in this prospectus supplement.
If economic conditions cause sufficiently high defaults, delinquencies or
liquidation losses to occur in any of these states, the credit support provided
to your certificates by the subordinate certificates could be reduced or
eliminated and you may experience a loss.
MISSING MORTGAGE LOAN DOCUMENTS MAY LIMIT THE MASTER SERVICER'S ABILITY TO
EXERCISE ITS OBLIGATIONS WITH RESPECT TO THE LOANS
Some of the mortgage loan files are incomplete or may be defective in
other respects. In particular, some of the mortgage loan files are missing one
or more of the following documents:
o [the original mortgage notes];
o [the original or certified copy of the mortgage or deed of
trust];
o [evidence of title insurance];
o [intervening assignments]; and
o [a complete chain of endorsements].
7
<PAGE> 57
The absence of the documents may inhibit the master servicer's ability
to exercise some remedies for delinquent or defaulted loans, including the
ability to do the following:
o enforce a borrower's obligations under the related mortgage
loan; and
o foreclose on defaulted mortgage loans.
However, the seller is obligated to repurchase a mortgage loan if
specified required documents, such as the original mortgage note, mortgage, or
title insurance policy, have not been delivered and if a material adverse effect
would result from the failure to deliver the documents. See "Description of the
Mortgage Loans -- Missing Mortgage Loan Documentation" in this prospectus
supplement.
[THE LACK OF A RECORDED ASSIGNMENT COULD ADVERSELY IMPACT THE DEPOSITOR'S LIEN
POSITION WITH RESPECT TO THE MORTGAGES
Union Planters Bank will provide the trustee with assignments of the
mortgages in blank but is not required to record assignments of transfer of the
mortgages in the applicable real property records. If Union Planters Bank were
to sell or transfer any mortgage loan to another person before recording the
assignments to the trust fund, the other person may have rights superior to
those of the trust fund.]
LACK OF A GUARANTEE COULD ADVERSELY IMPACT THE DISTRIBUTIONS ON YOUR SECURITIES
[Distributions on the certificates are payable solely from amounts
collected with respect to the mortgage loans.] [Neither the seller, the master
servicer nor the trustee has guaranteed any distributions on your certificates.]
[LACK OF LISTING ON A TRADING EXCHANGE COULD REDUCE YOUR ABILITY TO RESELL YOUR
SECURITIES]
[We do not intend to list your certificates on any trading exchange.
Accordingly, your certificates may not become as freely marketable as if we had
obtained a listing on a trading exchange, and a secondary market for your
certificates is less likely to develop. As a result, you may not be able to
resell your certificates so easily, and, if you do resell your certificates, the
price you obtain may not be as favorable to you as it would have been had we
listed your certificates on a trading exchange.]
8
<PAGE> 58
DESCRIPTION OF THE MORTGAGE LOANS
GENERAL
The trust fund will consist primarily of a pool of [fixed rate]
[adjustable rate] one- to four-family [junior lien] home equity mortgage loans.
MORTGAGE LOANS
Each mortgage loan is evidenced by a promissory note or mortgage note
and secured by a mortgage, deed of trust or other similar security instrument
creating a first lien or junior lien on a one to four family residential
property. All percentages of the mortgage loans described in this prospectus
supplement are approximate percentages, except as otherwise indicated, by
aggregate principal balance as of the cut off date.
The mortgage loans to be included in the trust fund will have been
originated or acquired by [Union Planters Bank], the asset seller and will
generally comply with the underwriting criteria described in this prospectus
supplement. The depositor will purchase the mortgage loans to be included in the
mortgage pool on or before the closing date from the asset seller pursuant to
the sales agreement, to be dated as of [____________], between the asset seller
and the depositor. The depositor will cause the mortgage loans to be
[assigned][pledged] to the trustee, pursuant to pooling and servicing
agreement], dated as of [____________], by and among the depositor, the trustee
and the master servicer. [Union Planters Bank], as master servicer will service
the mortgage loans, pursuant to the pooling and servicing agreement.
Under the sales agreement, the asset seller will make specified
representations, warranties and covenants to the depositor relating to, among
other things, the due execution and enforceability of the sales agreement and
specified characteristics of the mortgage loans, and will be obligated to
repurchase or substitute for any mortgage loans as to which there exists
deficient documentation, if a deficiency results in a materially adverse effect
on the certificateholders, or an uncured material breach of any representation,
warranty or covenant. Under the pooling and servicing agreement the depositor
will assign all its right, title and interest in the representations, warranties
and covenants, including the asset seller's repurchase or substitution
obligation, to the trustee for the benefit of certificateholders. In the event
any representations and warranties with respect to the mortgage loans are
materially incorrect, the asset seller will have an obligation to repurchase or
substitute for the mortgage loans. The asset seller is selling the mortgage
loans without recourse and, accordingly, will have no obligations with respect
to the certificates other than pursuant to the representations, warranties,
covenants and repurchase obligations. See "Description of the Agreements --
Representations and Warranties; Repurchases" in the prospectus.
9
<PAGE> 59
MISSING MORTGAGE LOAN DOCUMENTATION
Many of the mortgage loan files are incomplete or otherwise deficient.
See "Risk Factors -- Missing Mortgage Loan Documents May Limit the Master
Servicer's Ability to Exercise its Obligations with Respect to the Loans" in
this prospectus supplement. In particular, some of the mortgage loan files may
be missing:
o [the original mortgage note, although a lost note affidavit is
available for each of the mortgage loans];
o [the original mortgage or a certified copy evidencing
recordation]; or
o [a title insurance policy, a copy, or similar evidence of
title insurance].
Some mortgage loan files are also missing other documents or may be
defective in other respects. For example, some mortgage loan files have one or
more missing intervening assignments or lack a complete chain of endorsements.
[The absence of an original mortgage note, mortgage, or other documents
may limit the ability of the master servicer to enforce a mortgagor's
obligations under the related mortgage loans and to foreclose on defaulted
mortgage loans.] Under the sales agreement, the asset seller will be obligated
to repurchase a mortgage loan as to which the required documents, such as the
original mortgage note, mortgage, intervening assignments or title insurance
policy, have not been delivered, or that were otherwise deficient, but only to
the extent a material adverse effect on the certificateholders resulted from the
failure to deliver the documents.
UNDERWRITING STANDARDS
[underwriting standards specific to the assets]
CHARACTERISTICS OF THE MORTGAGE LOANS
As of the cut off date, the mortgage loans had the following
characteristics:
o mortgage rates ranging from [_____] per annum to [_____] per
annum;
o a weighted average mortgage rate of approximately [______] per
annum;
o outstanding principal balances ranging from [____] to
[_______];
o an average outstanding principal balance of approximately
[_______];
o original terms to scheduled maturity ranging from [_______]
months to [_______] months;
10
<PAGE> 60
o a weighted average original term to scheduled maturity of
approximately [_______] months;
o remaining terms to scheduled maturity ranging from [_______]
months to [_______] months;
o a weighted average remaining term to scheduled maturity of
approximately [_______] months;
o as of the cut off date, approximately [_______] of the
mortgage loans were [_______] to [_______] days delinquent,
and no mortgage loan was more than [_______] days delinquent;
and
o [____] mortgage loans were secured by first liens, [___]
mortgage loans were secured by second liens, and [___]
mortgage loans were secured by third liens.
With respect to mortgage loans as to which appraisals are available,
the combined loan to value ratios or combined LTV at origination range from
[_______] to [_______], with a weighted average combined LTV at origination of
approximately [_______]. Approximately [_______] of the mortgage loans, by cut
off date principal balance do not have appraisals that are readily available. As
a result, the mortgage loans are included in the not available category in the
combined LTV table below.
As of the cut off date, the mortgage loans have the characteristics set
forth in the following tables. Asterisks (*) in the following tables indicate
values of less than [_______]. The percentage totals may not sum due to
rounding.
LOAN TYPE
PERCENT BY
AGGREGATE AGGREGATE
PRINCIPAL PRINCIPAL
NUMBER OF BALANCE AS OF BALANCE AS OF
LOAN TYPE MORTGAGE LOANS THE CUT OFF DATE THE CUT OFF DATE
--------- -------------- ---------------- ----------------
11
<PAGE> 61
PRINCIPAL BALANCES AS OF THE CUT OFF DATE
<TABLE>
<CAPTION>
PERCENT BY
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
MORTGAGE BALANCE AS OF BALANCE AS OF
PRINCIPAL BALANCE AS OF THE CUT OFF DATE LOANS THE CUT OFF DATE THE CUT OFF DATE
---------------------------------------- --------- ---------------- ----------------
<S> <C> <C> <C>
</TABLE>
average principal balance: approximately $__________
12
<PAGE> 62
MORTGAGE RATES AS OF THE CUT OFF DATE
PERCENT BY
AGGREGATE AGGREGATE
PRINCIPAL PRINCIPAL
NUMBER OF BALANCE AS OF BALANCE AS OF
MORTGAGE RATE MORTGAGE LOANS THE CUT OFF DATE THE CUT OFF DATE
------------- -------------- ---------------- ----------------
weighted average mortgage rate: approximately _______%
ORIGINAL TERM TO MATURITY IN MONTHS
<TABLE>
<CAPTION>
PERCENT BY
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
MORTGAGE BALANCE AS OF BALANCE AS OF
ORIGINAL TERM TO MATURITY IN MONTHS LOANS THE CUT OFF DATE THE CUT OFF DATE
----------------------------------- --------- ---------------- ----------------
<S> <C> <C> <C>
</TABLE>
weighted average original term to maturity: approximately _____ months
13
<PAGE> 63
REMAINING TERM TO MATURITY IN MONTHS
PERCENT BY
AGGREGATE AGGREGATE
REMAINING TERM NUMBER OF PRINCIPAL PRINCIPAL
TO MATURITY MORTGAGE BALANCE AS OF BALANCE AS OF
IN MONTHS LOANS THE CUT OFF DATE THE CUT OFF DATE
-------------- --------- ---------------- ----------------
weighted average remaining term to maturity: approximately ____ months
MORTGAGE LOAN OCCUPANCY TYPE
PERCENT BY
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
MORTGAGE BALANCE AS OF BALANCE AS OF
MORTGAGE LOAN OCCUPANCY TYPE LOANS THE CUT OFF DATE THE CUT OFF DATE
---------------------------- --------- ---------------- ----------------
14
<PAGE> 64
YEAR OF ORIGINATION
PERCENT BY
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
MORTGAGE BALANCE AS OF BALANCE AS OF
YEAR OF ORIGINATION LOANS THE CUT OFF DATE THE CUT OFF DATE
------------------- --------- ---------------- ----------------
1960.....................
1965.....................
1968.....................
1970.....................
1971.....................
1972.....................
1973.....................
1974.....................
1975.....................
1976.....................
1977.....................
1978.....................
1979.....................
1980.....................
1981.....................
1982.....................
1983.....................
1984.....................
1985.....................
1986.....................
1987.....................
1988.....................
1989.....................
1990.....................
1991.....................
1992.....................
1993.....................
1994.....................
1995.....................
1996.....................
1997.....................
1998.....................
1999.....................
15
<PAGE> 65
YEAR OF SCHEDULED MATURITY
PERCENT BY
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
MORTGAGE BALANCE AS OF BALANCE AS OF
YEAR OF ORIGINATION LOANS THE CUT OFF DATE THE CUT OFF DATE
------------------- --------- ---------------- ----------------
2000.....................
2001.....................
2002.....................
2003.....................
2004.....................
2005.....................
2006.....................
2007.....................
2008.....................
2009.....................
2010.....................
2011.....................
2012.....................
2013.....................
2014.....................
2015.....................
2016.....................
2017.....................
2018.....................
2019.....................
2020.....................
2021.....................
2022.....................
2023.....................
2024.....................
2025.....................
2026.....................
2027.....................
2028.....................
2029.....................
Total...............
16
<PAGE> 66
ORIGINAL COMBINED LTV RATIOS
<TABLE>
<CAPTION>
PERCENT BY
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
MORTGAGE BALANCE AS OF BALANCE AS OF
ORIGINAL COMBINED LTV RATIO(%) LOANS THE CUT OFF DATE THE CUT OFF DATE
------------------------------ --------- ---------------- ----------------
<S> <C> <C> <C>
00.01- 10.00...........................
10.01- 20.00...........................
30.01- 40.00...........................
40.01- 50.00...........................
50.01- 60.00...........................
60.01- 70.00...........................
70.01- 80.00...........................
80.01- 90.00...........................
90.01- 95.00...........................
95.01-100.00...........................
100.01-105.00...........................
105.01-110.00...........................
110.01-115.00...........................
115.01-120.00...........................
Greater than 120........................
Not Available...........................
Total.........................
</TABLE>
weighted average original combined LTV ratio: approximately _____%
Original combined LTV ratio is a fraction, expressed as a percentage,
the numerator of which is the principal balance of the related mortgage loan and
all mortgage loans senior to such mortgage loan on the date of its origination,
and the denominator of which is generally the lesser of:
o the appraised value of the related mortgaged property as
determined by an appraisal obtained in connection with the
origination of the mortgage loan; and
o the sale price of the mortgaged property at the time of the
origination.
There can be no assurance that the value determined through an
appraisal or otherwise of a mortgaged property determined after origination of
the related mortgage loan will be equal to or greater than the value determined
through an appraisal or otherwise obtained in connection with the origination.
As a result, there can be no assurance that the loan to value ratio for any
mortgage loan determined at any time following origination will be lower than
the original combined LTV ratio, notwithstanding any positive amortization of
the mortgage loan. The combined LTV ratios at origination range from
[___________], with a weighted average combined LTV at origination of
approximately [_______]. Approximately [______] of the mortgage loans by cut off
date principal balance do not have appraisals that are readily available and are
not included in the weighted average original combined LTV calculation.
17
<PAGE> 67
GEOGRAPHIC DISTRIBUTION
PERCENT BY
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
MORTGAGE BALANCE AS OF BALANCE AS OF
STATE LOANS THE CUT OFF DATE THE CUT OFF DATE
----- --------- ---------------- ----------------
Alabama............
Alaska.............
Arizona............
Arkansas...........
California.........
Colorado...........
Connecticut........
Delaware...........
District of
Columbia...........
Florida............
Georgia............
Hawaii.............
Idaho..............
Illinois...........
Indiana............
Iowa...............
Kansas.............
Kentucky...........
Louisiana..........
Maryland...........
Massachusetts......
Michigan...........
Minnesota..........
Mississippi........
Missouri...........
Montana............
Nebraska...........
Nevada.............
New Hampshire......
New Jersey.........
New Mexico.........
New York...........
North Carolina.....
Ohio...............
Oklahoma...........
Oregon.............
Pennsylvania.......
Rhode Island.......
South Carolina.....
18
<PAGE> 68
South Dakota.......
Tennessee..........
Texas..............
Utah...............
Virginia...........
Virgin Islands.....
Washington.........
Wisconsin..........
Wyoming............
Total....
No more than approximately [_______] of the mortgage loans are secured by
mortgaged properties located in any one zip code.
ADDITIONAL INFORMATION
The description in this prospectus supplement of the mortgage loans is
based upon the trust fund as expected to be constituted at the close of business
on the cut off date. Prior to the issuance of the certificates, a mortgage loan
may be prepaid or may be removed from the trust fund as a result of incomplete
documentation or otherwise, if the depositor deems the removal necessary or
appropriate. A limited number of other assets may be included in the trust fund
prior to the issuance of the certificates unless including the mortgage loans
would materially alter the characteristics of the trust fund 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 trust fund as it will be constituted at the time the
certificates are issued.
A current report on form 8-K will be available to purchasers of the
certificates and will be filed, together with specified exhibits, with the
securities and exchange commission within fifteen days after the initial
issuance of the certificates. In the event mortgage loans are removed from or
added to the trust fund as set forth in the preceding paragraph, the removal or
addition will be noted on a form 8-K.
DELINQUENCY AND FORECLOSURE EXPERIENCE
The following tables set forth information concerning the delinquency
and loss experience, including pending foreclosures, on one- to four-family,
first lien or junior lien home equity loans included in the master servicer's
servicing portfolio. The indicated periods of delinquency are based on the
number of days past due on a contractual basis. No mortgage loan is considered
delinquent for these purposes until 31 days past due on a contractual basis.
19
<PAGE> 69
DELINQUENCY EXPERIENCE*
<TABLE>
<CAPTION>
AS OF AS OF AS OF AS OF
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1999 2000 2000 2000
BY NO. OF BY NO. OF BY NO. OF BY NO. OF
LOANS LOANS LOANS LOANS
------------ --------- --------- -------------
<S> <C> <C> <C> <C>
Total portfolio....... 677 2,472 7,437 12,854
Period of delinquency
30 to 59 days....... 0 2 22 93
Percent of portfolio 0.00% 0.08% 0.30% 0.72%
60 to 89 days....... 0 0 4 21
Percent of portfolio 0.00% 0.00% 0.05% 0.16%
90 days or more..... 0 0 5 17
Percent of portfolio 0.00% 0.00% 0.07% 0.13%
Total delinquent loans 0 2 31 131
Percent of portfolio 0.00% 0.08% 0.42% 1.02%
Bankruptcies.......... 0 0 0 0
Percent of portfolio 0.00% 0.00% 0.00% 0.00%
Foreclosures.......... 0 0 0 0
Percent of portfolio 0.00% 0.00% 0.00% 0.00%
</TABLE>
----------------
* Percentages are presented on the basis of the number of mortgage loans
serviced.
There can be no assurance that the delinquency and foreclosure
experience of the home equity loans comprising the trust will correspond to the
delinquency and foreclosure experience of the master servicer's mortgage
portfolio set forth in the foregoing tables. The aggregate delinquency and
foreclosure experience on the mortgage loans comprising the trust will depend on
the results obtained over the life of the trust.
20
<PAGE> 70
LOAN LOSS EXPERIENCE
<TABLE>
<CAPTION>
AT OR FOR THE TWELVE MONTHS ENDED AT OR FOR THE THREE MONTHS
DECEMBER 31, ENDED SEPTEMBER 30,
--------------------------------- --------------------------
1999 2000
---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Number of mortgage
loans........................ 677 12,854
Number of mortgage loans
foreclosed................... 0 0
Mortgage loans foreclosed as a
percentage of total Master
Servicer serviced mortgage
loans........................ 0.00% 0.00%
Mortgage loans foreclosed as a
percentage of average number
of mortgage loans............ 0.00% 0.00%
Average outstanding principal
balance of mortgage
loans........................ $30,996,445 $532,091,330
Net losses from mortgage loan
foreclosures:
Total dollars......... $0 $0
As a percentage of
average principal
balance of mortgage
loans............... 0.00% 0.00%
</TABLE>
The data presented in the foregoing tables are for illustrative
purposes only, and there is no assurance that the delinquency and loan loss
experience of the home equity loans in your trust will be similar to that set
forth above. The delinquency and loan loss experience of mortgage loans
historically has been sharply affected by downturns in regional or local
economic conditions. For instance, a downturn was experienced in areas dependent
on the oil and gas industry in the 1980s, causing increased levels of
delinquencies and loan losses on mortgage loans in affected areas. Regional and
local economic conditions are often volatile, and no predictions can be made
regarding their effects on future economic losses upon mortgage loan losses.
Information regarding the geographic location, at origination, of the mortgaged
properties is set forth under "Description of the Mortgage Loans" in this
prospectus supplement.
In particular, the foregoing data generally represents the master
servicer's experience servicing home equity loans underwritten pursuant to
particular underwriting standards, which may differ from the underwriting
standards used to originate the home equity loans in your trust. Further, this
data reflects the master servicer's experience servicing home equity loans
during historic economic conditions that may not reflect future conditions.
Accordingly, the performance of the home equity loans in your trust and the
master servicer's servicing experience with respect thereto may differ
materially from the historical servicing data presented in this prospectus
supplement.
21
<PAGE> 71
THE HOME EQUITY LOAN MARKET AND SERVICING
The home equity loan market is growing rapidly. The largest growth
usually occurs in a rising interest rate environment, and in cycles that occur
approximately every 7 years. The master servicer's home equity loan portfolio is
diversified geographically. No one state has more than a 15% concentration in
the portfolio. Properties securing home equity loans are located in all states
except Texas and Alabama. Legislation always has a potentially significant
impact on the home equity lending industry. In the year 2000 several states are
considering new legislation regarding "predatory lending practices." The current
result of this legislative effort on the industry is the industry's attempt to
keep fees, costs, and charges reasonable, as well as to deter unethical
activity. The master servicer's philosophy is to remain proactive regarding this
type of legislation. Interest rate fluctuations also play a major role in the
home equity lending industry. As interest rates decline, interest mortgage
credit shifts from home equity lending to more traditional first lien mortgage
lending. Home equity loans become more likely to prepay, and are often replaced
with more traditional first lien mortgage loans. Junior lien loans with high
combined loan-to-value ratios present additional risks, because these loans are
often made based on creditworthiness of the borrower rather than on the value of
the property serving as security. However, the creditworthiness of a borrowers
can change. Employment reductions in particular geographic areas and
irresponsible use of consumer loans affect the performance of a portfolio of
high combined loan-to-value ratio home equity loans. The master servicer's
strategy is to follow strict adherence to servicing guidelines.
DESCRIPTION OF THE CERTIFICATES
GENERAL
Material terms of the certificates are disclosed in this section of the
prospectus supplement. The certificates will be issued pursuant to the pooling
and servicing agreement and will consist of [__] classes to be designated as the
[class __, class __ and class __ certificates]. The certificates will be issued
in book entry form only, and will be issued in denominations of [______] and
integral multiples of [$__] in excess. The certificates will be freely
transferable and exchangeable at the corporate trust office of the trustee.
The certificates represent in the aggregate the entire beneficial
ownership interest in a trust fund consisting of: (i) the mortgage loans and all
payments under and proceeds in respect received after the cut off date,
exclusive of payments of principal and interest due on or before the cut off
date; (ii) any mortgaged property acquired on behalf of the trust fund through
foreclosure or deed in lieu of foreclosure, upon acquisition an REO property;
(iii) funds or assets as from time to time are deposited in the certificate
account and any account established in connection with REO property; and (iv)
the rights of the mortgagee under all insurance policies with respect to the
mortgage loans.
[The class __ certificates] have a notional principal amount for any
distribution date equal to the aggregate of the principal balances of the [non
discount] mortgage loans at the beginning of the related due period or as of the
cut off date in the case of the first distribution date.] The certificate
principal balance of any class of certificates outstanding at any time
represents the
22
<PAGE> 72
maximum amount that the holders are entitled to receive as distributions
allocable to principal from the cash flow on the mortgage loans. The respective
certificate principal balances of the classes of certificates will in each case
be reduced by the sum of amounts actually distributed on the class that are
allocable to principal, and realized losses, if any, allocated thereto.
[The subordinate certificates and the class __ certificates are not
offered by this prospectus supplement.]
AVAILABLE DISTRIBUTION AMOUNT
The available distribution amount for any distribution date will be
equal to the sum of:
o [the aggregate amount of scheduled 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,
o unscheduled payments, including mortgagor prepayments on the
mortgage loans, insurance proceeds, liquidation proceeds and
proceeds from repurchases of and substitution for the mortgage
loans occurring during the preceding calendar month, and
o all advances of scheduled principal and interest made for the
distribution date, in each case net of amounts reimbursable
therefrom to the master servicer, including reimbursement of
previously unreimbursed advances. With respect to any
distribution date, (a) the due date is deemed to be the first
day of the month in which the distribution date occurs and (b)
the determination date is the 15th day of the month in which
that distribution date occurs or the next immediately
succeeding business day.]
Except as provided in this prospectus supplement and to the extent of
the available distribution amount, on each distribution date distributions on
the certificates will be applied in the following order of priority:
[INSERT STRUCTURE.]
[Under circumstances described in this prospectus supplement,
distributions from the available distribution amount for a distribution date
that would otherwise be made on the subordinate certificates may be distributed
instead on the senior certificates. See "-- Allocation of Losses; Subordination"
in this prospectus supplement.]
INTEREST DISTRIBUTIONS
On each distribution date, to the extent of funds available, each class
of certificates, [other than the class __ certificates], will be entitled to
receive an amount allocable to interest with
23
<PAGE> 73
respect to the related interest accrual period. The interest distribution amount
for any class of certificates, [other than the class __ certificates], will be
equal to interest at the applicable pass through rate accrued on the related
certificate principal balance [or notional principal amount, as the case may
be,] during the related interest accrual period, subject to reductions described
in this prospectus supplement, and also interest distribution amounts, if any,
that should have been distributed on prior distribution dates but were not.
The interest entitlement described above for each class of
certificates[, other than the class __ certificates], will be reduced by the
amount of net interest shortfall for the distribution date. With respect to any
distribution date, the net interest shortfall is equal to the sum of:
o the amount of interest which would otherwise have been
received with respect to any mortgage loan that was subject of
a relief act reduction, and
o any net prepayment interest shortfall.
Net interest shortfall on any distribution date will be allocated pro
rata among all classes of certificates entitled to receive distributions of
interest on the distribution date, based on the amount of interest each the
class of certificates would otherwise be entitled to receive on the distribution
date before taking into account any reduction in the amounts resulting for the
net interest shortfall.
A relief act reduction is a reduction in the amount of monthly interest
payments on a mortgage loan pursuant to the Soldiers' and Sailors' Civil Relief
Act of 1940. See "Legal Aspects of the Mortgage Loans -- Soldiers' and Sailors'
Civil Relief Act" in the Prospectus. With respect to any distribution date, the
net prepayment interest shortfall is the aggregate amount of prepayment interest
shortfalls during the calendar month preceding the month of the distribution
date that are not offset by the master servicer. A prepayment interest shortfall
is the amount by which interest paid by a borrower in connection with a
prepayment in full of principal on a mortgage loan is less than one month's
interest at the related mortgage rate net of the servicing fee rate and the
trustee fee rate on the principal balance of the mortgage loan.
[The class __ certificates] are principal only certificates, and are
not entitled to distributions of interest.]
[The interest accrual period for all classes of certificates [other
than the class __ certificates] is the calendar month preceding the month in
which the distribution date occurs.] [Interest on the certificates will be
calculated on the basis of a 360 day year consisting of twelve 30 day months.]
If on any distribution date the available distribution amount is less
than the full interest entitlement on the senior certificates for the
distribution date, the shortfall will be allocated among the holders of all
classes of senior certificates other than the class __ certificates in
proportion to the respective amounts of their interest entitlement for the
distribution date. These shortfalls could occur, for example, if delinquencies
on the mortgage loans were exceptionally
24
<PAGE> 74
high and were concentrated in a particular month and advances by the master
servicer did not cover the shortfall. Any shortfall will be carried forward and
added to the amount holders of each class will be entitled to receive on the
next distribution date. Any amounts so carried forward will not bear interest.
The pass through rate on your certificates is set forth on the cover
hereof. [The pass through rate on the class __ certificates on each distribution
date will equal [________].]
The net mortgage rate on each mortgage loan is equal to [the mortgage
rate minus the servicing fee rate and the trustee fee rate]. The servicing fee
rate is [_______] per annum.
As described in this prospectus supplement, the interest distribution
amount allocable to each class of certificates[, other than the class __
certificates], is based on the certificate principal balance [or, in the case of
the class __ certificates, on the notional principal amount].
PRINCIPAL DISTRIBUTIONS
All payments and other amounts received in respect of principal of the
mortgage loans will be allocated on the certificates based on
[___________________].
Holders of the senior certificates [other than the class __
certificates] will be entitled to receive on each distribution date, in the
priority set forth in this prospectus supplement, a distribution allocable to
principal and equal to the senior principal distribution amount.
[INSERT PRINCIPAL STRUCTURE]
The principal balance of any mortgage loan as of any due date is equal
to the unpaid principal balance as of the cut off date reduced by all payments
in respect of principal received or advanced from the cut off date through the
due date.
ALLOCATION OF LOSSES; SUBORDINATION
[The subordination provided to the senior certificates by the
subordinate certificates is intended to cover realized losses. Realized losses
will be allocated to each class of subordinate certificates in the reverse order
of their numerical designations, in each case until the certificate principal
balance of the class of certificates has been reduced to zero, and then to the
senior certificates on a pro rata basis.]
Any allocation of a realized loss to a certificate will be made by
reducing the certificate principal balance, in each case until the certificate
principal balance of the class has been reduced to zero. In addition, any
allocation of a realized loss to a subordinate certificate may be
25
<PAGE> 75
made by operation of the priority to the senior certificates set forth under
"--- Principal Distributions" and any class of subordinate certificates with a
higher priority.
The holders of the certificates will not be entitled to any additional
distributions with respect to realized losses from amounts otherwise
distributable to any classes of certificates subordinate thereto. However, the
allocation of realized losses to the subordinate certificates on any
distribution date will increase the senior percentage applicable to determining
the amount of future distributions of principal of the remaining mortgage loans
to be distributed on the senior certificates.
The senior certificates will bear the entire amount of realized losses
that are not allocated to the subordinate certificates, which losses will be
allocated among all classes of senior certificates, on a pro rata basis. Classes
entitled to later distributions of principal may bear a larger share of the
realized losses.
Realized loss shall mean [the sum of (a) with respect to each defaulted
mortgage loan for which a foreclosure advance has been made, the excess, if any,
of the aggregate of all advances made with respect to the mortgage loan over all
recoveries, made in respect of the mortgage loan, (b) with respect to the
liquidation of a mortgage loan or related REO property, the excess, if any, of
the principal balance plus accrued interest through the last day of the month of
liquidation over net liquidation proceeds in respect of the mortgage loan or REO
property, and (c) the excess, if any, of
o the aggregate certificate principal balance of the class __,
class __, class __ and subordinate certificates after giving
effect to distributions of principal on a distribution date
and after taking into account preceding clauses (a) and (b)
over
o the aggregate principal balance of the mortgage loans at the
end of the related due period.]
In order to maximize the likelihood of distribution in full of the
interest distribution amount for the senior certificates, and senior principal
distribution amount, on each distribution date, holders of senior certificates
have a right to distributions of the available distribution amount that is prior
to the rights of the holders of the subordinate certificates, to the extent
necessary to satisfy the interest distribution amount for the senior
certificates and senior principal distribution amount.
[ADJUSTMENT TO SERVICING FEE IN CONNECTION WITH PREPAID MORTGAGE LOANS
When a borrower prepays a mortgage loan between due dates, the borrower
may be required to pay interest on the amount prepaid only to the date of
prepayment. Full and partial principal prepayments by borrowers received during
a calendar month will be distributed to certificateholders on the distribution
date in the month following the month of receipt. The servicing fee for any
month will be reduced by an amount with respect to each mortgage loan
26
<PAGE> 76
prepaid in full sufficient to pass through to certificateholders the full amount
of interest to which they would be entitled in respect of the mortgage loan on
the related distribution date. If shortfalls in interest as a result of
prepayments in any month exceed the amount of the servicing fee for the month,
the amount of interest available to be distributed to certificateholders will be
reduced by the amount of the excess. See "Description of the Certificates --
Interest Distributions" in this prospectus supplement.]
[ADVANCES
The master servicer is obligated to make the following advances:
o delinquent scheduled payments of principal or interest on
mortgage loans to the extent that the master servicer
determines, in its good faith judgment, that the amounts are
recoverable;
o delinquent payments of taxes, insurance premiums and other
escrowed items, to the extent deemed recoverable; and
o liquidation related expenses with respect to defaulted
mortgage loans, to the extent deemed recoverable.
At least two business days prior to each distribution date, the master
servicer will either:
o deposit from its own funds the related advance into the
certificate account;
o cause appropriate entries to be made in the records of the
certificate account that funds in the certificate account that
are not part of the available distribution amount for the
related distribution date are to be used to make the advance;
o instruct the trustee to use investment earnings on the
certificate account to defray the master servicer's advance
obligation; or
o make or cause to be made the aggregate advance through any
combination of the methods described in the three bullet
points above. Any funds held for future distribution and used
in accordance with the second bullet point above must be
restored by the master servicer from its own funds or from
early payments collected on the mortgage loans when they
become part of a future available distribution amount.
Advances are intended to maintain a regular flow of scheduled interest
and principal distributions to certificateholders rather than to guarantee or
insure against losses.
The master servicer will reimburse itself for advances out of
collections of the late payments in respect of which advances were made. In
addition, upon the determination that a
27
<PAGE> 77
nonrecoverable advance has been made in respect of a mortgage loan or upon a
mortgage loan becoming a liquidated asset, the master servicer will reimburse
itself out of funds in the certificate account for unreimbursed amounts advanced
by it in respect of the mortgage loan.]
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS
The effective yields to the holders of the certificates will be lower
than the yields otherwise produced by the applicable rate at which interest is
passed through to the holders and the purchase price of the certificates because
monthly distributions will not be payable to the holders until the [____] day or
the following business day, of the month following the month in which interest
accrues on the mortgage loans, without any additional distribution of interest
or earnings in respect of the delay.
Delinquencies on the mortgage loans that are not advanced by or on
behalf of the master servicer, because amounts, if advanced, would be
nonrecoverable, will adversely affect the yield on the certificates. Because of
the priority of distributions, shortfalls resulting from delinquencies not so
advanced will be borne first by the subordinate certificates, in reverse order
of their numerical class designations, and then by the senior certificates.
Net interest shortfalls will adversely affect the yields on the
certificates. In addition, although all losses initially will be borne by the
subordinate certificates in the reverse order of their numerical class
designations, losses will be allocated to the certificates in the event that the
losses exceed the aggregate certificate principal balance of the subordinate
certificates. As a result, the yields on the certificates will depend on the
rate and timing of realized losses.
PREPAYMENT CONSIDERATIONS AND RISKS
The rate of principal distributions on the certificates, the aggregate
amount of distributions on the certificates and the yields to maturity of the
certificates 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 rate of principal prepayments, including for this
purpose prepayments resulting from refinancing, liquidations of the mortgage
loans due to defaults, casualties, condemnations and repurchases by the asset
seller or master servicer. The mortgage loans may be prepaid by the mortgagors
at any time. Some mortgage loans may be subject to prepayment penalties.
Prepayment penalties may have the effect of reducing the amount or the
likelihood of prepayment on the related mortgage loans. [Some mortgage loans may
be subject to due on sale provisions and the master servicer will enforce due on
sale clauses to the extent enforcement is legally permissible.]
Prepayments, liquidations, and purchases of the mortgage loans,
including any optional purchase by the master servicer of a defaulted mortgage
loan and any optional repurchase of the remaining mortgage loans in connection
with the termination of the trust fund, in each case as described in this
prospectus supplement, will result in distributions on the certificates of
principal
28
<PAGE> 78
amounts that would otherwise be distributed over the remaining terms of the
mortgage loans. Because the rate of payment of principal on the mortgage loans
will depend on future events and a variety of other factors, no assurance can be
given as to the rate or the rate of principal prepayments. The extent to which
the yield to maturity of the certificates may vary from the anticipated yield
will depend upon the degree to which the timing of payments is sensitive to
prepayments, liquidations, and purchases of the mortgage loans. Further, an
investor should consider the risk that, in the case of any certificates
purchased at a discount, a slower than anticipated rate of principal payments,
including prepayments, repurchases, defaults, and liquidations, on the mortgage
loans could result in an actual yield to the investor that is lower than the
anticipated yield and, in the case of any certificates purchased at a premium, a
faster 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.
The rate of principal payments, including prepayments, repurchases,
defaults, and liquidations, on pools of mortgage loans may vary significantly
over time and may be influenced by a variety of economic, geographic, and other
factors, including changes in mortgagors' housing needs, job transfers,
unemployment, mortgagors' net equity in the mortgaged properties, and servicing
decisions. In general, if prevailing interest rates were to fall significantly
below the mortgage rates on the mortgage loans, the mortgage loans could be
subject to higher prepayment rates than if prevailing interest rates were to
remain at or above the mortgage rates on the mortgage loans. Conversely, if
prevailing interest rates were to rise significantly, the rate of prepayments on
the mortgage loans would generally be expected to decrease. No assurances can be
given as to the rate of prepayments on the mortgage loans in stable or changing
interest rate environments.
[As described in this prospectus supplement under "Description of the
Certificates -- Principal distributions," the senior accelerated distribution
percentage of all principal prepayments will be distributed initially to the
senior certificates then entitled to receive principal distributions. This
allocation may result in all or a disproportionate percentage of the principal
prepayments being distributed to holders of some classes of senior certificates
and none or less than their pro rata share of the principal prepayments being
distributed to holders of the subordinate certificates during the periods of
time described in the definition of senior accelerated distribution percentage.]
The timing of changes in the rate of prepayments on the mortgage loans
may significantly affect an investor's actual yield to maturity, even if the
average rate of principal payments is consistent with an investor's expectation.
In general, the earlier a prepayment of principal on the mortgage loans, the
greater the effect on an investor's yield to maturity. The effect on an
investor's yield as a result 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 may not be offset by a subsequent
like decrease or increase in the rate of principal payments.
29
<PAGE> 79
WEIGHTED AVERAGE LIFE OF THE CERTIFICATES
Weighted average life refers to the average amount of time from the
date of issuance of a certificate until each dollar of principal of the
certificate will be repaid to the investor. The weighted average life of the
certificates will be influenced by the rate at which principal payments,
including scheduled payments, principal prepayments, liquidations, and payments
made pursuant to any applicable policies of insurance, on the mortgage loans are
made. Principal payments on the mortgage loans may be in the form of scheduled
amortization or prepayments for this purpose, the term prepayment includes
prepayments and liquidations due to a default or other dispositions of the
mortgage loans.
[The table entitled percent of initial certificate principal balance
outstanding at the respective percentages of [CPR] sets forth below indicate the
weighted average life of the certificates and sets forth the percentage of the
initial principal amount of the certificates that would be outstanding after
each of the dates shown at the indicated constant prepayment rates, or CPR. The
tables have been prepared on the basis of the following assumptions regarding
the characteristics of the mortgage loans: [_______]
30
<PAGE> 80
<TABLE>
<CAPTION>
AMORTIZED
WEIGHTED REMAINING ORIGINAL
AGGREGATE AVERAGE MONTHS TERM TO TERM TO
PRINCIPAL GROSS SINCE MATURITY MATURITY
MORTGAGE LOAN POOL NUMBER BALANCE MORTGAGE RATE ORIGINATION (MONTHS) (MONTHS)
---------------------------- --------- ------------- ----------- --------- --------
<S> <C> <C> <C> <C> <C>
1...........................
2...........................
3...........................
4...........................
5...........................
6...........................
7...........................
8...........................
9...........................
10..........................
11..........................
12..........................
13..........................
14..........................
15..........................
16..........................
17..........................
18..........................
19..........................
20..........................
</TABLE>
Based on the foregoing assumptions, the following table indicates the
weighted average life of the certificates and sets forth the percentages of the
initial certificate principal balance of the certificates that would be
outstanding after the distribution date in [___] of each of the years indicated,
at various percentages of [CPR]. Neither [CPR] 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
actual prepayment experience and the balance of the mortgage loans that prepay
may increase or decrease the percentage of initial certificate principal balance
and weighted average life shown in the following tables. The variations may
occur even if the average prepayment experience of all the mortgage loans is the
same as any of the specified assumptions.
31
<PAGE> 81
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF CPR
CLASS __ CERTIFICATES
AT THE FOLLOWING
PERCENTAGE OF [CPR]
----------------------------------------------
[ ] DATE _% _% __% __% __% __% __%
--------------- ----- ------ ----- ---- ------ ----- ---
Initial percent..............
___ 25, 2001...............
___ 25, 2002...............
___ 25, 2003...............
___ 25, 2004...............
___ 25, 2005...............
___ 25, 2006...............
___ 25, 2007...............
___ 25, 2008...............
___ 25, 2009...............
___ 25, 2010...............
___ 25, 2011...............
___ 25, 2012...............
___ 25, 2013...............
___ 25, 2014...............
___ 25, 2015...............
___ 25, 2016...............
___ 25, 2017...............
___ 25, 2018...............
___ 25, 2019...............
___ 25, 2020...............
___ 25, 2021...............
___ 25, 2022...............
___ 25, 2023...............
weighted average life
(years)(+)...................
--------------
+ The weighted average life of the certificates is determined by
multiplying the amount of each distribution of principal by the number of years
from the date of issuance to the related distribution date, adding the results
and dividing the sum by the total principal distributions on the certificates.
32
<PAGE> 82
POOLING AND SERVICING AGREEMENT
GENERAL
The certificates will be issued pursuant to a pooling and servicing
agreement to be dated as of __________, 200_, by and among the depositor, the
trustee and the master servicer[, which incorporates by reference the
depositor's standard terms to pooling and servicing agreement September 2000
edition]. The following discussion, when read in conjunction with the
prospectus, describes the material provisions of the pooling and servicing
agreement. When particular provisions or terms used in the pooling and servicing
agreement are referred to, the actual provisions including definitions of terms
are incorporated by reference as part of the summaries. We recommend that you
read the pooling and servicing agreement in its entirety for a complete and
detailed discussion of the terms of your certificates.
Reference is made to the prospectus for important information in
addition to that set forth in this prospectus supplement regarding the terms and
conditions of the pooling and servicing agreement and the certificates. The
depositor will provide to any certificateholder, without charge, upon written
request, a copy without exhibits of the pooling and servicing agreement.
Requests should be addressed to Union Planters Home Equity Corp., 7130 Goodlett
Farms Parkway, Cordova, Tennessee 38018, attention: President.
ASSIGNMENT OF THE MORTGAGE LOANS
On or prior to the closing date, the depositor will assign or cause to
be assigned the mortgage loans, without recourse, to the trustee for the benefit
of the certificateholders. Prior to the closing date, the depositor will, as to
each mortgage loan, deliver to the trustee or the custodian, among other things,
the following documents collectively referred to as the mortgage file:
o the original or, if accompanied by a lost note affidavit, a
copy of the mortgage note, duly endorsed, which transferred
the mortgage loan, without recourse, in blank or to the order
of trustee;
o the original mortgage or a certified copy, and any intervening
assignments, or certified copies of the intervening
assignments, in each case with evidence of recording;
o an assignment of the mortgage, duly executed, which
transferred the mortgage loan, in blank or to the order of the
trustee, in recordable form;
o originals or certified copies of all assumption, modification
and substitution agreements in those instances where the terms
or provisions of the mortgage or mortgage note have been
modified or the mortgage or mortgage note has been assumed;
and
33
<PAGE> 83
o the originals or certificate of a lender's title insurance
policy issued on the date of the origination of the mortgage
loan or, with respect to each mortgage loan not covered by a
lender's title insurance policy, an attorney's opinion of
title given by an attorney licensed to practice law in the
jurisdiction where the mortgaged property is located. The
[pooling and servicing agreement][servicing agreement] will
not require the depositor to cause the assignments of mortgage
described above to be submitted for recording in the real
property records of the jurisdiction in which the related
mortgaged property is located unless the long term unsecured
debt rating of the asset seller declines below the level
indicated in the [pooling and servicing agreement][servicing
agreement].
CERTIFICATE ACCOUNT
The master servicer is required to deposit on a daily basis all amounts
received with respect to the mortgage loans, net of its servicing compensation,
into a separate account, the certificate account maintained with trustee.
Interest or other income earned on funds in the certificate account will be paid
to the master servicer as additional servicing compensation, and some interest
or other income earned on funds in the distribution account which is an account
held by the trustee for the benefit of the certificateholders, as defined in the
pooling and servicing agreement will be paid to the trustee as additional
trustee compensation. See "Description of the Trust Funds -- Assets" and
"Description of the Agreements -- Certificate Account and Other Collection
Accounts" in the prospectus.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The principal compensation to be paid to the master servicer in respect
of its master servicing activities will be the servicing fee. The servicing fee
will be payable monthly only from amounts received in respect of interest on
each mortgage loan, will accrue at the servicing fee rate and will be computed
on the basis of the same principal amount and for the same period respecting
which any related interest payment on the mortgage loan is computed. The
servicing fee rate equals [_______] per annum.
As additional servicing compensation, the master servicer is entitled
to retain all prepayment penalties and late payment charges, to the extent
collected from mortgagors, together with some interest or other income earned on
funds held in the certificate account. The servicing standard requires the
master servicer to, among other things, diligently service and administer the
mortgage loans on behalf of the trustee and in the best interests of the
certificateholders, but without regard to the master servicer's right to receive
the additional servicing compensation. The master servicer is obligated to pay
some ongoing expenses associated with the trust fund and incurred by the master
servicer in connection with its responsibilities under the pooling and servicing
agreement. See "Description of the Agreements -- Retained Interest; Servicing
Compensation and Payment of Expenses" in the prospectus for information
regarding other possible compensation payable to the master servicer and for
information regarding expenses
34
<PAGE> 84
payable by the master servicer and "Material Federal Income Tax Consequences" in
this prospectus supplement regarding the taxes payable by the master servicer.
REPORTS TO CERTIFICATEHOLDERS
On each distribution date the trustee shall furnish to each
certificateholder, to the depositor, to the master servicer and to the rating
agency a statement setting forth the information with respect to the mortgage
loans and the certificates required pursuant to the pooling and servicing
agreement. In addition, within a reasonable period of time after each calendar
year, the trustee shall furnish to each person who at any time during the
calendar year was the holder of a certificate a statement containing the
information with respect to the certificates required pursuant to the pooling
and servicing agreement, aggregated for the calendar year or portion during
which the person was a certificateholder. See "Description of the Certificates
-- Reports to Certificateholders" in the prospectus.
VOTING RIGHTS
At all times during the term of the pooling and servicing agreement,
__% of the voting rights shall be allocated among the class __, class __ and
class __ certificateholders in proportion to the certificate principal balances
of their certificates. Voting rights allocated to the class __, class __ and
class __ certificateholders will be allocated among the certificateholders] in
proportion to the percentage interests evidenced by their certificates. The
class __ and class __ certificateholders are each entitled to __% of the voting
rights.
TERMINATION
The obligations created by the pooling and servicing agreement will
terminate following the earliest of the final payment or other liquidation of
the last mortgage loan or REO property subject thereto, and the purchase of all
of the assets of the trust fund by the master servicer. Written notice of
termination of the pooling and servicing agreement will be given to each
certificateholder, and the final distribution will be made only upon surrender
and cancellation of the certificates at the office of the certificate registrar
specified in the notice of termination.
Any purchase by the master servicer of all the mortgage loans and other
assets in the trust fund is required to be made at a price equal to the greater
of (1) the aggregate fair market value of all the mortgage loans and REO
properties then included in the trust fund, as mutually determined by the master
servicer and the trustee, and (2) the excess of (a) the sum of:
o the aggregate purchase price of all the mortgage loans then
included in the trust fund, and
35
<PAGE> 85
o the fair market value of all REO properties then included in
the trust fund, as determined by an appraiser mutually agreed
upon by the master servicer and the trustee, over (b) the
aggregate of amounts payable or reimbursable to the master
servicer under the [pooling and servicing agreement][servicing
agreement].
In no event shall the termination price be less than an amount equal
to,
o the then outstanding certificate principal balance of all then
outstanding classes of certificates, plus accrued and unpaid
interest, reduced by,
o any losses or shortfalls otherwise allocable to any class of
certificates on the date of termination.
The payment of any termination price shall be made in the same order of
priority set forth under "Description of the Certificates" above. The purchase
will effect early retirement of the then outstanding certificates, but the right
of the master servicer to effect the termination is subject to the requirement
that the aggregate principal balance of the mortgage loans then in the trust
fund is less than [__]% of the aggregate principal balance of the mortgage loans
as of the cut off date.
THE TRUSTEE
[____________________] is the trustee under the pooling and servicing
agreement. The mailing address of the trustee is [____________________________].
The principal compensation to be paid to the trustee in respect of its
trustee activities will be the trustee fee. The trustee fee will be payable
monthly only from amounts received in respect of interest on each mortgage loan,
will accrue at the trustee fee rate and will be computed on the basis of the
same principal amount and for the same period respecting which any related
interest payment on the mortgage loan is computed. The trustee fee rate with
respect to each mortgage loan equals [___]% per annum. The trustee will also be
entitled to the investment earnings on funds on deposit in the distribution
account as specified in the pooling and servicing agreement.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The pooling and servicing agreement provides that the assets of the
trust fund will be treated as a real estate mortgage investment conduit, or
REMIC, for federal income tax purposes. The class __ certificates, the class __
certificates, the subordinate certificates and the class __ certificates will
represent regular interests in the REMIC. The class [R] certificates will
represent the residual interest in the REMIC.
Hunton & Williams, tax counsel to the depositor, is of the opinion
that, assuming compliance with the pooling and servicing agreement, for federal
income tax purposes, the assets
36
<PAGE> 86
of the trust fund will qualify as a REMIC within the meaning of section 860D of
the Internal Revenue Code of 1986, as amended.
TAXATION OF REGULAR INTERESTS
In the opinion of Hunton & Williams, a holder of the certificates will
be treated for federal income tax purposes as owning a regular interest in a
REMIC. A REMIC regular interest generally is treated for federal income tax
purposes as an ordinary debt instrument. See "Material Federal Income Tax
Consequences -- REMIC Securities" in the prospectus.
The certificates will be treated as assets described in section
7701(a)(19)(C) of the Internal Revenue Code and as real estate assets under
section 856(c)(4)(A) of the Internal Revenue Code, generally in the same
proportion that the assets in the trust fund would be so treated. In addition,
interest on the certificates will be treated as interest on obligations secured
by mortgages on real property under section 856(c)(3)(B) of the Internal Revenue
Code, generally to the extent that the certificates are treated as real estate
assets under section 856(c)(4)(A) of the Internal Revenue Code. See "Material
Federal Income Tax Consequences -- REMIC Securities" in the prospectus.
It is not anticipated that the trust fund will engage in any
transactions that would subject it to the prohibited transactions tax as defined
in section 860F(a)(2) of the Internal Revenue Code, the contributions tax as
defined in section 860G(d) of the Internal Revenue Code or the tax on net income
from foreclosure property as defined in section 860G(c) of the Internal Revenue
Code. However, in the event that any tax is imposed on the trust fund, the tax
will be borne:
o by the trustee, if the trustee has breached its obligations
with respect to REMIC compliance under the agreement,
o the master servicer, if the master servicer has breached its
obligations with respect to REMIC compliance under the
agreement, and
o otherwise by the trust fund, with a resulting reduction in
amounts otherwise distributable to holders of the
certificates. See "Material Federal Income Tax Consequences"
in the prospectus.
The responsibility for filing annual federal information returns and
other reports will be borne by the trustee. See "Material Federal Income Tax
Consequences -- Reporting and Tax Administration" in the prospectus.
For further information regarding the federal income tax consequences
of investing in the certificates, see "Material Federal Income Tax Consequences
-- REMIC Securities" in the prospectus.
37
<PAGE> 87
USE OF PROCEEDS
Substantially all of the net proceeds to be received from the sale of
the certificates will be used to purchase the mortgage loans and to pay other
expenses connected with pooling the mortgage loans and issuing the certificates.
UNDERWRITING
The depositor has entered into an underwriting agreement dated
[_______] with [________________] the underwriter, to which the asset seller is
also a party. Subject to the terms and conditions set forth in the underwriting
agreement, the depositor has agreed to sell to the underwriter and the
underwriter has agreed to purchase the certificates.
The underwriting agreement provides that the obligations of the
underwriter are subject to the conditions precedent and that the underwriter
will be obligated to purchase all of the certificates if any of the certificates
are purchased.
The depositor and the asset seller have agreed to indemnify the
underwriter against the civil liabilities, including liabilities under the
Securities Act of 1933, as amended, to the extent and under the circumstances
set forth in the underwriting agreement.
The underwriter intends to make a secondary market in the certificates,
but has no obligation to do so. Currently, no secondary market for the
certificates exists. We cannot assure, nor can you assume, that a market will
develop, or, if one does develop, that it will continue to operate in the future
or provide you with a sufficient level of liquidity for your investment.
The depositor estimates that its aggregate expenses in connection with
the issuance and offering of the certificates, excluding underwriting discounts
and commissions, will be approximately [_______].
RATINGS
It is a condition to their issuance that the certificates be rated [__]
by [___________], and [___] by [______________]. [__] and [___] are referred to
as the rating agencies.
The ratings on mortgage backed securities address the likelihood of the
receipt by you of all distributions on the underlying assets to which you are
entitled. Ratings address the structural, legal and issuer related aspects
associated with the certificates, including the nature of the underlying assets.
Ratings on securities do not represent any assessment of the likelihood that
principal prepayments will be made by borrowers with respect to the underlying
assets or of the degree to which the rate of prepayments might differ from that
originally anticipated. As a result, the ratings do not address the possibility
that you might suffer a lower than anticipated
38
<PAGE> 88
yield in the event of rapid prepayments of the mortgage loans or in the event
that the trust fund is terminated prior to the latest final scheduled
distribution date. In addition, the ratings do not address the possibility that,
in the event of the bankruptcy of the depositor, the issuance and sale of the
certificates might be recharacterized as a financing and that, as a result of a
recharacterization, distributions on your certificates may be delayed or
altered.
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.
The depositor will request only [_________] to rate the certificates.
There can be no assurance as to whether any rating agency not requested to rate
the certificates will nonetheless issue a rating and, if so, what that rating
would be. A rating assigned to the certificates by a rating agency that has not
been requested by the depositor to do so may be lower than the rating assigned
by a rating agency pursuant to the depositor's request.
39
<PAGE> 89
PROSPECTUS
MORTGAGE PASS-THROUGH CERTIFICATES
COLLATERALIZED MORTGAGE BONDS
UNION PLANTERS HOME EQUITY CORP.
DEPOSITOR
<TABLE>
<S> <C>
THE DEPOSITOR THE SECURITIES
o will periodically issue mortgage related o will represent interests in or be secured by
securities in one or more series with one or home equity loans, mortgage loans or
more classes as described in the related mortgage related securities;
prospectus supplement; and o will be payable solely from the assets of the
trust fund established by the issuer for the
o will establish a trust fund for each series related series;
consisting of one or more segregated pools of various o may be certificates or bonds;
types of first lien or junior lien home equity loans, o may be stripped interest or principal
one-to-four family residential loans, mortgage securities;
securities, mortgage pass through certificates, o may include credit enhancement;
mortgage related securities, mortgage related o may provide for distributions of accrued
securities issued or guaranteed by agencies or interest or principal;
instrumentalities of the United States, FHA loans, VA o may be treated as interests in a real estate
loans and sub-prime and non-conforming mortgage loans. mortgage investment conduit, or REMIC; and
o may have a pre-funding account or liquidity
facility.
</TABLE>
Consider carefully the risk factors beginning on page 13 of this
prospectus and the "Risk Factors" in the accompanying prospectus supplement.
This prospectus may be used to offer and sell the series of securities
described above only if accompanied by the prospectus supplement for that
series.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS OR THE RELATED PROSPECTUS
SUPPLEMENT, AND ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
December 15, 2000
<PAGE> 90
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE PAGE
<S> <C> <C> <C>
Important Notice about Information Reports to Securityholders......................57
Presented in this Prospectus and the Termination.....................................59
Accompanying Prospectus Supplement...........1 Book-Entry Registration.........................61
Summary of Prospectus........................2 Description of the Agreements.....................63
Assignment of Assets; Repurchases...............64
Risk Factors................................14 Representations and Warranties;
Repurchases.....................................65
Description of the Trust Funds..............22 Security Account and Other Collection
Assets....................................22 Accounts........................................67
Mortgage Loans............................23 Collection and Other Servicing
MBS.......................................34 Procedures......................................71
Agency Securities.........................36 Sub-Servicers...................................74
Accounts..................................43 Realization Upon Defaulted Mortgage
Credit Support............................43 Loans...........................................74
Liquidity Facilities......................43 Fidelity Bonds and Errors and Omissions
Cash Flow Agreements......................44 Insurance.......................................76
Pre-Funding...............................44 Due-On-Sale Provisions..........................76
Retained Interest; Servicing
Yield Considerations........................45 Compensation and Payment of
General...................................45 Expenses........................................77
Pass-Through Rate and Interest Evidence As To Compliance.......................77
Rate......................................46 Matters Regarding the Master Servicer
Timing of Payment of Interest.............46 and the Depositor...............................78
Payments of Principal; Special Servicers...............................79
Prepayments...............................46 Events of Default Under Pooling and
Prepayments--Maturity and Servicing Agreement.............................79
Weighted Average Life.....................48 Certificateholder Rights Upon Event of
Other Factors Affecting Weighted Default.........................................80
Average Life..............................49 Amendment.......................................81
The Trustee.....................................82
The Depositor...............................51 Duties of the Trustee...........................82
Matters Regarding the Trustee...................82
Legal Proceedings...........................51 Resignation and Removal of the
Trustee.........................................83
Description of the Securities...............51 Terms of the Indenture..........................84
General...................................51 General.......................................84
Distributions.............................52 Modification of Indenture.....................84
Available Distribution Amount.............53 Events of Default.............................86
Distributions of Interest.................54 Authentication and Delivery of Bonds..........88
Distributions of Principal................55 List of Bondholders...........................88
Components................................55 Annual Compliance Statement...................88
Allocation of Losses and Shortfalls.......56 Reports to Bondholders........................88
Advances in Respect of Delinquencies......56 Trustee's Annual Report.......................89
</TABLE>
i
<PAGE> 91
<TABLE>
<S> <C> <C> <C>
Trustee......................................88 Soldiers' and Sailors' Civil Relief
Satisfaction and Discharge of the Act of 1940.......................................109
Indenture....................................89 Forfeitures in Drug and RICO Proceedings..........110
Description Of Credit Support................89 Additional Legal Considerations...................110
General....................................89
Maintenance of Credit Support..............90 Use Of Proceeds.....................................110
Reduction or Substitution of
Credit Support.............................91 Material Federal Income Tax Consequences............111
Subordinate Securities.....................91 General...........................................111
Cross-Support Provisions...................91 REMIC Securities..................................112
Insurance or Guarantees with Tax Treatment of Residual Securities..............128
Respect to the Assets......................91 Taxation of Residual Securityholders..............129
Letter of Credit...........................92 Limitations on Offset or Exemption of
Insurance Policies and Surety Bonds........92 REMIC Income......................................131
Special Hazard Insurance Policies..........92 Non-Recognition of Some Transfers for
Mortgagor Bankruptcy Bond..................92 Federal Income Tax Purposes.......................132
Reserve Fund...............................93 Ownership of Residual Interests by
Overcollateralization......................93 Disqualified Organizations........................133
Credit Support with Respect To MBS.........94 Special Considerations for Some Types
Insurance Policies On The Mortgage of Investors......................................135
Loans......................................94 Disposition of Residual Securities................138
Primary Mortgage Guaranty Liquidation of the REMIC..........................138
Insurance Policies.........................94 Treatment by the Discount, Market Discount, and
Hazard Insurance Policies..................95 REMIC of Original Issue Amortizable Premium.......139
FHA Mortgage Insurance.....................97 REMIC-Level Taxes.................................140
VA Mortgage Guaranty.......................98 REMIC Qualification...............................141
Asset Composition.................................141
Legal Aspects of Mortgage Loans..................98 Investors' Interests..............................142
General........................................98 Consequences of Disqualification..................144
Types of Mortgage Instruments..................99 Taxable Mortgage Pools............................144
Interest in Real Property......................99 Taxation of Some Foreign Holders
Foreclosure...................................100 of REMIC Securities...............................145
Anti-Deficiency Legislation and Reporting and Tax Administration..................147
Other Limitations on Lenders..................104 Non-REMIC Certificates............................148
Environmental Legislation.....................105 Treatment of the Non-REMIC Certificates
Due-On-Sale Clauses...........................106 for Federal Income Tax Purposes...................148
Prepayment Charges............................107 Non-REMIC Collateralized Mortgage Bonds...........155
Subordinate Financing.........................107 Partnership Trust Funds...........................157
Applicability of Usury Laws...................108 Taxation of Partnership Bondholders...............158
Alternative Mortgage Instruments..............108
</TABLE>
ii
<PAGE> 92
<TABLE>
<S> <C> <C> <C>
Taxation of Owners of Partnership
Certificates.............................159
Proposed Legislation.....................165
State Tax Considerations...................166
ERISA Considerations.......................166
Legal Investment...........................169
Plan of Distribution.......................170
Legal Matters..............................170
Experts....................................171
Financial Information......................171
Ratings....................................171
Available Information......................171
Incorporation of Information by
Reference..................................172
</TABLE>
iii
<PAGE> 93
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS
AND THE ACCOMPANYING PROSPECTUS SUPPLEMENT
Information about each series of securities is contained in two
separate documents:
o this prospectus, which provides general information, some of
which may not apply to a particular series, including your
series; and
o the accompanying prospectus supplement for a particular
series, which describes the specific terms of that series.
The accompanying related prospectus supplement will contain information
about a particular series that enhances and supplements the information
contained in this prospectus. You should rely on the information in that
prospectus supplement to provide you with the specific details of the terms of
your series of securities. You should rely on the information in this prospectus
to provide you with more general information.
You should rely only on the information in this prospectus and the
accompanying related prospectus supplement. We have not authorized anyone to
provide you with information that is different from that contained in this
prospectus and the accompanying related prospectus supplement.
1
<PAGE> 94
SUMMARY OF PROSPECTUS
Title of Securities............... Mortgage pass-through certificates or
collateralized mortgage bonds, each to be
issued in one or more series with one or
more classes.
Risk Factors...................... There are material risks associated with
an investment in the securities. These
risks include:
o mortgage loan prepayments that may
adversely affect the timing of
payments on the securities;
o an increased frequency of defaults on
the underlying mortgage loans due to
the inclusion of sub-prime or
non-conforming mortgage loans;
o lack of credit enhancement protection
due to limitations and conditions
described in detail in the related
prospectus supplement; and
o a limited market for the securities.
See "Risk Factors" beginning on page 13 for
a detailed discussion of factors you should
consider before investing in the
securities.
The Depositor..................... Union Planters Home Equity Corp., a
Delaware corporation, and limited-purpose
wholly-owned financing subsidiary of
Union Planters Bank, National Association.
See "The Depositor."
Master Servicer................... Union Planters Bank, National Association,
an indirect wholly-owned subsidiary of
Union Planters Corporation, or the party
identified as the master servicer in the
related prospectus supplement.
2
<PAGE> 95
The Trust Assets.................. Each series of certificates will represent,
in the aggregate, the entire beneficial
ownership interest in a trust fund. Each
series of bonds will represent indebtedness
of either the depositor or the trust fund
and will be secured by a security interest
in the assets of the trust fund. A trust
fund will consist primarily of the
following assets:
o Mortgage Loans............... The mortgage loans with respect to each
series of securities will consist of a pool
or pools of one-to-four-family first lien
and/or junior lien home equity loans or
residential mortgage loans. The loans will
not be guaranteed or insured by the
depositor or any of its affiliates or by any
other person or entity. If provided in the
related prospectus supplement, the trust
fund may include mortgage loans guaranteed
or insured by a governmental agency or
instrumentality, including the FHA or VA.
The loans will be secured by
one-to-four-family residential properties.
The prospectus supplement will indicate the
geographic dispersion of the mortgaged
properties with respect to the mortgage
loans of the related series and will include
a discussion of any risks related to
geographic concentration of the mortgaged
properties. The pool of mortgage loans
related to any series of securities may
include loans originated by the depositor or
loans purchased by the depositor on or
before the issuance date of the related
securities, except the assets purchased with
pre-funded amounts. The mortgage loans will
provide for an accrual of interest at an
interest rate that is either:
o fixed over its term;
o that adjusts from time to time;
o that may be converted from an
adjustable rate to a fixed rate; or
3
<PAGE> 96
o that may be converted from a fixed rate
to an adjustable rate from time to time
at the mortgagor's election.
Mortgage interest rates may adjust based on
one or more indices. Mortgage loans may
provide for:
o scheduled payments until maturity;
o adjustable payments to accommodate
changes in the mortgage interest rates
or other specified events;
o negative amortization or accelerated
amortization;
o full amortization or require a
balloon payment due on its stated
maturity date; and/or
o prohibitions on prepayment or require
payment of a premium or a yield
maintenance penalty in connection
with a prepayment.
The prospectus supplement will provide more
detail regarding the characteristics of the
mortgage loans of any series. See
"Description of the Trust Funds -- Assets."
As specified in the related prospectus
supplement, less than 20 percent of the
mortgage loans included in the trust fund
may be between 30 and 59 days delinquent
with regard to payment of principal and
interest at the time of their deposit into a
trust fund. The FHA loans and VA loans with
respect to any series may include:
o sub-performing mortgage loans that
are between 30 and 59 days past due
under the terms of the related
mortgage note as of the
4
<PAGE> 97
cut-off date for the related series;
and
o reinstated mortgage loans that have
had more than three scheduled payments
of principal and interest past due
under the terms of the related mortgage
note one or more times during the term
of the related mortgage loan, but at
the related cut-off date for the series
are current in payment.
Less than 20 percent of the assets with
respect to any series of securities may
consist of sub-performing loans.
Some of the mortgage loans with respect to a
series may be guaranteed or insured with
respect to payment of interest and/or
principal by the United States, its agencies
or its instrumentalities, state or local
governments, or state or local government
agencies or instrumentalities, or private
insurance providers.
o Mortgage Backed Securities... The mortgage backed securities, or MBS's,
included in a trust fund will evidence
interests in or be secured by mortgage loans
and will be securities that:
o have been previously offered and
distributed under a public effective
registration statement, were acquired
by the depositor in a bona fide
secondary market transaction and not
from the issuer or an affiliate of the
issuer, and were not part of the
original distribution; or
o have been previously purchased in a
transaction not involving any public
offering from an entity that is not an
affiliate of the issuer of such
securities at the time of sale, or an
affiliate of the issuer at any time
during the three preceding months,
provided however, that a period of two
years have elapsed since the later of
5
<PAGE> 98
the date the securities were acquired
from the issuer or an affiliate.
o Agency Securities............ Agency securities may include Fannie Mae
certificates, Freddie Mac certificates,
GNMA certificates, VA vendee mortgage trust
certificates or other government securities
evidencing interests in mortgage loans or
real property.
o Accounts..................... Each trust fund will include one or more
accounts established and maintained on
behalf of the securityholders into which
payments and collections received or
advanced with respect to the trust assets
will be deposited. These accounts may be
maintained as interest bearing or
non-interest bearing, and the funds held in
the accounts may be held as cash or invested
in short-term, investment grade obligations.
The methods by which the accounts will be
established, maintained and invested will be
described in detail in the related
prospectus supplement and are more generally
described in the text appearing under the
section "Description of the Agreements --
Security Account and Other Collection
Accounts."
o Credit Support............... As more fully described in the related
prospectus supplement, partial or full
protection against defaults and losses on
the assets in the related trust fund, as
identified in the documents governing the
sale and issuance of the securities and the
related prospectus supplement, may be
provided to one or more classes of
securities. The credit support may be in the
form of:
o subordination of one or more of the
other classes of securities of that
series;
o a letter of credit;
o an insurance policy;
6
<PAGE> 99
o a reserve fund; or
o another type of credit support, or a
combination of various types of credit
support.
The credit support will be described in
detail in the related prospectus supplement.
The prospectus supplement also will describe
the credit support of any underlying MBS's
that are included in the related trust fund.
See "Risk Factors -- Insufficient Credit
Support May Adversely Impact Your
Securities" and "Description of Credit
Support."
o Liquidity Facilities......... As more fully described in the related
prospectus supplement, the trust fund with
respect to a series of securities may
include one or more liquidity facilities
that may make any required distributions of
principal or interest on the securities of
the related series to the extent funds are
not otherwise available. See "Description of
the Trust Funds -- Liquidity Facilities."
o Cash Flow Agreements......... The trust fund may include guaranteed
investment contracts pursuant to which money
held in the funds and accounts established
for the related series will be invested at a
specified rate. The trust fund may also
include other agreements, such as interest
rate exchange agreements, interest rate cap
or floor agreements, currency exchange
agreements or similar agreements provided to
reduce the effects of interest rate or
currency exchange rate fluctuations on the
trust assets or on one or more classes of
securities. The principal terms of any
guaranteed investment contract or other
agreement, referred to as a cash flow
agreement, will be described in detail in
the related prospectus supplement. The
related prospectus supplement also will
describe any cash flow agreements that are
included as part of the trust fund evidenced
by or providing
7
<PAGE> 100
security for the MBS's collateral included
in the related trust fund. See "Description
of the Trust Funds-- Cash Flow Agreements."
o Pre-Funding Accounts......... As more fully described in the related
prospectus supplement, a portion of the
issuance proceeds of the securities of a
particular series, the pre-funded amount,
may be deposited in a pre-funding account to
be established with the trustee, which will
be used to acquire additional assets from
time to time during the period known as the
pre-funding period.
Use of a pre-funding account with respect to
any series of securities will be subject to
the following general conditions:
o the pre-funding period will not exceed
three months from the related closing
date;
o the additional assets acquired during
the pre-funding period will be subject
to the same underwriting standards,
representations and warranties as the
assets included in the related trust
fund on the closing date, although
additional criteria may also be
required to be satisfied, as described
in the related prospectus supplement;
o the pre-funded amount will not exceed
25 percent of the principal amount of
the series of securities issued;
o the pre-funded amount will not exceed
25 percent of the scheduled principal
balance of the assets, inclusive of the
related pre-funded amount, as of the
cut-off date; and
o the pre-funded amount shall be
invested in permitted investments. See
"Description of the Trust Funds --
Pre-Funding."
8
<PAGE> 101
Description of the Securities'
Pass-Through or Interest Rate..... Each class of securities, except specified
stripped interest securities, will have a
stated principal balance amount referred to
as the security balance and, other than
stripped principal securities, will accrue
interest based on a fixed, variable or
adjustable interest rate referred to as
the pass-through rate or interest rate. The
related prospectus supplement will specify
the security balance and the pass-through
rate or interest rate, if any, for each
class of securities or, in the case of a
variable or adjustable pass-through rate
or interest rate, the method for
determining the pass-through rate or
interest rate.
Distributions on Securities....... Distributions on one or more classes of
securities may be limited to collections
from a designated portion of the assets
referred to as an asset group. See
"Description of the Securities -- General."
o Interest..................... Distributions with respect to interest on
stripped interest securities may be made on
each distribution date on the basis of a
notional amount as described in the related
prospectus supplement. Distributions of
interest with respect to one or more classes
of securities may be reduced to the extent
of delinquencies, losses, prepayment
interest shortfalls, and other contingencies
described in the related prospectus
supplement. See "Risk Factors -- Prepayment
Timing and Frequency may Adversely Affect
Yield on Your Securities," "Yield
Considerations" and "Description of the
Securities -- Distributions of Interest."
o Principal.................... The securities of a series initially will
have an aggregate security balance no
greater than the sum of:
o the outstanding principal balance of
the assets as of the close of business
on the day of formation of the related
trust fund,
9
<PAGE> 102
referred to as the cut-off date, after
application of scheduled payments due
on or before that date, whether or not
received; and
o amounts on deposit in the related
pre-funding account, if any, as of
the closing date.
The security balance of a security
outstanding from time to time represents the
maximum amount that the holder of that
outstanding security is then entitled to
receive with respect to principal from
future cash flow on the trust assets. See
"Description of the Securities --
Distributions of Principal."
Advances.......................... The master servicer may be obligated to
advance delinquent payments of taxes,
delinquent mortgage payments, insurance
premiums and escrowed items, as well as
liquidation-related expenses with respect to
mortgage loans, which advance obligations
may be subject to the master servicer's
determination that it will be able to
recover those advances from subsequent
proceeds of the related loan. The depositor
will not have any responsibility to make
advances. Advances made by a master servicer
would be reimbursable generally from
subsequent recoveries with respect to these
mortgage loans and otherwise to the extent
described and in the related prospectus
supplement. The related prospectus
supplement will describe any advance
obligations in connection with MBS's
collateral. See "Description of the
Securities -- Advances in Respect of
Delinquencies."
Termination....................... If so specified in the related prospectus
supplement, a series of securities may be
subject to optional early termination
through the repurchase of the assets in the
related trust fund. If so provided in the
related prospectus supplement, upon the
reduction of the security
10
<PAGE> 103
balance of a specified class or classes of
securities to a specified percentage or
amount on and after a date specified in the
related prospectus supplement, the specified
party will solicit bids for the purchase of
all of the assets of the trust fund, or of a
sufficient portion of these assets to retire
these class or classes, or purchase these
assets at a price set forth in the related
prospectus supplement. In addition, if so
provided in the related prospectus
supplement, the securities of a series may
be redeemed prior to their final
distribution date at the option of the
depositor, the master servicer or another
party by the purchase of the outstanding
securities of that series. See "Description
of the Securities -- Termination."
Book-Entry Securities............. If so provided in the related prospectus
supplement, one or more classes of the
securities will initially be represented by
one or more certificates or notes, as
applicable, registered in the name of a
clearing agency or its nominee, such as Cede
& Co., as the nominee of DTC. No person
acquiring an interest in the securities so
registered will be entitled to receive a
definitive certificate or note, as
applicable, representing that person's
interest except in the event that definitive
certificate or note, as applicable, is
issued under the limited circumstances
described in the related prospectus
supplement. See "Risk Factors -- Book-Entry
Securities May Experience Decreased
Liquidity and Payment Delays" and
"Description of the Securities -- Book-Entry
Registration."
Tax Status of the Securities...... The material federal income tax consequences
to securityholders will vary depending on
whether one or more elections are made to
treat the trust fund or specified portions
of the trust fund as one or more REMICs
under the provisions of the Internal Revenue
Code. The related prospectus supplement for
each series of securities will specify
whether such an election will be made.
Hunton & Williams,
11
<PAGE> 104
counsel to the depositor, has provided an
opinion regarding the federal income tax
treatment of the trust and each class of
securities. See "Material Federal Income Tax
Consequences -- General" for a general
discussion of the material federal income
tax consequences related to the purchase,
ownership and disposition of the securities.
A summary of the tax opinion rendered
regarding your securities is contained in
the accompanying prospectus supplement under
the heading "Summary -- Material Federal
Income Tax Consequences."
ERISA Considerations.............. We recommend that you review with your legal
advisors and the fiduciary of your employee
benefit plan and other retirement plans and
arrangements, including individual
retirement accounts, annuities, Keogh plans,
and collective investment funds and separate
accounts in which such plans, accounts,
annuities or arrangements are invested, that
is subject to ERISA or section 4975 of the
Internal Revenue Code whether the purchase
or holding of securities could give rise to
a transaction that is prohibited or is not
otherwise permissible either under ERISA or
section 4975 of the Internal Revenue Code.
See "ERISA Considerations" in this
prospectus and in the related prospectus
supplement.
Legal Investment.................. The related prospectus supplement will
specify which, if any, of the classes of
securities will constitute mortgage related
securities for purposes of the Secondary
Mortgage Market Enhancement Act of 1984,
also known as SMMEA. Securities designated
as qualifying as mortgage related securities
will continue to qualify as such for so long
as they are rated in one of the two highest
rating categories by at least one nationally
recognized statistical rating organization.
Classes of securities that qualify as
mortgage related securities under SMMEA will
be legal investments for persons, trusts,
corporations, partnerships, associations,
12
<PAGE> 105
business trusts and business entities under
specified circumstances as described more
fully in the "Legal Investments" section in
this prospectus and the related prospectus
supplement. We recommend that you consult
with your legal advisors regarding
applicable investment restrictions and the
effect of these restrictions on the purchase
of any class of securities and the liquidity
of any investment in any class of
securities.
Ratings........................... It is a condition to the issuance of the
securities that they be rated in one of the
four highest rating categories by at least
one nationally recognized statistical rating
organization, a rating agency.
13
<PAGE> 106
RISK FACTORS
You should consider, in connection with the purchase of your
securities, among other things, the following factors, which represent the
principal factors that make an offering of securities speculative or one of high
risk.
PREPAYMENT TIMING AND FREQUENCY MAY ADVERSELY AFFECT YIELD ON YOUR SECURITIES
Prepayments, including those caused by defaults on the assets, will
likely result in a rate of principal payments on your securities that differs
from what you anticipate. The prepayment experience on the assets may shorten or
lengthen the average life of your securities and this could have an adverse
affect on your expected yield. The rate of principal payments on pools of
mortgage loans varies between pools, and from time to time is influenced by a
variety of economic, demographic, geographic, tax, legal and other factors.
There can be no assurance as to the rate of prepayment on the assets in any
trust fund, or that the rate of payments will conform to any model described in
this prospectus or in the prospectus supplement. As a result, the actual
maturity of your securities could occur significantly earlier or later than
expected. This could result in a material adverse effect on the yield on your
securities.
PREMIUM OR DISCOUNTED SECURITIES MAY BE MORE SENSITIVE TO PREPAYMENTS AND YOU
ARE MORE LIKELY TO EXPERIENCE A NEGATIVE IMPACT ON THE YIELD OF YOUR DISCOUNTED
OR PREMIUM SECURITIES
A series of securities may include one or more classes offered at a
significant premium or discount. Yields on these classes of securities will be
sensitive, and in some cases extremely sensitive, to prepayments on assets.
Further, where the amount of interest payable with respect to a class is
disproportionately high, as compared to the amount of principal, as with some
classes of stripped interest securities, you might fail to recoup your original
investment. A series of securities may include one or more classes of securities
that provide for distribution of principal from amounts attributable to accrued
but not distributed interest. As a result, yields on these securities will be
sensitive to:
o the timing of interest distributions on the accrual
securities; and
o changes in the variable or adjustable pass-through rate or
interest rates on the accrual securities.
Additionally, in the case of FHA loans and VA loans, some events of
default may result in delayed payment of principal and interest for identified
classes of securities due to particular aspects of FHA insurance policies and VA
guaranties. As a result, the yield on your securities may be adversely affected.
You may also experience a delay in payments on your securities. See "Yield
Considerations" in this prospectus and in the related prospectus supplement.
YOUR PRINCIPAL AND INTEREST PAYMENTS ARE SOLELY DEPENDENT ON THE TRUST ASSETS
Your securities are secured by the assets underlying your trust only.
Your securities do not represent an interest in Union Planters Corporation,
Union Planters Bank, N.A., the depositor, the master servicer, any sub-servicer,
or any other person, other than to the limited
14
<PAGE> 107
extent of the representations and warranties made by the parties in the
governing agreements of the transaction. These obligations will be described in
detail in the prospectus supplement and may include:
o the limited obligation to make advances in the event of
delinquencies in the mortgage loans, to the extent
recoverable; and
o limited obligations of the master servicer to act as a
remarketing agent with respect to convertible ARM loans upon
conversion to a fixed rate made in connection with a purchase
agreement.
If the master servicer or any sub-servicer assigns any of these
obligations, you will have rights against the assignee only. Insufficient cash
flows from the underlying assets could have an adverse impact on your ability to
receive any payments and you will have recourse against the trust only, except
to the extent described above.
Proceeds of the assets of the trust and any related credit support are
the sole sources of funds available for payments of principal and interest due
on your securities. There is no recourse against any other entity in the event
that the proceeds are insufficient to make payments on the securities. Further,
as will be described in the prospectus supplement, specified amounts may be
available for withdrawal from the trust's asset as will be provided in the
governing documents. If any amounts are withdrawn, these amounts will not be
available to make payments on your securities and the withdrawal could have an
adverse impact on your ability to receive payments.
BANKRUPTCY OF THE DEPOSITOR MAY DELAY THE TIMING AND AMOUNT OF DISTRIBUTIONS ON
YOUR SECURITIES AND INCREASE THE CHANCE OF LOSS
Neither the United States Bankruptcy Code nor similar applicable state
insolvency laws prohibit the depositor from filing a voluntary application for
relief. However, the transactions contemplated by this prospectus and the
related prospectus supplement will be structured so that the voluntary or
involuntary application for relief under the United States Bankruptcy Code or
state insolvency laws by the depositor is unlikely. These structuring steps
include the creation of the depositor as a limited purpose financing subsidiary
of Union Planters Bank, N.A. See "The Depositor." However, there can be no
assurance that the activities of the depositor would not result in a court
concluding that the assets and liabilities of the depositor should be
consolidated with those of its parent.
Union Planters Bank, N.A. will transfer assets to the depositor, and
the depositor, in turn, will transfer all of these assets to the trust. If the
depositor were to become a debtor in a bankruptcy case, a creditor, a trustee or
the depositor, as debtor, may take the position that the transfer of the assets
by the depositor to the trust should be characterized as a pledge of the assets
to secure the depositor's borrowing. If such an attempt were successful, delays
in payments of collections on the assets could occur or reductions in the amount
of payments could result, or the trustee in bankruptcy could elect to accelerate
payment of the securities and liquidate the assets.
15
<PAGE> 108
Counsel to the depositor will render a reasoned legal opinion to the
effect that, in a bankruptcy or insolvency proceeding involving the depositor,
as debtor, a bankruptcy court would treat the transfer of the assets from the
depositor to the trust as a true sale and not a secured financing and,
accordingly, the assets would not be included in the depositor's bankruptcy
estate.
THE INSOLVENCY, RECEIVERSHIP OR CONSERVATORSHIP OF UNION PLANTERS BANK, NATIONAL
ASSOCIATION MAY INCREASE RISKS OF LOSS OR DELAYED PAYMENT ON YOUR SECURITIES
The depositor believes that each transfer of assets from Union Planters
Bank, N.A. to the depositor will constitute an absolute and unconditional sale.
However, in the event of an FDIC receivership or conservatorship of Union
Planters Bank, N.A., the FDIC could attempt to recharacterize the transfer of
the assets as a borrowing secured by a pledge of the assets. Such an attempt,
even if unsuccessful, could result in delays in distributions on the securities.
If such an attempt were successful, the FDIC could elect to accelerate payment
of the securities and liquidate the assets, with the holders of the securities
entitled to no more than the outstanding principal and accrued interest on their
securities. There is no assurance that the proceeds of any such sale would be
sufficient to pay the necessary amounts. You could experience delayed payments,
reinvestment loss or insufficient payments.
SUB-PERFORMING MORTGAGE LOANS AND REINSTATED MORTGAGE LOANS COULD LEAD TO YOUR
INABILITY TO RECOVER YOUR INITIAL INVESTMENT AND MAY ADVERSELY AFFECT YOUR YIELD
The mortgage assets included in the trust fund for any series may
include sub-performing mortgage loans and reinstated mortgage loans. Repayment
of the principal amount of the securities for a related series would be
dependent, in large part, upon the ability of the master servicer to cause these
mortgage loans to become or remain current in payment, to sell or foreclose upon
these mortgage loans or to acquire title to the mortgaged properties by other
means and to liquidate the related REO properties. There can be no assurance as
to whether the master servicer will be successful in its efforts. In addition,
rights of redemption in various states may limit or prevent the master servicer
from selling an REO property at what would otherwise be an appropriate time for
sale. These factors could have an adverse impact on your securities. See "Legal
Aspects of Mortgage Loans."
There is no obligation on the part of the depositor, the master
servicer or any other person to repurchase or replace any asset, except under
the limited circumstances described in this prospectus and in the related
prospectus supplement.
Some of the mortgage loans may be non-recourse loans or loans for which
recourse may be restricted or unenforceable. In some instances, recourse on the
mortgage loans may be limited to specific mortgage property and assets, if any,
that have been pledged to secure the mortgage loan. With respect to those
mortgage loans that provide for recourse against the mortgagor and his assets
generally, there can be no assurance that such recourse will ensure a recovery
of a defaulted mortgage loan greater than the liquidation value, if any, of the
related mortgaged property. The ability of the master servicer to liquidate any
mortgaged property or REO property,
16
<PAGE> 109
and its liquidation value, may be adversely affected by risks generally incident
to interests in real property, including changes or weakness in general or local
economic conditions, declines in real estate values, the volume of other similar
properties for sale, adverse changes in interest rates, real estate and personal
property tax rates, energy costs and other expenses, environmental concerns,
acts of God, and other factors that are beyond the master servicer's control.
UNDERWRITING STANDARDS FOR SUB-PRIME MORTGAGE LOANS MAY BE LESS STRINGENT AND
INCREASE THE POTENTIAL FOR DELINQUENCIES
Some of the mortgage loans may be originated under underwriting
standards less stringent than the underwriting guidelines of Fannie Mae or
Freddie Mac. These will be considered sub-prime mortgage loans. The sub-prime
mortgage loans generally will bear higher rates of interest than comparable
mortgage loans that are originated in accordance with Fannie Mae and Freddie Mac
underwriting guidelines. These non-conforming mortgage loans generally will be
underwritten in accordance with the underwriting standards described under
"Description of the Trust Funds -- Mortgage Loans -- Non-Conforming Credits,"
which are intended to provide for the origination of single-family mortgage
loans for non-conforming credits. A mortgage loan made to a non-conforming
credit means a mortgage loan that is ineligible for purchase by Fannie Mae or
Freddie Mac due to borrower credit characteristics that do not meet Fannie Mae
or Freddie Mac underwriting guidelines, including a loan made to a borrower
whose creditworthiness and repayment ability do not satisfy Fannie Mae or
Freddie Mac underwriting guidelines or a borrower who may have a record of major
derogatory credit items, such as default on a prior mortgage loan, credit
write-offs, outstanding judgments and prior bankruptcies. Accordingly, these
mortgage loans are likely to experience rates of delinquency and foreclosure
that are higher, and may be substantially higher, than mortgage loans originated
in accordance with Fannie Mae or Freddie Mac underwriting guidelines. Therefore,
losses on these non-conforming or sub-prime mortgage loans are likely to be
higher than losses on mortgage loans originated in accordance with Fannie Mae or
Freddie Mac guidelines. As a result, there could be an adverse impact on the
payments, distributions or yield on your securities.
Because delinquencies and foreclosures may be more likely for sub-prime
mortgage loans originated under underwriting standards for non-conforming
credits than for mortgage loans originated in accordance with Fannie Mae or
Freddie Mac underwriting guidelines, changes in the values of the related
mortgaged property may have a greater effect on the loss experience of the
sub-prime mortgage loans than on mortgage loans originated in accordance with
Fannie Mae or Freddie Mac underwriting guidelines. No assurance can be given
that the values of mortgaged property have remained or will remain at the levels
in effect on the dates of origination of the related mortgage loans. If the
values of the mortgaged properties decline after the dates of origination of the
mortgage loans, the rate and severity of losses on the mortgage loans may
increase, and such increase may be substantial and have a material adverse
impact on your securities.
THE RATINGS ON YOUR SECURITIES DO NOT REFLECT ALL POSSIBLE LOSSES AND IF THE
RATING IS CHANGED, THE RESELL PRICE OF YOUR SECURITIES MAY BE ADVERSELY AFFECTED
The ratings assigned by the rating agencies to your securities do not
reflect all risks of ownership. The ratings reflect the ratings agencies'
assessment of the likelihood that you will
17
<PAGE> 110
receive payment on your securities and is not a recommendation to purchase the
securities nor is it an analysis of the prepayments or defaults experienced on
the underlying assets. The rating agencies may lower their ratings or withdraw
their ratings at any time. If a rating is lowered or withdrawn, you may not be
able to resell your securities without incurring a substantial loss on your
investment. See "Ratings."
THE ABSENCE OF AN EXISTING MARKET FOR YOUR SECURITIES MAY LIMIT YOUR ABILITY TO
RESELL YOUR SECURITIES
There is currently no existing market for your securities. We cannot
assure you that a secondary market will develop or, if it develops, that it will
continue. Accordingly, you may not be able to resell your securities at all, or
may only be able to sell the securities at a substantial discount. An illiquid
market will reduce the marketability of your securities, and is likely to reduce
the sales price you could otherwise obtain. This is especially true if your
securities are particularly sensitive to prepayment, credit or interest rate
risks.
SUBORDINATION MAY ADVERSELY EFFECT YOUR SECURITIES
A series of securities may include one or more classes of subordinate
securities provided in the related prospectus supplement. Although subordination
is intended to reduce the risk to holders of senior securities of delinquent
distributions or ultimate losses, the amount of subordination will be limited
and may decline. In addition, if principal payments on one or more classes of
securities of a series are made in a specified order of priority, any limits
with respect to the aggregate amount of claims under any related credit support
may be exhausted before the principal of the lower priority classes of
securities has been repaid. As a result, significant losses and shortfalls on
the assets may fall primarily upon those subordinated classes of securities.
Moreover, if a form of credit support covers more than one series of securities
referred to as a covered trust, holders of securities evidencing an interest in
a covered trust will be subject to the risk that the credit support will be
exhausted by the claims of other covered trusts. You may experience a loss on
your investment in the securities, as a result.
INSUFFICIENT CREDIT SUPPORT MAY ADVERSELY IMPACT YOUR SECURITIES
The amount of any applicable credit support supporting one or more
classes of securities, including the subordination of one or more classes of
securities, will be determined on the basis of criteria established by each
rating agency rating the classes of securities. Credit support generally will be
based on an assumed level of defaults, delinquencies, other losses or other
factors. However, there can be no assurance that the loss experience on the
related assets will not exceed such assumed levels which could have an adverse
impact on your securities. See "Description of the Securities" and "Description
of Credit Support."
Regardless of the credit support provided, the amount of coverage will
be limited in amount and in most cases will be subject to periodic reduction in
accordance with a schedule or formula. The master servicer generally will be
permitted to reduce, terminate or substitute all or a portion of the credit
support for any series of securities if the applicable rating agencies indicate
that the then current ratings will not be adversely affected. To the extent that
losses are not covered by credit support, the unprotected classes of securities
will bear the risk of loss from
18
<PAGE> 111
delinquencies and defaults by the mortgagors. You will have to look primarily to
the value of the mortgaged property for recovery, if any recovery is possible.
HOW JUNIOR LIEN MORTGAGE ASSETS COULD ADVERSELY IMPACT THE YIELD TO PREPAYMENTS
ON YOUR SECURITIES
Your trust may contain mortgage assets secured by junior liens and the
senior liens may not be included in your trust. A general decline in residential
real estate values could reduce the value of a mortgaged property securing a
junior lien mortgage asset to below that of all liens on the mortgaged property.
Interest rates, the condition of the mortgaged property and other factors also
may reduce the value of the mortgaged property. Because the rights of a holder
of a junior lien are subordinate to the rights of holders under senior liens in
a mortgage asset, a decline in property value would adversely affect the junior
lienholder before having any affect on the senior lienholder. Any reduction in
the value of mortgaged properties securing junior lien mortgage loans increases
the possibility that the proceeds of any liquidation of the property will be
insufficient to repay amounts owing on the junior lien mortgage asset. This
could adversely affect your securities.
Other factors may influence the prepayment rate of junior lien mortgage
assets. These include the amounts of, and interest on, the senior mortgage loan
and the use of senior lien mortgage loans as long-term financing for home
purchases and junior lien mortgage loans as shorter-term financing. Accordingly,
junior lien mortgage assets may experience a higher rate of prepayments than
senior lien mortgage loans. Any future limitations on the rights of obligors to
deduct interest payments on junior lien mortgage assets for federal income tax
purposes may increase the rate of prepayments on junior lien mortgage assets.
This also could adversely affect the yield on your securities.
GEOGRAPHIC CONCENTRATION MAY LEAD TO INCREASED RISK OF DEFAULT AND DELINQUENCIES
Some of the mortgage loans may be located in geographic regions of the
United States that will experience weaker economic conditions and housing
markets. Consequently these loans are likely to experience higher rates of loss
and delinquency than will be experienced on other loans in your trust.
Furthermore, the rate of default may be higher on mortgage loans that are
refinanced, are limited documentation mortgage loans, or have high loan-to-value
ratios than other types of mortgage loans. See "Legal Aspects of Mortgage Loans"
in this prospectus.
DECLINES IN PROPERTY VALUES MAY ADVERSELY AFFECT YOUR SECURITIES
The value of properties underlying the loans held in the trust fund may
decline over time. Among the factors that could adversely affect the value of
the properties are:
o an overall decline in the residential real estate market in
the areas in which the mortgaged properties are located;
o a decline in the general condition of mortgaged property from
the failure of the borrower to maintain the property
adequately; and
o natural disasters that are not covered by insurance, such as
earthquakes and floods.
19
<PAGE> 112
If property values decline, the actual rates of delinquencies,
foreclosures, and losses on all underlying loans could be higher than those
currently experienced in the mortgage lending industry in general. The holders
of one or more classes of these securities may bear all or a portion of these
losses if they are not otherwise covered by a credit enhancement.
THE EXTENSION OR MODIFICATION OF MORTGAGE LOANS MAY DELAY PAYMENTS OR INCREASE
LIKELIHOOD OF A LOSS ON YOUR SECURITIES
The master servicer or a sub-servicer may be permitted to extend and
modify mortgage loans that are in default or as to which a payment default is
imminent. While the master servicer or a sub-servicer generally will be required
to determine that any such extension or modification is reasonably likely to
produce a greater recovery on these loans, there can be no assurance that such
flexibility will increase the likelihood of payment of mortgage loans that are
in default or as to which a payment default is imminent. You may experience a
delay in payment or loss if an extension or more modification is granted and no
payments on these mortgage loans are received.
ENFORCEMENT OF DUE ON SALE CLAUSES, DEBT ACCELERATION CLAUSES AND FORECLOSURE
MAY ADVERSELY IMPACT YOUR SECURITIES
Some of the mortgages may contain due-on-sale clauses which permit the
lender to accelerate the maturity of the related mortgage loan if the mortgagor
sells, transfers or conveys the related mortgaged property or its interest in
the mortgaged property. Mortgages may also include a debt-acceleration clause,
which permits the lender to accelerate the debt upon a monetary or non-monetary
default of the mortgagor. These clauses are generally enforceable subject to few
exceptions. Generally, state courts will enforce due-on-sale clauses and clauses
providing for acceleration in the event of a material payment default. State
equity courts, however, may refuse the foreclosure of a mortgage or deed of
trust when an acceleration of the indebtedness would be inequitable or unjust or
the circumstances would render the acceleration unconscionable. The enforcement
of these due on sale clauses, debt acceleration clauses or foreclosures could
have an adverse impact on your securities.
LOSSES ON BALLOON PAYMENT MORTGAGES ARE BORNE BY YOUR SECURITIES
Some of the mortgage loans may not be fully amortizing over their terms
to maturity and, thus, will require balloon payments at their stated maturity.
Mortgage loans with balloon payments involve a greater degree of risk than fully
amortizing loans because the borrower typically must be able to refinance the
loan or sell the property to make the balloon payment at maturity. The ability
of a borrower to refinance his loan will depend on factors such as mortgage
rates at the time of sale or refinancing, the borrower's equity in the property,
the condition of the property, the relative strength of the local housing
market, the financial condition of the borrower, and tax laws. The holders of
one or more classes of certificates will bear any losses on these loans that are
not otherwise covered by a form of credit enhancement.
BOOK-ENTRY SECURITIES MAY EXPERIENCE DECREASED LIQUIDITY AND PAYMENT DELAYS
Because you can generally effect transactions in book-entry securities
only through DTC and its direct and indirect participants:
20
<PAGE> 113
o your ability to pledge book-entry securities to someone who
does not participate in the DTC system, or to otherwise act
with respect to the book-entry securities, may be limited due
to the lack of a physical security;
o you may experience delays in your receipt of payments on
book-entry securities because distributions will be made by
the master servicer, or a paying agent on behalf of the master
servicer, to the DTC; and
o the liquidity of book-entry securities in any secondary
trading market that may develop may be limited because
investors may be unwilling to purchase securities for which
they cannot obtain delivery of physical securities.
See "Description of the Securities -- Book-Entry Securities."
21
<PAGE> 114
DESCRIPTION OF THE TRUST FUNDS
ASSETS
Permissible categories of assets of each trust fund include:
o first lien and junior lien one- to four-family residential
mortgage loans, which may include home equity mortgage loans;
o pass-through certificates or other mortgage-backed securities
evidencing interests in or secured by one or more mortgage
loans that:
o have been previously offered and distributed to the
public under an effective registration statement,
were acquired by the depositor in a bona fide
secondary market transaction and not from the issuer
or an affiliate of the issuer, and were not part of
the original distribution; or
o have been previously purchased in a transaction not
involving any public offering from an entity that is
not an affiliate of the issuer of the securities at
the time of sale, or an affiliate at any time during
the three preceding months; provided however, that, a
period of two years has elapsed since the later of
the date the securities were acquired from the issuer
or any of its affiliates;
o Mortgage related securities issued or guaranteed by the United
States or by agencies or instrumentalities of the United
States that are not subject to redemption prior to maturity at
the option of the issuer and may include:
o interest-bearing securities,
o non-interest-bearing securities,
o originally interest-bearing securities from which
coupons representing the right to payment of some or
all interest have been removed,
o interest-bearing securities from which the right to
payment of principal has been removed, or
o a combination of mortgage loans, MBS's and agency
securities.
As used, mortgage loans refers to both mortgage loans held directly by
a trust fund and mortgage loans underlying MBS and/or agency securities.
Mortgage loans that secure, or interests which are evidenced by, MBS's are in
this prospectus sometimes referred to as underlying mortgage loans. The assets
will not be guaranteed or insured by any governmental agency or instrumentality
or by any other person except as specified in the related prospectus supplement.
Except to the extent specified in the related prospectus supplement,
the securities will be entitled to payment only from the related trust assets
and will not be entitled to payments with respect to the trust assets of any
other series.
22
<PAGE> 115
MORTGAGE LOANS
General
The mortgage loans will be secured by first liens or junior liens on
mortgaged properties consisting of one- to four-family residential properties.
The mortgaged properties may include leasehold interests in real properties, the
title to which is held by third party lessors. The term of any leasehold shall
exceed the term of the related mortgage note by at least five years. Each
mortgage loan will have been originated by the originator. The depositor will
not originate any loans. The related prospectus supplement will indicate if any
originator is an affiliate of the depositor. Generally, the mortgage loans will
be evidenced by promissory notes or mortgage notes secured by mortgages, deeds
of trust or similar security instruments creating a first or junior lien on the
mortgaged properties.
The trust fund may include mortgage loans insured by FHA, mortgage
loans partially guaranteed by the VA, and mortgage loans not insured or
guaranteed by the FHA or VA. Some mortgage loans may contain prohibitions on
prepayment, known as a lock-out period or require payment of a premium or a
yield maintenance penalty, known as a prepayment premium, in connection with a
prepayment, in each case as described in the related prospectus supplement. In
the event that holders of any class of securities will be entitled to all or a
portion of any prepayment premiums collected with respect to the mortgage loans,
the related prospectus supplement will specify the method or methods by which
any amounts will be allocated. The mortgage loans may have fixed interest rates
or adjustable interest rates. The mortgage loans may provide for fixed level
payments or may include the following:
o home equity mortgage loans;
o GPM mortgage loans as to which the monthly payments by the
mortgagor during the early years of the related mortgage are
less than the amount of interest that would otherwise be
payable, with the interest not so paid added to the
outstanding principal balance of the mortgage loan;
o buy-down mortgage loans, as to 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, with the difference payable under a buy-down
plan;
o bi-weekly mortgage loans that provide for payments every other
week during their terms;
o mortgage loans that experience negative amortization;
o balloon mortgage loans that require a larger payment of
principal upon maturity; or
o mortgage loans with other payment characteristics as described
in this prospectus supplement or in the related prospectus
supplement.
If so specified in the related prospectus supplement, the trust fund
may include modified mortgage loans. Modifications may include conversions from
an adjustable to a fixed mortgage rate, as discussed in this prospectus, or
other changes in the related mortgage note. If a mortgage
23
<PAGE> 116
loan is a modified mortgage loan, references to origination generally shall be
deemed to be references to the date of modification.
The mortgaged properties may consist of detached individual dwellings,
individual condominiums, townhouses, duplexes, row houses, individual units in
planned unit developments, two-to four-family dwellings and other attached
dwelling units. To the extent specified in the related prospectus supplement,
the mortgaged properties may include vacation homes, second homes and
non-owner-occupied investment properties. Mortgage loans secured by investment
properties, including two-to four-unit dwellings, may also be secured by an
assignment of leases and rents and operating or other cash flow guarantees
relating to the mortgage loans.
The mortgage loans may be equity refinance mortgage loans, as to which
a portion of the proceeds are used to refinance an existing mortgage loan, and
the remaining proceeds may be retained by the mortgagor or used for purposes
unrelated to the mortgaged property. Alternatively, the mortgage loans may be
rate and term refinance mortgage loans, as to which substantially all of the
proceeds, net of related costs incurred by the mortgagor, are used to refinance
an existing mortgage loan or loans, which may include a junior lien, primarily
in order to change the interest rates or other terms. The mortgage loans may be
mortgage loans that have been consolidated and/or have had various terms
changed, mortgage loans that have been converted from adjustable rate mortgage
loans to fixed rate mortgage loans, or construction loans which have been
converted to permanent mortgage loans. In addition, a mortgaged property may be
subject to secondary financing at the time of origination of the mortgage loan.
Mortgage loans that have adjustable mortgage rates, or ARM loans,
generally will provide for a fixed initial mortgage rate until the first date on
which the mortgage rate is to be adjusted. Thereafter, the mortgage rate is
subject to periodic adjustment as described in the related prospectus
supplement. ARM loans typically adjust to a rate based on a specified index plus
a specified percentage, known as the gross margin, subject to certain
limitations as described in the related prospectus supplement. The initial
mortgage rate on an ARM loan may be lower than the sum of the then-applicable
index and the gross margin for an ARM loan.
ARM loans have features that provide different investment
considerations than fixed-rate mortgage loans. For example, adjustable mortgage
rates can cause payment increases that may exceed the capacity of some of the
mortgagors to cover the payments. Also, to the extent specified in the related
prospectus supplement, an ARM loan may provide that its mortgage rate may not be
adjusted to a rate above a specified maximum mortgage rate or below a specified
minimum mortgage rate for the ARM loan. In addition, to the extent specified in
the related prospectus supplement, some of the ARM loans may provide for
periodic caps, which limit the amount by which the mortgage rate may adjust for
any single adjustment period. Some ARM loans also provide for payment caps,
which limit the amount by which scheduled payments of principal and interest may
adjust for a single adjustment period.
Some ARM loans may be subject to negative amortization from time to
time prior to their maturity. These loans are referred to as Neg-Am ARM loans.
The negative amortization may
24
<PAGE> 117
result from either the adjustment of the mortgage rate on a more frequent basis
than the adjustment of the scheduled payment or the application of a payment
cap. In the first case, negative amortization results if an increase in the
mortgage rate occurs prior to an adjustment of the scheduled payment on the
related mortgage loan and the increase causes accrued monthly interest on the
mortgage loan to exceed the scheduled payment of interest. In the second case,
negative amortization results if an increase in the mortgage rate causes accrued
monthly interest on a mortgage loan to exceed the applicable payment cap. In the
event that the scheduled payment is not sufficient to pay the accrued monthly
interest on a Neg-Am ARM loan, the amount of accrued monthly interest that
exceeds the scheduled payment of interest on the mortgage loans, or deferred
interest, is added to the principal balance of the ARM loan and is to be repaid
from future scheduled payments. Neg-Am ARM loans do not provide for the
extension of their original stated maturity to accommodate changes in their
mortgage rates.
A trust fund may contain convertible ARM loans. A convertible ARM loan
allows the mortgagor to convert the adjustable rate on the mortgage loan to a
fixed rate at one or more specified periods during the life of the mortgage
loan. If specified in the related prospectus supplement, upon conversion of a
convertible mortgage loan, the depositor, the master servicer or a third party
may be required to purchase the converted mortgage loan as and to the extent set
forth in the related prospectus supplement. Alternatively, if specified in the
related prospectus supplement, the master servicer, or another specified party,
may agree to act as remarketing agent with respect to the converted mortgage
loans and, in that capacity, to use its best efforts to arrange for the sale of
the converted mortgage loans under specified conditions. Upon the failure of any
obligated party to purchase a converted mortgage loan, the inability of any
remarketing agent to arrange for the sale of the converted mortgage loans and
the unwillingness of the remarketing agent to exercise any election to purchase
the converted mortgage loans for its own account, the related converted mortgage
loan will remain in the trust fund as a fixed rate mortgage loan.
If specified in the related prospectus supplement, some of the mortgage
loans may be buy-down mortgage loans pursuant to which the payments made by the
mortgagor during the early years of the mortgage loan, the buy-down period, will
be less than the scheduled payments on the mortgage loan, with the difference
covered by:
o buy-down funds contributed by the seller of the mortgaged
property or another source and placed in an escrow account;
o investment earnings on the buy-down fund; or
o funds contributed over time by the seller, the mortgagor's
employer or another source.
The related prospectus supplement will provide material information
concerning the types and characteristics of the mortgage loans included in a
trust fund as of the related cut-off date. In the event that mortgage loans are
added to or deleted from the trust fund after the date of the related prospectus
supplement and prior to the closing date for the related series of securities,
the final characteristics of the mortgage loans included in the trust fund will
be noted on a report filed under Form 8-K by the depositor. The additions or
deletions will not affect more than five
25
<PAGE> 118
percent of the aggregate outstanding loans included in the trust as of the
cut-off date as described in the related prospectus supplement.
Loan-to-Value Ratio
The loan-to-value ratio of a mortgage loan on any date of determination
is a ratio, expressed as a percentage, the numerator of which is the then
outstanding principal balance of the mortgage loan, and the denominator of which
is the value of the related mortgaged property. The value of a mortgaged
property, other than with respect to refinance loans, is generally the lesser of
the appraised value determined in an appraisal obtained by the originator at
origination of the loan and the sales price for the property. Refinance loans
are loans made to refinance existing loans. The value of the mortgaged property
securing a refinance loan is the appraised value determined in an appraisal
obtained at the time of origination of the refinance loan. The value of a
mortgaged property as of the related cut-off date may be less than the
origination value and will fluctuate from time to time based upon changes in
economic conditions. Some mortgage loans that are subject to negative
amortization will have loan-to-value ratios that will increase after origination
as a result of negative amortization. In the case of seasoned mortgage loans,
the appraisals upon which loan-to-value ratios have been calculated may no
longer be accurate valuations of the related mortgaged properties. Some
mortgaged properties may be located in regions where property values have
declined significantly since the time of origination and the loan-to-value ratio
may not be reflective of that decline.
Mortgage Loan Information in Prospectus Supplements
Each prospectus supplement will contain information, as of the related
cut-off date, with respect to the mortgage loans, including:
o the aggregate outstanding principal balance and the largest,
smallest and average outstanding principal balance of the
mortgage loans;
o the type of property securing the mortgage loans;
o the weighted average, by principal balance, of the original
and remaining terms to maturity of the mortgage loans;
o the earliest and latest origination date and maturity date of
the mortgage loans;
o the weighted average, by principal balance, of the
loan-to-value ratios at origination of the mortgage loans;
o the mortgage rate or range of mortgage rates and the weighted
average mortgage rate borne by the mortgage loans;
o the jurisdictions in which the mortgaged properties are
located;
o information with respect to the prepayment provisions, if any,
of the mortgage loans;
o the weighted average retained interest, if any;
o with respect to mortgage loans with adjustable mortgage rates,
the index, the frequency of the adjustment dates, the highest,
lowest and weighted average note margin and pass-through
margin, and the maximum mortgage rate or monthly
26
<PAGE> 119
payment variation at the time of any adjustment and over the
life of the ARM loan and the frequency of monthly payment
adjustments; and
o information regarding the payment characteristics of the
mortgage loans, including without limitation balloon payment
and other amortization provisions.
If specific information respecting the mortgage loans has not been
identified in time for inclusion in a prospectus supplement, more general
information of the nature described above will be provided in the prospectus
supplement, and specific information will be set forth in a report which will be
available to purchasers of the related securities at or before the initial
issuance and will be filed as part of a Current Report on Form 8-K with the
Securities and Exchange Commission within fifteen days after initial issuance.
Non-Conforming Credits; Sub-Prime Mortgage Loans
If specified in the prospectus supplement, the underwriting guidelines
used to originate some sub-prime mortgage loans may be less stringent than those
of Fannie Mae or Freddie Mac, primarily in that they generally permit the
mortgagor to have a higher debt-to-income ratio and a larger number of
derogatory credit items than do the underwriting guidelines of Fannie Mae or
Freddie Mac.
Delinquent and Reinstated Mortgage Loans
Some mortgage loans included in the trust fund may be one or more
months delinquent with regard to payment of principal or interest at the time of
their deposit into a trust fund. The related prospectus supplement will set
forth the percentage of mortgage loans that are so delinquent. In addition, the
related prospectus supplement will set forth the percentage of mortgage loans
that have been delinquent more than once during the preceding twelve months.
Delinquent mortgage loans may be more likely to result in losses than mortgage
loans that have a current payment status.
The FHA loans and VA loans with respect to any series may contain
sub-performing mortgage loans and reinstated mortgage loans. The prospectus
supplement for any series shall fully set forth the particular characteristics
and risks of an investment in a pool containing these types of mortgage loans.
The prospectus supplement for any series of securities will include
tabular disclosure regarding the number of assets, the percentage by number, the
aggregate principal balance as of the cut-off date, and the percent by aggregate
principal balance as of the cut-off date for the sub-performing mortgage loans
and reinstated mortgage loans, if any, included in the related trust fund. In
addition, the disclosure concerning the master servicer will include related
tabular delinquency and foreclosure experience.
27
<PAGE> 120
The VA Loan Program
VA is an Executive Branch Department of the United States, headed by
the Secretary of Veterans Affairs. VA currently administers a variety of federal
assistance programs on behalf of eligible veterans and their dependents and
beneficiaries, including the VA loan guaranty program.
Under the VA loan guaranty program, a VA loan may be made to any
eligible veteran by an approved private sector mortgage lender. 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 VA and no realistic
alternative to foreclosure is developed by the servicer or through VA's
supplemental servicing of the loan, VA determines, through an economic analysis,
whether VA will authorize the servicer to convey the property securing the VA
loan to the Secretary of Veterans Affairs following termination or 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 FHA Loan Program
FHA is an organizational unit within the Department of Housing and
Urban Development. FHA was established to encourage improvement in housing
standards and conditions and to exert a stabilizing influence on the mortgage
market. FHA provides insurance for private lenders against loss on eligible
mortgages.
Under the FHA mortgage insurance program, an FHA home mortgage may be
made to borrowers meeting specific credit standards by an approved mortgage
lender. FHA insures payment to the holder of that loan, or to a servicer on its
behalf, in the event of default by the borrower. Upon default, the servicer,
depending upon the circumstances, may (a) acquire, through foreclosure or deed
in lieu of foreclosure, and convey title to FHA, (b) work with the borrower to
sell the property before the foreclosure sale or (c) in rare circumstances,
assign the mortgage to FHA. The servicer will receive insurance benefits equal
to the unpaid principal balance of the loan, plus approved expenses.
Underwriting Policies
The depositor generally expects that the originator of each of the
mortgage loans will have applied, consistent with applicable federal and state
laws and regulations, underwriting procedures intended to evaluate the
borrower's credit standing and repayment ability and/or the value and adequacy
of the related property as collateral. Any FHA loans or VA loans will have been
originated in compliance with the underwriting policies of the FHA or VA,
respectively. The underwriting criteria applied by the originators of the
mortgage loans included in a trust fund may vary significantly. The related
prospectus supplement will describe the relevant underwriting criteria applied
by the originators of mortgage.
General Standards
Generally, each mortgagor will have been required to complete an
application designed to provide to the original lender pertinent credit
information concerning the mortgagor. As part of
28
<PAGE> 121
the description of the mortgagor's financial condition, the mortgagor will have
furnished information which may be supplied solely in application with respect
to its assets, liabilities, income, credit history, employment history and
personal information and furnished an authorization to apply for a credit report
which summarizes the borrower's credit history with local merchants and lenders
and any record of bankruptcy. The mortgagor may also have been required to
authorize verifications of deposits at financial institutions where the
mortgagor had demand or savings accounts. In the case of investment properties,
only income derived from the mortgaged properties may have been considered for
underwriting purposes, rather than the income of the mortgagor from other
sources. With respect to mortgaged property consisting of vacation or second
homes, no income derived from the property generally will have been considered
for underwriting purposes.
As described in the related prospectus supplement, some mortgage loans
may have been originated under limited documentation or no documentation
programs which require less documentation and verification than do traditional
full documentation programs. Generally, under a program, minimal investigation
into the mortgagor's credit history and income profile is undertaken by the
originator and the underwriting may be based primarily or entirely on an
appraisal of the mortgaged property and the loan-to-value ratio at origination.
The adequacy of the mortgaged property as security for repayment of the
related mortgage loan will generally have been determined by appraisal in
accordance with pre-established appraisal procedure guidelines for appraisals
established by or acceptable to the originator. Appraisers may be staff
appraisers employed by the originator or independent appraisers selected in
accordance with pre-established guidelines established by the originator. The
appraisal procedure guidelines generally will have required the appraiser or an
agent on its behalf to personally inspect the property and to verify whether the
property was in good condition and that construction, if new, had been
substantially completed. The appraisal generally will have been based upon a
market data analysis of recent sales of comparable properties and, when deemed
applicable, an analysis based on income generated from the property or a
replacement cost analysis based on the current cost of constructing or
purchasing a similar property.
The underwriting standards applied by an originator generally require
that the underwriting officers be satisfied that the value of the property being
financed, as indicated by an appraisal or other acceptable valuation method,
currently supports and is anticipated to support in the future the outstanding
loan balance. In fact, some states where the mortgaged properties may be located
have anti-deficiency laws requiring, in general, that lenders providing credit
on single family property look solely to the property for repayment in the event
of foreclosure. See "Legal Aspects of Mortgage Loans." Any of these factors
could change nationwide or merely could affect a locality or region in which all
or some of the mortgaged properties are located. However, declining values of
real estate, as experienced recently in some regions, or increases in the
principal balances of some mortgage loans, such as GPM loans and Neg-Am ARM
loans, could cause the principal balance of some or all of the mortgage loans to
exceed the value of the mortgaged properties.
29
<PAGE> 122
Based on the data provided in the application, verifications, if
required by the originator of the mortgage loans, and the appraisal or other
valuation of the mortgaged property, a determination will have been made by the
original lender that the mortgagor's monthly income would be sufficient to
enable the mortgagor to meet its monthly obligations on the mortgage loan and
other expenses related to the property, such as property taxes, utility costs,
standard hazard and primary mortgage insurance and other fixed obligations other
than housing expenses. The originator's guidelines for mortgage loans generally
will specify that scheduled payments on a mortgage loan during the first year of
its term plus taxes and insurance, including primary mortgage insurance, and all
scheduled payments on obligations that extend beyond one year, including those
mentioned above and other fixed obligations, would equal no more than specified
percentages of the prospective mortgagor's gross income. The originator may also
consider the amount of liquid assets available to the mortgagor after
origination.
Underwriting standards, employed by originators, generally include a
set of specific criteria pursuant to which the underwriting evaluation is made.
However, the application of the underwriting standards does not imply that each
specific criterion was satisfied individually. Rather, a mortgage loan will be
considered to be originated in accordance with a given set of underwriting
standards if, based on an overall qualitative evaluation, the loan is in
substantial compliance with the underwriting standards. For example, a mortgage
loan may be considered to comply with a set of underwriting standards, even if
one or more specific criteria included in the underwriting standards were not
satisfied, if other factors compensated for the criteria that were not satisfied
or if the mortgage loan is considered to be in substantial compliance with the
underwriting standards.
Underwriting Standards for Junior Lien Mortgage Loans
The general underwriting standards used by Union Planters Bank, N.A. to
originate home equity mortgage loans are described below. These mortgage loans
may experience greater rates of delinquency, foreclosure and loss than mortgage
loans underwritten in accordance with more stringent standards. Union Planters
Bank, N.A. provides underwriters with specific underwriting guidelines and
maintains strict control procedures to manage the quality of its originations at
all locations. Generally, Union Planters Bank, N.A.'s guidelines require an
analysis of the following:
o a borrower's creditworthiness, as reflected in particular by
the borrower's credit history and employment stability,
o a borrower's debt-to-income ratio, which measures a borrower's
projected income relative to the proposed mortgage payment and
to other fixed obligations, and
o the combined loan-to-value ratio of the proposed loan, which
measures the adequacy of the mortgaged property to serve as
the collateral for a home equity mortgage loan and all related
senior mortgage loans.
Credit History. Union Planters Bank, N.A. obtains a credit bureau
report from an independent, nationally recognized credit reporting agency for
each borrower. Union Planters Bank, N.A. uses this report to evaluate the
borrower's payment record and tendency to pay debts in a timely manner. The
report reflects the applicant's credit history and typically contains
30
<PAGE> 123
information about delinquencies, repossessions, judgments, foreclosures,
bankruptcies and other adverse credit events reflected in public records. A
borrower's lack of credit payment history, however, will not necessarily
preclude Union Planters Bank, N.A. from making a home equity mortgage loan if
other favorable borrower characteristics exist, including an adequate
debt-to-income ratio or sufficient equity in the property.
Debt-to-Income Ratio. Union Planters Bank, N.A. calculates a borrower's
debt-to-income ratio to determine if a borrower has sufficient income to satisfy
all debt repayment requirements. The ratio is calculated by dividing the
borrower's total monthly payment obligations, including payments due under the
proposed home equity mortgage loan from Union Planters Bank, N.A., but after any
debt consolidation from the proceeds of that loan, by the borrower's monthly
gross income. The calculation of a borrower's debt-to-income ratio involves a
careful review of all debts listed on the credit report and the loan
application, as well as the verification of gross income. Union Planters Bank,
N.A. verifies a borrower's income through various means, including written
verifications from employers and the review of pay stubs, bank statements, tax
returns and W-2s. The borrower's debt-to-income ratio generally is 45 percent or
less.
Combined Loan-to-Value Ratio. The "combined loan to value ratio" of a
home equity mortgage loan helps Union Planters Bank, N.A. determine if the
mortgaged property will constitute sufficient security for repayment of the
proposed home equity mortgage loan and all senior mortgage loans. Union Planters
Bank, N.A. calculates the combined loan-to-value ratio by dividing:
o the principal amount of all loans secured by the mortgaged
property by
o the appraised value of the mortgaged property.
Union Planters Bank, N.A. has established appraisal procedure guidelines, and
appraisers are typically independent appraisers selected in accordance with
those guidelines. No home equity loan will have a combined loan-to-value ratio
in excess of 100 percent. If the appraised value of the mortgaged property is
between $400,000 and $599,999, the maximum combined loan-to-value ratio is 90
percent, and if the appraised value of the mortgaged property is $600,000 or
more, the maximum combined loan-to-value ratio is 80 percent.
The appraisal procedure guidelines generally require the appraiser, or
an agent on its behalf, to inspect the property personally and to verify whether
the property is in good condition. The appraisal also considers a market data
analysis of recent sales of comparable properties and when deemed applicable, an
analysis based on income generated from the property or replacement cost
analysis based on the current cost of constructing or purchasing a similar
property.
Borrowers. Union Planters Bank, N.A. will make home equity mortgage
loans only to borrowers that are natural persons that have title to the
underlying mortgaged property. In the case of home equity mortgage loans that
have a co-maker, Union Planters Bank, N.A. will consider the primary borrower to
be the borrower with the greater monthly income.
31
<PAGE> 124
Loan Programs. Each home equity mortgage loan originated by Union
Planters Bank, N.A. will either be a 15-year fixed rate mortgage loan, or will
be a 30-year mortgage loan with a fixed rate of interest for the first five
years and converting to an adjustable rate mortgage loan each year after the
initial five-year period. The maximum loan amount is generally $250,000 for any
borrower, however this may be increased in certain circumstances.
Lien Position. Home equity mortgage loans may have a first or second
lien position if the combined loan-to-value ratio is less than or equal to 100
percent. Home equity mortgage loans may have a third lien position if the
combined loan-to-value ratio is less than or equal to 100 percent and the loan
amount is $50,000 or less. A home equity mortgage loan will be in the fourth
lien position only if Union Planters Bank, N.A. is the holder of the third lien
position mortgage loan. No home equity mortgage loan will be in a lien position
junior to any negative-amortization mortgage loan or to any privately-held
mortgage loan.
Prepayment Penalties. Home equity mortgage loans originated by Union
Planters Bank, N.A. after March 1, 2000 may include a prepayment penalty, if
permitted by law.
Risk Categories. Based on the data provided in the loan application,
the required supporting documents, and the appraisal or other valuation of the
mortgaged property, Union Planters Bank, N.A. determines whether the borrower's
monthly income would be sufficient to enable the borrower to meet his monthly
obligations on the home equity mortgage loan, all senior mortgage loans, and
other expenses related to the property, such as property taxes, utility costs,
standard hazard insurance and other fixed obligations. In certain circumstances,
Union Planters Bank, N.A. may also consider income from investment properties
and the amount of liquid assets available to the borrower. Union Planters Bank,
N.A. then assigns each home equity mortgage loan a risk grade and categorizes it
into a particular loan class. This risk classification system is designed to
assess the likelihood that each borrower will satisfy the repayment obligations
associated with the related home equity mortgage loan and to establish the
maximum permissible loan-to-value ratio for the loan.
Beacon Scoring. As part of developing the overall credit picture of the
borrower, Union Planters Bank, N.A. uses various analyses and ratios including
the 96 Beacon Score. The 96 Beacon Score is a credit analysis model that takes
into account a prospective borrower's payment history, missed or late payments,
and any judgments, liens or bankruptcies, foreclosures, repossessions, defaults
and collections. The 96 Beacon Score also takes into account the borrower's
debt-to-income ratio and the outstanding balances on the borrower's various
credit accounts and loans. We consider a borrower's 96 Beacon Score as part of
our overall credit profile analysis, by which we attempt to determine whether
the borrower's default risk falls within an acceptable range in relation to our
overall lending strategy.
Loan Class A+. For Union Planters Bank, N.A. to assign a home equity
mortgage loan to loan class A+, the prospective borrower must have overall good
to excellent consumer credit. The borrower must be current in his payments on
any existing mortgage loan and have had no 30-day, 60-day or 90-day late
payments on any existing mortgage within the preceding 24 months.
32
<PAGE> 125
Union Planters Bank, N.A. allows minor derogatory items with respect to
non-mortgage credit in loan class A+. The borrower may have had three 30-day,
but no 60-day or 90-day late payments with respect to major non-mortgage credit
within the preceding 24 months. The borrower must be current in his payment of
all minor non-mortgage credit at the time of application. The prospective
borrower must have at least a 12 month credit history with a minimum of 5 credit
accounts. No bankruptcies with respect to the borrower may have been discharged,
nor any tax liens or judgments assessed against the borrower, during the
previous seven years.
The mortgaged property must be in average to good condition. Home
equity mortgage loans secured by a single family owner-occupied property may
have a maximum loan-to-value ratio of
o 100 percent for home equity mortgage loans to borrowers with a
96 Beacon Score of at least 640,
o 90 percent for home equity mortgage loans to borrowers with a
96 Beacon Score of at least 620 or
o 80 percent for home equity mortgage loans to borrowers with a
96 Beacon Score of at least 600.
Loan Class A. For Union Planters Bank, N.A. to assign a home equity
mortgage loan to loan class A, the prospective borrower must have overall good
to excellent consumer credit. The borrower may have a maximum of one 30-day late
payments, but no 60-day or 90-day late payments on any existing mortgage within
the preceding 24 months, and must be current in his payments on any existing
mortgage loan.
As to non-mortgage credit, Union Planters Bank, N.A. permits some prior
defaults, provided that by the closing of the proposed home equity mortgage
loan, the borrower must satisfy any open collections or charge-offs in excess of
$500. The prospective borrower must have at least a 12 month credit history with
a minimum of 5 credit accounts. The borrower may have had four 30-day, one
60-day, but no 90-day late payments with respect to major non-mortgage credit
within the preceding 24 months. The borrower must be current in his payment of
all minor non-mortgage credit at the time of application. The prospective
borrower must have at least a 12-month credit history with a minimum of 5 credit
accounts. No bankruptcies with respect to the borrower may have been discharged,
nor any tax liens or judgments assessed against the borrower, other than a
maximum of three such items during the previous seven years, each less than
$500, and each of which must be paid by closing.
The mortgaged property must be in average to good condition. Home
equity mortgage loans secured by a single family owner occupied property may
have a maximum loan-to-value ratio of:
o 100 percent for home equity mortgage loans to borrowers with a
96 Beacon Score of at least 640,
33
<PAGE> 126
o 90 percent for home equity mortgage loans to borrowers with a
96 Beacon Score of at least 620, or
o 80 percent for home equity mortgage loans to borrowers with a
96 Beacon Score of at least 600.
Loan Class A-. For Union Planters Bank, N.A. to assign a home equity
mortgage loan to loan class A, the prospective borrower must have overall good
consumer credit. The borrower may have a maximum of two 30-day late payments,
but no 60-day or 90-day late payments on an existing mortgage within the
preceding 24 months, but must be current in his payments on any existing
mortgage loan.
As to non-mortgage credit, Union Planters Bank, N.A. permits some prior
defaults, provided that by the closing of the proposed home equity mortgage
loan, the borrower must satisfy any open collections or charge-offs in excess of
$500. The prospective borrower must have at least a 12 month credit history with
a minimum of 5 credit accounts. The borrower may have had four 30-day, two
60-day, but no 90-day late payments with respect to major non-mortgage credit
within the preceding 24 months. The borrower must be current in his payment of
all minor non-mortgage credit at the time of application. The prospective
borrower must have at least a 12-month credit history with a minimum of 5 credit
accounts. No bankruptcies with respect to the borrower may have been discharged
in the past two years, nor any tax liens or judgments assessed against the
borrower, other than a maximum of five such items during the previous seven
years each under $500, each of which must be paid by closing.
The mortgaged property must be in average to good condition. Home
equity mortgage loans secured by a single family owner-occupied property may
have a maximum loan-to-value ratio of:
o 100 percent for home equity mortgage loans to borrowers with a
96 Beacon Score of at least 620,
o 90 percent for home equity mortgage loans to borrowers with a
96 Beacon Score of at least 600, or
o 80 percent for home equity mortgage loans to borrowers with a
96 Beacon Score of at least 580.
These underwriting standards are only guidelines. On a case-by-case basis, Union
Planters Bank, N.A. may have determined in the course of its underwriting
process that a prospective borrower warrants a loan classification upgrade based
on compensating factors. For example, a borrower may be able to get a home
equity mortgage loan in a particular loan class with a loan-to-value ratio 5
percent higher than the ratio that would otherwise be permitted for such loan
class if specified compensating factors exist. Union Planters Bank, N.A. also
adjusts its underwriting standards from time to time to reflect changes in
market conditions and for other reasons.
MBS
Any MBS will have been issued under a participation and servicing
agreement, a pooling and servicing agreement, a trust agreement, an indenture or
similar agreement generally referred
34
<PAGE> 127
to as an MBS agreement. A MBS seller or MBS issuer and/or MBS servicer of the
underlying mortgage loans or underlying MBS will have entered into the MBS
agreement with a MBS trustee or a MBS custodian, if any, under the MBS agreement
or with the original purchaser of the interest in the underlying mortgage loans
or MBS evidenced by the MBS. We select particular MBS for inclusion in any trust
fund based on the MBS's pricing and financial terms, its interest rate, general
market conditions, its creditworthiness, necessary representations and
warranties, and other business considerations.
Distributions of any principal or interest, as applicable, will be made
on the MBS on the dates specified in the related prospectus supplement. The MBS
may be issued in one or more classes with characteristics similar to the classes
of securities described in this prospectus. Any principal or interest
distributions will be made on the MBS by the MBS trustee or the MBS issuer. The
MBS issuer, the master servicer or another person specified in the related
prospectus supplement may have the right or obligation to repurchase or
substitute assets underlying the MBS after a specified date or under other
circumstances specified in the related prospectus supplement.
Credit support in the form of reserve funds, subordination or other
forms of credit support similar to that described for the securities under
"Description of Credit Support" may be provided with respect to the MBS. The
type, characteristics and amount of the credit support, if any, will be a
function of some of the characteristics of the mortgage loans or underlying MBS
evidenced by or securing the MBS and other factors and generally will have been
established for the MBS on the basis of requirements of either any rating agency
that may have assigned a rating to the MBS or the initial purchasers of the MBS.
The prospectus supplement for a series of securities evidencing
interests in assets that include MBS will specify:
o the aggregate approximate initial and outstanding principal
amount or notional amount, as applicable, and type of the MBS
to be included in the trust fund;
o the original and remaining term to stated maturity of the MBS,
if applicable;
o whether the MBS is entitled only to interest payments, only to
principal payments or to both;
o the pass-through or bond rate of the MBS or formula for
determining these rates, if any;
o the applicable payment provisions for the MBS, including, but
not limited to, any priorities, payment schedules and
subordination features;
o the MBS issuer, MBS servicer and MBS trustee, as applicable;
o some of the characteristics of the credit support, if any,
such as subordination, reserve funds, insurance policies,
letters of credit or guarantees relating to the related
underlying mortgage loans, the underlying MBS or directly to
the MBS;
35
<PAGE> 128
o the terms on which the related underlying mortgage loans or
underlying MBS may, or are required to, be purchased prior to
their maturity;
o the terms on which underlying mortgage loans or underlying MBS
may be substituted for those originally underlying the MBS;
o the servicing fees payable under the MBS agreement;
o the characteristics of any cash flow agreements that are
included as part of the trust fund evidenced or secured by the
MBS; and
o whether the MBS is in certificated form, book-entry form or
held through a depository.
AGENCY SECURITIES
The prospectus supplement for a series of securities evidencing
interests in assets of a trust fund that include agency securities will specify,
to the extent available:
o the aggregate approximate initial and outstanding principal
amounts or notional amounts, as applicable, and types of the
agency securities to be included in the trust fund;
o the original and remaining terms to stated maturity of the
agency securities;
o whether the agency securities are entitled to interest
payments only, principal payments only or to both;
o the interest rates of the agency securities or the formula to
determine these rates, if any, or the applicable payment
provisions for the agency securities;
o the issuer of the agency securities and any guarantor;
o generally, the assets that collateralize the agency
securities; and
o to what extent, if any, the obligation evidenced is backed by
the full faith and credit of the United States.
Government National Mortgage Association
GNMA is authorized under HUD section 306(g) of Title II of the National
Housing Act of 1934, as amended, the Housing Act, to guarantee the timely
payment of the principal of and interest on GNMA certificates that represent an
interest in a pool of mortgage loans insured by the FHA or partially guaranteed
by the VA under the Servicemen's Readjustment Act of 1944, as amended, or
Chapter 37 of Title 38, United States Code.
Section 306(g) of the Housing Act provides that "the full faith and
credit of the United States is pledged to the payment of all amounts which may
be required to be paid under any guaranty under this subsection." In order to
meet its obligations under any guaranty, GNMA may, under section 306(d) of the
Housing Act, borrow from the United States Treasury in an
36
<PAGE> 129
unlimited amount which is at any time sufficient to enable GNMA to perform its
obligations under its guarantee.
GNMA Certificates
Each GNMA certificate held in a trust fund may be issued under either
the GNMA I program or the GNMA II program and will be a fully modified
pass-through mortgage-backed certificate issued and serviced by a mortgage
banking company or other financial concern approved by GNMA or by Fannie Mae as
a seller-servicer of FHA loans and/or VA loans. The mortgage loans underlying
the GNMA certificates will consist of FHA loans and/or VA loans. Each mortgage
loan is secured by a one-to-four-family or multifamily residential property.
GNMA will approve the issuance of each GNMA certificate in accordance with a
guaranty agreement between GNMA and the GNMA issuer. Under its guaranty
agreement, a GNMA issuer will be required to advance its own funds in order to
make timely payments of all amounts due on each GNMA certificate if the payments
received by the GNMA issuer on the FHA loans or VA loans underlying each GNMA
certificate are less than the amounts due on each GNMA certificate.
The full and timely payment of principal of and interest on each GNMA
certificate will be guaranteed by GNMA, which obligation is backed by the full
faith and credit of the United States. Each GNMA certificate will have an
original maturity of not more than 30 years. Each GNMA certificate will be based
on and backed by a pool of FHA loans or VA loans secured by one-to-four-family
residential properties and will provide for the payment by or on behalf of the
GNMA issuer to the registered holder of the GNMA certificate of scheduled
monthly payments of principal and interest equal to the registered holder's
proportionate interest in the aggregate amount of the monthly principal and
interest payment on each FHA loan or VA loan underlying the GNMA certificate,
less the applicable servicing and guaranty fee, which together equal the
difference between the interest on the FHA loan or VA loan and the pass-through
rate on the GNMA certificate. In addition, each payment will include
proportionate pass-through payments of any prepayment of principal on the FHA
loans or VA loans underlying the GNMA certificate and liquidation proceeds in
the event of a foreclosure or other disposition of any FHA loans or VA loans.
If a GNMA issuer is unable to make the payments on a GNMA certificate
as it becomes due, it must properly notify GNMA and request GNMA to make the
payment. Upon notification and request, GNMA will make the payments directly to
the registered holder of the GNMA certificate. In the event no payment is made
by a GNMA issuer and the GNMA issuer fails to notify and request GNMA to make
the payments, the holder of the GNMA certificate will have recourse only against
GNMA to obtain the payment. The trustee or its nominee, as registered holder of
the GNMA certificates held in a trust fund, will have the right to proceed
directly against GNMA under the terms of the guaranty agreements relating to the
GNMA certificates for any amounts that are not paid when due.
All mortgage loans underlying a particular GNMA I certificate must have
the same interest rate. The interest rate on the GNMA I certificate will equal
the interest rate on the
37
<PAGE> 130
mortgage loans included in the pool of mortgage loans underlying the GNMA I
certificate, less one-half percentage point per annum of the unpaid principal
balance of the mortgage loans.
Mortgage loans underlying a particular GNMA II certificate may have per
annum interest rates that vary from each other by up to one percentage point.
The interest rate on each GNMA II certificate will be between one-half
percentage point and one and one-half percentage points lower than the highest
interest rate on the mortgage loans included in the pool of mortgage loans
underlying the GNMA II certificate.
Regular monthly installment payments on each GNMA certificate held in a
trust fund will be comprised of interest due as specified on the GNMA
certificate plus the scheduled principal payments on the FHA loans or VA loans
underlying the GNMA certificate due on the first day of the month in which the
scheduled monthly installments on the GNMA certificate are due. These regular
monthly installments on each GNMA certificate is required to be paid to the
trustee as registered holder by the 15th day of each month in the case of a GNMA
I certificate and are required to be mailed to the trustee by the 20th day of
each month in the case of a GNMA II certificate. Any principal prepayments on
any FHA loans or VA loans underlying a GNMA certificate held in a trust fund or
any other early recovery of principal on the loans will be passed through to the
trustee as the registered holder of the GNMA certificate.
Some GNMA certificates may be backed by graduated payment mortgage
loans or by buy-down mortgage loans for which funds will have been provided, and
deposited into escrow accounts, for application to the payment of a portion of
the borrowers' monthly payments during the early years of the mortgage loan.
Payments due the registered holders of GNMA certificates backed by pools
containing buy-down mortgage loans will be computed in the same manner as
payments derived from other GNMA certificates and will include amounts to be
collected from both the borrower and the related escrow account. The graduated
payment mortgage loans will provide for graduated interest payments that, during
the early years of the mortgage loans, will be less than the amount of stated
interest on the mortgage loans. The interest not so paid will be added to the
principal of the graduated payment mortgage loans and, together with interest
will be paid in subsequent years. The obligations of GNMA and of a GNMA issuer
will be the same irrespective of whether the GNMA certificates are backed by
graduated payment mortgage loans or buy-down mortgage loans. No statistics
comparable to the FHA's prepayment experience on level payment, non-buydown
mortgage loans are available in respect of graduated payment or buy-down
mortgage loans. GNMA certificates related to a series of securities may be held
in book-entry form.
The GNMA certificates included in a trust fund, and the related
underlying mortgage loans, may have characteristics and terms other than those
described above. Any of the characteristics and terms will be described in the
related prospectus supplement.
Federal Home Loan Mortgage Corporation
Freddie Mac is a corporate instrumentality of the United States created
by Title III of the Emergency Home Finance Act of 1970, as amended, the Freddie
Mac Act. The common stock of Freddie Mac is owned by the Federal Home Loan Banks
and its preferred stock is owned by
38
<PAGE> 131
stockholders of the Federal Home Loan Banks. Freddie Mac was established
primarily for the purpose of increasing the availability of mortgage credit for
the financing of urgently needed housing. It seeks to provide an enhanced degree
of liquidity for residential mortgage investments primarily by assisting in the
development of secondary markets for conventional mortgages. The principal
activity of Freddie Mac currently consists of the purchase of mortgage loans or
participation interests in the mortgage loans and the sale of the mortgage loans
or participations so purchased in the form of mortgage securities, primarily
Freddie Mac certificates. Freddie Mac is confined to purchasing, so far as
practicable, mortgage loans that it deems to be of the quality, type and class
as to meet generally the purchase standards imposed by private institutional
mortgage investors.
Freddie Mac Certificates
Each Freddie Mac certificate represents an undivided interest in a pool
of mortgage loans that may consist of residential mortgage loans, FHA loans or
VA loans. Freddie Mac certificates are sold under the terms of a mortgage
participation certificate agreement. A Freddie Mac certificate may be issued
under either Freddie Mac's cash program or guarantor program.
Mortgage loans underlying the Freddie Mac certificates held by a trust
fund will consist of mortgage loans with original terms to maturity of between
10 and 30 years. Each mortgage loan must meet the applicable standards set forth
in the Freddie Mac Act. The mortgage loans will be secured by loans on
properties that would qualify as mortgaged properties. A Freddie Mac certificate
group may include whole loans, participation interests in whole loans and
undivided interests in whole loans and/or participations comprising another
Freddie Mac certificate group. Under the guarantor program, any Freddie Mac
certificate group may include only whole loans or participation interests in
whole loans.
Freddie Mac guarantees to a registered holder of a Freddie Mac
certificate the timely payment of interest on the underlying mortgage loans to
the extent of the applicable certificate interest rate on the registered
holder's pro rata share of the unpaid principal balance outstanding on the
underlying mortgage loans in the Freddie Mac certificate group represented by
the Freddie Mac certificate, whether or not received. Freddie Mac also
guarantees to each registered holder of a Freddie Mac certificate collection by
the holder of all principal on the underlying mortgage loans, without any offset
or deduction, to the extent of the holder's pro rata share, but does not, except
if and to the extent specified in the related prospectus supplement for a series
of securities, guarantee the timely payment of scheduled principal. Under
Freddie Mac's Gold PC Program, Freddie Mac guarantees the timely payment of
principal based on the difference between the pool factor published in the month
preceding the month of distribution and the pool factor published in the month
of distribution. Under its guaranties, Freddie Mac indemnifies holders of
Freddie Mac certificates against any diminution in principal by reason of
charges for property repairs, maintenance and foreclosure. Freddie Mac may remit
the amount due on account of its guaranty of collection of principal at any time
after default on an underlying mortgage loan, but not later than:
o 30-days following foreclosure sale;
o 30-days following payment of the claim by any mortgage
insurer; or
39
<PAGE> 132
o 30-days following the expiration of any right of redemption,
whichever occurs later, but in any event no later than one
year after demand has been made upon the mortgagor for
accelerated payment of principal.
In taking actions regarding the collection of principal after default
on the mortgage loans underlying Freddie Mac certificates, including the timing
of demand for acceleration, Freddie Mac reserves the right to exercise its
judgment with respect to the mortgage loans in the same manner as for mortgage
loans that it has purchased but not sold. The length of time necessary for
Freddie Mac to determine that a mortgage loan should be accelerated varies with
the particular circumstances of each mortgagor, and Freddie Mac has not adopted
standards which require that the demand be made within any specified period.
Freddie Mac certificates are not guaranteed by the United States or by
any Federal Home Loan Bank and do not constitute debts or obligations of the
United States or any Federal Home Loan Bank. The obligations of Freddie Mac
under its guaranty are obligations solely of Freddie Mac and are not backed by,
or entitled to, the full faith and credit of the United States. If Freddie Mac
were unable to satisfy the obligations, distributions to holders of Freddie Mac
certificates would consist solely of payments and other recoveries on the
underlying mortgage loans and, accordingly, monthly distributions to holders of
Freddie Mac certificates would be affected by delinquent payments and defaults
on the mortgage loans.
Registered holders of Freddie Mac certificates are entitled to receive
their monthly pro rata share of all principal payments on the underlying
mortgage loans received by Freddie Mac, including any scheduled principal
payments, full and partial prepayments of principal and principal received by
Freddie Mac by virtue of condemnation, insurance, liquidation or foreclosure,
and repurchases of the mortgage loans by Freddie Mac or the seller. Freddie Mac
is required to remit each registered Freddie Mac certificateholder's pro rata
share of principal payments on the underlying mortgage loans, interest at the
Freddie Mac pass-through rate and any other sums such as prepayment fees, within
60-days of the date on which the payments are deemed to have been received by
Freddie Mac.
Under Freddie Mac's cash program, there is no limitation on the amount
by which interest rate on the mortgage loans underlying a Freddie Mac
certificate may exceed the pass-through rate on the Freddie Mac certificate.
Under the program, Freddie Mac purchases groups of whole mortgage loans from
sellers at specified percentages of their unpaid principal balances, adjusted
for accrued or prepaid interest, which when applied to the interest rate of the
mortgage loans and participations purchased results in the yield, expressed as a
percentage, required by Freddie Mac. The required yield, which includes a
minimum servicing fee retained by the servicer, is calculated using the
outstanding principal balance. The range of interest rates on the mortgage loans
and participations in a Freddie Mac certificate group under the cash program
will vary since mortgage loans and participations are purchased and assigned to
a Freddie Mac certificate group based upon their yield to Freddie Mac rather
than on the interest rate on the underlying mortgage loans. Under Freddie Mac's
Guarantor Program, the pass-through rate on a Freddie Mac certificate is
established based upon the lowest interest rate on the underlying mortgage
loans, minus a minimum servicing fee and the amount of Freddie Mac's management
and guaranty income as agreed upon between the seller and Freddie Mac.
40
<PAGE> 133
Freddie Mac certificates duly presented for registration of ownership
on or before the last business day of a month are registered effective as of the
first day of the month. The first remittance to a registered holder of a Freddie
Mac certificate will be distributed so as to be received normally by the 15th
day of the second month following the month in which the purchaser became a
registered holder of the Freddie Mac certificate. Following the initial payment,
the remittance will be distributed monthly to the registered holder so as to be
received normally by the 15th day of each month. The Federal Reserve Bank of New
York maintains book-entry accounts with respect to Freddie Mac certificates sold
by Freddie Mac on or after January 2, 1985, and makes payments of principal and
interest each month to the registered holders in accordance with the holders'
instructions.
The Freddie Mac certificates included in a trust fund, and the related
underlying mortgage loans, may have characteristics and terms other than those
described above. Any of the characteristics and terms will be described in the
related prospectus supplement.
Fannie Mae
Fannie Mae is a federally chartered and privately owned corporation
organized and existing under the Federal National Mortgage Association Charter
Act, as amended. Fannie Mae was originally established in 1938 as a United
States government agency to provide supplemental liquidity to the mortgage
market and was transformed into a stockholder-owned and privately-managed
corporation by legislation enacted in 1968.
Fannie Mae provides funds to the mortgage market primarily by
purchasing mortgage loans from lenders, thereby replenishing their funds for
additional lending. Fannie Mae acquires funds to purchase mortgage loans from
many capital market investors that may not ordinarily invest in mortgages,
thereby expanding the total amount of funds available for housing. Operating
nationwide, Fannie Mae helps to redistribute mortgage funds from capital-surplus
to capital-short areas.
Fannie Mae Certificates
Fannie Mae certificates are guaranteed mortgage pass-through
certificates representing fractional undivided interests in a pool of mortgage
loans formed by Fannie Mae. Each mortgage loan must meet the applicable
standards of the Fannie Mae purchase program. Mortgage loans comprising a pool
are either provided by Fannie Mae from its own portfolio or purchased under the
criteria set forth in the Fannie Mae purchase program.
Mortgage loans underlying Fannie Mae certificates held by a trust fund
will consist of conventional mortgage loans, FHA loans or VA loans. Original
maturities of substantially all of the conventional, level payment mortgage
loans underlying a Fannie Mae certificate are expected to be between either 8 to
15 years or 20 to 30 years. The original maturities of substantially all of the
fixed rates, level payment FHA loans or VA loans are expected to be 30 years.
The mortgage loans will be secured by properties that would qualify as mortgaged
properties.
Mortgage loans underlying a Fannie Mae certificate may have annual
interest rates that vary by as much as two percentage points from each other.
The rate of interest payable on a Fannie Mae certificate is equal to the lowest
interest rate of any mortgage loan in the related
41
<PAGE> 134
pool, less a specified minimum annual percentage representing servicing
compensation and Fannie Mae's guaranty fee. Under a regular servicing option,
pursuant to which the mortgagee or each other servicer assumes the entire risk
of foreclosure losses, the annual interest rates on the mortgage loans
underlying a Fannie Mae certificate will be between 50 basis points and 250
basis points greater than its annual pass-through rate and under a special
servicing option, pursuant to which Fannie Mae assumes the entire risk for
foreclosure losses, the annual interest rates on the mortgage loans underlying a
Fannie Mae certificate will generally be between 55 basis points and 255 basis
points greater than the annual Fannie Mae certificate pass-through rate. Fannie
Mae certificates may be backed by adjustable rate mortgages.
Fannie Mae guarantees to each registered holder of a Fannie Mae
certificate that it will distribute amounts representing the holder's
proportionate share of scheduled principal and interest payments at the
applicable pass-through rate provided for by the Fannie Mae certificate on the
underlying mortgage loans, whether or not received, and the holder's
proportionate share of the full principal amount of any foreclosed or other
finally liquidated mortgage loan, whether or not the principal amount is
actually recovered. The obligations of Fannie Mae under its guaranties are
obligations solely of Fannie Mae and are not backed by, or entitled to, the full
faith and credit of the United States. Although the Secretary of the Treasury of
the United States has discretionary authority to lend Fannie Mae up to $2.25
billion outstanding at any time, neither the United States nor any agency is
obligated to finance Fannie Mae's operations or to assist Fannie Mae in any
other manner. If Fannie Mae were unable to satisfy its obligations,
distributions to holders of Fannie Mae certificates would consist solely of
payments and other recoveries on the underlying mortgage loans and, accordingly,
monthly distributions to holders of Fannie Mae certificates would be affected by
delinquent payments and defaults on the mortgage loans.
Fannie Mae certificates evidencing interests in pools of mortgage loans
formed on or after May 1, 1985, other than Fannie Mae certificates backed by
pools containing graduated payment mortgage loans or mortgage loans secured by
multifamily projects, are available in book-entry form only. Distributions of
principal and interest on each Fannie Mae certificate will be made by Fannie Mae
on the 25th day of each month to the persons in whose name the Fannie Mae
certificate is entered in the books of the Federal Reserve Banks, or registered
on the Fannie Mae certificate register in the case of fully registered Fannie
Mae certificates, as of the close of business on the last day of the preceding
month. With respect to Fannie Mae certificates issued in book-entry form,
distributions will be made by wire, and with respect to fully registered Fannie
Mae certificates, distributions will be made by check.
The Fannie Mae certificates included in a trust fund, and the related
underlying mortgage loans, may have characteristics and terms other than those
described above. Any of the characteristics and terms will be described in the
related prospectus supplement.
Stripped Mortgage-Backed Securities
Agency securities may consist of one or more stripped mortgage-backed
securities, each as described in this prospectus and in the related prospectus
supplement. Each agency security will represent an undivided interest in all or
part of either the principal distributions, but not the
42
<PAGE> 135
interest distributions, or the interest distributions, but not the principal
distributions, or in some specified portion of the principal and interest
distributions, but not all of the distributions, on some Freddie Mac, Fannie Mae
or GNMA certificates. The yield on and value of stripped agency securities are
extremely sensitive to the timing and amount of principal prepayments on the
underlying securities. The underlying securities will be held under a trust
agreement by Freddie Mac, Fannie Mae or GNMA, each as trustee, or by another
trustee named in the related prospectus supplement. Freddie Mac, Fannie Mae or
GNMA will guarantee each stripped agency security to the same extent as the
entity guarantees the underlying securities backing the stripped agency
security.
Other Agency Securities
If specified in the related prospectus supplement, a trust fund may
include other mortgage pass-through certificates issued or guaranteed by GNMA,
Fannie Mae or Freddie Mac. The characteristics of any the mortgage pass-through
certificates will be described in the prospectus supplement. If so specified, a
combination of different types of agency securities may be held in a trust fund.
ACCOUNTS
Each trust fund will include one or more accounts established and
maintained on behalf of the securityholders into which the person or persons
designated in the related prospectus supplement will, to the extent described in
this prospectus and in the prospectus supplement deposit all payments and
collections received or advanced with respect to the trust assets. An account
may be maintained as an interest bearing or a non-interest bearing account, and
funds held in an account may be held as cash or invested in some short-term,
investment grade obligations, in each case described in the related prospectus
supplement. See "Description of the Agreements -- Security Account and Other
Collection Accounts."
CREDIT SUPPORT
If so provided in the related prospectus supplement, partial or full
protection against some defaults and losses on the trust assets may be provided
to one or more classes of securities in the form of subordination of one or more
other classes of securities, including securities, in the series or by one or
more other types of credit support, such as a letter of credit, insurance
policy, reserve fund or another type of credit support, or a combination of
various types of credit support. The amount and types of coverage, the
identification of the entity providing the coverage, if applicable, and related
information with respect to each type of credit support, if any, will be
described in the related prospectus supplement. See "Risk Factors --
Insufficient Credit Support May Adversely Impact Your Securities" and
"Description of Credit Support."
LIQUIDITY FACILITIES
If so provided in the related prospectus supplement, the depositor will
establish one or more liquidity facilities, which may be used by the trustee to
make the required distributions of principal of, or interest on, the securities
of the related series to the extent funds are not otherwise available. The
depositor may fund a liquidity facility by depositing cash, certificates of
deposit
43
<PAGE> 136
and/or letters of credit in this prospectus on the closing date, or a liquidity
facility may be funded by the trustee's deposit in this prospectus of available
distribution amounts not required to pay servicing or administrative fees or to
make distributions on the securities on a distribution date until amounts on
deposit in the liquidity facility equal a required amount. The method of funding
any liquidity facility will be described in the related prospectus supplement.
Any liquidity facility will be maintained in trust but may not constitute a part
of the trust fund for the related series. The depositor may have specific rights
on any distribution date to cause the trustee to make withdrawals from a
liquidity facility for a series and to pay the amounts in accordance with the
instructions of the depositor to the extent that the funds are no longer
required to be maintained for the securityholders.
CASH FLOW AGREEMENTS
A trust fund may include guaranteed investment contracts pursuant to
which moneys held in the funds and accounts established for the related series
will be invested at a specified rate. The trust fund may also include other
agreements, the as interest rate exchange agreements, interest rate cap or floor
agreements, currency exchange agreements or similar agreements provided to
reduce the effects of interest rate or currency exchange rate fluctuations on
the assets or on one or more classes of securities. Currency exchange agreements
might be included in the trust fund if some or all of the assets such as
mortgage loans secured by mortgaged properties located outside the United States
were denominated in a non-United States currency. The principal terms of any
guaranteed investment contract or other agreement including, without limitation,
provisions relating to the timing, manner and amount of payments and provisions
relating to the termination, will be described in the prospectus supplement. In
addition, the related prospectus supplement will provide information with
respect to the obligor under any cash flow agreement.
PRE-FUNDING
If so specified in the related prospectus supplement, a portion of the
issuance proceeds of the securities of a particular series, a pre-funded amount,
will be deposited in a pre-funding account to be established with the trustee,
which will be used to acquire additional assets during the pre-funding period.
Prior to the investment of the pre-funded amount in additional assets, the
pre-funded amount may be invested in one or more permitted investments. Any
permitted investment must mature no later than the business day prior to the
next distribution date.
During any pre-funding period, the depositor will be obligated, subject
only to the availability of additional assets, to transfer to the related trust
fund additional assets from time to time during the pre-funding period. The
additional assets will be required to satisfy the eligibility criteria more
fully set forth in the related prospectus supplement. The eligibility criteria
will be consistent with the eligibility criteria of the assets included in the
trust fund as of the closing date, subject to the exceptions as are expressly
stated in the related prospectus supplement.
Use of a pre-funding account with respect to any series of securities
will be subject to the following general conditions:
44
<PAGE> 137
o the pre-funding period will not exceed three months from the
related closing date;
o the additional assets to be acquired during the pre-funding
period will be subject to the same underwriting standards,
representations and warranties as the assets included in the
related trust fund on the closing date, although additional
criteria may also be required to be satisfied, as described in
the related prospectus supplement;
o the pre-funded amount will not exceed 25 percent of the
principal amount of the securities issued as a series;
o the pre-funded amount will not exceed 25 percent of the
scheduled principal balance of the assets, inclusive of the
related pre-funded amount, as of the cut-off date; and
o the pre-funded amount shall be invested in permitted
investments.
To the extent that amounts on deposit in the pre-funding account have
not been fully applied to the purchase of additional assets by the end of the
pre-funding period, the related securityholders then entitled to receive
distributions of principal will receive a prepayment of principal in an amount
equal to the related pre-funded amount remaining in the pre-funding account on
the first distribution date following the end of the pre-funding period. Any
prepayment of principal would have an adverse effect on the yield to maturity of
securities purchased at a premium, and would expose securityholders to the risk
that alternative investments of equivalent value may not be available at a later
time. If specified in the related prospectus supplement, the depositor may be
required to deposit cash into an account maintained by the trustee, the
capitalized interest account, for the purpose of assuring the availability of
funds to pay interest with respect to the securities during the pre-funding
period. Any amount remaining in the capitalized interest account at the end of
the pre-funding period will be remitted as specified in the related prospectus
supplement.
A maximum of 5 percent of the assets, including assets acquired after
the closing date with pre-funded amounts, included in the trust fund will
deviate from the characteristics of the assets described in the related
prospectus supplement. Further, information regarding additional assets acquired
by a trust fund during the pre-funding period comparable to the disclosure
regarding the assets in the related prospectus supplement will be filed on a
Current Report on Form 8-K in addition to any other reporting requirements of
the trust fund under the Exchange Act within fifteen days following the end of
the pre-funding period.
YIELD CONSIDERATIONS
GENERAL
The yield on any security will depend on the price paid by the
securityholder, the pass-through rate or interest rate of the security, the
receipt and timing of receipt of distributions on the security and the weighted
average life of the related trust assets which may be affected by prepayments,
defaults, liquidations or repurchases. See "Risk Factors."
45
<PAGE> 138
Any redemption or termination of the securities will have an adverse
effect on the yield to maturity of any securities purchased at a premium,
because such a redemption or termination will have the same effect as a
prepayment in full of the assets.
PASS-THROUGH RATE AND INTEREST RATE
Securities may have fixed, variable or adjustable pass-through rates or
interest rates, which may or may not be based upon the interest rates borne by
the related trust assets. The prospectus supplement will specify the following:
o the pass-through rate or interest rate for each class of
securities or, in the case of a variable or adjustable
pass-through rate or interest rate, the method of determining
the pass-through rate or interest rate;
o the effect, if any, of the prepayment of any asset on the
pass-through rate or interest rate of one or more classes of
securities; and
o whether the distributions of interest on the securities of any
class will be dependent, in whole or in part, on the
performance of any obligor under a cash flow agreement.
The effective yield to maturity to each holder of securities entitled
to payments of interest will be less than that otherwise produced by the
applicable pass-through rate or interest rate and purchase price of the security
because, while interest may accrue on each asset during a specified period, the
distribution of the interest will be made following the period of accrual.
TIMING OF PAYMENT OF INTEREST
Each payment of interest on the securities or addition to the security
balance of a class of accrual securities on a distribution date will include
interest accrued during the interest accrual period for the distribution date.
As indicated above under "Yield Considerations -- Pass-Through Rate and Interest
Rate," if the interest accrual period ends on a date other than a distribution
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 distribution 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 security balance of accrual
securities, and allocations of losses on the assets may be made on the first day
of the interest accrual period for a distribution date and not on the
distribution date. That 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. The interest accrual period for any class of
securities will be specified in the related prospectus supplement.
PAYMENTS OF PRINCIPAL; PREPAYMENTS
The yield to maturity on the securities will be affected by the rates
of principal payments on the assets, including principal prepayments on mortgage
loans resulting from both voluntary prepayments by the mortgagors and
involuntary liquidations. The rates at which principal
46
<PAGE> 139
prepayments occur on the assets will be affected by a variety of factors,
including, without limitation, the terms of the mortgage loans, the level of
prevailing interest rates, the availability of mortgage credit and economic,
demographic, geographic, tax, legal and other factors. In general, however, if
prevailing interest rates fall significantly below the mortgage rate on the
mortgage loans comprising or underlying the trust assets, the mortgage loans are
likely to be the subject of higher principal prepayments than if prevailing
rates remain at or above the rates borne by the mortgage loans. In this regard,
it should be noted that specified assets may consist of mortgage loans with
different mortgage rates and the stated pass-through or pay-through interest
rates of the MBS may be a number of percentage points higher or lower than some
of the underlying mortgage loans. The rate of principal payments on some or all
of the classes of securities will correspond to the rate of principal payments
on the trust assets and is likely to be affected by the existence of lock-out
periods and prepayment premium provisions of the mortgage loans underlying or
comprising the trust assets, and by the extent to which the servicer of any the
mortgage loan is able to enforce the provisions. Mortgage loans with a lock-out
period or a prepayment premium provision, to the extent enforceable, generally
would be expected to experience a lower rate of principal prepayments than
otherwise identical mortgage loans without the provisions, with shorter lock-out
periods or with lower prepayment premiums.
If the purchaser of a security sold 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 assets, the
actual yield to maturity will be lower than that calculated. Conversely, if the
purchaser of a security sold 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 assets, the actual yield to maturity will
be lower than that calculated. In either case, the effect of prepayments on
yield may be mitigated or exacerbated by provisions for sequential or selective
distribution of principal.
When a full prepayment is made on a mortgage loan, the mortgagor is
charged interest on the principal amount of the mortgage loan so prepaid for the
number of days in the month actually elapsed up to the date of the prepayment.
The effect of prepayments in full will be to reduce the amount of interest paid
or available to be paid in the following month to holders of securities entitled
to payments of interest because interest on the principal amount of any mortgage
loan so prepaid will be paid only to the date of prepayment rather than for a
full month. Generally, a partial prepayment of principal is applied so as to
reduce the outstanding principal balance of the related mortgage loan as of the
due date in the month in which the partial prepayment is received. As a result,
the effect of a partial prepayment on a mortgage loan will be to reduce the
amount of interest passed through to holders of securities in the month
following the receipt of the partial prepayment by an amount equal to one
month's interest at the applicable pass-through rate or interest rate on the
prepaid amount. Additionally, in the case of FHA loans and VA loans, some events
of default may result in delayed payment of principal and interest for some
classes of securities.
The timing of changes in the rate of principal payments on the 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
47
<PAGE> 140
on the assets and distributed on a security, the greater the effect on the
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.
PREPAYMENTS -- MATURITY AND WEIGHTED AVERAGE LIFE
The rates at which principal payments are received on the trust assets
and the rate at which payments are made from any credit support or cash flow
agreement for a series of securities may affect the maturity and the weighted
average life of each related class of securities. Prepayments on the mortgage
loans will generally accelerate the rate at which principal is paid on some or
all of the related classes of securities.
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
the security will be repaid to the investor. The weighted average life of the
securities will be influenced by the rate at which principal on the mortgage
loans comprising or underlying the assets is paid to the 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 loans are also commonly measured relative to a
prepayment standard or model, such as the constant prepayment rate prepayment
model, or CPR, or the standard prepayment assumption prepayment model, or SPA,
each 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 the 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 percent of SPA assumes prepayment rates of 0.2
percent 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 percent per annum in
each month until the thirtieth month. Beginning in the thirtieth month and in
each month during the life of the loans, 100 percent of SPA assumes a constant
prepayment rate of 6 percent per annum each month.
Neither CPR nor SPA 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 loans, including the
mortgage loans.
In general, if interest rates fall below the mortgage rates on
fixed-rate mortgage loans, the rate of prepayment is expected to increase.
The prospectus supplement may contain tables, if applicable, setting
forth the projected weighted average life of the securities of the series and
the percentage of the initial security balance that would be outstanding on
specified distribution dates based on the assumptions stated in this prospectus,
including assumptions that prepayments on the mortgage loans are made at rates
corresponding to various percentages of CPR, SPA or at the other rates specified
in the related prospectus supplement. The tables and assumptions are intended to
illustrate the sensitivity of weighted average life of the securities to various
prepayment rates and will not be
48
<PAGE> 141
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 loans will conform to any particular level of CPR,
SPA or any other rate specified in the related prospectus supplement.
OTHER FACTORS AFFECTING WEIGHTED AVERAGE LIFE
Type of Asset
To the extent specified in the related prospectus supplement, mortgage
loans may have balloon payments due at maturity. Because the ability of a
mortgagor to make a balloon payment depends upon his ability to either refinance
the loan or to sell the related mortgaged property, there is a risk that balloon
mortgage loans will default at maturity. 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 loans, the master servicer or sub-servicer
may, to the extent and under the circumstances set forth in the related
prospectus supplement, be permitted to modify mortgage loans that are in default
or as to which a payment default is imminent. Any defaulted balloon payment or
modification that extends the maturity of a mortgage loan will tend to extend
the weighted average life of the securities.
With respect to some mortgage loans, particularly ARM loans, the
mortgage rate at origination may be below the rate that would result if the
index and margin relating to the mortgage rate were applied at origination.
Under some underwriting standards, the mortgagor under each mortgage loan will
be qualified on the basis of the mortgage rate in effect at origination. The
repayment of any mortgage loan may thus be dependent on the ability of the
mortgagor to make larger level monthly payments following the adjustment of the
mortgage rate. In addition, buy-down mortgage loans provide for a buy-down
period during which the monthly payment made by the mortgagor will be less than
the scheduled monthly payment. The periodic increase in the amount paid by the
mortgagor of a buy-down mortgage loan during or at the end of the applicable
buy-down period may create a greater financial burden for the mortgagor, who
might not have otherwise qualified for a mortgage, and may accordingly increase
the risk of default.
The mortgage rates on some 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, initial mortgage rates are generally lower than the sum of
the applicable index at origination and the related margin over the index at
which interest accrues, the amount of interest accruing on the principal balance
of the mortgage loans may exceed the amount of the minimum scheduled monthly
payment. As a result, a portion of the accrued interest on negatively amortizing
mortgage loans may be added to the principal balance and will bear interest at
the applicable mortgage rate. The addition of deferred interest to the security
principal balance of securities will lengthen the weighted average life and may
adversely affect yield to holders, particularly those purchased at a premium
from their parity price. In addition, with respect to some ARM loans subject to
negative amortization, during a period of declining interest rates, it might be
expected that each minimum scheduled monthly payment on a mortgage loan would
exceed the amount of scheduled principal and accrued interest on the
49
<PAGE> 142
principal balance, and because the excess will be applied to reduce the security
principal balance of the related class or classes of securities, the weighted
average life of the securities will be reduced and may adversely affect yield to
holders, depending upon the price at which the securities were purchased.
Defaults
The rate of defaults on the mortgage loans will also affect the rate
and timing of principal payments on the assets and thus the yield on the
securities. In general, defaults on mortgage loans are expected to occur with
greater frequency in their early years. The rate of default on mortgage loans
which are refinanced or limited documentation mortgage loans, and on mortgage
loans with high loan-to-value ratios, may be higher than for other types of
mortgage loans. Reinstated mortgage loans will likely experience a higher rate
of default than mortgage loans that have no history of delinquent mortgagor
payments. Furthermore, the rate and timing of prepayments, defaults and
liquidations on the mortgage loans will be affected by the general economic
condition of the geographic region 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.
Foreclosures
The number of foreclosures and the principal amount of the mortgage
loans that are foreclosed in relation to the number and principal amount of
mortgage loans that are repaid in accordance with their terms will affect the
weighted average life of the mortgage loans and, accordingly, that of the
related securities.
Refinancing
At the request of a mortgagor, the master servicer or a sub-servicer
may allow the refinancing of a mortgage loan by accepting prepayments and
permitting a new loan secured by a mortgage on the same property. In the event
of a refinancing, the new loan would not be included in the related trust fund
and, therefore, the refinancing would have the same effect as a prepayment in
full of the related mortgage loan. A sub-servicer or the master servicer may,
from time to time, implement programs designed to encourage refinancing. The
programs may include, without limitation, modifications of existing loans,
general or targeted solicitations, the offering of pre-approved applications,
reduced origination fees or closing costs, or other financial incentives. In
addition, sub-servicers may encourage the refinancing of mortgage loans,
including defaulted mortgage loans, that would permit creditworthy borrowers to
assume the outstanding indebtedness of the mortgage loans.
Due-on-Sale Clauses
Acceleration of mortgage payments as a result of some transfers of
underlying mortgaged property is another factor affecting prepayment rates that
may not be reflected in the prepayment standards or models used in the related
prospectus supplement. A number of the mortgage loans may include due-on-sale
clauses that allow the holders of the mortgage loans to demand payment in full
of the remaining principal balance of the mortgage loans upon sale, transfer or
conveyance of the related mortgaged property. With respect to any mortgage
loans, the master servicer will
50
<PAGE> 143
generally enforce any due-on-sale clause to the extent it has knowledge of the
conveyance or proposed conveyance of the underlying mortgaged property and it is
entitled to do so under applicable law; provided, however, that the master
servicer will not take any action in relation to the enforcement of any
due-on-sale provision which would adversely affect or jeopardize coverage under
any applicable insurance policy. See "Legal Aspects of Mortgage Loans --
Due-on-Sale Clauses" and "Description of the Agreements -- Due-on-Sale
Provisions."
THE DEPOSITOR
Union Planters Home Equity Corp., the depositor, is a direct
wholly-owned finance subsidiary of Union Planters Bank, National Association and
was incorporated in the state of Delaware on August 31, 2000. The principal
executive offices of the depositor are located at 7130 Goodlett Farms Parkway,
Cordova, Tennessee, 38018. Its telephone number is (901) 580-6000.
The depositor does not have, nor is it expected in the future to have,
any significant assets.
LEGAL PROCEEDINGS
Neither the issuer, depositor, seller or master servicer is party to
any legal proceedings that could have a material adverse impact on your
securities.
DESCRIPTION OF THE SECURITIES
GENERAL
Each series of bonds will be issued under an indenture between the
issuer or a trust established by the depositor and the trustee named in the
related prospectus supplement with respect to a series. A form of indenture has
been filed as an exhibit to the registration statement of which this prospectus
forms a part. The certificates will also be issued in series under separate
agreements, each, a pooling and servicing agreement or a trust agreement among
the depositor, the master servicer, and the trustee. A form of each agreement
has been filed as an exhibit to the registration statement of which this
prospectus forms a part. The indenture, the pooling and servicing agreement and
the trust agreement are referred to as the agreements. A series may consist of
both bonds and certificates.
The material provisions in the agreements under which your securities
are issued are described in this section of the prospectus and in the
accompanying prospectus supplement. These provisions describe the material
provisions of the agreements, but we suggest you read the agreements and the
prospectus supplement in their entireties for a complete discussion of the
transaction. Where particular provisions or terms used in the agreements are
referred to, the actual provisions including the definitions of terms are
incorporated in this prospectus by reference as part of the summaries.
Each class of securities may:
51
<PAGE> 144
o provide for the accrual of interest based on fixed, variable
or adjustable rates;
o be securities that are senior or subordinate to one or more
other classes of securities with respect to some
distributions;
o be stripped principal securities;
o be stripped interest securities;
o provide for distributions of accrued interest to commence only
following the occurrence of specified events, such as the
retirement of one or more other classes of securities;
o provide for payments of principal sequentially, based on
specified payment schedules, from only a portion of the assets
in the trust fund or based on specified calculations; and/or
o provide for distributions based on a combination of two or
more components with one or more of the characteristics
described in this paragraph, including a stripped principal
security component and a stripped interest security component,
in the aggregate to the extent of the available distribution
amount.
Distributions on one or more classes of securities may be limited to
collections from a designated portion of the assets or asset group.
Each class of securities will be issued in minimum denominations
corresponding to the security balances or, in the case of stripped interest
securities, notional amounts or percentage interests specified in the related
prospectus supplement. The transfer of any securities may be registered and the
securities may be exchanged without the payment of any service charge payable in
connection with the registration of transfer or exchange, but the depositor or
the trustee or any agent may require payment of a sum sufficient to cover any
tax or other governmental charge. One or more classes of securities may be
issued in definitive form or in book-entry form, as provided in the related
prospectus supplement. See "Risk Factors -- Book-Entry Securities May Experience
Decreased Liquidity and Payment Delays" and "Description of the Securities --
Book-Entry Registration." Definitive securities will be exchangeable for other
securities of the same class and series of a like aggregate security balance,
notional amount or percentage interest, but of different authorized
denominations.
DISTRIBUTIONS
Distributions on the securities will be made by or on behalf of the
trustee on each distribution date as specified in the related prospectus
supplement from the available distribution amount for the series and the
distribution date. Unless a different date is specified in the related
prospectus supplement, distributions other than the final distribution will be
made to the persons in whose names the securities are registered at the close of
business on the last business day of the month preceding the month in which the
distribution date occurs or 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 or the determination date. All distributions with
respect to each class of securities on each distribution date will be allocated
as described in the related
52
<PAGE> 145
prospectus supplement. Payments will be made either by wire transfer of
immediately available funds to the account of a securityholder at a bank or
other entity having the appropriate facilities to receive the payments, if the
securityholder has so notified the trustee or other person required to make the
payments no later than the date specified in the related prospectus supplement.
If so provided in the related prospectus supplement, payments may be made by
securities held in the requisite amount specified, or by check mailed to the
address of the person entitled to receive the check as it appears on the
security register; provided, however, that the final distribution in retirement
of the securities will be made only upon presentation and surrender of the
securities at the location specified in the notice to securityholders of the
final distribution.
AVAILABLE DISTRIBUTION AMOUNT
All distributions on the securities of each series on each distribution
date will be made from the available distribution amount described below, in
accordance with the terms described in the related prospectus supplement.
Generally, the available distribution amount for each distribution date will
equal the sum of the following amounts:
o the total amount of all cash on deposit in the related
security 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 and related prepayment premiums,
liquidation proceeds, insurance proceeds and other
unscheduled recoveries received subsequent to the
related due period;
(c) all amounts in the security account that are due or
reimbursable to the depositor, the trustee, an asset
seller, a sub-servicer, the master servicer or any
other entity as specified in the related prospectus
supplement or that are payable with respect to some
expenses of the related trust fund; and
(d) all amounts received subsequent to the related due
period for a repurchase of an asset from the trust
fund for defective documentation or a breach of
representation or warranty;
o if the related prospectus supplement so provides, interest or
investment income on amounts on deposit in the security
account, including any net amounts paid under any cash flow
agreements,
o all advances made by a master servicer, a sub-servicer or any
other entity as specified in the related prospectus supplement
with respect to the distribution date,
o if and to the extent the related prospectus supplement so
provides, amounts paid by a master servicer, a sub-servicer or
any other entity as specified in the related
53
<PAGE> 146
prospectus supplement with respect to interest shortfalls
resulting from prepayments during the related prepayment
period, and
o to the extent not on deposit in the related security account
as of the corresponding Determination date, any amounts
collected under, from or in respect of any credit support or
liquidity facilities with respect to the distribution date.
As described in this prospectus, 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. The related prospectus supplement for a series of securities will
describe any variation in the calculation of the available distribution amount
for the series.
DISTRIBUTIONS OF INTEREST
Each class of securities, other than classes of stripped principal
securities that have no pass-through rate or interest rate, may have a different
pass-through rate or interest rate, which will be a fixed, variable or
adjustable rate at which interest will accrue on the class or a component. The
related prospectus supplement will specify the pass-through rate or interest
rate for each class or component or, in the case of a variable or adjustable
pass-through rate or interest rate, the method for determining the pass-through
rate or interest rate. Interest on the securities will be calculated on the
basis of a 360-day year consisting of twelve 30-day months or on the basis of
actual days elapsed, as specified in the related prospectus supplement.
Distributions of interest in respect of the securities will be made on
each distribution date, other than any class of accrual securities, which will
be entitled to distributions of accrued interest commencing only on the
distribution date or under the circumstances specified in the related prospectus
supplement, and any class of stripped principal securities that are not entitled
to any distributions of interest, based on the accrued security interest for the
class and the distribution date, subject to the sufficiency of the portion of
the available distribution amount allocable to the class on the distribution
date. Prior to the time interest is distributable on any class of accrual
securities, the amount of accrued security interest otherwise distributable on
the class will be added to the security balance on each distribution date. With
respect to each class of securities and each distribution date, other than
specified classes of stripped interest securities, accrued security interest
will be equal to interest accrued for a specified period on the outstanding
security balance immediately prior to the distribution date, at the applicable
pass-through rate or interest rate, subject to specified reductions described
below or in the related prospectus supplement.
Accrued security interest on stripped interest securities will be equal
to interest accrued for a specified period on the outstanding notional amount
immediately prior to each distribution date, at the applicable pass-through rate
or interest rate, subject to specified reductions as described below, or accrued
as otherwise described in the related prospectus supplement. The method of
determining the notional amount for any class of stripped interest securities
will be described in the related prospectus supplement. Reference to notional
amount is solely for convenience in specified calculations and does not
represent the right to receive any distributions
54
<PAGE> 147
of principal. Unless otherwise provided in the related prospectus supplement,
accrued security interest on a series of securities will be reduced in the event
of prepayment interest shortfalls, which are shortfalls in collections of
interest for a full accrual period resulting from prepayments prior to the due
date in the accrual period on the mortgage loans comprising or underlying the
assets in the trust fund for the series.
The particular manner in which the shortfalls are to be allocated among
some or all of the classes of securities will be specified in the related
prospectus supplement. The related prospectus supplement will also describe the
extent to which the amount of accrued security interest that is otherwise
distributable on or, in the case of accrual securities, that may otherwise be
added to the security balance of a class of securities may be reduced as a
result of any other contingencies, including delinquencies, losses and deferred
interest on or in respect of the mortgage loans comprising or underlying the
assets in the related trust fund. Unless otherwise provided in the related
prospectus supplement, any reduction in the amount of accrued security interest
otherwise distributable on a class of securities by reason of the allocation to
the class of a portion of any deferred interest on the mortgage loans comprising
or underlying the assets in the related trust fund will result in a
corresponding increase in the security balance of the class. See "Risk
Factors -- Prepayment Timing and Frequency may Adversely Affect Yield on Your
Securities" and "Yield Considerations."
DISTRIBUTIONS OF PRINCIPAL
The securities of each series, other than specified classes of stripped
interest securities, will have a security balance which, at any time, will equal
the then maximum amount that the holder will be entitled to receive in respect
of principal out of the future cash flow on the trust assets. Generally, the
outstanding security balance of a security will be reduced to the extent of
distributions of principal from time to time and, if and to the extent so
provided in the related prospectus supplement, by the amount of losses incurred
in respect of the related assets that are allocated to the class. Moreover,
security balances may be increased through interest deferral on the related
mortgage loans and, in the case of accrual securities prior to the distribution
date on which distributions of interest are required to commence, security
balances will be increased by any related accrued security interest. The initial
aggregate security balance of all classes of securities of a series will not be
greater than the sum of (a) the outstanding aggregate principal balance of the
assets as of the cut-off date and (b) amounts on deposit in the pre-funding
account, if any, as of the closing date. The initial aggregate security balance
of a series and each class 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 those distributions of principal
in accordance with the provisions described in the prospectus supplement until
the security balance of the class has been reduced to zero. Stripped interest
securities with no security balance are not entitled to any principal
distributions.
COMPONENTS
To the extent specified in the related prospectus supplement,
distributions on a class of securities may be based on a combination of two or
more different components as described
55
<PAGE> 148
under "-- General" above. To that extent, the descriptions set forth under
"-- Distributions of Interests" and "-- Distributions of Principal" above also
relate to components. In this case, reference in those sections to security
balance and pass-through rate or interest rate refer to the principal balance,
if any, of any component and the pass-through rate or interest rate, if any, on
any component, respectively.
ALLOCATION OF LOSSES AND SHORTFALLS
If so provided in the prospectus supplement for a series of securities
consisting of one or more classes of subordinate securities, on any distribution
date in respect of which losses or shortfalls in collections on the assets have
been incurred, the amount of the losses or shortfalls will be borne first by a
class of subordinate securities in the priority and manner and subject to the
limitations specified in the related prospectus supplement. See "Description of
Credit Support" for a description of the types of protection that may be
included in a trust fund against losses and shortfalls on assets comprising the
trust fund.
ADVANCES IN RESPECT OF DELINQUENCIES
The master servicer or another entity described in the prospectus
supplement may be required to advance as part of its servicing responsibilities
on or before each distribution date its own funds or funds held in a collection
account for the securities in an amount equal to the aggregate of payments of
principal, other than any balloon payments, and interest, net of related
servicing fees and retained interest, that were due on the mortgage loans during
the related due period but delinquent on the related determination date and
delinquent payments of taxes, insurance premiums and escrowed items in respect
of related assets and liquidation-related expenses, each subject to the master
servicer's or other entity's good faith determination that the advances will be
reimbursable from related proceeds as described below. In the case of specified
series of securities that include subordinate securities, the master servicer's
or other entity's advance obligation may be limited to the portion of
delinquencies necessary to make the required distributions on classes of senior
securities and/or may be subject to the master servicer's, or other entity's,
good faith determination that advances will be reimbursable not only from
related proceeds but also from collections on assets otherwise distributable to
other subordinate securities. See "Description of Credit Support."
Advances are intended to maintain a regular flow of scheduled interest
and principal payments to holders of securities entitled to principal and
interest payments, rather than to guarantee or insure against losses. Advances
of the master servicer's or another entity's funds will be reimbursable out of
recoveries on related mortgage loans, including amounts received under any form
of credit support, as to any mortgage loan, or related proceeds. In addition, an
advance will be reimbursable from amounts in the security account prior to
distributions being made on the securities if the master servicer or other
entity determines in good faith that an advance, known as a nonrecoverable
advance, ultimately is not recoverable from related proceeds. If advances have
been made by the master servicer from excess funds in the security account that
are required to be distributed to securityholders on the related distribution
date, the master servicer will be required to replace the funds in the security
account on any future
56
<PAGE> 149
distribution date to the extent that funds in the security account on the
distribution date are less than payments required to be made to securityholders
on the date. If so specified in the related prospectus supplement, the
obligations of the master servicer or another entity to make advances may be
secured by a cash advance reserve fund, a surety bond, a letter of credit or
another form of limited guaranty. 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.
The prospectus supplement will describe any corresponding advancing
obligation of any person in connection with MBS included in the trust fund.
REPORTS TO SECURITYHOLDERS
With each distribution to holders of any class of securities, the
master servicer or the trustee, as provided in the related prospectus
supplement, will forward or cause to be forwarded to each holder, to the
depositor and to other parties as may be specified in the related agreement, a
statement setting forth, in each case to the extent applicable and available:
o the amount of the distribution to holders of securities of the
class applied to reduce the security balance;
o the amount of the distribution to holders of securities of the
class allocable to accrued security interest;
o the amount of the distribution allocable to prepayment
premiums;
o the amount of related servicing compensation received by a
master servicer and, if payable directly out of the related
trust fund, by any sub-servicer and other customary
information as any master servicer or the trustee deems
necessary or desirable, or that a securityholder reasonably
requests, to enable securityholders to prepare their tax
returns;
o the aggregate amount of advances included in the distribution,
and the aggregate amount of unreimbursed advances at the close
of business on the distribution date;
o the aggregate principal balance of the assets at the close of
business on the distribution date;
o the number and aggregate principal balance of mortgage loans
in the trust fund in respect of which (a) one scheduled
payment is delinquent, (b) two scheduled payments are
delinquent, (c) three or more scheduled payments are
delinquent and (d) foreclosure proceedings have been
commenced;
o with respect to any mortgage loan in the trust fund liquidated
during the related due period, (a) the portion of the
liquidation proceeds payable or reimbursable to the master
servicer or any other entity in respect of the mortgage loan
and (b) the amount of any loss to securityholders;
o with respect to each REO property relating to a mortgage loan
and included in the trust fund as of the end of the related
due period, the date of acquisition;
57
<PAGE> 150
o with respect to each REO property relating to a mortgage loan
and included in the trust fund as of the end of the related
due period, (a) the principal balance of the related mortgage
loan immediately following the distribution date calculated as
if the mortgage loan were still outstanding taking into
account specified limited modifications to the terms of the
mortgage loan specified in the agreement, (b) the aggregate
amount of unreimbursed servicing expenses and unreimbursed
advances with respect to the related mortgage loan and (c) if
applicable, the aggregate amount of interest accrued and
payable on related servicing expenses and related advances;
o with respect to any REO property sold during the related due
period (a) the aggregate amount of sale proceeds, (b) the
portion of the sales proceeds payable or reimbursable to the
master servicer in respect of the REO property or the related
mortgage loan and (c) the amount of any loss to
securityholders in respect of the related mortgage loan;
o the aggregate security balance or notional amount, as the case
may be, of each class of securities, including any class of
securities not being offered under the related prospectus, at
the close of business on the distribution date, separately
identifying any reduction in the security balance due to the
allocation of any loss and increase in the security balance of
a class of accrual securities in the event that accrued
security interest has been added to the balance;
o the aggregate amount of principal prepayments made during the
related due period;
o the amount deposited in the reserve fund, if any, on the
distribution date;
o the amount remaining in the reserve fund, if any, as of the
close of business on the distribution date;
o the amount deposited in the liquidity fund, if any, on the
distribution date;
o the amount remaining in the liquidity fund, if any, as of the
close of business on the distribution date;
o the aggregate unpaid accrued security interest, if any, on
each class of securities at the close of business on the
distribution date;
o in the case of securities with a variable pass-through rate or
interest rate, the pass-through rate or interest rate
applicable to the distribution date, and, if available, the
immediately succeeding distribution date, as calculated in
accordance with the method specified in the related prospectus
supplement;
o in the case of securities with an adjustable pass-through rate
or interest rate, for statements to be distributed in any
month in which an adjustment date occurs, the adjustable
pass-through rate or interest rate applicable to the
distribution date and the immediately succeeding distribution
date as calculated in accordance with the method specified in
the related prospectus supplement;
o as to any series which includes credit support, the amount of
coverage of each instrument of credit support included in this
prospectus and any draws as of the close of business on the
distribution date;
58
<PAGE> 151
o as to any series which includes a liquidity facility, the
amount of coverage of each liquidity facility included in this
prospectus and any draws as of the close of business on the
distribution date;
o as to any series which includes any cash flow agreement, the
amount of coverage of any the cash flow agreement included in
this prospectus and any draws under the cash flow agreement as
of the close of business on the distribution date;
o during the pre-funding period, the remaining pre-funded amount
and the portion of the pre-funding amount used to acquire
additional assets since the preceding distribution date;
o during the pre-funding period, the amount remaining in the
related capitalized interest account;
o as to any series that includes mortgage loans insured or
guaranteed by any government agency or instrumentality, the
amount of all proceeds from governmental guarantors and
insurers paid with respect to the mortgage loans as of the
close of business on the distribution date; and
o the aggregate amount of payments by the mortgagors of (a)
default interest, (b) late charges and (c) assumption and
modification fees collected during the related due period.
The master servicer or the trustee, as specified in the related
prospectus supplement, will forward or cause to be forwarded to each holder, to
the depositor and to the other parties as may be specified in the agreement, a
copy of any statements or reports received by the master servicer or the
trustee, as applicable, with respect to any MBS. The prospectus supplement for
each series of securities will describe any additional information to be
included in reports to the holders of the securities.
Within a reasonable period of time after the end of each calendar year,
the master servicer or the trustee shall furnish to each securityholder of
record at any time during the calendar year the information required by the
Internal Revenue Code and applicable regulations to enable securityholders to
prepare their federal income tax returns. See "-- Book-Entry Registration."
TERMINATION
To the extent and under the circumstances specified in the related
prospectus supplement, the securities of a series may be redeemed prior to their
final distribution date at the option of the depositor, the master servicer or
another party as may be specified in the related prospectus supplement by
purchase of the outstanding securities of the series. The right so to redeem the
securities of a series may be conditioned upon (1) the passage of a certain date
specified in the prospectus supplement and/or (2) (a) the decline of the
aggregate principal balance of the trust assets to less than a percentage
specified in the related prospectus supplement of the aggregate principal
balance of the trust assets at the related cut-off date or (b) the decline of
the aggregate security balance of a specified class or classes of securities to
less than a percentage specified in the related prospectus supplement of the
aggregate security balance of the applicable class or
59
<PAGE> 152
classes of securities at the closing date for the series. The percentages of the
aggregate principal balance of the assets and the aggregate security balance of
a class referred to in (2)(a) and (2)(b), respectively, above, may range from 5
percent to 25 percent. The maximum amount of assets or securities that may be
outstanding at the time of an optional redemption shall be 25 percent, with
respect to any series of bonds, or 10 percent, with respect to any series of
certificates. In the event the option to redeem the securities is exercised, the
purchase price distributed with respect to each security offered hereby and by
the related prospectus supplement will equal 100 percent of its then outstanding
principal amount, plus accrued and unpaid interest at the applicable
pass-through rate or interest rate, less any unreimbursed advances and
unrealized losses allocable to the security. Notice of the redemption of the
securities will be given to securityholders as provided in the related
agreement.
In addition, the depositor, the master servicer or another party as may
be specified in the related prospectus supplement may, at their respective
options, purchase all of the assets of the trust fund at a time specified in the
related prospectus supplement, which will be when the aggregate principal
balance of the assets is less than a percentage specified in the related
prospectus supplement, ranging from 5 percent to 25 percent, of the aggregate
principal balance of the assets on the cut-off date, or when the aggregate
security balance of a specified class or classes of securities is less than a
percentage specified in the related prospectus supplement, ranging from 5
percent to 25 percent, of the aggregate security balance of the class or classes
at the closing date. The maximum amount of assets or securities that may be
outstanding at the time of an optional termination shall be 25 percent, with
respect to any series of bonds, or 10 percent, with respect to any series of
certificates. The termination price for a trust fund will be specified in the
related agreement, and will generally equal the sum of:
o any liquidation expenses incurred by the master servicer in
respect of any asset that has not yet been liquidated;
o all amounts required to be reimbursed or paid in respect of
previously unreimbursed advances; and
o the greater of (a) the sum of (1) the aggregate unpaid
principal balance of the related assets, plus accrued and
unpaid interest through the interest accrual period preceding
the date of repurchase at the rates borne by the assets, plus
(2) the lesser of (A) the aggregate unpaid principal balance
of each asset that had been secured by any REO property
remaining in the trust fund, plus accrued interest at the
rates borne by the assets through the interest accrual period
preceding the purchase, and (B) the current appraised value of
any REO property, net of liquidation expenses to be incurred
in connection with the disposition of the property reasonably
estimated in good faith by the master servicer, the appraisal
to be conducted by an appraiser mutually agreed upon by the
master servicer and the trustee, plus all previously
unreimbursed advances made in respect of the REO property, and
(b) the aggregate fair market value of the trust assets, as
reasonably determined by the master servicer as described in
the related agreement, plus all previously unreimbursed
advances made with respect to the related assets; provided,
however, that in no event shall the termination price be less
than the then outstanding security principal balance of all
then
60
<PAGE> 153
outstanding classes of securities, plus accrued and unpaid
interest, and less any losses or shortfalls otherwise
allocable to any related class of securities on the payment
date or distribution date of the termination. The fair market
value of the trust assets as determined for purposes of a
terminating purchase shall be deemed to include accrued
interest through the interest accrual period preceding the
date of the purchase at the applicable rate on the unpaid
principal balance of each asset, including any asset that has
become a REO property and which has not been disposed of yet
by the master servicer. The basis for any valuation shall be
furnished by the master servicer to the securityholders upon
request.
If specified in the related prospectus supplement, at the time
specified, the trustee may be required to solicit bids for the purchase of all
assets and REO properties remaining in the trust fund. The trustee would sell
the assets and REO properties only if the net proceeds to the trust fund from
the sale would be at least equal to the termination price, and the net proceeds
from the sale will be distributed first to the master servicer to reimburse it
for all previously unreimbursed liquidation expenses paid and advances made by,
and not previously reimbursed to, it with respect to the assets and second to
the securityholders in accordance with the distribution priorities set forth in
the prospectus supplement. If the net proceeds from the sale would not at least
equal the termination price, the trustee would decline to sell the assets and
REO properties and would not be under any obligation to solicit any further bids
or otherwise negotiate any further sale of the assets and REO properties.
Following the transfer of assets and REO properties by the trust fund, the
securityholders shall have no continuing liabilities, either direct or indirect.
On the date set for termination of a trust fund, the termination price
shall be distributed (1) first to the master servicer to reimburse it for all
previously unreimbursed liquidation expenses paid and advances made by the
master servicer with respect to the related assets and (2) second to the
securityholders in accordance with the payment priorities that apply on each
distribution date as described in the related prospectus supplement. This will
result in the distribution with respect to each security of an amount equal to
100 percent of its then outstanding principal amount, plus accrued and unpaid
interest at the applicable pass-through rate or interest rate, less any
unreimbursed advances and unrealized losses allocable to the security.
Any redemption or termination of the securities will have an adverse
effect on the yield to maturity of any securities purchased at a premium,
because such a redemption or termination will have the same effect as a
prepayment in full of the assets.
BOOK-ENTRY REGISTRATION
If so provided in the related prospectus supplement, one or more
classes of the securities of any series may be issued as book-entry securities,
and each class will be represented by one or more single securities registered
in the name of a nominee for DTC.
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 as defined in the Uniform
61
<PAGE> 154
Commercial code or UCC 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 or participants and
facilitate the clearance and settlement of securities transactions between
participants through electronic book-entry changes in their accounts, thus
eliminating the need for physical movement of certificates. Participants include
securities brokers and dealers, banks, trust companies and clearing corporations
and may include other organizations. Indirect access to the DTC system also is
available to others such as banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a participant, either
directly or indirectly.
Investors that are not participants or indirect participants but desire
to purchase, sell or otherwise transfer ownership of, or other interests in,
book-entry securities may do so only through participants and indirect
participants. In addition, these investors or security owners will receive all
distributions on the book-entry securities through DTC and its participants.
Under a book-entry format, security owners will receive payments after the
related distribution date because, while payments are required to be forwarded
to Cede, on each distribution date, DTC will forward payments to its
participants which will be required to forward them to indirect participants or
security owners. If provided in the related prospectus supplement, the only
securityholder, as that term is used in the agreement, will be Cede, as nominee
of DTC, and the security owners will not be recognized by the trustee as
securityholders under the agreement. Security owners will be permitted to
exercise the rights of securityholders under the related agreement only
indirectly through the participants who in turn will exercise their rights
through DTC.
Under the rules, regulations and procedures creating and affecting DTC
and its operations, DTC is required to make book-entry transfers among
participants on whose behalf it acts with respect to the book-entry securities
and is required to receive and transmit distributions of principal of and
interest on the book-entry securities. Participants and indirect participants
with which security owners have accounts with respect to the book-entry
securities similarly are required to make book-entry transfers and receive and
transmit payments on behalf of their respective security owners.
Because DTC can act only on behalf of participants, who in turn act on
behalf of indirect participants and banks, the ability of a security owner to
pledge its interest in the book-entry securities to persons or entities that do
not participate in the DTC system, or otherwise take actions in respect of its
interest in the book-entry securities, may be limited due to the lack of a
physical certificate evidencing the interest.
DTC has advised the depositor that it will take any action permitted to
be taken by a securityholder under an agreement only at the direction of one or
more participants to whose account with DTC interests in the book-entry
securities are credited.
Securities initially issued in book-entry form will be issued in fully
registered, certificated form to security owners or their nominees in definitive
form known as definitive securities, rather than to DTC or its nominee only if
(1) the depositor advises the trustee in writing that
62
<PAGE> 155
DTC is no longer willing or able to properly discharge its responsibilities as
depository with respect to the securities and the depositor is unable to locate
a qualified successor or (2) the depositor, at its option, elects to terminate
the book-entry system through DTC.
Upon the occurrence of either of the events described in the
immediately preceding paragraph, DTC is required to notify all participants of
the availability through DTC of definitive securities for the security owners.
Upon surrender by DTC of the certificate or certificates representing the
book-entry securities, together with instructions for re-registration, the
trustee will issue or cause to be issued to the security owners identified in
the instructions the definitive securities to which they are entitled, and the
trustee will recognize the holders of the definitive securities as
securityholders under the agreement.
None of the depositor, the master servicer, any sub-servicer, the
trustee, or any of their affiliates will have any responsibility for any aspect
of the records relating to or payments made on account of beneficial ownership
interests of the book-entry securities or for maintaining, supervising or
reviewing any records relating to the beneficial ownership interests.
DESCRIPTION OF THE AGREEMENTS
Each series of bonds will be issued under an indenture between the
depositor or a trust established by the depositor and the trustee. Each series
of certificates evidencing interests in a trust fund including mortgage loans
will be issued under a pooling and servicing agreement among the depositor, a
master servicer(s) and the trustee. Each series of certificates evidencing
interests in a trust fund not including mortgage loans will be issued under a
trust agreement between the depositor and a trustee. Any indenture, pooling and
servicing agreement or trust agreement pursuant to which securities are issued
is referred to as an agreement. Any master servicer and the trustee with respect
to any series of securities will be named in the related prospectus supplement.
In any series of securities for which there are multiple master servicers there
will be multiple asset groups, each corresponding to a particular master
servicer, and, if the related prospectus supplement so specifies, the servicing
obligations of each master servicer will be limited to the mortgage loans in the
corresponding asset group. Alternatively, a servicer may be appointed under the
related agreement for any trust fund. The servicer may service all or a
significant number of mortgage loans directly without a sub-servicer. The
obligations of any servicer shall be commensurate with those of the master
servicer described in this prospectus. References in this prospectus to a master
servicer and its rights and obligations shall be deemed to also be references to
any servicer directly servicing mortgage loans. A manager or administrator may
be appointed under the trust agreement for any trust fund. The provisions of
each agreement will vary depending upon the nature of the securities to be
issued and the nature of the related trust fund. The following discussion
describes the material provisions of each agreement. We suggest you read all of
the provisions of the agreement for each trust fund and the description of
provisions in the related prospectus supplement for a complete discussion of the
transaction. As used in this prospectus with respect to any series, the term
security refers to all of the securities of that series, whether or not offered
hereby and by the related prospectus supplement. Some provisions that may appear
separately in an indenture relating to the bonds of a series are summarized
under "Material Terms of the Indenture." The depositor will provide a
63
<PAGE> 156
copy of the agreement without exhibits relating to any series of securities
without charge upon written request of a securityholder addressed to Union
Planters Home Equity Corp., 7130 Goodlett Farms Parkway, Cordova, Tennessee
38018, Attention: President.
ASSIGNMENT OF ASSETS; REPURCHASES
At the time of issuance of any series of securities, the depositor will
assign or cause to be assigned to the designated trustee the trust assets,
together with all principal and interest to be received on or with respect to
trust assets after the 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, deliver the securities to the depositor in
exchange for the trust assets. Each asset will be identified in a schedule
appearing as an exhibit to the related agreement. The schedule will include
detailed information (a) in respect of each mortgage loan, including without
limitation, the address of the related mortgaged property and type of property,
the mortgage rate and, if applicable, the applicable index, margin, adjustment
date and any rate cap information, the original and remaining term to maturity,
the original and outstanding principal balance and balloon payment, if any, the
existence of FHA, VA or other government insurance or guarantees, the value and
loan-to-value ratio as of the date indicated and payment and prepayment
provisions, if applicable, and (b) in respect of each MBS, including without
limitation, the MBS issuer, MBS servicer and MBS trustee, the pass-through or
bond rate or formula for determining the rates, the issue date and original and
remaining term to maturity, if applicable, and the original and outstanding
principal amount and payment provisions, if applicable.
With respect to each mortgage loan, the depositor will deliver or cause
to be delivered to the trustee or to the custodian, the material loan documents,
which will include the original mortgage note endorsed, without recourse, in
blank or to the order of the trustee, the original mortgage, or a certified
copy, with evidence of recording indicated and an assignment of the mortgage to
the trustee in recordable form. Notwithstanding the foregoing, a trust fund may
include mortgage loans where the original mortgage note is not delivered to the
trustee if the depositor delivers to the trustee or the custodian a copy or a
duplicate original of the mortgage note, together with an affidavit certifying
that the original has been lost or destroyed. With respect to the mortgage
loans, the trustee or its nominee may not be able to enforce the mortgage note
against the related borrower. The asset seller will be required to repurchase,
or substitute for, each mortgage loan that is subsequently in default if the
enforcement of the related mortgage is materially adversely affected by the
absence of the original mortgage note. The related agreement will require the
depositor or another party specified in this prospectus to promptly cause each
assignment of mortgage to be recorded in the appropriate public office for real
property records, except in states where, in the opinion of counsel acceptable
to the trustee, the recording is not required to protect the trustee's interest
in the related mortgage loan against the claim of any subsequent transferee or
any successor to or creditor of the depositor, the master servicer, the relevant
asset seller or any other prior holder of the mortgage loan.
The trustee or a custodian will review the mortgage loan documents
within a specified period of days after receipt, and the trustee or a custodian
will hold the documents in trust for the
64
<PAGE> 157
benefit of the securityholders. If any document is found to be missing or
defective in any material respect, the trustee or the custodian shall
immediately notify the master servicer and the depositor, and the master
servicer shall immediately notify the relevant asset seller. If the asset seller
cannot cure the omission or defect within a specified number of days after
receipt of the notice, then the asset seller will be obligated, within a
specified number of days of receipt of the notice, to repurchase the related
mortgage loan from the trustee at the purchase price or substitute for the
mortgage loan. There can be no assurance that an asset seller will fulfill this
repurchase or substitution obligation, and neither the master servicer nor the
depositor will be obligated to repurchase or substitute for the mortgage loan if
the asset seller defaults on its obligation. This repurchase or substitution
obligation constitutes the sole remedy available to the securityholders and the
trustee for omission of, or a material defect in, a constituent document. To the
extent specified in the related prospectus supplement, in lieu of curing any
omission or defect in the asset or repurchasing or substituting for the asset,
the asset seller may agree to cover any losses suffered by the trust fund as a
result of a breach or defect.
With respect to each agency security or MBS in certificated form, the
depositor will deliver or cause to be delivered to the trustee or the custodian
the original certificate or other definitive evidence of an agency security or
MBS, as applicable, together with bond power or other instruments,
certifications or documents required to transfer fully any agency security or
MBS, as applicable, to the trustee for the benefit of the securityholders. With
respect to each agency security or MBS in uncertificated or book-entry form or
held through a clearing corporation within the meaning of the UCC, the depositor
and the trustee will cause an agency security or MBS to be registered directly
or on the books of a clearing corporation or of a financial intermediary in the
name of the trustee for the benefit of the securityholders. The related
agreement will require that either the depositor or the trustee promptly cause
any MBS and agency securities in certificated form not registered in the name of
the trustee to be re-registered, with the applicable persons, in the name of the
trustee.
REPRESENTATIONS AND WARRANTIES; REPURCHASES
The depositor will, with respect to each mortgage loan, make or assign
some representations and warranties, as of a specified date. The person making
representations and warranties is referred to as the warrantor, and the
representations and warranties for a mortgage loan may include the following:
o the accuracy of the information set forth for the mortgage
loan on the schedule of assets appearing as an exhibit to the
related agreement;
o the existence of title insurance insuring the lien priority of
the mortgage loan;
o the authority of the warrantor to sell the mortgage loan;
o the payment status of the mortgage loan and the status of
payments of taxes, assessments and other charges affecting the
related mortgaged property;
65
<PAGE> 158
o the existence of customary provisions in the related mortgage
note and mortgage to permit realization against the mortgaged
property of the benefit of the security of the mortgage; and
o the existence of hazard and extended perils insurance coverage
on the mortgaged property.
Representations and warranties made in respect of an asset may have
been made as of a date prior to the applicable cut-off date. A substantial
period of time may have elapsed between the date on which the represenations and
warranties were made and the date of initial issuance of the related series of
securities evidencing an interest in the asset. In the event of a breach of any
of the representations or warranties, the warrantor will be obligated to
reimburse the trust fund for losses caused by any breach or either cure the
breach or repurchase or replace the affected asset as described below. Because
the representations and warranties will not address events that may occur
following the date as of which they were made, the warrantor will have no
reimbursement, cure, repurchase or substitution obligation in connection with
the subsequent events, even if they occur prior to the date of the initial
issuance of the related series of securities. The party would have no
obligations if the relevant event that causes the breach occurs after that date.
Each warrantor, if other than the depositor, shall be an asset seller
or an affiliate or other person acceptable to the depositor and shall be
identified in the related prospectus supplement.
Each agreement will provide that the master servicer and/or trustee
will be required to notify promptly the relevant warrantor of any breach of any
representation or warranty made by it in respect of an asset that materially and
adversely affects the value of the asset or the interests in this prospectus of
the securityholders. If the warrantor cannot cure the breach within a specified
period following the date on which the warrantor was notified of a breach, then
the warrantor will be obligated to repurchase the asset from the trustee within
a specified period from the date on which the warrantor was notified of the
breach, at the purchase price. As to any asset, the purchase price generally is
equal to the sum of the unpaid principal balance, plus unpaid accrued interest
at the applicable coupon rate from the date as to which interest was last paid
to the due date in the due period in which the relevant purchase is to occur,
plus some servicing expenses that are reimbursable to the master servicer. If so
provided in the prospectus supplement for a series, a warrantor, rather than
repurchase an asset as to which a breach has occurred, will have the option,
within a specified period after initial issuance of the securities, to cause the
removal of the asset from the trust fund and substitute in its place one or more
other assets, in accordance with the standards described in the related
prospectus supplement. If so provided in the related prospectus supplement for a
series, a warrantor, rather than repurchase or substitute an asset as to which a
breach has occurred, will have the option to reimburse the trust fund or the
securityholders for any losses caused by a breach. This reimbursement,
repurchase or substitution obligation will constitute the sole remedy available
to holders of securities or the trustee for a breach of representation by a
warrantor.
Neither the depositor, except to the extent that it is the warrantor,
nor the master servicer will be obligated to purchase or substitute for an asset
if a warrantor defaults on its obligation to
66
<PAGE> 159
do so, and no assurance can be given that warrantying parties will carry out its
obligations with respect to assets.
A master servicer will make some representations and warranties
regarding its authority to enter into, and its ability to perform its
obligations under, the related agreement. Generally, a breach of any
representation of the master servicer that materially and adversely affects the
interests of the securityholders and continues unremedied for thirty days after
the giving of written notice of a breach to the master servicer by the trustee
or the depositor, or to the master servicer, the depositor and the trustee by a
percentage of securityholders evidencing not less than 25 percent of the voting
rights will constitute an event of default under an agreement.
See "Events of Default" and "Rights Upon Event of Default."
SECURITY ACCOUNT AND OTHER COLLECTION ACCOUNTS
General
The master servicer and/or the trustee will, as to each trust fund,
establish and maintain or cause to be established and maintained one or more
separate accounts or security accounts for the collection of payments on the
related trust assets which must be either (a) an account or accounts the
deposits in which are insured by the Bank Insurance Fund or the Savings
Association Insurance Fund of the FDIC to the limits established by the FDIC and
the uninsured deposits which are otherwise secured such that the securityholders
have a claim with respect to the funds in the security account or a perfected
first priority security interest against any collateral securing these funds
that is superior to the claims of any other depositors or general creditors of
the institution with which the security account is maintained or (b) otherwise
maintained with a bank or trust company, and in a manner, satisfactory to the
rating agencies rating any class of securities of that series. The collateral
eligible to secure amounts in the security account is limited to United States
government securities and other investment grade obligations specified in the
agreement or permitted investments. A security account may be maintained as an
interest bearing or a non-interest bearing account and the funds held in this
prospectus may be invested pending each succeeding distribution date in some
short-term permitted investments. Any interest or other income earned on funds
in the security account will be paid to a master servicer or its designee as
additional servicing compensation to the extent provided in the related
prospectus supplement. The security account may be maintained with an
institution that is an affiliate of the master servicer, if applicable, provided
that this institution meets the standards imposed by the rating agencies. If
specified in the related prospectus supplement, a security account may contain
funds relating to more than one series of securities and may contain other funds
respecting payments on mortgage loans belonging to the master servicer or
sub-servicer or serviced by it on behalf of others.
Deposits
A master servicer or the trustee will deposit or cause to be deposited
in the security account for one or more trust funds on a daily basis, unless
otherwise provided in the related agreement, the following payments and
collections received, or advances made, by or on behalf of the master servicer
or the trustee subsequent to the cut-off date, other than payments due on or
before the cut-off date, and exclusive of any amounts representing a retained
interest:
67
<PAGE> 160
o all payments of principal, including principal prepayments, on
the assets;
o all payments of interest on the assets, including any default
interest collected, in each case net of any portion retained
by a master servicer or a sub-servicer as its servicing
compensation and net of any retained interest;
o all proceeds of the hazard insurance policies, flood insurance
policies and primary mortgage insurance policies, if any, to
be maintained in respect of each mortgaged property securing a
mortgage loan to the extent the proceeds are not applied to
the restoration of the property or released to the mortgagor
in accordance with the normal servicing procedures of a master
servicer or the related sub-servicer, subject to the terms and
conditions of the related mortgage and mortgage note,
collectively, the insurance proceeds and all other amounts
received and retained in connection with the liquidation of
defaulted mortgage loans, by foreclosure or otherwise;
o liquidation proceeds, together with the net proceeds on a
monthly basis with respect to any mortgaged properties and REO
properties acquired for the benefit of securityholders by
foreclosure or by deed in lieu of foreclosure or otherwise;
o any amounts paid under any instrument or drawn from any fund
that constitutes credit support for the related series of
securities as described under "Description of Credit Support;"
o any amounts paid under any instrument or drawn from any fund
that constitutes a liquidity facility for the related series
of securities;
o any advances made as described under "Description of the
Securities -- Advances in Respect of Delinquencies;"
o any amounts paid under any cash flow agreement, as described
under "Description of the Trust Funds -- Cash Flow
Agreements;"
o all proceeds of any asset or, with respect to a mortgage loan,
property acquired or purchased by the depositor, any asset
seller or any other specified person as described under
"Assignment of Assets; Repurchases" and "Representations and
Warranties; Repurchases," all proceeds of any defaulted
mortgage loan purchased as described under "Realization Upon
Defaulted Mortgage Loans," and all proceeds of any asset
purchased as described under "Description of the Securities --
Termination;"
o if specified in the related agreement, any amounts paid by a
master servicer to cover interest shortfalls arising out of
the prepayment of mortgage loans as described under
"Description of the Agreements -- Retained Interest; Servicing
Compensation and Payment of Expenses;"
o to the extent that any item does not constitute additional
servicing compensation to a master servicer, any payments on
account of modification or assumption fees, late payment
charges or prepayment premiums on the assets;
o all payments required to be deposited in the security account
with respect to any deductible clause in any blanket insurance
policy described under "Hazard Insurance Policies;"
68
<PAGE> 161
o any amount required to be deposited by a master servicer or
the trustee in connection with losses realized on investments
for the benefit of the master servicer or the trustee, as the
case may be, of funds held in the security account;
o all proceeds of insurance or guarantees with respect to
mortgage loans provided by any governmental agency or
instrumentality; and
o any other amounts required to be deposited in the security
account as provided in the related agreement and described in
the related prospectus supplement.
Withdrawals
A master servicer or the trustee may, from time to time, make
withdrawals from the security account for each trust fund for any of the
following purposes, as applicable:
o to make distributions to the securityholders on each
distribution date;
o to reimburse a master servicer or other entity for
unreimbursed advances as described under "Description of the
Securities -- Advances in Respect of Delinquencies," the
reimbursement to be made out of amounts identified and applied
by the master servicer or other entity as late collections of
interest net of related servicing fees and retained interest
on and principal of the related mortgage loans or out of
amounts drawn under any related form of credit support or
liquidity facilities;
o to reimburse a master servicer or other entity for unpaid
servicing fees earned and some unreimbursed servicing expenses
incurred with respect to mortgage loans and properties
acquired in respect of those mortgage loans, the reimbursement
made out of liquidation proceeds and insurance proceeds
collected on related mortgage loans and properties, and net
income collected on those mortgage loans and properties and,
with respect to which the fees were earned or the expenses
were incurred, or out of amounts drawn under any related form
of credit support or liquidity facilities;
o to reimburse a master servicer or other entity for advances
described in the clause above and any servicing expenses
described above which, in the master servicer's or other
entity's good faith judgment, will not be recoverable from the
amounts described in the above clauses, or, if and to the
extent so provided by the related agreement and described in
the related prospectus supplement, from amounts collected on
unrelated assets otherwise distributable on subordinate
securities, if any remain outstanding, and otherwise any
outstanding class of securities, of the related series;
o to reimburse a master servicer, the depositor, or any of their
respective directors, officers, employees and agents, as the
case may be, for some expenses, costs and liabilities incurred
thereby, as and to the extent described under "Material
Matters Regarding a Master Servicer and the Depositor;"
o if and to the extent described in the related prospectus
supplement, to pay or to transfer to a separate account for
purposes of escrowing for the payment of the trustee's fees;
69
<PAGE> 162
o to reimburse the trustee or any of its directors, officers,
employees and agents, as the case may be, for some expenses,
costs and liabilities incurred thereby, as and to the extent
described under " Matters Regarding the Trustee;"
o to pay any amounts deposited in the security account that were
identified and applied by the master servicer as recoveries of
retained interest to the person entitled to such amounts;
o to pay for costs reasonably incurred in connection with the
proper management and maintenance of any mortgaged property
acquired for the benefit of securityholders by foreclosure or
by deed in lieu of foreclosure or otherwise, these payments to
be made out of income received on the property;
o if one or more elections have been made to treat the trust
fund or designated portions of the trust fund 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 "Material Federal Income Tax Consequences" or
in the related prospectus supplement;
o 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 connection with the liquidation of a mortgage loan
or property;
o to pay for the cost of various opinions of counsel obtained
under the related agreement for the benefit of
securityholders;
o to pay for the costs of recording the related agreement if the
recordation materially and beneficially affects the interests
of securityholders, provided that the payment shall not
constitute a waiver with respect to the obligation of the
warrantor to remedy any breach of representation or warranty
under the agreement;
o to pay any amounts deposited in the security account in error,
including amounts received on any asset after its removal from
the trust fund whether by reason of purchase or substitution
as contemplated by "-- Assignment of Assets; Repurchase" and
"-- Representations and Warranties; Repurchases" or otherwise
to the person entitled to such amounts;
o to make any other withdrawals permitted by the related
agreement; and
o to clear and terminate the security account at the termination
of the trust fund.
Other Collection Accounts
Notwithstanding the foregoing, if so specified in the related
prospectus supplement, an agreement may provide for the establishment and
maintenance of a separate collection account into which the master servicer or
any related sub-servicer will deposit on a daily basis the amounts described
under "Security Account and Other Collection Accounts -- Deposits" above. Any
amounts on deposit in any collection account will be withdrawn from the
collection account and deposited into the appropriate security account by a time
specified in the related prospectus supplement. To the extent specified in the
related prospectus supplement, any amounts which could be withdrawn from the
security account as described under "Security Account and Other Collection
Accounts -- Withdrawals" above, may also be withdrawn from the appropriate
70
<PAGE> 163
collection account. The related prospectus supplement will set forth any
restrictions with respect to any collection account, including investment
restrictions and any restrictions with respect to financial institutions with
which any collection account may be maintained.
COLLECTION AND OTHER SERVICING PROCEDURES
The master servicer, directly or through sub-servicers, is required to
make reasonable efforts to collect all scheduled payments under the mortgage
loans and will follow or cause to be followed those collection procedures that
it would follow with respect to mortgage loans that are comparable to the
mortgage loans and held for its own account, provided the procedures are
consistent with (a) the terms of the related agreement and any related hazard
insurance policy or instrument of credit support or liquidity facilities
included in the related trust fund as described, (b) applicable law and (c) the
general servicing standard specified in the related prospectus supplement or, if
no standard is so specified, its normal servicing practices. In either case, the
servicing procedures are referred to as the servicing standard. In connection
therewith, the master servicer will be permitted discretion to waive any late
payment charge or penalty interest in respect of a late mortgage loan payment.
The master servicer will also be required to perform other customary
functions of a servicer of comparable loans, including maintaining hazard
insurance policies as described in this prospectus and in any related prospectus
supplement, and filing and settling claims under those policies; maintaining
escrow or impoundment accounts of mortgagors for payment of taxes, insurance and
other items required to be paid by any mortgagor under the terms of the mortgage
loan; processing assumptions or substitutions in those cases where the master
servicer has determined not to enforce any applicable due-on-sale clause;
attempting to cure delinquencies; supervising foreclosures; inspecting and
managing mortgaged properties under some circumstances; and maintaining
accounting records relating to the mortgage loans. The master servicer will be
responsible for filing and settling claims in respect of particular mortgage
loans under any applicable instrument of credit support. See "Description of
Credit Support."
Subject to the provisions of the related agreement, the master servicer
may agree to modify, waive or amend any term of any mortgage loan in a manner
consistent with the servicing standard so long as the modification, waiver or
amendment will not (a) affect the amount or timing of any scheduled payments of
principal or interest on the mortgage loan or (b) in its judgment, materially
impair the security for the mortgage loan or reduce the likelihood of timely
payment of amounts due. The master servicer also may agree to any modification,
waiver or amendment that would so affect or impair the payments on, or the
security for, a mortgage loan if, (a) in its judgment, a material default on the
mortgage loan has occurred or a payment default is imminent and (b) in its
judgment, modification, waiver or amendment is reasonably likely to produce a
greater recovery on a present value basis than would liquidation. The master
servicer is required to notify the trustee in the event of any modification,
waiver or amendment of any mortgage loan.
71
<PAGE> 164
VA Loan Servicing Procedures
The VA loans will be serviced under the related agreement and other
servicing agreements by the master servicer either directly or through
sub-servicers. This servicing will be conducted generally in compliance with
Fannie Mae or Freddie Mac standards and otherwise consistent with prudent
residential mortgage loan servicing standards generally accepted in the
servicing industry. The master servicer shall be diligent in abiding by VA
collection and default timetables.
Each agreement will require the master servicer, directly or through
sub-servicers, to exercise a degree of skill and care that is generally in
compliance with Fannie Mae or Freddie Mac standards and consistent with prudent
residential mortgage loan servicing standards generally accepted in the
servicing industry. Consistently with these standards, the master servicer in
its discretion may waive late payment charges or assumption fees and arrange
with a mortgagor a schedule for repayment of due and unpaid principal and
interest so long as, by this action, the master servicer does not knowingly or
intentionally cause the termination of the REMIC status of the related REMIC or
the imposition of an entity-level tax on the related trust fund. Any payment
schedule modification will not affect the computation of the amount required to
be distributed for the related securities.
A notice to VA of intent to begin action need not be given within any
prescribed period of time. This flexibility affords the master servicer time to
work with a deserving mortgagor to avoid liquidation. Barring exceptional
circumstances, the notice will not be given until a default has continued for
90-days. If the mortgaged property is in jeopardy, however, the notice will be
filed as soon as the risk becomes known to the master servicer. Except upon
express waiver by VA, the master servicer may not begin foreclosure until the VA
has been notified 30-days in advance of this intent to liquidate. In the case of
a mortgage loan assumption, the master servicer must make a good faith effort to
notify the original mortgagor of its intention by certified mail. Failure to
notify the original mortgagor may result in the loss of the VA guaranty with
respect to the mortgaged property. The master servicer must request a
liquidation appraisal at least 30-days prior to the projected foreclosure sale
in addition to furnishing the VA with a the VA status of account form to
estimate the projected claim amount that is necessary to prepare the bid amount.
The master servicer must deliver to the VA the lender's election to
convey within 15 days of the foreclosure sale or the master servicer loses its
right to transfer the mortgaged property. Upon receipt of advice that the VA
elects not to specify a bid amount, the master servicer may waive or satisfy a
portion of the indebtedness on behalf of the related trust fund in order to
reduce the amount owing to an amount that would allow the VA to specify a bid
amount under 38 C.F.R. section 36.4320.
FHA Loan Servicing Procedures
The FHA loans will be serviced under the related agreement and other
servicing agreements by master servicers. The master servicer will be required
to be diligent in pursuing claims for defaulted FHA loans as a lender and in
abiding by FHA collection and default timetables.
72
<PAGE> 165
Under the FHA mortgage insurance program the lender may accelerate an
insured loan following a default on the loan only after the lender or its agent
has contacted the borrower to discuss the reasons for the default and to seek
its cure. If the borrower does not cure the default or agree to a modification
agreement or repayment plan, the lender will notify the borrower in writing
that, unless within 30-days the default is cured or the borrower enters into a
modification agreement or repayment plan, the loan will be accelerated and that,
if the default persists, the lender will report the default to an appropriate
credit agency. The lender may rescind the acceleration of maturity after full
payment is due and reinstate the loan only if the borrower brings the loan
current, executes a modification agreement or agrees to an acceptable repayment
plan.
Following acceleration of maturity upon a secured FHA loan, the lender
may either (a) proceed against the property under any security instrument, or
(b) make a claim under the lender's contract of insurance. If the lender chooses
to proceed against the property under a security instrument or it accepts a
voluntary conveyance or surrender of the property, the lender may file an
insurance claim only with the prior approval of the Secretary of HUD.
When a lender files an insurance claim with the FHA, the FHA reviews
the claim, the complete loan file and documentation of the lender's efforts to
obtain recourse, certification of compliance with applicable state and local
laws in carrying out any foreclosure, and evidence that the lender has properly
filed proofs of claims, where the borrower is bankrupt or deceased. Generally,
an action to initiate foreclosure on any FHA insured mortgage loan must be filed
with the local jurisdiction within nine months after the date of default.
Concurrently with the subsequent filing of the insurance claim for reimbursement
for loss, the lender assigns to the United States of America the lender's entire
interest in the related security instrument and in any claim filed in any legal
proceedings. If, at the time the ownership in the property is conveyed to the
United States, the FHA has reason to believe that the title is not marketable,
the FHA may deny the claim and reconvey the property to the lender. If a defect
is discovered after the FHA has paid a claim, the FHA may require the lender to
repurchase the paid claim and to accept a reassignment of the loan note. If the
lender subsequently obtains a valid and enforceable judgment against the
borrower, the lender may resubmit a new insurance claim with an assignment of
the judgment. Although the FHA may contest any insurance claim and make a demand
for repurchase of the loan at any time up to two years from the date the claim
was certified for payment and may do so in the event of fraud or
misrepresentation on the part of the lender, the FHA has expressed an intention
to limit the period of time within which it will take such an action to one year
from the date the claim was certified for payment.
The Secretary of HUD may deny a claim for insurance in whole or in part
for any violations of the regulations governing the FHA program; however, the
Secretary of HUD may waive these violations if it determines that enforcement of
the regulations would impose an injustice upon a lender which has substantially
complied with the regulations in good faith.
73
<PAGE> 166
SUB-SERVICERS
A master servicer may delegate its servicing obligations in respect of
the mortgage loans to third-party servicers, each, a sub-servicer, but the
master servicer will remain obligated under the related agreement. Each
sub-servicing agreement between a master servicer and a sub-servicer must be
consistent with the terms of the related agreement and must provide that, if for
any reason the master servicer is no longer acting in its capacity, the trustee
or any successor master servicer may assume the master 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, whether or not the master servicer's compensation under the
related agreement is sufficient to pay the fees. However, a sub-servicer may be
entitled to retained interests. Each sub-servicer will be reimbursed by the
master servicer for some expenditures that it makes, generally to the same
extent the master servicer would be reimbursed under an agreement. See "Retained
Interest, Servicing Compensation and Payment of Expenses."
REALIZATION UPON DEFAULTED MORTGAGE LOANS
A mortgagor's failure to make required payments may reflect inadequate
income or the diversion of that income from payments due under the mortgage
loan, and may call into question the mortgagor's ability to make timely payment
of taxes and to pay for necessary maintenance of the related mortgaged property.
The master servicer is required to monitor any mortgage loan in default, contact
the mortgagor concerning the default, evaluate whether the causes of the default
can be cured over a reasonable period without significant impairment of the
value of the mortgaged property, initiate corrective action in cooperation with
the mortgagor if cure is likely, inspect the mortgaged property and take any
other actions as are consistent with the servicing standard. A significant
period of time may elapse before the master servicer is able to assess the
success of any corrective action or the need for additional initiatives.
The time within which the master servicer makes the initial
determination of appropriate action, evaluates the success of corrective action,
develops additional initiatives, institutes foreclosure proceedings and actually
forecloses or takes a deed to a mortgaged property in lieu of foreclosure on
behalf of the securityholders, may vary considerably depending on the particular
mortgage loan, the mortgaged property, the mortgagor, the presence of an
acceptable party to assume the mortgage loan and the laws of the jurisdiction in
which the mortgaged property is located. Under federal bankruptcy law, the
master servicer in some cases may not be permitted to accelerate a mortgage loan
or to foreclose on a mortgaged property for a considerable period of time. See "
Legal Aspects of Mortgage Loans."
Any agreement relating to a trust fund that includes mortgage loans may
grant to the master servicer and/or the holders of securities a right of first
refusal to purchase from the trust fund at a predetermined purchase price any
mortgage loan as to which a specified number of scheduled payments are
delinquent. Any right granted to the holder of an security will be described in
the related prospectus supplement. The related prospectus supplement will also
74
<PAGE> 167
describe any right granted to any person if the predetermined purchase price is
less than the purchase price described under "Representations and Warranties;
Repurchases."
If so specified in the related prospectus supplement, the master
servicer may offer to sell any defaulted mortgage loan described in the
preceding paragraph and not otherwise purchased by any person having a right of
first refusal and when the master servicer determines, consistent with the
servicing standard, that a sale would produce a greater recovery on a present
value basis than would liquidation through foreclosure or similar proceeding.
The related agreement will provide that any offer be made in a commercially
reasonable manner for a specified period and that the master servicer accept the
highest cash bid received from any person including itself, an affiliate of the
master servicer or any securityholder that constitutes a fair price for the
defaulted mortgage loan. In the absence of any bid determined in accordance with
the related agreement to be fair, the master servicer shall proceed with respect
to the defaulted mortgage loan as described in this prospectus. Any bid in an
amount at least equal to the purchase price described in this prospectus under
"Representations and Warranties; Repurchases" will in all cases be deemed fair.
The master servicer, on behalf of the trustee, may at any time
institute foreclosure proceedings, exercise any power of sale contained in any
mortgage, obtain a deed in lieu of foreclosure, or otherwise acquire title to a
mortgaged property securing a mortgage loan by operation of law or otherwise, if
the action is consistent with the servicing standard and a default on the
mortgage loan has occurred or, in the master servicer's judgment, is imminent.
If title to any mortgaged property is acquired by a trust fund as to
which a REMIC election has been made, the master servicer, on behalf of the
trust fund, generally will be required to sell the mortgaged property by the end
of the third taxable year after the taxable year of acquisition, unless (a) the
IRS grants an extension of time to sell the property or (b) the trustee receives
an opinion of independent counsel to the effect that the holding of the property
by the trust fund subsequent to three years after its acquisition will not
result in the imposition of a tax on the trust fund or cause the trust fund to
fail to qualify as a REMIC, under the Internal Revenue tax code at any time that
any security is outstanding. Subject to the foregoing, the master servicer will
be required to (a) solicit bids for any mortgaged property so acquired in a
manner as will be reasonably likely to realize a fair price for the property and
(b) accept the first and, if multiple bids are contemporaneously received, the
highest cash bid received from any person that constitutes a fair price.
The limitations imposed by the related agreement and the REMIC
provisions of the Internal Revenue tax code if a REMIC election has been made
with respect to the related trust fund on the ownership and management of any
mortgaged property acquired on behalf of the trust fund may result in the
recovery of an amount less than the amount that would otherwise be recovered.
See "Legal Aspects of Mortgage Loans -- Foreclosure."
If recovery on a defaulted mortgage loan under any related instrument
of credit support is not available, the master servicer nevertheless will be
obligated to follow or cause to be followed normal practices and procedures
necessary or advisable to realize thereupon. If the reimbursable
75
<PAGE> 168
liquidation proceeds are less than the outstanding principal balance of the
defaulted mortgage loan, plus interest accrued at the mortgage rate and the
aggregate amount of expenses incurred by the master servicer in connection with
the proceedings, the trust fund will realize a loss in the amount of this
difference. The master servicer may withdraw or cause to be withdrawn from the
security account out of liquidation proceeds recovered on a defaulted mortgage
loan, prior to the distribution of the liquidation proceeds to securityholders,
amounts representing normal servicing compensation, unreimbursed servicing
expenses incurred and any unreimbursed advances of delinquent payments made.
If any property securing a defaulted mortgage loan is damaged and
proceeds, if any, from the related hazard insurance policy are insufficient to
restore the damaged property to a condition sufficient to permit recovery under
related credit support, 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 the expenses will be recoverable by it from related insurance proceeds
or liquidation proceeds.
As servicer of the mortgage loans, a master servicer, on behalf of
itself, the trustee and the securityholders, will present claims to the obligor
under each instrument of credit support, and will take reasonable steps as are
necessary to receive payment or to permit recovery with respect to defaulted
mortgage loans.
If a master servicer or its designee recovers payments under any
instrument of credit support with respect to a defaulted mortgage loan, the
master servicer will be entitled to withdraw or cause to be withdrawn from the
security account out of these payments, prior to distribution to
securityholders, its normal servicing compensation on the mortgage loan,
unreimbursed servicing expenses incurred and any related unreimbursed advances
of delinquent payments. See "Hazard Insurance Policies" and "Description of
Credit Support."
FIDELITY BONDS AND ERRORS AND OMISSIONS INSURANCE
Each servicing agreement and pooling and servicing agreement will
require that the master servicer obtain and maintain in effect a fidelity bond
or similar form of insurance coverage which may provide blanket coverage or any
combination of various types of coverage insuring against loss occasioned by
fraud, theft or other intentional misconduct of the officers, employees and
agents of the master servicer. The related agreement may allow the master
servicer to self-insure against loss occasioned by the errors and omissions of
the officers, employees and agents of the master servicer so long as specified
criteria set forth in the agreement are met.
DUE-ON-SALE PROVISIONS
Some mortgage loans may contain clauses requiring the consent of the
mortgagee to any sale or other transfer of the related mortgaged property, or
due-on-sale clauses entitling the mortgagee to accelerate payment of the
mortgage loan upon any sale, transfer or conveyance of the related mortgaged
property. The master servicer generally will enforce due-on-sale clauses to
76
<PAGE> 169
the extent it has knowledge of the conveyance or proposed conveyance of the
underlying mortgaged property and it is entitled to do so under applicable law;
provided, however, that the master servicer will not take any action in relation
to the enforcement of any due-on-sale provision that would adversely affect or
jeopardize coverage under any applicable insurance policy. Fees 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. See "Legal Aspects of Mortgage Loans -- Due-on-Sale and
Due-on-Encumbrance."
RETAINED INTEREST; SERVICING COMPENSATION AND PAYMENT OF EXPENSES
Each prospectus supplement will specify whether there will be any
retained interest, and, if so, the initial owner of the retained interest.
Retained interest will be established on a loan-by-loan basis and will be
specified on an exhibit to the related agreement. A retained interest in an
asset represents a specified portion of the interest payable. The retained
interest will be deducted from mortgagor payments as received and will not be
part of the related trust fund.
The master servicer's and a sub-servicer's primary servicing
compensation will come from the periodic payment to it of a portion of the
interest payment on each asset. Because any retained interest and the master
servicer's primary compensation are a function of the principal balance of the
assets, these amounts may decrease with amortization. The prospectus supplement
may provide that, as additional compensation, the master servicer or the
sub-servicers will retain all or a portion of assumption fees, modification
fees, late payment charges or prepayment premiums collected from mortgagors and
any interest or other income which may be earned on funds held in the security
account or any account established by a sub-servicer.
The master servicer may, to the extent provided in the related
prospectus supplement, pay from servicing compensation expenses incurred in
connection with its servicing and managing of the assets, 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 payment of any other expenses described in the
related prospectus supplement. Specified other expenses, including specified
expenses relating to defaults and liquidations on the mortgage loans and, to the
extent so provided in the related prospectus supplement, interest at the rate
specified in this prospectus may be borne by the trust fund.
If and to the extent provided in the related prospectus supplement, the
master servicer may be required to apply servicing compensation otherwise
payable to it in respect of any due period to cover specified interest
shortfalls resulting from the voluntary prepayment of any asset in the related
trust fund during the period.
EVIDENCE AS TO COMPLIANCE
Each agreement with respect to mortgage loan collateral will provide
that on or before a specified date in each year, beginning with the first date
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
77
<PAGE> 170
with the Uniform Single Attestation Program for Mortgage Bankers, the servicing
by or on behalf of the master servicer of mortgage loans under agreements
substantially similar to each other including the related agreement was
conducted in compliance with the terms of the agreements or the program except
for any significant exceptions or errors in records that, in the opinion of the
firm, the Uniform Single Attestation Program for Mortgage Bankers, or other
program, requires it to report. In rendering its statement the firm may rely, as
to matters relating to the direct servicing of mortgage loans by sub-servicers,
upon comparable statements for examinations conducted substantially in
compliance with the Uniform Single Attestation Program for Mortgage Bankers
rendered within one year of the statement of firms of independent public
accountants with respect to the related sub-servicer.
Each agreement also will provide for delivery to the trustee, on or
before a specified date in each year, of an annual statement signed by two
officers of the master servicer to the effect that the master servicer has
fulfilled its obligations under the agreement throughout the preceding calendar
year or other specified twelve-month period.
Copies of the annual accountants' statement and the statements of
officers will be obtainable 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, if any, or a servicer for the mortgage loans under
each agreement will be named in the related prospectus supplement. The entity
serving as master servicer or as sub-servicer may be an affiliate of the
depositor and may have other normal business relationships with the depositor or
the depositor's affiliates. Reference in this prospectus to the master servicer
shall be deemed to include a servicer, if applicable.
The related agreement will provide that the master servicer may resign
from its obligations and duties only upon a determination that its duties under
the agreement are no longer permissible under applicable law or are in material
conflict by reason of applicable law with other activities carried on thereby at
the time the related series was initially issued, and upon the appointment of an
acceptable successor master servicer. No resignation will become effective until
the trustee or a successor servicer has assumed the master servicer's
obligations under the agreement.
Each servicing agreement and pooling and servicing agreement will
further provide that neither the master servicer, the depositor nor any
director, officer, employee, or agent of a master servicer or the depositor will
be liable 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 agreement,
or for errors in judgment provided, however, that neither a master servicer, the
depositor nor any person will be protected against any breach of a
representation, warranty or covenant made in its agreement, or against any
liability specifically imposed thereby, or against any liability which would
otherwise be imposed by reason of willful misfeasance, bad faith or gross
negligence in the performance of obligations or duties or by reason of reckless
disregard of obligations and duties. Each agreement will further provide that
any master servicer, the depositor and any
78
<PAGE> 171
director, officer, employee or agent of a master servicer or the depositor may
rely in good faith on any document of any kind prima facia properly executed and
submitted by any person respecting any matters arising under that agreement. In
addition, each agreement will provide that neither the master servicer nor the
depositor will be under any obligation to appear in, prosecute or defend any
legal action not incidental to its respective responsibilities under the
agreement and that in its opinion may involve an expense or liability. Any
master servicer or the depositor may, however, in its discretion undertake any
action which it may deem necessary or desirable with respect to its agreement
and the rights and duties of the parties and the interests of the
securityholders . In that event, the legal expenses and costs of action and any
liability resulting therefrom 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 from the security account.
Any person into which the master servicer or the depositor may be
merged or consolidated, or any person resulting from any merger or consolidation
to which the master servicer or the depositor is a party, or any person
succeeding to the business of the master servicer or the depositor, will be the
successor of the master servicer or the depositor, as the case may be, under the
related agreement.
SPECIAL SERVICERS
If and to the extent specified in the related prospectus supplement, a
special servicer may be a party to the related agreement or may be appointed by
the servicer or another specified party to perform specified duties in respect
of servicing the related mortgage loans that would otherwise be performed by the
master servicer. For example, the special servicer would perform the workout or
foreclosure of defaulted mortgage loans. The rights and obligations of any
special servicer will be specified in the related prospectus supplement, and the
master servicer will be liable for the performance of a special servicer only
if, and to the extent, set forth in the related prospectus supplement.
EVENTS OF DEFAULT UNDER POOLING AND SERVICING AGREEMENTS
Events of default under any pooling and servicing agreement generally
will include:
o any failure by the master servicer to remit funds in the
security account or to make required advances, and the
continuance of a failure unremedied for a period of five days
after the date upon which a payment or remittance was due;
o any failure on the part of the master servicer duly to observe
or perform in any material respect specified of the covenants
or agreements on the part of the master servicer in the
pooling and servicing agreement, which failure continues
unremedied for a period of 60-days after the date on which
written notice of a failure, requiring the same to be
remedied, shall have been given to the master servicer by the
trustee, or to the master servicer and the trustee by the
holders of certificates of a series entitled to at least 25
percent of the related voting rights;
79
<PAGE> 172
o the issuance of a decree or order of a court or agency or
supervisory authority having jurisdiction in the premises in
an involuntary case under any present or future federal or
state bankruptcy, insolvency or similar law or appointing a
conservator or receiver or liquidator in any insolvency,
readjustment of debt, marshalling of assets and liabilities or
similar proceedings, or for the winding-up or liquidation of
its affairs, against the master servicer, and the remaining of
a decree or order in force undischarged or unstayed for a
period of 60 consecutive days;
o the master servicer's consent to the appointment of a
conservator or receiver or liquidator in any insolvency,
readjustment of debt, marshalling of assets and liabilities,
or similar proceedings of, or relating to, the master servicer
or of, or relating to, all or substantially all of the
property of the master servicer; and
o the master servicer's (1) admission in writing of its
inability to pay its debts generally as they become due, (2)
filing of a petition to take advantage of, or commence a
voluntary case under, any applicable insolvency or
reorganization statute, (3) making of an assignment for the
benefit of its creditors, or (4) voluntarily suspending
payment of its obligations.
The manner of determining the voting rights of a security or class or
classes of securities will be specified in the related prospectus supplement.
CERTIFICATEHOLDER RIGHTS UPON EVENT OF DEFAULT
So long as an event of default under a pooling and servicing agreement
remains unremedied, the depositor or the trustee may, and at the direction of
holders of securities evidencing not less than 51 percent of the voting rights,
the trustee shall, terminate all of the rights and obligations of the master
servicer under the agreement and in and to the assets other than as a
securityholder or as the owner of any retained interest, whereupon the trustee
will succeed to all of the responsibilities, duties and liabilities of the
master servicer under the agreement, except that if the trustee is prohibited by
law from obligating itself to make advances regarding delinquent mortgage loans,
or if the related prospectus supplement so specifies, then the trustee will not
be obligated to make advances, and will be entitled to similar compensation
arrangements. In the event that the trustee is unwilling or unable so to act, it
may or, at the written request of the holders of securities entitled to at least
51 percent of the voting rights, it shall appoint, or petition a court of
competent jurisdiction for the appointment of, a loan servicing institution
acceptable to each rating agency with a net worth at the time of an appointment
of at least $15,000,000 to act as successor to the master servicer under the
agreement. Pending an appointment, the trustee is obligated to act in that
capacity. The trustee and any successor may agree upon the servicing
compensation to be paid, which in no event may be greater than the compensation
payable to the master servicer under the agreement.
The holders of at least 66 2/3 percent of the voting rights allocated
to the respective classes of certificates affected by any event of default will
be entitled to waive an event of default; provided, however, that an event of
default involving a failure to distribute a required payment to securityholders
described in clause (a) under "Events of Default" may be waived only
80
<PAGE> 173
by all of the securityholders. Upon any waiver of an event of default, that
event of default shall cease to exist and shall be deemed to have been remedied
for every purpose under the agreement.
No securityholder will have the right under any pooling and servicing
agreement to institute any proceeding to his rights as a securityholder unless
the holder previously has given to the trustee written notice of default and
unless the holders of securities evidencing not less than 25 percent of the
voting rights have made written requests upon the trustee to institute a
proceeding in its own name as trustee and have offered to the trustee reasonable
indemnity, and the trustee for sixty days has neglected or refused to institute
any proceeding. The trustee, however, is under no obligation to exercise any of
the trusts powers vested in it by any pooling and servicing agreement or to make
any investigation of matters arising under a pooling and servicing agreement.
The trustee is also under no obligation to institute, conduct, or defend any
litigation arising under a pooling and servicing agreement or in relation to the
authority granted to it under a pooling and servicing agreement at the request,
order or direction of any of the holders of securities covered by any pooling
and servicing agreement, unless the securityholders have offered to the trustee
reasonable security or indemnity against the costs, expenses and liabilities
that may be incurred in connection with any litigation arising from the
trustee's role as trustee under any pooling and servicing agreement.
AMENDMENT
Each trust agreement, each pooling and servicing agreement and the
indenture may be amended by the parties, without the consent of any of the
holders of securities covered by the agreement:
o to cure any ambiguity;
o to correct, modify or supplement any provision in this
prospectus that may be inconsistent with any other provision
in this prospectus;
o to make any other provisions with respect to matters or
questions arising under the agreement that are not materially
inconsistent with the provisions; or
o to comply with any requirements imposed by the Internal
Revenue tax code; provided that the amendment other than an
amendment for the purpose specified in clause above will not
as evidenced either by an opinion of counsel or by the
confirmation of each rating agency that the credit ratings
assigned to the securities will not be downgraded, withdrawn
or, adversely affect in any material respect the interests of
any holder of securities 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 securities
affected thereby evidencing not less than 66 2/3 percent of the voting rights,
for any purpose; provided, however, that no amendment may (a) reduce in any
manner the amount of or delay the timing of, payments received or advanced on
assets that are required to be distributed on any security without the consent
of the holder of the security, (b) adversely affect in any material respect the
interests of the holders of any class of securities in any additional manner not
described above, without the consent of the holders of all
81
<PAGE> 174
securities of a class or (c) modify the provisions of the agreement described in
this paragraph without the consent of the holders of all securities covered by
the agreement then outstanding. However, with respect to any series of
securities 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 result in the
imposition of a tax on the related trust fund or cause the related trust fund to
fail to qualify as a REMIC at any time that the related securities are
outstanding.
THE TRUSTEE
The trustee under each agreement will be named in the related
prospectus supplement. The commercial bank, national banking association,
banking corporation or trust company serving as trustee may have a banking
relationship with the depositor and its affiliates and with any master servicer
and its affiliates.
The trustee, and any successor trustee, with respect to any series
containing bonds offered hereunder, each will have a combined capital and
surplus of at least $50,000,000, or will be a member of a bank holding system,
the aggregate combined capital and surplus of which is at least $50,000,000,
provided that the trustee's and any successor trustee's separate capital and
surplus shall at all times be at least the amount specified in section 310(a)(2)
of the Trust Indenture Act of 1939 and that the trustee and the successor
trustee will be subject to supervision or examination by federal or state
authorities and will have an office in the United States.
DUTIES OF THE TRUSTEE
The trustee will make no representations as to the validity or
sufficiency of any agreement, the securities or any asset or related document
and is not accountable for the use or application by or on behalf of any master
servicer of any funds paid to the master servicer or its designee in respect of
the securities or the trust assets, or deposited into or withdrawn from the
security 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 agreement.
MATTERS REGARDING THE TRUSTEE
The trustee and any director, officer, employee or agent of the trustee
shall be entitled to indemnification out of the security account for any loss,
liability or expense including costs and expenses of litigation, and of
investigation, counsel fees, damages, judgments and amounts paid in settlement
incurred in connection with the trustee's:
o enforcing its rights and remedies and protecting the
interests, and enforcing the rights and remedies, of the
securityholders during the continuance of an event of default;
82
<PAGE> 175
o defending or prosecuting any legal action in respect of the
related agreement or securities;
o being the mortgagee of record with respect to the mortgage
loans in a trust fund and the owner of record with respect to
any mortgaged property acquired for the benefit of
securityholders; and
o acting or refraining from acting in good faith at the
direction of the holders of the related series of securities
entitled to not less than 25 percent or other percentage as is
specified in the related agreement with respect to any
particular matter of the voting rights for a series.
(a) provided, however, that the indemnification will not
extend to any loss, liability or expense that constitutes a
specific liability of the trustee under the related agreement,
or to any loss, liability or expense incurred by reason of
willful misfeasance, bad faith or negligence on the part of
the trustee in the performance of its obligations and duties,
or by reason of its reckless disregard of its obligations or
duties, or as may arise from a breach of any representation,
warranty or covenant of the trustee made in this prospectus.
RESIGNATION AND REMOVAL OF THE TRUSTEE
The trustee may at any time resign from its obligations and duties
under any trust agreement or pooling and servicing agreement by giving written
notice to the depositor, the master servicer, if any, and all securityholders.
Upon receiving a notice of resignation, the depositor is required promptly to
appoint a successor trustee acceptable to the master servicer, if any. If no
successor trustee shall have been so appointed and have accepted appointment
within 30-days after the giving of a notice of resignation, the resigning
trustee may petition any court of competent jurisdiction for the appointment of
a successor trustee.
If at any time the trustee shall cease to be eligible to continue as
such under any trust agreement or pooling and servicing agreement, or if at any
time the trustee shall become incapable of acting, or shall be adjudged bankrupt
or insolvent, or a receiver of the trustee or of its property shall be
appointed, or any public officer shall take charge or control of the trustee or
of its property or affairs for the purpose of rehabilitation, conservation or
liquidation, then the depositor may remove the trustee and appoint a successor
trustee acceptable to the master servicer, if any, holders of the securities of
any series entitled to at least 51 percent of the voting rights for a series may
at any time remove the trustee without cause and appoint a successor trustee.
Any resignation or removal of the trustee and appointment of a
successor trustee shall not become effective until acceptance of appointment by
the successor trustee.
83
<PAGE> 176
TERMS OF THE INDENTURE
The following discussion describes the material provisions of the
indenture. When particular provisions or terms used in the indenture are
referred to, the actual provisions including definitions of terms are
incorporated by reference as part of the summaries. We recommend that you read
the related indenture in its entirety for a complete and detailed discussion of
the terms of your securities.
General
The indenture does not limit the amount of bonds that can be issued and
provides that bonds of any series may be issued up to the aggregate principal
amount that may be authorized from time to time by the depositor.
Modification of Indenture
With the consent of the holders of not less than a majority in
principal balance of the outstanding bonds of each series to be affected or, if
fewer than all classes of a series would be affected, of each class to be
affected, the trustee and the depositor may execute a supplemental indenture to
add provisions to, or change in any manner or eliminate provisions of, the
indenture relating to a series, or to a class or classes, or modify in any
manner the rights of the holders of the bonds of a series, or of a class or
classes. If any related supplemental indenture would adversely affect the
holders of any senior bonds or of any subordinated bonds, then approval of
holders of a majority in principal balance of the outstanding senior bonds or of
the outstanding subordinated bonds, as the case may be, would also be required.
Without the consent of the bondholders of each outstanding bond
affected, however, no supplemental indenture may:
o change the stated maturity date of the principal of, or timing
of any installment of principal or interest on, any bond,
reduce the principal amount or the interest or the redemption
price or the time for redemption with respect, change the
provisions relating to the application of proceeds of the
trust estate to the payment of principal on the bonds, change
any place where, or the currency in which, any bond or
interest is payable, or impair the right to institute suit for
payment on or after the maturity or, in the case of
redemption, on or after the redemption date;
o reduce the percentage in principal amount of bonds of the
affected series whose holders must consent to any supplemental
indenture or to any waiver of compliance with some of the
provisions of the indenture or some of the defaults or their
consequences;
o impair or adversely affect the collateral securing a series;
o permit the creation of any lien ranking prior to or on a par
with the lien of the indenture with respect to any part of the
trust estate or terminate the lien of the
84
<PAGE> 177
indenture on any part of the trust estate or on any property
at any time subject to the indenture or deprive the holder of
the security afforded by the lien of the indenture;
o change the definition of default under the indenture, or
reduce the percentage of bondholders of bonds of any series
whose consent is required to direct the trustee to liquidate
the collateral for the series;
o change any condition precedent for the redemption of any
series of bonds; and
o modify any of the provisions of the indenture with respect to
supplemental indentures except to increase the percentage of
outstanding bonds whose consent is required for any action or
to provide that some of the other provisions of the indenture
cannot be modified or waived without the consent of the
bondholders of each outstanding bond of an affected class.
The issuance of additional bonds in accordance with the provisions and
limitations contained in a series supplement relating to outstanding bonds will
be deemed not to have changed the timing of any installment of principal of or
interest on any outstanding class of bonds issued under the series supplement
for purposes of requiring bondholder consent under the first bullet point above.
The depositor and the trustee, upon advice of counsel, also may enter
into supplemental indentures, without obtaining the consent of bondholders, for
the purpose of, among other things:
o setting forth the terms of and security for any previously
unissued series;
o adding to the covenants of the depositor or the trustee for
the benefit of the bondholders; and
o curing ambiguities, or correcting or supplementing any
defective, ineffective or inconsistent provision or amending
any other provision with respect to matters or questions
relating to the indenture, provided the interests of the
bondholders would not be materially adversely affected.
For purposes of the third bullet point above, among other things, a
supplemental indenture will be conclusively deemed not to adversely affect a
particular series if:
o the trustee receives a letter or other writing from each
rating agency rating the class or series to the effect that
execution of the supplemental indenture will not result in any
change in the current rating assigned by that rating agency to
the class or series; and
o the supplemental indenture effects no change in principal
priority schedules, interest rates, redemption prices,
substitution of collateral, payment dates, record dates,
accounting dates, terms of optional or mandatory redemption,
application of surplus to the payment of a series or other
payment terms established by the series supplement for the
series.
85
<PAGE> 178
Events of Default
An event of default with respect to a series or class of bonds will be
described in the related prospectus supplement. Generally, an event of default
with respect to the senior bonds of a series and, so long as 91 days have passed
during which no senior bond has been outstanding, a class of the subordinated
bonds of a series is (a) failure to pay required interest and principal when any
related available credit enhancement amount has been reduced to zero, (b)
failure to pay principal in full prior to the stated maturity date for the bonds
and (c) default in the performance of some of the covenants in the indenture and
the continuation of the default for 60-days after notice to the depositor by the
trustee or to the trustee and the depositor by the bondholders of at least 25
percent in principal amount of the bonds. Some events of bankruptcy, insolvency,
reorganization or receivership of the depositor constitute an event of default
for all bonds of a series.
Generally, (a) a breach of a representation, warranty or covenant in
the servicing agreement will not constitute an event of default under the
indenture and (b) an event of default with respect to one series will not
constitute an event of default with respect to any other series.
Within 90-days after the occurrence of any default that is, or with
notice or the lapse of time or both would become, an event of default with
respect to the bonds, the trustee is required under the indenture to transmit
notice of a default, if known to the trustee, to all bondholders, unless a
default shall have been cured or waived, or the trustee determines in good faith
that the withholding of a notice is in the interest of the bondholders.
If an event of default with respect to the senior bonds of a series
occurs and is continuing, the bondholders of not less than 25 percent in
principal balance of the outstanding senior bonds of a series may declare the
principal of all of the bonds of a series to be immediately due and payable, by
a notice in writing to the depositor and to the trustee. If an event of default
with respect to the subordinated bonds of a series occurs and is continuing, the
bondholders of not less than 25 percent in principal balance of the outstanding
subordinated bonds and of the outstanding senior bonds, if any of the series may
declare the principal of all of the bonds of the series to be immediately due
and payable, by a notice in writing to the depositor and to the trustee. Any
declaration may be rescinded by the bondholders of not less than a majority in
principal balance of the outstanding bonds that were entitled to vote on the
declaration. Following any declaration that is not rescinded, the trustee shall
sell the collateral as described in the indenture. If an event of default has
occurred and is continuing and no bonds of the series have been declared due and
payable, or any declaration and its consequences has been rescinded, the trustee
may, and on the direction of a majority in principal balance of the outstanding
senior bonds or, if no senior bonds are outstanding, subordinated bonds shall
give notice to the depositor of its election to preserve the trust estate,
collect the proceeds and make and apply all payments in respect of the bonds in
accordance with the indenture.
Proceeds from the liquidation of the collateral for a series of bonds
will be applied, after all required payments and reimbursements to the trustee,
servicer, and any special servicer, in the order set forth in the series
supplement and related prospectus supplement for a series of bonds.
86
<PAGE> 179
Declaration of acceleration and liquidation of the collateral under the
foregoing procedures shall be the sole remedy for the bondholders upon an event
of default. In the event that a series of bonds is declared due and payable, as
described above, and the collateral securing the bonds is sold, the net proceeds
from a sale may, in limited circumstances, be insufficient to pay the full
unpaid amount of principal of and interest due on each outstanding class of
bonds of a series. Furthermore, in the event that the principal of the bonds of
a series is declared due and payable, as described above, and the collateral
securing a series is sold, the bondholders of any discount bonds may be entitled
to receive no more than an amount equal to the unpaid principal amount less the
unamortized original issue discount. No assurance can be given about how the
amount of the original issue discount that has not been amortized will be
determined.
Subject to the provisions of the indenture relating to the duties of
the trustee in case an event of default will occur and be continuing, the
trustee will be under no obligation to exercise any of the rights or powers
under the indenture at the request or direction of any bondholders of the bonds
of a series, unless the bondholders will have offered to the trustee reasonable
security or indemnity. Subject to the provisions for indemnification and some of
the limitations contained in the indenture, holders of a majority in principal
amount of the outstanding senior bonds or the most senior of any subordinated
bonds if no senior bonds are outstanding of a series will have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the trustee or exercising any trust or power conferred on the
trustee with respect to the bonds of a series; and the bondholders of the
majority in principal amount of the outstanding senior bonds or the subordinated
bonds if no senior bonds are outstanding of a series may, in some of the cases,
waive any default with respect to a series.
No bondholder of any of the bonds of a series will have the right to
institute any proceeding with respect to the indenture, unless:
o the bondholder previously has given to the trustee written
notice of an event of default;
o the bondholders of not less than 25 percent in principal
amount of the outstanding senior bonds or the subordinate
bonds if no senior bonds are outstanding of the same series
have made written request upon the trustee to institute the
proceedings in its own name as trustee and have offered the
trustee reasonable indemnity;
o the trustee has for 60-days failed to institute any
proceeding; 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 in principal amount of the outstanding senior
bonds, or the subordinated bonds if no senior bonds are
outstanding, of a series.
Regardless of the exceptions described above, section 3.07(g) of the
indenture provides that any bondholder has the absolute and unconditional right
to receive payment of principal and interest that is due and payable, and may
institute a lawsuit directly to enforce this right.
87
<PAGE> 180
At the time as an event of default for a series is declared and so long
as senior bonds of a series remain outstanding, the trustee will cease to act on
behalf of the holders of subordinated bonds and will act only on behalf of the
holders of the senior classes of bonds. The depositor is required under these
circumstances to appoint a separate trustee for the holders of the subordinated
bonds. The trustee may seek to act in a manner adverse to the holders of the
senior bonds, and the action may result in a delay in disposition of the trust
estate or the exercise of other remedies and, consequently, a delay in payment
to the holders of the senior bonds. Should the depositor fail to appoint a
separate trustee within 60-days after the event of default, the trustee will
petition a court of competent jurisdiction to appoint a separate trustee.
Authentication and Delivery of Bonds
The depositor may from time to time deliver bonds executed by it to the
trustee and request that the trustee authenticate the bonds. Upon the receipt of
the bonds and the request, and subject to the depositor's compliance with
specified conditions specified in the indenture, the trustee will authenticate
and deliver the bonds as the depositor may direct.
List of Bondholders
Three or more bondholders of the bonds of a series, each of whom has
owned a bond of a series for at least six months, may, by written request to the
trustee, obtain access to the list of all bondholders of bonds of the same
series or of all bonds, as specified in the request, maintained by the trustee
for the purpose of communicating with other bondholders with respect to their
rights under the indenture. The trustee may elect not to afford the requesting
bondholders access to the list of bondholders if it agrees to mail the desired
communication or proxy, on behalf of the requesting bondholders, to all of the
bondholders.
Annual Compliance Statement
The depositor will be required to file annually with the trustee a
written statement as to fulfillment of its obligations under the indenture.
Reports to Bondholders
On or before each payment date for a series, the trustee will transmit
by mail to each bondholder of a series a report with respect to the principal
balance of the bonds of a series held by a bondholder as of the immediately
preceding payment date and the amount of principal, interest and premium, if
any, paid with respect to the bonds of a series held by a bondholder since the
immediately preceding payment date. The report also will include information
regarding the levels of delinquencies and losses on the collateral, losses with
respect to each related class of bonds, and the amount of servicing and master
servicing fees paid with respect to the collateral in the related collateral
pool for the applicable payment date.
88
<PAGE> 181
Trustee's Annual Report
The trustee under present law is required to mail each year to all
registered bondholders of bonds of a series a brief report with respect to any
of the following events that may have occurred within the previous year, but if
no event has occurred, no report is required: any change in its eligibility and
qualifications to continue as the trustee under the indenture, any amounts
advanced by it under the indenture, the amount, interest rate and maturity date
of specified indebtedness owing by the depositor to it in the trustee's
individual capacity, any change in the property and funds relating to a series
physically held by the trustee as such, any additional issue of bonds of a
series not previously reported, any change in the release or release and
substitution of any property relating to a series subject to the lien of the
indenture, and any action taken by it that materially affects the bonds or the
trust estate for a series and that has not been previously reported. In any
event, the trustee will make the information available to all bondholders on an
annual basis.
Trustee
The trustee for each series of bonds will be specified in the
respective prospectus supplement. The commercial bank or trust company serving
as trustee may have normal banking relationships with the depositor or any of
its affiliates.
The trustee may resign at any time, in which event the depositor will
be obligated to appoint a successor trustee. The depositor may remove the
trustee and appoint a successor trustee if the trustee ceases to be eligible to
act as trustee under the indenture or if the trustee becomes insolvent or
otherwise incapable of acting with respect to any series of bonds. The depositor
may also remove the trustee and appoint a successor trustee for any series of
bonds at any time provided that the depositor receives confirmation that the
appointment of the successor trustee will not result in the lowering of the
rating of that series of bonds. The trustee with respect to a series of bonds
may also be removed at any time by the holders of a majority in principal amount
of the bonds of the series then outstanding.
Satisfaction and Discharge of the Indenture
The indenture will be discharged as to a series upon the cancellation
of all of the bonds of the series or, with specified limitations, upon deposit
with the trustee of funds sufficient for the payment or redemption .
Description Of Credit Support
GENERAL
For any series of securities, credit support may be provided with
respect to one or more classes or the related assets. Credit support may be in
the form of the subordination of one or more classes of securities, letters of
credit, insurance policies, the establishment of one or more reserve funds or
other methods described in the related prospectus supplement, or any combination
of the foregoing. If so provided in the related prospectus supplement, any form
of
89
<PAGE> 182
credit support may be structured so as to be drawn upon by more than one series,
to the extent described in this prospectus.
Credit support will not provide protection against all risks of loss
and will not guarantee repayment of the entire security balance of the
securities together with interest. If losses or shortfalls occur that exceed the
amount of credit support or that are not covered by credit support,
securityholders will bear risk of loss. Moreover, if a form of credit support
covers more than one series of securities each, a covered trust, holders of
securities evidencing interests in any of the covered trusts will be subject to
the risk that the credit support will be exhausted by the claims of other
covered trusts prior to the covered trust receiving any coverage.
The prospectus supplement will include a description of the nature and
amount of coverage under any credit support, any conditions to payment not
otherwise described in this prospectus, the conditions, if any, under which the
amount of coverage under a credit support may be reduced and under which a
credit support may be terminated or replaced and the material provisions
relating to credit support. Additionally, the prospectus supplement will set
forth specified information with respect to the obligor under any instrument of
credit support, 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.
See "Risk Factors -- Availability of Credit Support Does Not Eliminate
Risk of Loss on Securities."
MAINTENANCE OF CREDIT SUPPORT
If credit support has been obtained for a series of securities, the
master servicer, or other party specified in the related prospectus supplement,
will be obligated to exercise its best reasonable efforts to keep or cause to be
kept credit support in full force and effect throughout the term of the
applicable agreement, unless coverage has been exhausted through payment of
claims or otherwise, or substitution therefor is made as described below under
"-- Reduction or Substitution of Credit Enhancement." The master servicer or
other party will be required to provide information required for the trustee to
draw under any applicable credit support.
The master servicer, or other party specified in the related prospectus
supplement, will agree to pay the premiums for any instrument of credit support,
if applicable, on a timely basis, in accordance with the terms of the related
agreement. In the event the related insurer ceases to be qualified under
applicable law to transact insurance business, a qualified insurer or coverage
is terminated for any reason other than exhaustion of coverage, the master
servicer or other party will use its best reasonable efforts to obtain from
another qualified insurer a comparable
90
<PAGE> 183
replacement insurance policy or bond with a total coverage equal to the then
outstanding coverage of a policy or bond. If the cost of the replacement policy
is greater than the cost of a policy or bond, the coverage of the replacement
policy or bond will, unless otherwise agreed to by the master servicer, be
reduced to a level such that its premium rate does not exceed the premium rate
on the original insurance policy.
If any property securing a defaulted mortgage loan is damaged and
proceeds, if any, from the related hazard insurance policy or any applicable
special hazard insurance policy are insufficient to restore the damaged property
to a condition sufficient to permit recovery under any instrument of credit
support, the master servicer is not required to expend its own funds to restore
the damaged property unless it determines (a) that a restoration will increase
the proceeds to one or more classes of securityholders on liquidation of the
mortgage loan after reimbursement of the master servicer for its expenses and
(b) that an expenses will be recoverable by it through liquidation proceeds or
insurance proceeds. If recovery under any instrument of credit support or any
related primary insurance policy is not available because the master servicer
has been unable to make the above determinations, has made determinations
incorrectly or recovery is not available for any other reason, the master
servicer is nevertheless obligated to follow normal practices and procedures,
subject to the preceding sentence, as it deems necessary or advisable to realize
upon the defaulted mortgage loan and in the event a determination has been
incorrectly made, is entitled to reimbursement of its expenses in connection
with a restoration.
REDUCTION OR SUBSTITUTION OF CREDIT SUPPORT
The amount of credit support provided with respect to any series of
securities may be reduced under specified circumstances. In most cases, the
amount available as credit support will be subject to periodic reduction on a
non-discretionary basis in accordance with a schedule or formula set forth in
the related agreement. Additionally, in the event that the credit rating of any
obligor under any applicable credit enhancement is downgraded, the credit rating
of each class of the related securities may be downgraded to a corresponding
level, and the master servicer or a other party specified in the prospectus
supplement will not be obligated to obtain replacement credit support in order
to restore the rating of the securities. The master servicer or a other party
will also be permitted to replace a credit support with other credit enhancement
instruments issued by obligors whose credit ratings are equivalent to a
downgraded level and in lower amounts which would satisfy a downgraded level,
provided that the then-current rating of each class of the related series of
securities is maintained.
SUBORDINATE SECURITIES
If so specified in the related prospectus supplement, one or more
classes of securities of a series may be subordinate securities. To the extent
specified in the related prospectus supplement, the rights of the holders of
subordinate securities to receive distributions of principal and interest from
the security account on any distribution date will be subordinated to the rights
of the holders of senior securities. If so provided in the related prospectus
supplement, subordination may apply only in the event of, or may be limited to,
certain types of losses or shortfalls. The related prospectus supplement will
set forth information concerning the amount of
91
<PAGE> 184
subordination of subordinate securities, the circumstances in which
subordination will be applicable and the manner, if any, in which the amount of
subordination will be affected.
CROSS-SUPPORT PROVISIONS
If the assets are divided into separate groups, each supporting a
separate class or classes of securities, credit support may be provided by
cross-support provisions requiring that distributions be made on senior
securities evidencing interests in one group of assets prior to distributions on
subordinate securities evidencing interests in a different group of assets
within the trust fund. The prospectus supplement for a series that includes a
cross-support provision will describe the manner and conditions for applying
these provisions.
INSURANCE OR GUARANTEES WITH RESPECT TO THE ASSETS
If so provided in the prospectus supplement, the assets in the related
trust fund will be covered for various default risks by insurance policies or
guarantees. A copy of any material instrument will be filed with the Commission
as an exhibit to a Current Report on Form 8-K to be filed within 15 days of
issuance of the securities.
LETTER OF CREDIT
If so provided in the prospectus supplement, deficiencies in amounts
otherwise payable on securities will be covered by one or more letters of
credit, issued by a bank or financial institution specified in the related
prospectus supplement, the L/C bank. Under a letter of credit, the L/C bank will
be obligated to honor draws in an aggregate fixed dollar amount, net of
unreimbursed payments , generally equal to a percentage specified in the
prospectus supplement of the aggregate principal balance of the assets on the
related cut-off date or of the initial aggregate security balance of one or more
classes of securities. If so specified in the prospectus supplement, the letter
of credit may permit draws in the event of only certain types of losses and
shortfalls. The amount available under the letter of credit will, in all cases,
be reduced to the extent of the unreimbursed payments and may otherwise be
reduced as described in the related prospectus supplement. A copy of any letter
of credit will be filed with the Commission as an exhibit to a Current Report on
Form 8-K to be filed within 15 days of issuance of the securities.
INSURANCE POLICIES AND SURETY BONDS
If so provided in the prospectus supplement, deficiencies in amounts
otherwise payable on the securities or identified classes will be covered by
pool insurance policies, other insurance policies and/or surety bonds provided
by one or more insurance companies or sureties. The instruments may cover, with
respect to one or more classes of securities, timely distributions of interest
and/or full distributions of principal on the basis of a schedule of principal
distributions set forth in or determined in the manner specified in the related
prospectus supplement. A copy of any instrument for a series will be filed with
the Commission as an exhibit to a Current Report on Form 8-K to be filed within
15 days of issuance of the securities.
92
<PAGE> 185
SPECIAL HAZARD INSURANCE POLICIES
If so specified in the related prospectus supplement, a special hazard
insurance policy may also be obtained for the related trust fund in the amount
set forth in the related prospectus supplement. The special hazard insurance
policy will, subject to the limitations described in the related prospectus
supplement, protect against identified losses by reason of damage to mortgaged
properties caused by identified hazards not insured against under the standard
form of hazard insurance policy for the respective states in which the mortgaged
properties are located. The amount and principal terms of any coverage will be
set forth in the prospectus supplement.
MORTGAGOR BANKRUPTCY BOND
If so specified in the related prospectus supplement, losses resulting
from a bankruptcy proceeding relating to a mortgagor affecting the mortgage
loans in a trust fund with respect to a series of securities may be covered
under a mortgagor bankruptcy bond or any other instrument. Any mortgagor
bankruptcy bond or other instrument will provide for coverage in an amount
meeting the criteria of the rating agency or rating agencies rating the
securities of the related series, which amount will be set forth in the related
prospectus supplement. The amount and principal terms of any coverage will be
set forth in the related prospectus supplement.
RESERVE FUND
If so provided in the prospectus supplement, deficiencies in amounts
otherwise payable on the securities or identified classes will be covered by one
or more reserve funds in which cash, a letter of credit, permitted investments,
a demand note or a combination will be deposited, in the amounts so specified in
the related prospectus supplement. The reserve funds may also be funded over
time by depositing in this prospectus a specified amount of the distributions
received on the related assets, as specified in the related prospectus
supplement.
Amounts on deposit in any reserve fund, together with the reinvestment
income , if any, will be applied for the purposes, in the manner, and to the
extent specified in the related prospectus supplement. A reserve fund may be
provided to increase the likelihood of timely distributions of principal of and
interest on the securities. If so specified in the related prospectus
supplement, reserve funds may be established to provide limited protection
against only identified types of losses and shortfalls. Following each
distribution date amounts in a reserve fund in excess of any amount required to
be maintained in this prospectus may be released from the reserve fund under the
conditions and to the extent specified in the related prospectus supplement, and
may not be available for further application to the securities.
Moneys deposited in any reserve funds will be invested in permitted
investments. Reinvestment income or other gain from investments may be credited
to the related reserve fund for a series, and any loss resulting from
investments may be charged to a reserve fund. The income may be payable to any
related master servicer or another service provider as additional compensation.
93
<PAGE> 186
Additional information concerning any reserve fund will be set forth in
the related prospectus supplement, including the initial balance, the balance
required to be maintained in this prospectus, the manner in which a required
balance will decrease over time, the manner of funding, the purposes for which
funds may be applied to make distributions to securityholders and use of
investment earnings, if any.
OVERCOLLATERALIZATION
If specified in the related prospectus supplement, subordination
provisions of a trust fund may be used to accelerate to a limited extent the
amortization of one or more classes of securities relative to the amortization
of the related assets. The accelerated amortization is achieved by the
application of excess interest to the payment of principal of one or more
classes of securities. This acceleration feature creates, with respect to the
assets or groups , overcollateralization which is the excess of the aggregate
principal balance of the related assets, or a group , over the security
principal balance of the related class or classes of securities. The
acceleration may continue for the life of the related security, or may be
limited. In the case of limited acceleration, once the required level of
overcollateralization is reached, and subject to the provisions specified in the
related prospectus supplement, the limited acceleration feature may cease,
unless necessary to maintain the required level of overcollateralization.
CREDIT SUPPORT WITH RESPECT TO MBS
If so provided in the prospectus supplement, the MBS in the related
trust fund and/or the mortgage loans underlying the MBS may be covered by one or
more of the types of credit support. The related prospectus supplement will
specify each form of credit support, to the extent that information is material
and available.
INSURANCE POLICIES ON THE MORTGAGE LOANS
Each mortgage loan will be required to be covered by a hazard insurance
policy as described in the following section and, in some cases, a primary
insurance policy. In addition, FHA loans and VA loans will be covered by the
government mortgage insurance programs described below. The descriptions of any
insurance policies set forth in this prospectus or any related prospectus
supplement and the coverage are only summaries of the material provisions and do
not purport to be complete and are you are urged to read the to the forms of
policies and the disclosure in the prospectus supplement for a complete
discussion of the policies.
PRIMARY MORTGAGE GUARANTY INSURANCE POLICIES
o Each mortgage loan having a loan-to-value ratio at origination
of over 80 percent will be covered by a primary mortgage
guaranty insurance policy insuring against default on the
mortgage loan as to at least the principal amount exceeding 75
percent of the appraised value of the mortgaged property at
origination of the mortgage loan, unless and until the
principal balance of the mortgage loan is reduced to a level
that would produce a loan-to-value ratio equal to or less than
80 percent; and
94
<PAGE> 187
o the asset seller will represent and warrant that, to the best
of an entity's knowledge, the mortgage loans are so covered.
The master servicer will have the ability to cancel any
primary insurance policy if the loan-to-value ratio of the
mortgage loan is reduced below 80 percent, or a lesser
specified percentage, based on an appraisal of the mortgaged
property after the related closing date or as a result of
principal payments that reduce the principal balance of the
mortgage loan after the closing date. Mortgage loans that are
subject to negative amortization will only be covered by a
primary insurance policy if the coverage was so required upon
their origination, notwithstanding that subsequent negative
amortization may cause the mortgage loan's loan-to-value ratio
based upon the current balance at that time to subsequently
exceed the limits which would have required the coverage upon
their origination.
While the terms and conditions of the primary insurance policies issued
by one primary mortgage insurer will differ from those in primary insurance
policies issued by other primary insurers, each primary insurance policy
generally will pay either:
o the insured percentage of the loss on the related mortgaged
property;
o the entire amount of the loss, after receipt by the primary
insurer of good and merchantable title to, and possession of,
the mortgaged property; and
o at the option of the primary insurer under the primary
insurance policies, the sum of the delinquent monthly payments
plus any advances made by the insured, both to the date of the
claim payment and, monthly payments in the amount that would
have become due under the mortgage loan if it had not been
discharged plus any advances made by the insured until the
earlier of (a) the date the mortgage loan would have been
discharged in full if the default had not occurred or (b) an
approved sale of the related mortgaged property.
The amount of the loss as calculated under a primary insurance policy
covering a mortgage loan will generally consist of the unpaid principal amount
of the mortgage loan and accrued and unpaid interest and reimbursement of the
expenses, less:
o rents or other payments received by the insured, other than
the proceeds of hazard insurance, that are derived from the
related mortgaged property;
o hazard insurance proceeds received by the insured in excess of
the amount required to restore the mortgaged property and
which have not been applied to the payment of the mortgage
loan;
o amounts expended, but not approved by the primary insurer;
o claim payments previously made on the mortgage loan; and
o unpaid premiums and other amounts;
As conditions precedent to the filing or payment of a claim under a
primary insurance policy, in the event of default by the mortgagor, the insured
will typically be required, among other things, to:
95
<PAGE> 188
o advance or discharge (a) hazard insurance premiums and (b) as
necessary and approved in advance by the primary insurer, real
estate taxes, 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 insurance
policy, ordinary wear and tear excepted; and
o tender to the primary insurer good and merchantable title to,
and possession of, the mortgaged property.
The related agreement for a series generally will require that the
master servicer maintain, or cause to be maintained, coverage under a primary
insurance policy to the extent the coverage was in place on the cut-off date.
HAZARD INSURANCE POLICIES
The terms of the mortgage loans require each mortgagor to maintain a
hazard insurance policy providing for the coverage as is required under the
related mortgage or, if any mortgage permits the holder to dictate to the
mortgagor the insurance coverage to be maintained on the related mortgaged
property, then the coverage as is consistent with the servicing standard. The
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 hazard insurance policy and under any
other insurance policy referred to in this discussion, or upon the extent to
which information in this regard is furnished by mortgagors. All amounts
collected by the master servicer under any policy, except for amounts to be
applied to the restoration or repair of the mortgaged property or released to
the mortgagor in accordance with the master servicer's normal servicing
procedures, subject to the terms and conditions of the related mortgage and
mortgage note, will be deposited in the security account. The agreement will
provide that the master servicer may satisfy its obligation to cause each
mortgagor to maintain a hazard insurance policy by the master servicer's
maintaining a blanket policy insuring against hazard losses on the mortgage
loans. If a blanket policy contains a deductible clause, the master servicer
will be required to deposit in the security account all sums that would have
been deposited in this prospectus but for the clause.
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 are dictated by respective state laws, and most
of these policies typically do not cover any physical damage resulting from war,
revolution, governmental actions, floods and other water-
96
<PAGE> 189
related causes, earth movement including earthquakes, landslides and mudflows,
wet or dry rot, vermin, domestic animals and other risks.
The hazard insurance policies covering the mortgaged properties
securing the mortgage loans will typically contain a co-insurance clause that in
effect requires the insured at all times to carry insurance of a specified
percentage, generally 80 percent to 90 percent, 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 clause generally provides that the insurer's liability in the event of
partial loss does not exceed the lesser of (a) the replacement cost of the
improvements less physical depreciation and (b) the proportion of the loss as
the amount of insurance carried bears to the specified percentage of the full
replacement cost of the improvements.
Each agreement for a trust fund will require the master servicer to
cause the mortgagor on each mortgage loan to maintain all other insurance
coverage with respect to the related mortgaged property as is consistent with
the terms of the related mortgage and the servicing standard, which insurance
may include flood insurance, if the related mortgaged property was located at
origination in a federally designated flood area or is included in a Federal
Emergency Management agency remapping at any time during the life of the related
mortgage loan.
Under the terms of the mortgage loans, mortgagors generally will be
required to present claims to insurers under hazard insurance policies
maintained on the related 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 securing the mortgage loans. However, the ability
of the master servicer to present or cause to be presented claims is dependent
upon the extent to which information in this regard is furnished to the master
servicer by mortgagors.
FHA MORTGAGE INSURANCE
The Housing Act authorizes various FHA mortgage insurance programs.
Some of the mortgage loans may be insured under either section 203(b), section
234 or section 235 of the Housing Act. Under section 203(b), FHA insures
mortgage loans with original terms up to 30 years for the purchase of one- to
four-family dwelling units. Mortgage loans for the purchase of condominium units
are insured by FHA under section 234. Loans insured under these programs must
bear interest at a rate not exceeding the maximum rate in effect at the time the
loan is made, as established by HUD, and may not exceed specified percentages of
the lesser of the appraised value of the property and the sale price, less
seller paid closing costs for the property, up to specified maximums. In
addition, FHA imposes initial investment minimums and other requirements on
mortgage loans insured under the section 203(b) and section 234 programs.
Under section 235, assistance payments are paid by HUD to the mortgagee
on behalf of eligible mortgagors for as long as the mortgagors continue to be
eligible for the payments. To be eligible, a mortgagor must have income within
the limits prescribed by HUD at the time of initial occupancy, must occupy the
property and must meet requirements for recertification at least annually.
97
<PAGE> 190
The regulations governing these programs provide that insurance
benefits are payable either (a) upon foreclosure or other acquisition of
possession and conveyance of the mortgaged premises to HUD or (b) upon
assignment of the defaulted mortgage loan to HUD. The FHA insurance that may be
provided under these programs upon conveyance of the home to HUD is equal to 100
percent of the outstanding principal balance of the mortgage loan, plus accrued
interest, as described below, and additional costs and expenses. When
entitlement to insurance benefits results from assignment of the mortgage loan
to HUD, the insurance payment is computed as of the date of assignment and
includes the unpaid principal amount of the mortgage loan plus mortgage interest
accrued and unpaid at the debenture rate.
When entitlement to insurance benefits results from foreclosure or
other acquisition of possession and conveyance, the insurance payment is equal
to the unpaid principal amount of the mortgage loan, adjusted to reimburse the
mortgagee for tax, insurance and similar payments made by it and to deduct
specified amounts received or retained by the mortgagee after default, plus
reimbursement not to exceed two-thirds of the mortgagee's foreclosure costs.
VA MORTGAGE GUARANTY
The Servicemen's Readjustment Act of 1944, as amended, permits a
veteran or, in specified instances, his or her spouse to obtain a mortgage loan
guaranty by the VA covering mortgage financing of the purchase of a one-to
four-family dwelling unit to be occupied as the veteran's home at an interest
rate not exceeding the maximum rate in effect at the time the loan is made, as
established by HUD. The program has no limit on the amount of a mortgage loan,
requires no down payment from the purchaser and permits the guaranty of mortgage
loans with terms limited by the estimated economic life of the property, up to
30 years. The maximum guaranty that may be issued by the VA under this program
is 50 percent of the original principal amount of the mortgage loan up to a
specified dollar limit established by the VA. The liability on the guaranty is
reduced or increased pro rata with any reduction or increase in the amount of
indebtedness, but in no event will the amount payable on the guaranty exceed the
amount of the original guaranty. Notwithstanding the dollar and percentage
limitations of the guaranty, a mortgagee will ordinarily suffer a monetary loss
only where the difference between the unsatisfied indebtedness and the proceeds
of a foreclosure sale of mortgaged premises is greater than the original
guaranty as adjusted. The VA may, at its option, and without regard to the
guaranty, make full payment to a mortgagee of the unsatisfied indebtedness on a
mortgage upon its assignment to the VA. This procedure is a VA No-Bid.
Because there is no limit imposed by the VA on the principal amount of
a VA-guaranteed mortgage loan but there is a limit on the amount of the VA
guaranty, additional coverage under a primary insurance policy may be required
by the depositor for VA loans in excess of specified amounts. The amount of any
additional coverage will be set forth in the related prospectus supplement.
LEGAL ASPECTS OF MORTGAGE LOANS
The following discussion contains summaries, necessarily general in
nature, of the material legal aspects of mortgage loans secured by single-family
residential properties. Because
98
<PAGE> 191
legal aspects are governed primarily by applicable state law, which may differ
substantially, 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 loans is situated. These are summaries of the
material applicable federal and state laws governing mortgage loans. See
"Description of the Trust Funds -- Assets."
GENERAL
All of the mortgage loans are loans evidenced by a note or bond and
secured by instruments granting a security interest in real property which may
be mortgages, deeds of trust, security deeds or deeds to secure debt, depending
upon the prevailing practice and law in the state in which the mortgaged
property is located. Mortgages, deeds of trust and deeds to secure debt are in
this prospectus collectively referred to as mortgages. Any of the foregoing
types of mortgages will create a lien upon, or grant a title interest in, the
subject property, the priority of which will depend on the terms of the
particular security instrument, as well as separate, recorded, contractual
arrangements with others holding interests in the mortgaged property, the
knowledge of the parties to an instrument, and the order of recordation of the
instrument in the appropriate public recording office. The lien may be a first
lien and/or junior lien. However, recording does not generally establish
priority over governmental claims for real estate taxes and assessments and
other charges imposed under governmental police powers.
TYPES OF MORTGAGE INSTRUMENTS
A mortgage either creates a lien against or constitutes a conveyance of
real property between two parties -- a mortgagor, the borrower and usually the
owner of the subject property, and a mortgagee, the lender. In contrast, a deed
of trust is a three-party instrument, among a trust, or the equivalent of a
mortgagor, a trustee, a person or entity to whom the mortgaged property is
conveyed in trust, and a beneficiary, the lender for whose benefit the
conveyance is made. As used in this prospectus, unless the context otherwise
requires, mortgagor includes the trustor under a deed of trust and a grantor
under a security deed or a deed to secure debt. Under a deed of trust, the
mortgagor grants the property to the trustee, which holds the property in trust,
until the debt is paid. The trustee generally is granted the power of sale as
security for the indebtedness evidenced by the related note. A deed to secure
debt typically has two parties. By executing a deed to secure debt, the grantor
conveys title to, as opposed to merely creating a lien upon, the subject
property to the grantee until such time as the underlying debt is repaid,
generally with a power of sale as security for the indebtedness evidenced by the
related mortgage note. In case the mortgagor under a mortgage is a land trust,
there would be an additional party because legal title to the property is held
by a land trustee under a land trust agreement for the benefit of the mortgagor.
At origination of a mortgage loan involving a land trust, the mortgagor executes
a separate undertaking to make payments on the mortgage note. The mortgagee's
authority under a mortgage, the trustee's authority under a deed of trust and
the grantee's authority under a deed to secure debt are governed by the express
provisions of the mortgage, the law of the state in which the real property is
located, the applicable federal laws, including, without limitation, the
Soldiers' and Sailors' Civil Relief Act of 1940, and, in some cases, in deed of
trust transactions, the directions of the beneficiary.
99
<PAGE> 192
INTEREST IN REAL PROPERTY
The real property covered by a mortgage, deed of trust, security deed
or deed to secure debt is most often the fee estate in land and improvements.
However, an instrument may encumber other interests in real property such as a
tenant's interest in a lease of land or improvements, or both, and the leasehold
estate created by a lease. An instrument covering an interest in real property
other than the fee estate requires special provisions in the instrument creating
an interest or in the mortgage, deed of trust, security deed or deed to secure
debt, to protect the mortgagee against termination of such interest in land
other than the fee interest before the mortgage, deed of trust, security deed or
deed to secure debt is paid. The depositor or the asset seller will make
representations and warranties with respect to any mortgage loans that are
secured by an interest in a leasehold estate. The representation and warranties,
if applicable, will be set forth in the related prospectus supplement.
FORECLOSURE
General
Foreclosure is a legal procedure that allows the mortgagee to recover
its mortgage debt by enforcing its rights and available legal remedies under the
mortgage. If the mortgagor defaults in payment or performance of its obligations
under the note or mortgage, the mortgagee has the right to institute foreclosure
proceedings to sell the mortgaged property at public auction to satisfy the
indebtedness.
Foreclosure procedures with respect to the enforcement of a mortgage
vary from state to state. Two primary methods of foreclosing a mortgage are
judicial foreclosure and non-judicial foreclosure under a power of sale granted
in the mortgage instrument. There are several other foreclosure procedures
available that are either infrequently used or available only in limited
circumstances, such as strict foreclosure.
Judicial Foreclosure
A judicial foreclosure proceeding is conducted in a court having
jurisdiction over the mortgaged property. Generally, the action is initiated by
the service of legal pleadings upon all parties having an interest of record in
the real property. Delays in completion of the foreclosure may occasionally
result from difficulties in locating defendants. When the lender's right to
foreclose is contested, the legal proceedings can be time-consuming. Upon
successful completion of a judicial foreclosure proceeding, the court generally
issues a judgment of foreclosure and appoints a referee or other officer to
conduct a public sale of the mortgaged property, the proceeds of which are used
to satisfy the judgment. The sales are made in accordance with procedures that
vary from state to state.
Equitable Limitations on Enforceability of Material Provisions
United States courts have traditionally imposed general equitable
principles to limit the remedies available to a mortgagee in connection with
foreclosure. These equitable principles are generally designed to relieve the
mortgagor from the legal effect of mortgage defaults, to the extent that an
effect is perceived as harsh or unfair. Relying on these principles, a court may
alter the specific terms of a loan to the extent it considers necessary to
prevent or remedy an injustice,
100
<PAGE> 193
undue oppression or overreaching, or may require the lender to undertake
affirmative and expensive actions to determine the cause of the mortgagor's
default and the likelihood that the mortgagor will be able to reinstate the
loan. In some cases, courts have substituted their judgment for the lender's and
have required that lenders reinstate loans or recast payment schedules in order
to accommodate mortgagors who are suffering from a temporary financial
disability. In other cases, courts have limited the right of the lender to
foreclose if the default under the mortgage is not monetary, e.g., The mortgagor
failed to maintain the mortgaged property adequately or the mortgagor executed a
junior mortgage on the mortgaged property. The exercise by the court of its
equity powers will depend on the individual circumstances of each case presented
to it. Finally, some courts have been faced with the issue of whether federal or
state constitutional provisions reflecting due process concerns for adequate
notice require that a mortgagor receive notice in addition to
statutorily-prescribed minimum notice. For the most part, these cases have
upheld the reasonableness of the notice provisions or have found that a public
sale under a mortgage providing for a power of sale does not involve sufficient
state action to afford constitutional protections to the mortgagor.
Non-Judicial Foreclosure/Power of Sale
Foreclosure of a deed of trust is generally accomplished by a
non-judicial trustee's sale under the power of sale granted in the deed of
trust. A power of sale is typically granted in a deed of trust. It may also be
contained in any other type of mortgage instrument. A power of sale allows a
non-judicial public sale to be conducted generally following a request from the
beneficiary/lender to the trustee to sell the property upon any default by the
mortgagor under the terms of the mortgage note or the mortgage instrument and
after notice of sale is given in accordance with the terms of the mortgage
instrument, as well as applicable state law. In some states, prior to a sale,
the trustee under a deed of trust must record a notice of default and notice of
sale and send a copy to the mortgagor and to any other party who has recorded a
request for a copy of a notice of default and notice of sale. In addition, in
some states the trustee must provide notice to any other party having an
interest of record in the real property, including junior lienholders. A notice
of sale must be posted in a public place and, in most states, published for a
specified period of time in one or more newspapers. The mortgagor or junior
lienholder may then have the right, during a reinstatement period required in
some states, to cure the default by paying the entire actual amount in arrears,
without acceleration, plus the expenses incurred in enforcing the obligation. In
other states, the mortgagor or the junior lienholder is not provided a period to
reinstate the loan, but has only the right to pay off the entire debt to prevent
the foreclosure sale. Generally, the procedure for public sale, the parties
entitled to notice, the method of giving notice and the applicable time periods
are governed by state law and vary among the states. Foreclosure of a deed to
secure debt is also generally accomplished by a non-judicial sale similar to
that required by a deed of trust, except that the lender or its agent, rather
than a trustee, is typically empowered to perform the sale in accordance with
the terms of the deed to secure debt and applicable law.
Public Sale
A third party may be unwilling to purchase a mortgaged property at a
public sale because of the difficulty in determining the value of the property
at the time of sale, due to, among other things, redemption rights which may
exist and the possibility of physical deterioration of the
101
<PAGE> 194
property during the foreclosure proceedings. For these reasons, it is common for
the lender to purchase the mortgaged property for an amount equal to or less
than the underlying debt and accrued and unpaid interest plus the expenses of
foreclosure. Generally, state law controls the amount of foreclosure costs and
expenses which may be recovered by a lender. After that, subject to the
mortgagor's right in some states to remain in possession during a redemption
period, if applicable, the lender will become the owner of the property and have
both the benefits and burdens of ownership of the mortgaged property. For
example, the lender will become obligated to pay taxes, obtain casualty
insurance and to make the repairs at its own expense as are necessary to render
the property suitable for sale. The lender will commonly obtain the services of
a real estate broker and pay the broker's commission in connection with the sale
of the property. Depending upon market conditions, the ultimate proceeds of the
sale of the property may not equal the lender's investment in the property.
Moreover, a lender commonly incurs substantial legal fees and court costs in
acquiring a mortgaged property through contested foreclosure and/or bankruptcy
proceedings. Generally, state law controls the amount of foreclosure expenses
and costs, including attorneys' fees, that may be recovered by a lender.
The proceeds received by the referee or trustee from the sale are
applied first to the costs, fees and expenses of sale and then in satisfaction
of the indebtedness secured by the mortgage under which the sale was conducted.
Any proceeds remaining after satisfaction of senior mortgage debt are generally
payable to the holders of junior mortgages and other liens and claims in order
of their priority, whether or not the mortgagor is in default. Any additional
proceeds are generally payable to the mortgagor. The payment of the proceeds to
the holders of junior mortgages may occur in the foreclosure action of the
senior mortgage or a subsequent ancillary proceeding or may require the
institution of separate legal proceedings by the holders.
REO Properties
With respect to trust funds for which one or more REMIC elections
exist, if title to any mortgaged property is acquired by the trustee on behalf
of the securityholders, the master servicer or any related sub-servicer or the
special servicer, on behalf of the holders, will be required to sell the
mortgaged property by the end of the third taxable year after the taxable year
of acquisition, unless (a) the IRS grants an extension of time to sell the
property, or (b) it obtains an opinion of counsel generally to the effect that
the holding of the property for more than three years after its acquisition will
not result in the imposition of a tax on the trust fund or cause any REMIC
created under the agreement to fail to qualify as a REMIC under the Internal
Revenue tax code. Subject to the foregoing, the master servicer or any related
sub-servicer will generally be required to solicit bids for any mortgaged
property so acquired in a manner as will be reasonably likely to realize a fair
price for the property. The master servicer or any related sub-servicer may
retain an independent contractor to operate and manage any REO property;
however, the retention of an independent contractor will not relieve the master
servicer or any related sub-servicer of its obligations with respect to the REO
property.
In general, the master servicer or any related sub-servicer or an
independent contractor employed by the master servicer or any related
sub-servicer at the expense of the trust fund will be obligated to operate and
manage any mortgaged property acquired as REO property in a manner that would,
to the extent commercially feasible, maximize the trust fund's net after-tax
102
<PAGE> 195
proceeds from the property. After the master servicer or any related
sub-servicer reviews the operation of the property and consults with the trustee
to determine the trust fund's federal income tax reporting position with respect
to the income it is anticipated that the trust fund would derive from the
property, the master servicer or any related sub-servicer could determine,
particularly in the case of an REO property that is a hospitality or residential
health care facility, that it would not be commercially feasible to manage and
operate the property in a manner that would avoid the imposition of a tax on net
income from foreclosure property, within the meaning of section 857(b)(4)(B) of
the Internal Revenue tax code or a tax on prohibited transactions under sections
860F of the Internal Revenue tax code, referred to as an REO tax. To the extent
that income the trust fund receives from an REO property is subject to a tax on
(a) net income from foreclosure property the income would be subject to federal
income tax at the highest marginal corporate tax rate, currently 35 percent, or
(b) prohibited transactions, the income would be subject to federal income tax
at a 100 percent rate. The determination as to whether income from an REO
property would be subject to an REO tax will depend on the specific facts and
circumstances relating to the management and operation of each REO property.
Generally, income from an REO property that is directly operated by the master
servicer or any related sub-servicer would be apportioned and classified as
service or non-service income. The service portion of the income could be
subject to federal income tax either at the highest marginal corporate tax rate
or at the 100 percent rate on prohibited transactions, and the non-service
portion of the income could be subject to federal income tax at the highest
marginal corporate tax rate or, although it appears unlikely, at the 100 percent
rate applicable to prohibited transactions. Any REO tax imposed either on or
from an REO property would reduce the amount available for distribution to
securityholders. We recommend that securityholders consult their tax advisors
regarding the possible imposition of REO taxes in connection with the operation
of commercial REO properties by REMICs. See "Material Federal Income Tax
Consequences."
Rights of Redemption
The purposes of a foreclosure action are to enable the mortgagee to
realize upon its security and to end the rights of the mortgagor, and all
persons who have an interest in the property which is subordinate to the
mortgage being foreclosed, from exercising their equity of redemption. The
doctrine of equity of redemption provides that, until the property covered by a
mortgage has been sold in accordance with a properly conducted foreclosure and
foreclosure sale, those having an interest which is subordinate to that of the
foreclosing mortgagee may redeem the property by paying the entire debt with
interest. In addition, in some states, when a foreclosure action has been
commenced, the redeeming party must pay specified costs of the foreclosure
action. Those having an equity of redemption must generally be made parties and
joined in the foreclosure proceeding in order for their equity of redemption to
be cut-off and terminated.
The equity of redemption is a common-law or non-statutory right which
exists prior to completion of the foreclosure, is not waivable by the mortgagor,
must be exercised prior to foreclosure sale and should be distinguished from the
post-sale statutory rights of redemption. In some states, after sale under a
deed of trust or foreclosure of a mortgage, the mortgagor and foreclosed junior
lienors are given a statutory period in which to redeem the property from the
foreclosure sale. In some states, statutory redemption may occur only upon
payment of the
103
<PAGE> 196
foreclosure sale price. In other states, redemption may be authorized if the
former mortgagor pays only a portion of the sums due. The effect of a statutory
right of redemption is to diminish the ability of the lender to sell the
foreclosed property. The exercise of a right of redemption would defeat the
title of any purchaser from a foreclosure sale or sale under a deed of trust.
Consequently, the practical effect of the redemption right is to force the
lender to maintain the property and pay the expenses of ownership until the
redemption period has expired. In some states, a post-sale statutory right of
redemption may exist following a judicial foreclosure, but not following a
trustee's sale under a deed of trust.
Under the REMIC Provisions currently in effect, property acquired by
foreclosure generally must not be held beyond the end of the third taxable year
after the taxable year of foreclosure. With respect to a series of securities
for which an election is made to qualify the trust fund or a part of the series
of securities as a REMIC, the agreement will permit foreclosed property to be
held for more than three years if the IRS grants an extension of time within
which to sell the property or independent counsel renders an opinion to the
effect that holding the property for the additional period is permissible under
the REMIC provisions.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Statutes in some states limit the right of a beneficiary under a deed
of trust or a mortgagee under a mortgage to obtain a deficiency judgment against
the mortgagor following foreclosure or sale under a deed of trust. A deficiency
judgment would be a personal judgment against the former mortgagor equal to the
difference between the net amount realized upon the public sale of the real
property and the amount due to the lender. Some states require the lender to
exhaust the security afforded under a mortgage by foreclosure in an attempt to
satisfy the full debt before bringing a personal action against the mortgagor.
In other states, the lender has the option of bringing a personal action against
the mortgagor on the debt without first exhausting the security; however, in
some of these states, the lender, following judgment on the personal action, may
be deemed to have elected a remedy and may be precluded from exercising remedies
with respect to the security. In some cases, a lender will be precluded from
exercising any additional rights under the note or mortgage if it has taken any
prior enforcement action. Consequently, the practical effect of the election
requirement, in those states permitting an election, is that lenders will
usually proceed against the security first rather than bringing a personal
action against the mortgagor. Finally, other statutory provisions limit any
deficiency judgment against the former mortgagor 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 lender from obtaining a large deficiency judgment against the former
mortgagor as a result of low or no bids at the judicial sale.
In addition to laws limiting or prohibiting deficiency judgments,
numerous other federal and state statutory provisions, including the federal
bankruptcy laws and state laws affording relief to debtors, may interfere with
or affect the ability of the secured mortgage lender to realize upon collateral
or enforce a deficiency judgment. For example, with respect to federal
bankruptcy law, a court with federal bankruptcy jurisdiction may permit a debtor
through his or her Chapter 11 or Chapter 13 rehabilitative plan to cure a
monetary default in respect of a
104
<PAGE> 197
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 residence
had yet occurred, prior to the filing of the debtor's petition. Some courts with
federal bankruptcy jurisdiction have approved plans, based on the particular
facts of the reorganization case, that effected the curing of a mortgage loan
default by paying arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that
the terms of a mortgage loan secured by property of the debtor may be modified.
These courts have allowed modifications that include reducing the amount of each
monthly payment, changing the rate of interest, altering the repayment schedule,
forgiving all or a portion of the debt and reducing the lender's security
interest to the value of the residence, thus leaving the lender a general
unsecured creditor for the difference between the value of the residence and the
outstanding balance of the loan. Generally, however, the terms of a mortgage
loan secured only by a mortgage on real property that is the debtor's principal
residence may not be modified under a plan confirmed under Chapter 11 or Chapter
13 except with respect to mortgage payment arrearages, which may be cured within
a reasonable time period.
Some tax liens arising under the Internal Revenue Code of 1986, as
amended, may in some circumstances 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
mortgage loans by numerous federal and some state consumer protection laws.
These laws include the Federal Truth-in-Lending Act, Real Estate Settlement
Procedures Act, Equal Credit Opportunity Act, Fair Credit Billing 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. In some cases this liability may affect
assignees of the mortgage loans.
ENVIRONMENTAL LEGISLATION
Real property pledged as security to a lender may be subject to
environmental risks. Under the laws of some states, contamination of a property
may give rise to a lien on the property to secure recovery of the costs of
clean-up. In several states, this type of lien has priority over the lien of an
existing mortgage against the property. In addition, under the laws of some
states and under the Federal Comprehensive Environmental Response, Compensation,
and Liability Act of 1980, as amended or CERCLA, a lender may be liable, as an
owner or operator, for costs of addressing releases or threatened releases of
hazardous substances that require remedy at a property securing a mortgage loan
owned by the lender, if agents or employees of the lender have become
sufficiently involved in the operations of the related obligor, regardless of
whether or not the environmental damage or threat was caused by the lender's
obligor or by a prior owner. A lender also risks the liability arising out of
foreclosure of a mortgaged property securing a mortgage loan owned by the
lender. Until recent legislation was adopted, it was uncertain what actions
could be taken by a secured lender in the event of a loan default without it
incurring exposure under CERCLA in the event the property was environmentally
contaminated.
105
<PAGE> 198
The asset Conservation, Lender Liability and Deposit insurance Act of 1996, the
1996 Lender Liability Act, provides for a safe harbor for secured lenders from
CERCLA liability even though the lender forecloses and sells the real estate
securing the loan, provided the secured lender sells at the earliest
practicable, commercially reasonable time, at commercially reasonable terms,
taking into account market conditions and legal and regulatory requirements.
Although the 1996 Lender Liability Act provides significant protection to
secured lenders, it has not been construed by the courts, and there are
circumstances in which actions taken could expose a secured lender to CERCLA
liability. And, the transferee from the secured lender is not entitled to the
protections enjoyed by a secured lender. Thus, contamination may decrease the
amount that prospective buyers are willing to pay for a mortgaged property and,
thus, decrease the likelihood that the trust fund will recover fully on the
mortgage loan through foreclosure.
Application of environmental laws other than CERCLA could also result
in the imposition of liability on lenders for costs associated with
environmental hazards. The most significant of these other laws is the Resource
Conservation and Recovery Act of 1976, as amended or RCRA, and state regulatory
programs implemented pursuant to RCRA. Subtitle I of RCRA imposes cleanup
liabilities on owners or operators of underground storage tanks. Some states
also impose similar liabilities on owners and operators of aboveground storage
tanks. The definition of owner under RCRA Subtitle I contains a security
interest exemption nearly identical to the CERCLA security interest exemption.
However, as with CERCLA costs, it is possible that the costs, if imposed in
connection with a mortgage loan included in a trust fund, could become a
liability of the related trust in some circumstances.
At the time the mortgage loans were originated, it is possible that no
environmental assessment or a very limited environmental assessment of the
related mortgaged properties was conducted. No representations or warranties are
made by the asset seller or depositor as to the absence or effect of hazardous
wastes or hazardous substances on any of the related mortgaged properties. In
addition, the master servicer has not made any representations or warranties or
assumed any liability with respect to the absence or effect of hazardous wastes
or hazardous substances on any mortgaged property or any casualty resulting from
the presence or effect of hazardous wastes or hazardous substances on any
mortgaged property, and any loss or liability resulting from the presence or
effect of the hazardous wastes or hazardous substances will reduce the amounts
otherwise available to pay to securityholders.
Under the agreement, the master servicer is not required to foreclose
on any mortgaged property if one of its principal officers has actual knowledge
that the property is contaminated with or affected by hazardous wastes or
hazardous substances. If the master servicer does not foreclose on the mortgaged
property underlying a defaulted mortgage loan, the amounts otherwise available
to pay to the securityholders may be reduced. The master servicer will not be
liable to the securityholders if it fails to foreclose on a mortgaged property
that it believes may be so contaminated or affected, even if the mortgaged
property is, in fact, not so contaminated or affected. Similarly, the master
servicer will not be liable to the securityholders if the master servicer
forecloses on a mortgaged property and takes title to a mortgaged property that
is so contaminated or affected.
106
<PAGE> 199
DUE-ON-SALE CLAUSES
The mortgage loans will contain due-on-sale clauses unless the related
prospectus supplement indicates otherwise. These clauses generally provide that
the lender may accelerate the maturity of the loan if the mortgagor sells,
transfers or conveys the related mortgaged property. The enforceability of
due-on-sale clauses has been the subject of legislation or litigation in many
states and, in some cases, the enforceability of these clauses was limited or
denied. However, with respect to some loans, the Garn-St. Germain Depository
Institutions Act of 1982 preempts state constitutional, statutory and case law
that prohibits the enforcement of due-on-sale clauses and permits lenders to
enforce these clauses in accordance with their terms, subject to some limited
exceptions. Due-on-sale clauses contained in mortgage loans originated by
federal savings and loan associations of federal savings banks are fully
enforceable under regulations of the United States Federal Home Loan Bank Board,
as succeeded by the Office of Thrift Supervision, which preempt state law
restrictions on the enforcement of the clauses. Similarly, due-on-sale clauses
in mortgage loans made by national banks and federal credit unions are now fully
enforceable under preemptive regulations of the Comptroller of the Currency and
the National Credit Union Administration, respectively.
The Garn-St. Germain Act also sets forth nine specific instances in
which a mortgage lender covered by the act, including federal savings and loan
associations and federal savings banks, may not exercise a due-on-sale clause,
notwithstanding the fact that a transfer of the property may have occurred.
These include intra-family transfers, transfers by operation of law, leases of
fewer than three years and the creation of a junior encumbrance. Regulations
promulgated under the Garn-St. Germain Act also prohibit the imposition of a
prepayment penalty upon the acceleration of a loan under a due-on-sale clause.
The inability to enforce a due-on-sale clause may result in a mortgage that
bears an interest rate below the current market rate being assumed by a new home
buyer rather than being paid off, which may affect the average life of the
mortgage loans and the number of mortgage loans which may extend to maturity.
PREPAYMENT CHARGES
Under some state laws, prepayment charges may not be imposed after a
specified period of time following the origination of mortgage loans secured by
liens encumbering owner-occupied residential properties, if the loans are paid
prior to maturity. Because many of the mortgaged properties will be
owner-occupied, it is anticipated that prepayment charges may not be imposed
with respect to many of the mortgage loans. The absence of this type of
restraint on prepayment, particularly with respect to fixed rate mortgage loans
having higher mortgage rates, may increase the likelihood of refinancing or
other early retirement of the loans.
SUBORDINATE FINANCING
Where a 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
107
<PAGE> 200
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 any existing junior lender is harmed or the mortgagor is
additionally burdened. Third, if the mortgagor defaults on the senior loan
and/or any junior loan or loans, 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
proceedings by the senior lender.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980, enacted in March 1980 provides that state usury limitations
shall not apply to some types of residential first mortgage loans originated by
some 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 Office
of Thrift Supervision is authorized to issue rules and regulations and to
publish interpretations governing implementation of Title V. 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. Some states have taken action to
reimpose interest rate limits and/or to limit discount points or other charges.
The depositor believes that a court interpreting Title V would hold
that residential first mortgage loans that are 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 limitation under a 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 loan originated after the date of a state action will be eligible for
inclusion in a trust fund unless (a) a mortgage loan provides for an interest
rate, discount points and charges as are permitted in a state or (b) a mortgage
loan provides that the terms shall be construed in accordance with the laws of
another state under which an interest rate, discount points and charges would
not be usurious and the mortgagor's counsel has rendered an opinion that a
choice of law provision would be given effect.
Statutes differ in their provisions as to the consequences of a
usurious loan. One group of statutes requires the lender to forfeit the interest
due above the applicable limit or impose a specified penalty. Under this
statutory scheme, the mortgagor may cancel the recorded mortgage or deed of
trust upon paying its debt with lawful interest, and the lender may foreclose,
but only for the debt plus lawful interest. A second group of statutes is more
severe. A violation of this type of usury law results in the invalidation of the
transaction, thus permitting the mortgagor to
108
<PAGE> 201
cancel the recorded mortgage or deed of trust without any payment or prohibiting
the lender from foreclosing.
ALTERNATIVE MORTGAGE INSTRUMENTS
Alternative mortgage instruments, including adjustable rate mortgage
loans and early ownership mortgage loans, originated by non-federally chartered
lenders have historically been subject to a variety of restrictions. The
restrictions differed from state to state, resulting in difficulties in
determining whether a particular alternative mortgage instrument originated by a
state-chartered lender was in compliance with applicable law. These difficulties
were alleviated 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, state-chartered banks may originate alternative mortgage
instruments in accordance with regulations promulgated by the Comptroller of the
Currency with respect to origination of alternative mortgage instruments by
national banks; 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 all other non-federally chartered
housing creditors, including state-chartered savings and loan associations,
state-chartered 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
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. Some states have
taken this type of an action.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940,
as amended or the Relief Act, a mortgagor who enters military service after the
origination of the mortgagor's mortgage loan ,including a mortgagor 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 percent during the period of the mortgagor's active duty status,
unless a court orders otherwise upon application of the lender. The Relief Act
applies to mortgagors 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
mortgagors who enter 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 any servicer to collect full amounts of interest
on some of the 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 certificates, and
would not be covered by advances or, if 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
109
<PAGE> 202
of the servicer to foreclose on an affected mortgage loan during the mortgagor's
period of active duty status, and, under some circumstances, during an
additional three month period. Thus, in the event that a mortgage loan affected
by the Relief Act goes into default, delays and losses in payments may result.
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 RICO statute can be seized
by the government if the property was used in, or purchased with the proceeds of
those crimes. Under procedures contained in the Comprehensive Crime Control Act
of 1984 or the Crime Control Act, 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: (a) its mortgage was executed and recorded before commission
of the crime upon which the forfeiture is based, or (b) 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.
ADDITIONAL LEGAL CONSIDERATIONS
The mortgage loans are also subject to federal laws, including:
o Regulation Z, which requires specified disclosures to the
borrowers regarding the terms of the mortgage loans;
o the Equal Opportunity Act and Regulation B promulgated, 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. Violations of provisions of these federal laws may
limit the ability of persons to collect all or part of the
principal of or interest on the mortgage loans and in addition
could subject persons to damages and administrative
enforcement.
USE OF PROCEEDS
Substantially all of the net proceeds to be received from the sale of
each series of securities will be used to purchase the assets related to a
series or to reimburse the amounts previously used to effect a purchase, the
costs of carrying assets until the sale of the related securities and other
expenses connected with pooling the assets and issuing the securities.
110
<PAGE> 203
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following represents the opinion of Hunton & Williams as to the
material federal income tax consequences of the purchase, ownership, and
disposition of the securities being offered. The opinion is based upon laws,
regulations, rulings, and decisions now in effect, all of which are subject to
change, and any change could apply retroactively. Because REMIC status may be
elected with respect to a series, this discussion includes a summary of the
federal income tax consequences to holders of REMIC securities. The discussion
does not purport to deal with the federal income tax consequences to all
categories of investors, some of which (such as banks, insurance companies, and
foreign investors) may be subject to special rules. The discussion focuses
primarily on investors who will hold the securities as capital assets, which
generally means property held for investment within the meaning of section 1221
of the Internal Revenue Code, although much of the discussion is applicable to
other investors as well. Investors should note that, although final regulations
under the REMIC provisions of the Internal Revenue Code have been issued by the
Treasury, no currently effective regulations or other administrative guidance
has been issued with respect to some provisions of the Internal Revenue Code
that are or may be applicable to securityholders, particularly the provisions
dealing with market discount and stripped debt securities. Although the Treasury
has issued final regulations dealing with original issue discount and premium,
those regulations do not address directly the treatment of REMIC regular
securities and some other types of securities. Furthermore, the REMIC
regulations do not address many of the issues that arise in connection with the
formation and operation of a REMIC. Hence, definitive guidance cannot be
provided with respect to many aspects of the tax treatment of securityholders,
particularly residual securityholders. Moreover, this opinion is based on
current law, and there can be no assurance that the IRS will not take positions
that would be materially adverse to investors. Finally, the opinion does not
purport to address the anticipated state income tax consequences to investors of
owning and disposing of the securities. Consequently, we suggest that investors
consult their own tax advisors in determining the federal, state, foreign, and
any other tax consequences to them of the purchase, ownership, and disposition
of the securities.
GENERAL
Many aspects of the federal income tax treatment of the securities of a
particular series will depend upon whether an election is made to treat the
trust, or one or more segregated pools of trust assets, as a REMIC. The
prospectus supplement for each series will indicate whether a REMIC election or
elections will be made with respect to the related trust. For each series with
respect to which one or more REMIC elections are to be made, Hunton & Williams,
counsel to the depositor, is of the opinion that, assuming timely filing of a
REMIC election or elections and compliance with the relevant trust agreement and
other documents, the trust fund or one or more segregated pools of trust assets
will qualify as one or more REMICs. For each series of mortgage pass-through
certificates with respect to which a REMIC election is not to be made, Hunton &
Williams is of the opinion that, assuming compliance with the relevant trust
agreement and other documents, the trust will be treated as a grantor trust
under subpart E, Part I of subchapter J of the Internal Revenue Code or as a
partnership and not as an association, publicly traded partnership or taxable
mortgage pool taxable as a corporation. To the extent that the trust (or
111
<PAGE> 204
segregated pools of trust assets) qualifies as a REMIC, a grantor trust, or such
a partnership, the trust generally will not be subject to federal income tax at
the entity level. For each series of collateralized mortgage bonds with respect
to which a REMIC election is not to be made, Hunton & Williams is of the opinion
that, assuming compliance with the relevant agreement and other documents, the
bonds will be treated for federal income tax purposes as indebtedness, and not
as an ownership interest in the assets or an equity interest in a separate
association taxable as a corporation. Those opinions will be based on existing
law, but there can be no assurance that the law will not change or that contrary
positions will not be taken by the IRS.
REMIC SECURITIES
REMIC securities will be classified as either REMIC regular securities,
which generally are treated as debt for federal income tax purposes, or residual
securities, which generally are not treated as debt for those purposes, but
rather as representing rights and responsibilities with respect to the taxable
income or loss of the related REMIC. The prospectus supplement for each series
of REMIC securities will indicate which of the securities of the series will be
classified as REMIC regular securities and which will be classified as residual
securities. REMIC securities held by a thrift institution taxed as a domestic
building and loan association will constitute a regular or residual interest in
a REMIC, as the case may be, within the meaning of section 7701(a)(19)(C)(xi) of
the Internal Revenue Code. REMIC securities held by a real estate investment
trust, or REIT, will constitute real estate assets within the meaning of section
856(c)(4)(A) of the Internal Revenue Code, and interest on the securities will
be considered interest on obligations secured by mortgages on real property as
defined by section 856(c)(3)(B), all in the same proportion that the related
REMIC's assets would so qualify. If 95 percent or more of the assets of a given
series REMIC constitute qualifying assets for thrift institutions and REITs, the
related REMIC securities and the income from those securities will be treated
entirely as qualifying assets and income for those purposes. REMIC regular and
residual securities held by a financial institution to which section 585 of the
Internal Revenue Code applies will be treated as evidences of indebtedness for
purposes of section 582(c)(1) of the Internal Revenue Code. The REMIC regular
securities generally will be qualified mortgages as defined by section
860G(a)(3) of the Internal Revenue Code with respect to other REMICs. Effective
September 1, 1997, REMIC regular securities held by a financial asset
securitization investment trust, or FASIT, will qualify for treatment as
permitted assets within the meaning of section 860L(c)(1)(G) of the Internal
Revenue Code. In the case of a series for which two or more series REMICs will
be created, all series REMICs will be treated as a single REMIC for purposes of
determining the extent to which the related securities and the income will be
treated as qualifying assets and income for these purposes. However, REMIC
securities will not qualify as government securities for REITS and regulated
investment companies, or RICS, in any case.
Tax Treatment of REMIC Regular Securities
Payments received by holders of REMIC regular securities generally
should be accorded the same tax treatment under the Internal Revenue Code as
payments received on ordinary taxable corporate debt instruments. Except as
described below for REMIC regular securities
112
<PAGE> 205
issued with original issue discount or acquired with market discount or premium,
interest paid or accrued on REMIC regular securities will be treated as ordinary
income to the securityholder and a principal payment on the securities will be
treated as a return of capital to the extent that the securityholder's basis in
the security is allocable to that payment. Holders of REMIC regular or residual
securities must report income from the securities under an accrual method of
accounting, even if they otherwise would have used the cash receipts and
disbursements method. The trustee or the master servicer will report annually to
the IRS and to securityholders of record with respect to interest paid or
accrued and original issue discount, if any, accrued on the securities.
Under temporary Treasury regulations, holders of REMIC regular
securities issued by single-class REMICs who are individuals, trusts, estates,
or pass-through entities in which the investors hold interests may be required
to recognize some amounts of income in addition to interest and discount income.
A single-class REMIC, in general, is a REMIC that (a) would be classified as an
investment trust in the absence of a REMIC election or (b) is substantially
similar to an investment trust. Under the temporary Treasury regulations, each
holder of a regular or residual interest in a single-class REMIC is allocated
(a) a share of the REMIC's allocable investment expenses, i.e., expenses
normally allowable under section 212 of the Internal Revenue Code, which may
include servicing and administrative fees and insurance premiums and (b) a
corresponding amount of additional income. Section 67 of the Internal Revenue
Code permits an individual, trust or estate to deduct miscellaneous itemized
expenses, including section 212 expenses, only to the extent that the expenses,
in the aggregate, exceed 2 percent of its adjusted gross income. Consequently,
an individual, trust or estate that holds a regular interest in a single-class
REMIC, either directly or through a pass-through entity, will recognize
additional income with respect to the regular interest to the extent that its
share of allocable investment expenses, when combined with its other
miscellaneous itemized deductions for the taxable year, fails to exceed 2
percent of its adjusted gross income. Any additional income will be treated as
interest income. In addition, Internal Revenue Code section 68 provides that the
amount of itemized deductions otherwise allowable for the taxable year for an
individual whose adjusted gross income exceeds the applicable amount ($128,950,
or $64,475 in the case of a separate return by a married individual within the
meaning of Internal Revenue Code section 7703 for taxable year 2000 and adjusted
for inflation each year following tax year 2000), will be reduced by the lesser
of (a) 3 percent of the excess of adjusted gross income over the applicable
amount, and (b) 80 percent of the amount of itemized deductions otherwise
allowable for a taxable year. The amount of additional taxable income recognized
by holders who are subject to the limitations of either section 67 or section 68
may be substantial and may reduce or eliminate the after-tax yield to holders of
an investment in the securities of an affected series. Where appropriate, the
prospectus supplement for a particular series REMIC will indicate that the
holders of securities of a series may be required to recognize additional income
as a result of the application of the limitations of either section 67 or
section 68 of the Internal Revenue Code. Non-corporate holders of REMIC regular
securities evidencing an interest in a single-class REMIC also should be aware
that miscellaneous itemized deductions, including allocable investment expenses
attributable to the REMIC, are not deductible for purposes of the alternative
minimum tax, or AMT.
113
<PAGE> 206
Original Issue Discount
Some classes of REMIC regular securities may be issued with original
issue discount within the meaning of section 1273(a) of the Internal Revenue
Code. In general, the original issue discount, if any, will equal the excess of
the stated redemption price at maturity of the REMIC regular security, generally
its principal amount, over its issue price. Holders of REMIC regular securities
as to which there is original issue discount should be aware that they generally
must include original issue discount in income for federal income tax purposes
on an annual basis under a constant yield accrual method that reflects
compounding. In general, original issue discount is treated as ordinary income
and must be included in income in advance of the receipt of the cash to which it
relates.
The amount of original issue discount required to be included in a
REMIC regular securityholder's income in any taxable year will be computed in
accordance with section 1272(a)(6) of the Internal Revenue Code, which provides
for the accrual of original issue discount under a constant yield method for
some of the debt instruments, such as the REMIC regular securities, that are
subject to prepayment by reason of prepayments of underlying obligations. Under
section 1272(a)(6), the amount and rate of accrual of original issue discount on
a REMIC regular security generally is to be calculated based on:
o a single constant yield to maturity; and
o the pricing prepayment assumptions, which means the prepayment
rate for the related mortgage collateral, and the reinvestment
rate on amounts held pending distribution that were assumed in
pricing the REMIC regular security.
No regulatory guidance currently exists under Internal Revenue Code
section 1272(a)(6). Accordingly, until the Treasury issues guidance to the
contrary, the master servicer or other person responsible for computing the
amount of original issue discount to be reported to a REMIC regular
securityholder each taxable year, the tax administrator, will, except as
otherwise provided, base its computations on Internal Revenue Code section
1272(a)(6), existing final regulations that govern the accrual of original issue
discount on debt instruments but that do not address directly the treatment of
instruments that are subject to Internal Revenue Code section 1272(a)(6), known
as the OID regulations, and other guidance, all as described below. However,
there can be no assurance that the methodology described below represents the
correct manner of calculating original issue discount on the REMIC regular
securities. The tax administrator will account for income on some REMIC regular
securities that provide for one or more contingent payments as described in
"Material Federal Income Tax Consequences -- Original Issue Discount -- Interest
Weighted Securities and Non-VRDI Securities." Prospective purchasers should be
aware that none of the depositor, the master servicer, any servicer or the
trustee will make any representation that the assets underlying a series will in
fact prepay at a rate conforming to the related pricing prepayment assumptions
or at any other rate.
The amount of original issue discount on a REMIC regular security is
the excess, if any, of the security's stated redemption price at maturity over
its issue price. Under the OID regulations, a debt instrument's stated
redemption price at maturity is the sum of all payments provided by the
instrument other than qualified stated interest, referred to as deemed principal
payments. Qualified stated interest, in general, is stated interest that is
unconditionally payable in
114
<PAGE> 207
cash or property, other than debt instruments of the issuer, at least annually
at (1) a single fixed rate or (2) a variable rate that meets the requirements
set out in the OID regulations. See "Material Federal Income Tax Consequences --
REMIC Securities -- Original Issue Discount -- Variable Rate Securities." Thus,
in the case of any REMIC regular security, the stated redemption price at
maturity will equal the total amount of all deemed principal payments due on
that security. In the case of any REMIC regular security that does not require
unconditional payments of interest at least annually, the stated redemption
price at maturity of the security will equal the aggregate of all payments due,
whether designated as principal, accrued interest, or current interest. The
issue price of a REMIC regular security generally will equal the initial price
at which a substantial amount of securities of the same class is sold to the
public.
The OID regulations contain an aggregation rule under which two or more
debt instruments issued in connection with the same transaction or related
transactions, determined based on all the facts and circumstances, generally are
treated as a single debt instrument for federal income tax accounting purposes
if issued by a single issuer to a single holder. The aggregation rule, however,
does not apply if the debt instrument is part of an issue:
o a substantial portion of which is traded on an established
market; and
o a substantial portion of which is issued for cash, or property
traded on an established market, to parties who are not
related to the issuer or holder and who do not purchase other
debt instruments of the same issuer in connection with the
same transaction or related transactions.
In most cases, the aggregation rule will not apply to REMIC regular
securities of different classes because one or both of the exceptions to the
aggregation rule will have been met. Although the tax administrator currently
intends to apply the aggregation rule to all REMIC regular interests in a series
REMIC that are held by a related series REMIC, it generally will not apply the
aggregation rule to REMIC regular securities for purposes of reporting to
securityholders.
Under a de minimis rule, a REMIC regular security will be considered to
have no original issue discount if the amount of original issue discount is less
than 0.25 percent of the security's stated redemption price at maturity
multiplied by the weighted average maturity, or WAM, of all deemed principal
payments. For that purpose, the WAM of a REMIC regular security is the sum of
the amounts obtained by multiplying the amount of each deemed principal payment
by a fraction, the numerator of which is the number of complete years from the
security's issue date until the payment is made, and the denominator of which is
the security's stated redemption price at maturity. Although no Treasury
regulations have been issued under the relevant provisions of the Internal
Revenue Code, it is expected that the WAM of a REMIC regular security will be
computed using the pricing prepayment assumptions. A REMIC regular
securityholder will include de minimis original issue discount in income on a
pro rata basis as stated principal payments on the security are received or, if
earlier, upon disposition of the security, unless the securityholder makes the
all OID election described below.
115
<PAGE> 208
REMIC regular securities of some series may bear interest under terms
that provide for a teaser rate period, interest holiday, or other period during
which the rate of interest payable on the securities is lower than the rate
payable during the remainder of the life of the securities teaser securities.
Under some circumstances, those securities, referred to as teaser securities,
may be considered to have a de minimis amount of original issue discount even
though the amount of original issue discount on the securities would be more
than de minimis determined as described above. If the stated interest on a
teaser security would be qualified stated interest but for the fact that during
one or more accrual periods its interest rate is below the rate applicable for
the remainder of its term, the amount of original issue discount on the security
that is measured against the de minimis amount of original issue discount
allowable on the security is the greater of:
o the excess of the stated principal amount of the security over
its issue price; and
o the amount of interest that would be necessary to be payable
on the security in order for all stated interest to be
qualified stated interest.
The holder of a REMIC regular security generally must include in gross
income the sum, for all days during his taxable year in which he holds the REMIC
regular security, of the daily portions of the original issue discount on the
security. In the case of an original holder of a REMIC regular security, the
daily portions of original issue discount with respect to the security generally
will be determined by allocating to each day in any accrual period the
security's ratable portion of the excess, if any, of (1) the sum of (a) the
present value of all payments under the security yet to be received as of the
close of the period plus (b) the amount of any deemed principal payments
received on the security during the period over (2) the security's adjusted
issue price at the beginning of the period. The present value of payments yet to
be received on a REMIC regular security is to be computed using the pricing
prepayment assumptions and the security's original yield to maturity, adjusted
to take into account the length of the particular accrual period, and taking
into account deemed principal payments actually received on the security prior
to the close of the accrual period. The adjusted issue price of a REMIC regular
security at the beginning of the first period is its issue price. The adjusted
issue price at the beginning of each subsequent period is the adjusted issue
price of the security at the beginning of the preceding period increased by the
amount of original issue discount allocable to that period and reduced by the
amount of any deemed principal payments received on the security during that
period. Thus, an increased or decreased rate of prepayments received with
respect to a REMIC regular security will be accompanied by a correspondingly
increased or decreased rate of recognition of original issue discount by the
holder of the security.
The yield to maturity of a regular security is calculated based on (a)
the pricing prepayment assumptions and (b) any contingencies not already taken
into account under the pricing prepayment assumptions that, considering all of
the facts and circumstances as of the issue date, are more likely than not to
occur. Contingencies, such as the exercise of mandatory redemptions, that are
taken into account by the parties in pricing the regular security typically will
be subsumed in the pricing prepayment assumptions and thus will be reflected in
the security's yield to maturity. The tax administrator's determination of
whether a contingency relating to a class of regular securities is more likely
than not to occur is binding on each holder
116
<PAGE> 209
of a regular security of a class unless the holder explicitly discloses on its
federal income tax return that its determination of the yield and maturity of
the security is different from that of the tax administrator.
In many cases, REMIC regular securities will be subject to optional
redemption before their stated maturity dates. Under the OID regulations, the
depositor will be presumed to exercise its option to redeem for purposes of
computing the accrual of original issue discount if, and only if, by using the
optional redemption date as the maturity date and the optional redemption price
as the stated redemption price at maturity, the yield to maturity of the
security is lower than it would be if the security were not redeemed early. If
the depositor is presumed to exercise its option to redeem the securities,
original issue discount on the securities will be calculated as if the
redemption date were the maturity date and the optional redemption price were
the stated redemption price at maturity. In cases in which all of the securities
of a particular series are issued at par or at a discount, the depositor will
not be presumed to exercise its option to redeem the securities because a
redemption by the depositor would not lower the yield to maturity of the
securities. If, however, some securities of a particular series are issued at a
premium, the depositor may be able to lower the yield to maturity of the
securities by exercising its redemption option. In determining whether the
depositor will be presumed to exercise its option to redeem securities when one
or more classes of the securities is issued at a premium, the tax administrator
will take into account all classes of securities that are subject to the
optional redemption to the extent that they are expected to remain outstanding
as of the optional redemption date, based on the pricing prepayment assumptions.
If, determined on a combined weighted average basis, the securities of the
classes were issued at a premium, the tax administrator will presume that the
depositor will exercise its option. However, the OID regulations are unclear as
to how the redemption presumption rules should apply to instruments such as the
securities, and there can be no assurance that the IRS will agree with the tax
administrator's position.
A REMIC regular security having original issue discount may be acquired
subsequent to its issuance for more than its adjusted issue price. If the
subsequent holder's adjusted basis in such a security, immediately after its
acquisition, exceeds the sum of all deemed principal payments to be received on
the security after the acquisition date, the security will no longer have
original issue discount, and the holder may be entitled to reduce the amount of
interest income recognized on the security by the amount of amortizable premium.
See "Material Federal Income Tax Consequences -- REMIC Securities -- Amortizable
Premium." If the subsequent holder's adjusted basis in the security, immediately
after the acquisition, exceeds the adjusted issue price of the security, but is
less than or equal to the sum of the deemed principal payments to be received on
the security after the acquisition date, the amount of original issue discount
on the security will be reduced by a fraction, the numerator of which is the
excess of the security's adjusted basis immediately after its acquisition over
the adjusted issue price of the security and the denominator of which is the
excess of the sum of all deemed principal payments to be received on the
security after the acquisition date over the adjusted issue price of the
security. For that purpose, the adjusted basis of a REMIC regular security
generally is reduced by the amount of any qualified stated interest that is
accrued but unpaid as of the acquisition date. Alternatively, the subsequent
holder of a REMIC regular security having original issue discount may make the
all OID election described below with respect to the security.
117
<PAGE> 210
The OID regulations provide that a securityholder generally may make an
election, referred to as an all OID election, to include in gross income all
stated interest, original issue discount, de minimis original issue discount,
market discount, and de minimis market discount that accrues on a REMIC regular
security, reduced by any acquisition premium or amortizable premium, under the
constant yield method used to account for original issue discount. To make the
all OID election, the holder of the security must attach a statement to its
timely filed federal income tax return for the taxable year in which the holder
acquired the security. The statement must identify the instruments to which the
election applies. An all OID election is irrevocable unless the holder obtains
the consent of the IRS. If an all OID election is made for a debt instrument
with market discount, the holder is deemed to have made an election to include
in income currently the market discount on all of the holder's other debt
instruments with market discount, as described in "Material Federal Income Tax
Consequences -- REMIC Securities -- Market Discount" below. In addition, if an
all OID election is made for a debt instrument with amortizable bond premium,
the holder is deemed to have made an election to amortize the premium on all of
the holder's other debt instruments with amortizable premium under the constant
yield method. See "Material Federal Income Tax Consequences -- REMIC
Securities -- Amortizable Premium." Securityholders should be aware that the law
is unclear as to whether an all OID election is effective for a security that is
subject to the contingent payment rules. See "Material Federal Income Tax
Consequences -- REMIC Securities -- Original Issue Discount -- Interest Weighted
Securities and Non-VRDI Securities."
If the interval between the issue date of a current interest security
and the first distribution date contains more days than the number of days of
stated interest that are payable on the first distribution date, the effective
interest rate received by the securityholder during the first distribution
period will be less than the security's stated interest rate, making the
security a teaser security. If the amount of original issue discount on the
security measured under the expanded de minimis test exceeds the de minimis
amount of original issue discount allowable on the security, the amount by which
the stated interest on the security exceeds the interest that would be payable
on the security at the effective rate of interest for the first distribution
period would be treated as part of the security's stated redemption price at
maturity. Accordingly, the holder of a teaser security may be required to
recognize ordinary income arising from original issue discount in the first
distribution period in addition to any qualified stated interest that accrues in
that period.
Similarly, if the first distribution period is shorter than the
interval between subsequent distribution dates, the effective rate of interest
payable on a security during the first distribution period will be higher than
the stated rate of interest if a securityholder receives interest on the first
distribution date based on a full accrual period. Unless the pre-issuance
accrued interest rule described below applies, this type of security, known as a
rate bubble security, would be issued with original issue discount unless the
amount of original issue discount is de minimis. The amount of original issue
discount on a rate bubble security attributable to the first distribution period
would be the amount by which the interest payment due on the first distribution
date exceeds the amount that would have been payable had the effective rate for
that period been equal to the stated interest rate. However, under the
pre-issuance accrued interest rule, if:
118
<PAGE> 211
o a portion of the initial purchase price of a rate bubble
security is allocable to interest that has accrued under the
terms of the security prior to its issue date, known as
pre-issuance accrued interest; and
o the security provides for a payment of stated interest on the
first distribution date within one year of the issue date that
equals or exceeds the amount of the pre-issuance accrued
interest, the security's issue price may be computed by
subtracting from the issue price the amount of pre-issuance
accrued interest.
If the securityholder opts to apply the pre-issuance accrued interest
rule, the portion of the interest received on the first distribution date equal
to the pre-issuance accrued interest would be treated as a return of the
interest and would not be treated as a payment on the security. Thus, where the
pre-issuance accrued interest rule applies, a rate bubble security will not have
original issue discount attributable to the first distribution period, provided
that the increased effective interest rate for that period is attributable
solely to pre-issuance accrued interest, as typically will be the case. The tax
administrator intends to apply the pre-issuance accrued interest rule to each
rate bubble security for which it is available if the security's stated interest
otherwise would be qualified stated interest. If, however, the first
distribution period of a rate bubble security is longer than subsequent payment
periods, the application of the pre-issuance accrued interest rule typically
will not prevent disqualification of the security's stated interest because its
effective interest rate during the first distribution period will be less than
its stated interest rate. Thus, a REMIC regular security with a long first
distribution period typically will be a teaser security, as discussed above. The
pre-issuance accrued interest rule will not apply to any amount paid at issuance
for a teaser security that is nominally allocable to interest accrued under the
terms of the security before its issue date. All amounts paid for a teaser
security at issuance, regardless of how designated, will be included in the
issue price of the security for federal income tax accounting purposes.
It is not entirely clear how income should be accrued with respect to a
REMIC regular security, the payments on which consist entirely or primarily of a
specified nonvarying portion of the interest payable on one or more of the
qualified mortgages held by the REMIC. Unless and until the IRS provides
contrary administrative guidance on the income tax treatment of such a security,
known as an interest weighted security, the tax administrator will take the
position that an interest weighted security does not bear qualified stated
interest, and will account for the income as described in "Material Federal
Income Tax Consequences -- REMIC Securities -- Original Issue Discount --
Interest Weighted Securities and Non-VRDI Securities." Some interest weighted
securities may provide for a relatively small amount of principal and for
interest that can be expressed as qualified stated interest at a very high fixed
rate with respect to that principal. Those securities, referred to as
super-premium securities, technically are issued with amortizable premium.
However, because of their close similarity to other interest weighted securities
it appears more appropriate to account for super-premium securities in the same
manner as for other interest weighted securities. Consequently, in the absence
of further administrative guidance, the tax administrator intends to account for
super-premium securities in the same manner as other interest weighted
securities.
119
<PAGE> 212
In view of the complexities and current uncertainties as to the manner
of inclusion in income of original issue discount on the REMIC regular
securities, we suggest that each investor consult his own tax advisor to
determine the appropriate amount and method of inclusion in income of original
issue discount on the securities for federal income tax purposes.
Variable Rate Securities
A REMIC regular security may pay interest at a variable rate. A
variable rate security that qualifies as a variable rate debt instrument as that
term is defined in the OID regulations, known as a VRDI, will be governed by the
rules applicable to VRDIs, which are described below. A variable rate security
qualifies as a VRDI under the OID regulations if:
o the security is not issued at a premium to its noncontingent
principal amount in excess of the lesser of (a) .015
multiplied by the product of the noncontingent principal
amount and the WAM, as that term is defined above, of the
security and (b) 15 percent of the noncontingent principal
amount;
o stated interest on the security compounds or is payable
unconditionally at least annually at (a) one or more qualified
floating rates, (b) a single fixed rate and one or more
qualified floating rates, (c) a single objective rate, or (d)
a single fixed rate and a single objective rate that is a
qualified inverse floating rate; and
o the qualified floating rate or the objective rate in effect
during an accrual period is set at a current value of that
rate, i.e., the value of the rate on any day occurring during
the interval that begins three months prior to the first day
on which that value is in effect under the security and ends
one year following that day.
Under Treasury regulations, a rate is a qualified floating rate if
variations in the rate reasonably can be expected to measure contemporaneous
variations in the cost of newly borrowed funds in the currency in which the debt
instrument is denominated. A qualified floating rate may measure contemporaneous
variations in borrowing costs for the issuer of the debt instrument or for
issuers in general. A multiple of a qualified floating rate is considered a
qualified floating rate only if the rate is equal to either (a) the product of a
qualified floating rate and a fixed multiple that is greater than .65 but not
more than 1.35 or (b) the product of a qualified floating rate and a fixed
multiple that is greater than .65 but not more than 1.35, increased or decreased
by a fixed rate. If a REMIC regular security provides for two or more qualified
floating rates that reasonably can be expected to have approximately the same
values throughout the term of the security, the qualified floating rates
together will constitute a single qualified floating rate. Two or more qualified
floating rates conclusively will be presumed to have approximately the same
values throughout the term of a security if the values of all rates on the issue
date of the security are within 25 basis points of each other.
A variable rate will be considered a qualified floating rate if it is
subject to a restriction or restrictions on the maximum stated interest rate,
known as a cap, a restriction or restrictions on the minimum stated interest
rate, known as a floor, a restriction or restrictions on the amount of increase
or decrease in the stated interest rate, known as a governor, or other similar
restriction only if: (a) the cap, floor, governor, or similar restriction is
fixed throughout the term of the related security or (b) the cap, floor,
governor, or similar restriction is not reasonably expected,
120
<PAGE> 213
as of the issue date, to cause the yield on the security to be significantly
less or significantly more than the expected yield on the security determined
without a cap, floor, governor, or similar restriction, as the case may be.
Although the OID regulations are unclear, it appears that a VRDI, the principal
rate on which is subject to a cap, floor, or governor that itself is a qualified
floating rate, bears interest at an objective rate.
An objective rate is a rate, other than a qualified floating rate that:
o is determined using a single fixed formula;
o is based on objective financial or economic information; and
o is not based on information that either is within the control
of the issuer or a related party or is unique to the
circumstances of the issuer or related party, such as
dividends, profits, or the value of the issuer's or related
party's stock.
That definition would include, in addition to a rate that is based on one or
more qualified floating rates or on the yield of actively traded personal
property, a rate that is based on changes in a general inflation index. In
addition, a rate would not fail to be an objective rate merely because it is
based on the credit quality of the issuer. A qualified inverse floating rate is
a rate equal to a fixed rate minus a qualified floating rate that inversely
reflects contemporaneous variations in the cost of newly borrowed funds.
If interest on a variable rate security is stated at a fixed rate for
an initial period of less than one year followed by a variable rate that is
either a qualified floating rate or an objective rate for a subsequent period,
and the value of the variable rate on the issue date is intended to approximate
the fixed rate, the fixed rate and the variable rate together constitute a
single qualified floating rate or objective rate. A variable rate conclusively
will be presumed to approximate an initial fixed rate if the value of the
variable rate on the issue date does not differ from the value of the fixed rate
by more than 25 basis points.
All interest payable on a variable rate security that qualifies as a
VRDI and provides for stated interest unconditionally payable in cash or
property at least annually at a single qualified floating rate or a single
objective rate, is treated as qualified stated interest. The amount and accrual
of original issue discount on that type of security, known as a single rate VRDI
security, is determined, in general, by converting the security into a
hypothetical fixed rate security and applying the rules applicable to fixed rate
securities described under "Material Federal Income Tax Consequences -- REMIC
Securities -- Original Issue Discount" above to the hypothetical fixed rate
security. Qualified stated interest or original issue discount allocable to an
accrual period with respect to a single rate VRDI security also must be
increased or decreased if the interest actually accrued or paid during an
accrual period exceeds or is less than the interest assumed to be accrued or
paid during an accrual period under the related hypothetical fixed rate
security.
Except as provided below, the amount and accrual of original issue
discount on a variable rate security that qualifies as a VRDI but is not a
single rate VRDI security, known as a multiple rate VRDI security, is determined
by converting the security into a hypothetical equivalent fixed
121
<PAGE> 214
rate security that has terms that are identical to those provided under the
multiple rate VRDI security, except that the hypothetical equivalent fixed rate
security will provide for fixed rate substitutes in lieu of the qualified
floating rates or objective rate provided for under the multiple rate VRDI
security. A multiple rate VRDI security that provides for a qualified floating
rate or rates or a qualified inverse floating rate is converted to a
hypothetical equivalent fixed rate security by assuming that each qualified
floating rate or the qualified inverse floating rate will remain at its value as
of the issue date. A multiple rate VRDI security that provides for an objective
rate or rates is converted to a hypothetical equivalent fixed rate security by
assuming that each objective rate will equal a fixed rate that reflects the
yield that reasonably is expected for the multiple rate VRDI security. Qualified
stated interest or original issue discount allocable to an accrual period with
respect to a multiple rate VRDI security must be increased or decreased if the
interest actually accrued or paid during an accrual period exceeds or is less
than the interest assumed to be accrued or paid during an accrual period under
the hypothetical equivalent fixed rate security.
The amount and accrual of original issue discount on a multiple rate
VRDI security that provides for stated interest at either one or more qualified
floating rates or at a qualified inverse floating rate and in addition provides
for stated interest at a single fixed rate other than an initial fixed rate that
is intended to approximate the subsequent variable rate is determined using the
method described above for all other multiple rate VRDI securities, except that
prior to its conversion to a hypothetical equivalent fixed rate security, the
multiple rate VRDI security is treated as if it provided for a qualified
floating rate or a qualified inverse floating rate, rather than the fixed rate.
The qualified floating rate or qualified inverse floating rate replacing the
fixed rate must be such that the fair market value of the multiple rate VRDI
security as of its issue date would be approximately the same as the fair market
value of an otherwise identical debt instrument that provides for the qualified
floating rate or qualified inverse floating rate, rather than the fixed rate.
REMIC regular securities of some series may provide for interest based
on a weighted average of the interest rates on some or all of the REMIC's
assets. Under the OID regulations, it appears that weighted average securities
relating to a REMIC whose assets consist exclusively of adjustable rate loans
bear interest at objective rates, provided the adjustable rate loans themselves
bear interest at qualified floating rates. However, under the OID regulations,
weighted average securities relating to a REMIC whose assets do not bear
interest at qualified floating rates, known as non-objective weighted average
securities or NOWA securities, do not bear interest at an objective or a
qualified floating rate and, consequently, do not qualify as VRDIs. Accordingly,
unless and until the IRS provides contrary administrative guidance on the income
tax treatment of NOWA securities, the tax administrator intends to account for
the income on the securities as described in "Material Federal Income Tax
Consequences -- REMIC Securities -- Original Issue Discount -- Interest Weighted
Securities and Non-VRDI Securities."
REMIC regular securities of some series may provide for the payment of
interest at a rate determined as the difference between two interest rate
parameters, one of which is a variable rate and the other of which is a fixed
rate or a different variable rate. Under the OID regulations, those securities,
known as inverse floater securities, generally bear interest at objective rates,
122
<PAGE> 215
because their rates either constitute a qualified inverse floating rate under
those regulations or, although not qualified floating rates themselves, the
rates are based on one or more qualified floating rates. Consequently, if the
securities are not issued at an excess premium and their interest rates
otherwise meet the test for qualified stated interest, the income on the
securities will be accounted for under the rules applicable to VRDIs described
above. However, an inverse floater security may have an interest rate parameter
equal to the weighted average of the interest rates on some or all of the assets
held by the related REMIC, in a case where one or more of those rates is a fixed
rate or otherwise may not qualify as a VRDI. Unless and until the IRS provides
contrary administrative guidance on the income tax treatment of the inverse
floater securities, the tax administrator intends to account for the income on
the securities as described in "Material Federal Income Tax Consequences --
REMIC Securities -- Original Issue Discount -- Interest Weighted Securities and
Non-VRDI Securities."
Interest Weighted Securities and Non-VRDI Securities
The treatment of a NOWA security, a variable rate security that is
issued at an excess premium, any other variable rate security that does not
qualify as a VRDI, each, a non-VRDI security, or an interest weighted security,
is unclear under current law. The OID regulations contain provisions known as
the contingent payment regulation, that address the federal income tax treatment
of debt obligations that provide for one or more contingent payments. Under the
contingent payment regulations, any variable rate debt instrument that is not a
VRDI is classified as a contingent payment obligation. However, the contingent
payment regulations, by their terms, do not apply to REMIC regular interests and
other instruments that are subject to section 1272(a)(6) of the Internal Revenue
Code. In the absence of further guidance, the tax administrator will account for
non-VRDI securities, interest weighted securities, and other REMIC regular
securities that are contingent payment obligations in accordance with Internal
Revenue Code section 1272(a)(6) and the accounting methodology described in this
paragraph. Income will be accrued on the securities based on a constant yield
that is derived from a projected payment schedule as of the closing date. The
projected payment schedule will take into account the related pricing prepayment
assumptions and the interest payments that are expected to be made on the
securities based on the value of any relevant indices on the issue date. To the
extent that actual payments differ from projected payments for a particular
taxable year, appropriate adjustments to interest income and expense accruals
will be made for that year. In the case of a weighted average security, the
projected payments schedule will be derived based on the assumption that the
principal balances of the mortgage loans that collateralize the security pay
down pro rata.
The method described in the foregoing paragraph for accounting for
interest weighted securities and non-VRDI securities is consistent with Internal
Revenue Code section 1272(a)(6) and the legislative history. Because of the
uncertainty with respect to the treatment of the securities under the OID
regulations, however, there can be no assurance that the IRS will not assert
successfully that a method less favorable to securityholders will apply. In view
of the complexities and the current uncertainties as to income inclusions with
respect to non-VRDI securities and interest weighted securities, particularly
with respect to the method that should be used to account for the income on the
securities, we suggest that each investor consult his or her
123
<PAGE> 216
own tax advisor to determine the appropriate amount and method of income
inclusion on the securities for federal income tax purposes.
Anti-Abuse Rule
Concerned that taxpayers might be able to structure debt instruments or
transactions, or to apply the bright-line or mechanical rules of the OID
regulations, in a way that produce unreasonable tax results, the Treasury issued
regulations containing an anti-abuse rule on the same date as the issuance of
the OID regulations. The regulations provide that if a principal purpose in
structuring a debt instrument, engaging in a transaction, or applying the OID
regulations is to achieve a result that is unreasonable in light of the purposes
of the applicable statutes, the IRS can apply or depart from the OID regulations
as necessary or appropriate to achieve a reasonable result. A result is not
considered unreasonable under the regulations, however, in the absence of a
substantial effect on the present value of a taxpayer's tax liability.
Market Discount
A subsequent purchaser of a REMIC regular security at a discount from
its outstanding principal amount or, in the case of a REMIC regular security
having original issue discount, its adjusted issue price, will acquire the
security with market discount. The purchaser generally will be required to
recognize the market discount, in addition to any original issue discount
remaining with respect to the security, as ordinary income. A person who
purchases a REMIC regular security at a price lower than the remaining
outstanding deemed principal payments but higher than its adjusted issue price
does not acquire the security with market discount, but will be required to
report original issue discount, appropriately adjusted to reflect the excess of
the price paid over the adjusted issue price. See "Material Federal Income Tax
Consequences -- REMIC Securities -- Original Issue Discount." A REMIC regular
security will not be considered to have market discount if the amount of the
market discount is de minimis, i.e., less than the product of:
o 0.25 percent of the remaining principal amount of the security
or, in the case of a REMIC regular security having original
issue discount, the adjusted issue price of the security;
multiplied by
o the WAM of the security remaining after the date of purchase.
Regardless of whether the subsequent purchaser of a REMIC regular
security with more than a de minimis amount of market discount is a cash-basis
or accrual-basis taxpayer, market discount generally will be taken into income
as principal payments, including, in the case of a REMIC regular security having
original issue discount, any deemed principal payments, are received, in an
amount equal to the lesser of (a) the amount of the principal payment received
or (b) the amount of market discount that has accrued but that has not yet been
included in income. The purchaser may make a special election, which generally
applies to all market discount instruments held or acquired by the purchaser in
the taxable year of election or subsequently, to recognize market discount
currently on an uncapped accrual basis, known as the current recognition
election. The IRS has set forth in Revenue Procedure 92-67 the manner in which a
current recognition election may be made. In addition, a purchaser may make an
all OID election with respect to a REMIC regular security purchased with market
discount. See "Material Federal Income Tax Consequences -- REMIC Securities --
Original Issue Discount" above.
124
<PAGE> 217
Until the Treasury promulgates applicable regulations, the purchaser of
a REMIC regular security with market discount generally may elect to accrue the
market discount either:
o on the basis of a constant interest rate;
o in the case of a REMIC regular security not issued with
original issue discount, in the ratio of stated interest
payable in the relevant period to the total stated interest
remaining to be paid from the beginning of the period; and
o in the case of a REMIC regular security issued with original
issue discount, in the ratio of original issue discount
accrued for the relevant period to the total remaining
original issue discount at the beginning of the period. The
IRS indicated in Revenue Procedure 92-67 the manner in which
an election may be made to accrue market discount on a REMIC
regular security on the basis of a constant interest rate.
Regardless of which computation method is elected, the pricing prepayment
assumptions must be used to calculate the accrual of market discount.
A securityholder who has acquired any REMIC regular security with
market discount generally will be required to treat a portion of any gain on a
sale or exchange of the security as ordinary income to the extent of the market
discount accrued to the date of disposition under one of the foregoing methods,
less any accrued market discount previously reported as ordinary income as
partial principal payments were received. Moreover, the securityholder generally
must defer interest deductions attributable to any indebtedness incurred or
continued to purchase or carry the security to the extent they exceed income on
the security. Any deferred interest expense, in general, is allowed as a
deduction not later than the year in which the related market discount income is
recognized. If a regular securityholder makes a current recognition election or
an all OID election, the interest deferral rule will not apply.
Treasury regulations implementing the market discount rules have not
yet been issued, and uncertainty exists with respect to many aspects of those
rules. For example, the treatment of a REMIC regular security subject to
redemption at the option of the depositor that is acquired at a market discount
is unclear. It appears likely, however, that the market discount rules
applicable in such a case would be similar to the rules pertaining to original
issue discount. Due to the substantial lack of regulatory guidance with respect
to the market discount rules, it is unclear how those rules will affect any
secondary market that develops for a given class of REMIC regular securities. We
suggest that prospective investors in REMIC regular securities consult their own
tax advisors as to the application of the market discount rules to those
securities.
Amortizable Premium
A purchaser of a REMIC regular security who purchases the security at a
premium over the total of its deemed principal payments may elect to amortize
the premium under a constant yield method that reflects compounding based on the
interval between payments on the securities. The legislative history of the 1986
Act indicates that premium is to be accrued in the same manner as market
discount. Accordingly, it appears that the accrual of premium on a REMIC regular
security will be calculated using the pricing prepayment assumptions. Under
Treasury regulations, amortized premium generally would be treated as an offset
to interest
125
<PAGE> 218
income on a REMIC regular security and not as a separate deduction item. If a
holder makes an election to amortize premium on a REMIC regular security, the
election will apply to all taxable debt instruments, including all REMIC regular
interests, held by the holder at the beginning of the taxable year in which the
election is made, and to all taxable debt instruments acquired by the holder,
and will be irrevocable without the consent of the IRS. We suggest that
purchasers who pay a premium for the REMIC regular securities consult their tax
advisors regarding the election to amortize premium and the method to be
employed.
Amortizable premium on a REMIC regular security that is subject to
redemption at the option of the trust generally must be amortized as if the
optional redemption price and date were the security's principal amount and
maturity date if doing so would result in a smaller amount of premium
amortization during the period ending with the optional redemption date. Thus, a
securityholder would not be able to amortize any premium on a REMIC regular
security that is subject to optional redemption at a price equal to or greater
than the securityholder's acquisition price unless and until the redemption
option expires. In cases where premium must be amortized on the basis of the
price and date of an optional redemption, the security will be treated as having
matured on the redemption date for the redemption price and then having been
reissued on that date for that price. Any premium remaining on the security at
the time of the deemed reissuance will be amortized on the basis of (a) the
original principal amount and maturity date or (b) the price and date of any
succeeding optional redemption, under the principles described above. Under the
contingent payment regulations, a secondary market purchaser of a non-VRDI
security or an interest weighted security at a premium generally would continue
to accrue interest and determine adjustments on the security based on the
original projected payment schedule devised by the issuer of the security. See
"Material Federal Income Tax Consequences -- REMIC Securities -- Original Issue
Discount -- Interest Weighted Securities and Non-VRDI Securities" in this
prospectus. The holder of such a security would allocate the difference between
its basis in the security and the adjusted issue price of the security as
negative adjustments to the accruals or projected payments on the security over
the remaining term of the security in a manner that is reasonable -- e.g., based
on a constant yield to maturity.
Consequences of Realized Losses
Under section 166 of the Internal Revenue Code, both corporate holders
of REMIC regular securities and non-corporate holders that acquire REMIC regular
securities 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
REMIC regular securities become wholly or partially worthless as the result of
one or more realized losses on the underlying assets. However, a non-corporate
holder that does not acquire a REMIC regular security in connection with its
trade or business will not be entitled to deduct a loss under Internal Revenue
Code section 166 until its REMIC regular security becomes wholly worthless,
i.e., until its outstanding security principal balance has been reduced to zero,
and the loss will be characterized as short-term capital loss.
Each holder of a REMIC regular security will be required to accrue
original issue discount income with respect to the security without giving
effect to any reduction in distributions attributable to a default or
delinquency on the underlying assets until a realized loss is allocated to the
security or until such earlier time as it can be established that any reduction
126
<PAGE> 219
ultimately will not be recoverable. As a result, the amount of original issue
discount reported in any period by the holder of a REMIC regular security could
exceed significantly the amount of economic income actually realized by the
holder in a period. Although the holder of a REMIC regular security eventually
will recognize a loss or a reduction in income attributable to previously
included original issue discount that, as a result of a realized loss,
ultimately will not be realized, the law is unclear with respect to the timing
and character of a loss or reduction in income. Accordingly, we suggest that
holders of REMIC regular securities consult with their own tax advisors with
respect to the federal income tax consequences of realized losses on original
issue discount.
The tax administrator will adjust the accrual of original issue
discount on REMIC regular securities in a manner that it believes to be
appropriate to reflect realized losses. However, there can be no assurance that
the IRS will not contend successfully that a different method of accounting for
the effect of realized losses is correct and that the method will not have an
adverse effect upon the holders of REMIC regular securities.
Gain or Loss on Disposition
If a REMIC regular security is sold, the securityholder will recognize
gain or loss equal to the difference between the amount realized on the sale and
his adjusted basis in the security. The adjusted basis of a REMIC regular
security generally will equal the cost of the security to the securityholder,
increased by any original issue discount or market discount previously
includable in the securityholder's gross income with respect to the security,
and reduced by the portion of the basis of the security allocable to payments on
the security, other than qualified stated interest, previously received by the
securityholder and by any amortized premium. Similarly, a securityholder who
receives a scheduled or prepaid principal payment with respect to a REMIC
regular security will recognize gain or loss equal to the difference between the
amount of the payment and the allocable portion of his adjusted basis in the
security. Except to the extent that the market discount rules apply and except
as provided below, any gain or loss on the sale or other disposition of a REMIC
regular security generally will be capital gain or loss. The gain or loss will
be long-term gain or loss if the security is held as a capital asset for more
than the applicable long-term capital gain holding period.
If the holder of a REMIC regular security is a bank, thrift, or similar
institution described in section 582 of the Internal Revenue Code, any gain or
loss on the sale or exchange of the REMIC regular security will be treated as
ordinary income or loss. In the case of other types of holders, gain from the
disposition of a REMIC regular security that otherwise would be capital gain
will be treated as ordinary income to the extent that the amount actually
includable in income with respect to the security by the securityholder during
his holding period is less than the amount that would have been includable in
income if the yield on that security during the holding period had been 110
percent of a specified U.S. Treasury borrowing rate as of the date that the
securityholder acquired the security. Although the legislative history to the
1986 Act indicates that the portion of the gain from disposition of a REMIC
regular security that will be recharacterized as ordinary income is limited to
the amount of original issue discount, if any, on the security that was not
previously includable in income, the applicable Internal Revenue Code provision
contains no such limitation.
127
<PAGE> 220
A portion of any gain from the sale of a REMIC regular security that
might otherwise be capital gain may be treated as ordinary income to the extent
that the security is held as part of a conversion transaction within the meaning
of section 1258 of the Internal Revenue Code. A conversion transaction generally
is one in which the taxpayer has taken two or more positions in securities 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 taxpayer's net investment
at 120 percent of the appropriate applicable federal rate, which rate is
computed and published monthly by the IRS, at the time the taxpayer entered into
the conversion transaction, subject to appropriate reduction for prior inclusion
of interest and other ordinary income from the transaction.
Currently, the highest marginal individual income tax bracket is 39.6
percent. The alternative minimum tax rate for individuals is 26 percent with
respect to AMT income up to $175,000 and 28 percent with respect to alternative
minimum tax rate income over $175,000. The highest marginal federal tax rate
applicable to individuals with respect to net capital gain on assets held for
one year or less generally is 28 percent. Accordingly, there can be a
significant marginal tax rate differential between net capital gains and
ordinary income for individuals. The highest marginal corporate tax rate is 35
percent for corporate taxable income over $10 million, and the marginal tax rate
on corporate net capital gains also is 35 percent.
TAX TREATMENT OF RESIDUAL SECURITIES
Overview
Residual securities will be considered residual interests in the series
REMIC to which they relate. A REMIC is an entity for federal income tax purposes
consisting of a fixed pool of mortgages or other mortgage-backed assets in which
investors hold multiple classes of interests. To be treated as a REMIC, the
trust or one or more segregated pools of trust assets underlying a series must
meet specified continuing qualification requirements, and a REMIC election must
be in effect. See "REMIC Qualification." A series REMIC generally will be
treated as a pass-through entity for federal income tax purposes, i.e., as not
subject to entity-level tax. All interests in a series REMIC other than the
residual securities must be regular interests. As described in "Tax Treatment of
Regular Securities," a regular interest generally is an interest whose terms are
analogous to those of a debt instrument and it generally is treated as a debt
instrument for federal income tax purposes. REMIC regular securities will
generate interest and original issue discount deductions for the REMIC. As a
residual interest, a residual security represents the right to stated principal
and interest on the security, if any, and the income generated by the REMIC
assets in excess of the amount necessary to service the regular interests and
pay the REMIC's expenses. In a manner similar to that employed in the taxation
of partnerships, REMIC taxable income or loss will be determined at the REMIC
level, but passed through to the residual securityholders. Thus, REMIC taxable
income or loss will be allocated pro rata to the residual securityholders, and
each residual securityholder will report his share of REMIC taxable income or
loss on his own federal income tax return. Prospective investors in residual
securities should be aware that the obligation to account for the REMIC's income
or loss will continue until all of the REMIC regular
128
<PAGE> 221
securities have been retired, which may not occur until well beyond the date on
which the last payments on residual securities are made. In addition, because of
the way in which REMIC taxable income is calculated, a residual securityholder
may recognize phantom income, i.e., income recognized for tax purposes in excess
of income as determined under financial accounting or economic principles, which
will be matched in later years by a corresponding tax loss or reduction in
taxable income, but which could lower the yield to residual securityholders due
to the lower present value of the loss or reduction.
A portion of the income of residual securityholders in specified series
of REMICs will be treated unfavorably in three contexts:
o it may not be offset by current or net operating loss
deductions;
o it will be considered unrelated business taxable income, or
UBTI, to tax-exempt entities; and
o it is ineligible for any statutory or treaty reduction in the
30 percent withholding tax otherwise available to a foreign
residual securityholder.
The concepts presented in this overview are discussed more fully below.
TAXATION OF RESIDUAL SECURITYHOLDERS
A residual securityholder will recognize his share of REMIC taxable
income or loss for each day during his taxable year on which he holds the
residual security. The amount so recognized will be characterized as ordinary
income or loss and generally will not be taxed separately to the REMIC. If a
residual security is transferred during a calendar quarter, REMIC taxable income
or loss for that quarter will be prorated between the transferor and the
transferee on a daily basis.
A REMIC generally determines its taxable income or loss in a manner
similar to that of an individual using a calendar year and the accrual method of
accounting. REMIC taxable income or loss will be characterized as ordinary
income or loss and will consist of the REMIC's gross income, including interest,
original issue discount, and market discount income, if any, on the REMIC's
assets, including temporary cash flow investments, premium amortization on the
REMIC regular securities, income from foreclosure property, and any cancellation
of indebtedness income due to the allocation of realized losses to REMIC regular
securities, reduced by the REMIC's deductions, including deductions for interest
and original issue discount expense on the REMIC regular securities, premium
amortization and servicing fees on the assets, the administration expenses of
the REMIC and the REMIC regular securities, any tax imposed on the REMIC's
income from foreclosure property, and any bad debt deductions with respect to
the mortgage loans. However, the REMIC may not take into account any items
allocable to a prohibited transaction. See "Material Federal Income Tax
Consequences -- REMIC Securities -- REMIC-Level Taxes." The deduction of REMIC
expenses by residual securityholders who are individuals is subject to specified
limitations as described in "Material Federal Income Tax Consequences -- REMIC
Securities -- Special Considerations for Some Types of Investors -- Individuals
and Pass-through Entities."
129
<PAGE> 222
The amount of the REMIC's net loss with respect to a calendar quarter
that may be deducted by a residual securityholder is limited to the
securityholder's adjusted basis in the residual security as of the end of that
quarter or time of disposition of the residual security, if earlier, determined
without taking into account the net loss for that quarter. A residual
securityholder's basis in its residual security initially is equal to the price
paid for the security. The basis is increased by the amount of income recognized
with respect to the residual security and decreased but not below zero by the
amount of distributions made and the amount of net losses recognized with
respect to that security. The amount of the REMIC's net loss allocable to a
residual securityholder that is disallowed under the basis limitation may be
carried forward indefinitely, but may be used only to offset income with respect
to the related residual security. The ability of residual securityholders to
deduct net losses with respect to a residual security may be subject to
additional limitations under the Internal Revenue Code, and we suggest that
securityholders consult their tax own tax advisors regarding those limitations.
A distribution with respect to a residual security is treated as a non-taxable
return of capital up to the amount of the residual securityholder's adjusted
basis in his residual security. If a distribution exceeds the adjusted basis of
the residual security, the excess is treated as gain from the sale of the
residual security.
Although the law is unclear in some respects, a residual securityholder
effectively should be able to recover some or all of the basis in his residual
security as the REMIC recovers the basis of its assets through either the
amortization of premium on REMIC's assets or the allocation of basis to
principal payments received on the REMIC's assets. The REMIC's initial aggregate
basis in its assets will equal the sum of the issue prices of all residual
securities and REMIC regular securities. In general, the issue price of a REMIC
regular security of a particular class is the initial price at which a
substantial amount of the securities of the class is sold to the public. In the
case of a REMIC regular security of a class not offered to the public, the issue
price is either the price paid by the first purchaser of the security or the
fair market value of the property received in exchange for the security, as
appropriate. The REMIC's aggregate basis will be allocated among its assets in
proportion to their respective fair market values.
The assets of some series of REMICs may have bases that exceed their
principal amounts. Except as indicated in "Material Federal Income Tax
Consequences -- REMIC Securities -- Treatment by the REMIC of Original Issue
Discount, Market Discount, and Amortizable Premium," the premium on a REMIC's
assets will be amortizable under the constant yield method and the same
prepayment assumptions used in pricing the securities. The amortized premium
will reduce the REMIC's taxable income or increase its tax loss for each year
which will offset a corresponding amount of the stated interest or other
residual cash flow, if any, allocable to the residual securityholders. It should
be noted, however, that the law concerning the amortization of premium on
mortgage loans and mortgage certificates is unclear in some respects. If the IRS
were to contend successfully that part or all of the premium on the REMIC's
assets underlying some series of REMIC is not amortizable, the residual
securityholders would recover the basis attributable to the unamortizable
premium only as principal payments are received on the assets or upon the
disposition or worthlessness of their residual securities. The inability to
amortize part or all of the premium could give rise to timing differences
between the REMIC's income and deductions, creating phantom income. Because
phantom income arises
130
<PAGE> 223
from timing differences, it will be matched by a corresponding loss or reduction
in taxable income in later years, during which economic or financial income will
exceed REMIC taxable income. Any acceleration of taxable income, however, could
lower the yield to a residual securityholder, since the present value of the tax
paid on that income will exceed the present value of the corresponding tax
reduction in the later years. The amount and timing of any phantom income are
dependent upon the structure of the particular series REMIC and the rate of
prepayment on the mortgage loans comprising or underlying the REMIC's assets
and, therefore, cannot be predicted without reference to a particular series
REMIC.
The assets of some series of REMICs may have bases that are less than
their principal amounts. In such a case, a residual securityholder will recover
the basis in his residual security as the REMIC recovers the portion of its
basis in the assets that is attributable to the residual interest. The REMIC's
basis in the assets is recovered as it is allocated to principal payments
received by the REMIC.
A portion of the REMIC's taxable income may be subject to special
treatment. That portion, known as excess inclusion income, generally is any
taxable income beyond that which the residual securityholder would have
recognized had the residual security been a conventional debt instrument bearing
interest at 120 percent of the applicable long-term federal rate based on
quarterly compounding as of the date on which the residual security was issued.
Excess inclusion income generally is intended to approximate phantom income and
may result in unfavorable tax consequences for some investors. See "Material
Federal Income Tax Consequences -- REMIC Securities -- Taxation of residual
Securityholders Limitations on Offset or Exemption of REMIC Income" and
"Material Federal Income Tax Consequences -- REMIC Securities -- Special
Considerations for Some Types of Investors."
LIMITATIONS ON OFFSET OR EXEMPTION OF REMIC INCOME
Generally, a residual securityholder's taxable income for any taxable
year may not be less than the securityholder's excess inclusion income for that
taxable year. Excess inclusion income is equal to the excess of REMIC taxable
income for the quarterly period for the residual securities over the product of
(a) 120 percent of the long-term applicable federal rate that would have applied
to the residual securities if they were debt instruments for federal income tax
purposes on the date of their issuance and (b) the adjusted issue price of the
residual securities at the beginning of the related quarterly period. For this
purpose, the adjusted issue price of a residual security at the beginning of a
quarter is the issue price of the residual security, increased by the amount of
the daily accruals of REMIC income for all prior quarters, and decreased by any
distributions made with respect to the residual security prior to the beginning
of the quarterly period. If the residual securityholder is an organization
subject to the tax on UBTI imposed by Internal Revenue Code section 511, the
residual securityholder's excess inclusion income will be treated as UBTI. In
addition, under Treasury regulations yet to be issued, if a REIT or a RIC owns a
residual security that generates excess inclusion income, a pro rata portion of
the dividends paid by the REIT or the RIC generally will constitute excess
inclusion income for its shareholders. Finally, residual securityholders that
are foreign persons will not be entitled to any exemption from the 30 percent
withholding tax or a reduced treaty rate with respect to their
131
<PAGE> 224
excess inclusion income from the REMIC. See "Material Federal Income Tax
Consequences -- REMIC Securities -- Taxation of Some Foreign Holders of REMIC
Securities -- Residual Securities."
NON-RECOGNITION OF SOME TRANSFERS FOR FEDERAL INCOME TAX PURPOSES
In addition to the limitations specified above, the REMIC regulations
provide that the transfer of a noneconomic residual interest to a United States
person will be disregarded for tax purposes unless no significant purpose of the
transfer was to impede the assessment or collection of tax. A residual security
will constitute a noneconomic residual interest unless, at the time the interest
is transferred:
o the present value of the expected future distributions with
respect to the residual security equals or exceeds the product
of the present value of the anticipated excess inclusion
income and the highest corporate tax rate for the year in
which the transfer occurs; and
o the transferor reasonably expects that the transferee will
receive distributions from the REMIC in amounts sufficient to
satisfy the taxes on excess inclusion income as they accrue.
If a transfer of a residual interest is disregarded, the transferor
would continue to be treated as the owner of the residual security and thus
would continue to be subject to tax on its allocable portion of the net income
of the related REMIC. A significant purpose to impede the assessment or
collection of tax exists if the transferor, at the time of the transfer, either
knew or should have known that the transferee would be unwilling or unable to
pay taxes due on its share of the taxable income of the REMIC, i.e., the
transferor has improper knowledge. Under an applicable safe harbor, a transferor
is presumed not to have improper knowledge if:
o the transferor conducted, at the time of the transfer, a
reasonable investigation of the financial condition of the
transferee and, as a result of the investigation, the
transferor found that the transferee had historically paid its
debts as they came due and found no significant evidence to
indicate that the transferee would not continue to pay its
debts as they come due; and
o the transferee represents to the transferor that it
understands that, as the holder of a noneconomic residual
interest, it may incur tax liabilities in excess of any cash
flows generated by the interest and that it intends to pay the
taxes associated with holding the residual interest as they
become due.
Proposed Treasury regulations issued on February 4, 2000, would modify
that safe harbor, however. Under the new proposed regulations, a transfer of a
noneconomic residual interest would not qualify under the safe harbor unless, in
addition to the requirements noted above, the present value of the anticipated
tax liabilities associated with holding the residual interest does not exceed
the sum of the present values of (a) any consideration given to the transferee
to acquire the interest, (b) the expected future distributions on the interest,
and (c) any anticipated tax savings associated with holding the interest as the
REMIC generate losses. For
132
<PAGE> 225
purposes of that calculation, present value generally is calculated using a
discount rate equal to the applicable federal rate. The new proposed regulations
indicate that the effective date for the safe harbor modifications could be as
early as February 4, 2000. Limitations also exist with respect to transfers of
some residual interests to foreign investors. See "Material Federal Income Tax
Consequences -- REMIC Securities -- Taxation of Some Foreign Holders of REMIC
Securities -- Residual Securities."
OWNERSHIP OF RESIDUAL INTERESTS BY DISQUALIFIED ORGANIZATIONS
The Internal Revenue Code contains three sanctions that are designed to
prevent or discourage the direct or indirect ownership of a REMIC residual
interest by the United States, any state or state political subdivision, any
foreign government, any international organization, any agency or
instrumentality of any of the foregoing, any tax-exempt organization other than
a farmers' cooperative described in section 521 of the Internal Revenue Code
that is not subject to the tax on UBTI, or any rural electrical or telephone
cooperative, each a disqualified organization. A corporation is not treated as
an instrumentality of the United States or any state or political subdivision if
all of its activities are subject to tax and, with the exception of Freddie Mac,
a majority of its board of directors is not selected by a governmental unit.
First, the REMIC status of any REMIC created after March 31, 1988 is
dependent upon the presence of reasonable arrangements designed to prevent a
disqualified organization from acquiring record ownership of a residual
interest. Residual interests in series REMICs are not offered for sale to
disqualified organizations. Furthermore:
o residual interests in series REMICs will be registered as to
both principal and any stated interest with the trustee or its
agent and transfer of a residual interest may be effected only
(a) by surrender of the old residual interest instrument and
reissuance by the trustee of a new residual interest
instrument to the new holder or (b) through a book entry
system maintained by the trustee;
o the applicable trust agreement will prohibit the ownership of
residual interests by disqualified organizations; and
o each residual interest instrument will contain a legend
providing notice of that prohibition.
Consequently, each series REMIC should be considered to have made
reasonable arrangements designed to prevent the ownership of residual interests
by disqualified organizations.
Second, the Internal Revenue Code imposes a one-time tax on the
transferor of a residual interest to a disqualified organization. The one-time
tax equals the product of (a) the present value of the total anticipated excess
inclusions with respect to the transferred residual interest for periods after
the transfer and (b) the highest marginal federal income tax rate applicable to
corporations. Under the REMIC regulations, the anticipated excess inclusions
with respect to a transferred residual interest must be based on (a) both actual
prior prepayment experience and the prepayment assumptions used in pricing the
related REMIC's interests and (b) any required or
133
<PAGE> 226
permitted clean up calls or required qualified liquidation provided for in the
REMIC's organizational documents. The present value of anticipated excess
inclusions is determined using a discount rate equal to the applicable federal
rate that would apply to a debt instrument that was issued on the date the
disqualified organization acquired the residual interest and whose term ends on
the close of the last quarter in which excess inclusions are expected to accrue
with respect to the residual interest. Where a transferee is acting as an agent
for a disqualified organization, the transferee is subject to the one-time tax.
Upon the request of the transferee or the transferor, the REMIC must furnish to
the requesting party and to the IRS information sufficient to permit the
computation of the present value of the anticipated excess inclusions. For that
purpose, the term agent includes a broker, nominee, or other middleman. The
transferor of a residual interest will not be liable for the one-time tax if the
transferee furnishes to the transferor an affidavit that states, under penalties
of perjury, 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. The one-time tax must be paid by April 15th of the year
following the calendar year in which the residual interest is transferred to a
disqualified organization. The one-time tax may be waived by the Secretary of
the Treasury if, upon discovery that a transfer is subject to the one-time tax,
the disqualified organization promptly disposes of the residual interest and the
transferor pays the amounts as the Secretary may require.
Third, the Internal Revenue Code imposes an annual tax on any
pass-through entity, i.e., a RIC, REIT, common trust fund, partnership, trust,
estate or cooperative described in Internal Revenue Code section 1381, that owns
a direct or indirect interest in a residual interest, if record ownership of an
interest in the pass-through entity is held by one or more disqualified
organizations. The tax imposed equals the highest corporate rate multiplied by
the share of any excess inclusion income of the pass-through entity for the
taxable year that is allocable to the interests in the pass-through entity held
by disqualified organizations. The same tax applies to a nominee who acquires an
interest in a residual security on behalf of a disqualified organization. For
example, a broker that holds an interest in a residual security in street name
for a disqualified organization is subject to the tax. The tax due must be paid
by the fifteenth day of the fourth month following the close of the taxable year
of the pass-through entity in which the disqualified organization is a record
holder. Any tax of this kind imposed on a pass-through entity would be
deductible against that entity's ordinary income in determining the amount of
its required distributions. In addition, dividends paid by a RIC or a REIT are
not considered preferential dividends within the meaning of section 562(c) of
the Internal Revenue Code solely because the RIC or REIT allocates a tax expense
only to the shares held by disqualified organizations. A pass-through entity
will not be liable for the annual tax if the record holder of the interest in
the pass-through entity furnishes to the pass-through entity an affidavit that
states, under penalties of perjury, that the record holder is not a disqualified
organization, and the pass-through entity does not have actual knowledge that
the affidavit is false.
If an electing large partnership holds a residual security, all
interests in the electing large partnership are treated as held by disqualified
organizations for purposes of the tax imposed upon a pass-through entity by
section 860E(c) of the Internal Revenue Code. The exception to this tax,
otherwise available to a pass-through entity that is furnished the specific
affidavits as described above, is not available to an electing large
partnership.
134
<PAGE> 227
The applicable trust agreement will provide that no record or
beneficial ownership interest in a residual security may be purchased,
transferred or sold, directly or indirectly, without the express written consent
of the master servicer. The master servicer will grant the required consent to a
proposed transfer only if it receives:
o an affidavit from the proposed transferee to the effect that
it is not a disqualified organization and is not acquiring the
residual security as a nominee or agent for a disqualified
organization; and
o a covenant by the proposed transferee to the effect that the
proposed transferee agrees to be bound by and to abide by the
transfer restrictions applicable to the residual security.
The Internal Revenue Code and the REMIC regulations also require that
reasonable arrangements be made with respect to each REMIC to enable the REMIC
to provide the Treasury and the transferor with information necessary for the
application of the one-time tax described above. Consequently, the applicable
trust agreement will provide for the tax administrator or an affiliate to
perform information services as may be required for the application of the
one-time tax. If a residual securityholder transfers an interest in a residual
security in violation of the relevant transfer restrictions and triggers the
information requirement, the tax administrator or the affiliate may charge the
residual securityholder a reasonable fee for providing the information.
SPECIAL CONSIDERATIONS FOR SOME TYPES OF INVESTORS
Dealers in securities. Residual securityholders that are dealers in
securities should be aware that under Treasury regulations, the mark-to-market
regulations, relating to the requirement under section 475 of the Internal
Revenue Code that dealers in securities use mark-to-market accounting for
federal income tax purposes, dealers in securities are not permitted to mark to
market any REMIC residual interests acquired on or after January 4, 1995. We
suggest that prospective purchasers of residual securities consult with their
tax advisors regarding the possible application of the mark-to-market
regulations.
Tax-Exempt Entities. Any excess inclusion income with respect to a
residual security held by a tax-exempt entity, including a qualified
profit-sharing, pension, or other employee benefit plan, will be treated as
UBTI. Although the legislative history and statutory provisions imply otherwise,
the Treasury conceivably could take the position that, under pre-existing
Internal Revenue Code provisions, substantially all income on a residual
security including non-excess inclusion income is to be treated as UBTI. See
"Material Federal Income Tax Consequences -- REMIC Securities -- Taxation of
Residual Securityholders."
Individuals and Pass-Through Entities. A residual securityholder who is
an individual, trust, or estate will be able to deduct its allocable share of
the fees or expenses relating to servicing the assets assigned to a trust or
administering the series REMIC under section 212 of the Internal Revenue Code
only to the extent that the amount of the fees or expenses, when combined with
the securityholder's other miscellaneous itemized deductions for the taxable
year,
135
<PAGE> 228
exceeds 2 percent of the holder's adjusted gross income. That same limitation
will apply to individuals, trusts, or estates that hold residual securities
indirectly through a grantor trust, a partnership, an S corporation, a common
trust fund, a REMIC, or a nonpublicly offered RIC. A nonpublicly offered RIC is
a RIC other than one whose shares are:
o continuously offered in a public offering;
o regularly traded on an established securities market; and
o held by no fewer than 500 persons at all times during the
taxable year.
In addition, that limitation will apply to individuals, trusts, or
estates that hold residual securities through any other person (a) that is not
generally subject to federal income tax and (b) the character of whose income
may affect the character of the income generated by that person for its owners
or beneficiaries. In addition, Internal Revenue Code section 68 provides that
the amount of itemized deductions otherwise allowable for the taxable year for
an individual whose adjusted gross income exceeds the applicable amount
$128,950, or $64,475 in the case of a separate return by a married individual
within the meaning of Internal Revenue Code section 7703 for taxable year 2000
and adjusted for inflation in each following year, will be reduced by the lesser
of (i) 3 percent of the excess of adjusted gross income over the applicable
amount, or (ii) 80 percent of the amount of itemized deductions otherwise
allowable for the taxable year. In some cases, the amount of additional income
that would be recognized as a result of the foregoing limitations by a residual
securityholder who is an individual, trust, or estate could be substantial.
Non-corporate holders of REMIC residual securities also should be aware that
miscellaneous itemized deductions, including allocable investment expenses
attributable to a REMIC, are not deductible for purposes of the AMT. Finally,
persons holding an interest in a residual security indirectly through an
interest in a RIC, common trust fund or one of the corporations doing business
as a cooperative generally will recognize a share of any excess inclusion
allocable to that residual security.
Employee Benefit Plans. See "Material Federal Income Tax
Consequences -- Residual Securities -- Special Considerations for Some Types of
Investors -- Tax-exempt Entities" and "ERISA Considerations."
REITS and RICS. If the residual securityholder is a REIT and the REMIC
generates excess inclusion income, a portion of REIT dividends will be treated
as excess inclusion income for the REIT's shareholders, in a manner to be
provided by regulations. Thus, shareholders in a REIT that invests in residual
securities could face unfavorable treatment of a portion of their REIT dividend
income for purposes of (i) using current deductions or NOL carryovers or
carrybacks, (ii) UBTI in the case of tax-exempt shareholders, and (iii)
withholding tax in the case of foreign shareholder. See "Material Federal Income
Tax Consequences -- Residual Securities -- Special Considerations for Some Types
of Investors -- Foreign Residual Securityholders." Moreover, because residual
securityholders may recognize phantom income, a REIT contemplating an investment
in residual securities should consider carefully the effect of any phantom
income upon its ability to meet its income distribution requirements under the
Internal Revenue Code. The same rules regarding excess inclusion will apply to a
residual securityholder that is a RIC, common trust fund, or one of the
corporations doing business as a cooperative.
136
<PAGE> 229
A residual security held by a REIT will be treated as a real estate
asset for purposes of the REIT qualification requirements in the same proportion
that the REMIC's assets would be treated as real estate assets if held directly
by the REIT, and interest income derived from the residual security will be
treated as qualifying interest income for REIT purposes, to the same extent. If
95 percent or more of a REMIC's assets qualify as real estate assets for REIT
purposes, 100 percent of that REMIC's regular and residual interests will be
treated as real estate assets for REIT purposes, and all of the income derived
from the interests will be treated as qualifying REIT interest. The REMIC
regulations provide that payments of principal and interest on mortgage loans
that are reinvested pending distribution to the holders of the REMIC securities
constitute real estate assets for REIT purposes. Two REMICs that are part of a
tiered structure will be treated as one REMIC for purposes of determining the
percentage of assets of each REMIC that constitutes real estate assets. It is
expected that at least 95 percent of the assets of a series REMIC will be real
estate assets throughout the REMIC's life. The amount treated as a real estate
asset in the case of a residual security apparently is limited to the REIT's
adjusted basis in the security. REITs should be aware that 100 percent of the
interest income derived by a REIT from a residual interest in the REMIC may not
be treated as qualifying REIT interest if the REMIC holds mortgage loans that
provide for interest that is contingent on mortgagor profits or property
appreciation.
Significant uncertainty exists with respect to the treatment of a
residual security for purposes of the various asset composition requirements
applicable to RICs. A residual security should be treated as a security, but
probably will not be considered a government security for purposes of section
851(b)(4) of the Internal Revenue Code. Moreover, it is unclear whether a
residual security will be treated as a voting security under that Internal
Revenue Code section. Finally, because the REMIC will be treated as the issuer
of the residual security for purposes of that section, a RIC would be unable to
invest more than 25 percent of the value of its total assets in residual
securities.
Partnerships. Partners in a partnership that acquires a residual
security generally must take into account their allocable share of any income,
including excess inclusion income, that is produced by the residual security.
The partnership itself is not subject to tax on income from the residual
security other than excess inclusion income that is allocable to partnership
interests owned by disqualified organizations.
Foreign Residual Securityholders. Some adverse tax consequences may be
associated with the holding of the residual securities by a foreign person or
with the transfer of the securities to or from a foreign person. See "Material
Federal Income Tax Consequences -- REMIC Securities -- Taxation of Some Foreign
Holders of REMIC Securities -- Residual Securities."
Thrift Institutions, Banks, and Other Financial Institutions. Residual
securities will be treated as qualifying assets for thrift institutions in the
same proportion that the assets of the REMIC would be so treated. However, if 95
percent or more of the assets of a given series REMIC are qualifying assets for
thrift institutions, 100 percent of that REMIC's regular and residual interests
would be treated as qualifying assets. In addition, the REMIC regulations
provide that payments of principal and interest on mortgage loans that are
reinvested pending
137
<PAGE> 230
their distribution to the holders of the REMIC securities will be treated as
qualifying assets for thrift institutions. Moreover, two REMICs that are part of
a tiered structure will be treated as one REMIC for purposes of determining the
percentage of assets of each REMIC that constitutes qualifying assets for thrift
institution purposes. It is expected that at least 95 percent of the assets of
any series REMIC will be qualifying assets for thrift institutions throughout
the REMIC's life. The amount of a residual security treated as a qualifying
asset for thrift institutions, however, cannot exceed the holder's adjusted
basis in that residual security.
Generally, gain or loss arising from the sale or exchange of residual
securities held by particular financial institutions will give rise to ordinary
income or loss, regardless of the length of the holding period for the residual
securities. Those financial institutions include banks, mutual savings banks,
cooperative banks, domestic building and loan institutions, savings and loan
institutions, and similar institutions.
DISPOSITION OF RESIDUAL SECURITIES
A residual securityholder will recognize gain or loss on the
disposition of his residual security equal to the difference between the amount
of proceeds, or the fair market value of any property, received and his adjusted
basis in the residual security. If the holder has held the residual security for
more than the applicable holding period, the gain or loss generally will be
characterized as long-term capital gain or loss. In the case of banks, thrifts,
and other financial institutions, however, gain or loss on the disposition of a
residual security will be treated as ordinary gain or loss, regardless of the
length of the holding period. See "Material Federal Income Tax Consequences --
REMIC Securities -- Special Considerations for Some Types of Investors."
A special version of the wash sale rules will apply to dispositions of
residual securities. Under that version, losses on dispositions of residual
securities generally will be disallowed where, within six months before or after
the disposition, the seller of the securities acquires any residual interest in
a REMIC or any interest in a taxable mortgage pool. Regulations providing for
appropriate exceptions to the application of the wash sale rules have been
authorized, but have not yet been promulgated.
LIQUIDATION OF THE REMIC
A REMIC may liquidate without the imposition of entity-level tax only
in a qualified liquidation. A liquidation is considered qualified if the REMIC:
o adopts a plan of complete liquidation;
o sells all of its non-cash assets within 90-days of the date on
which it adopts the plan; and
o distributes in liquidation all sale proceeds plus its cash
other than amounts retained to meet claims against it to
securityholders within the 90-day period.
138
<PAGE> 231
Under the REMIC regulations, a plan of liquidation need not be in any
special form. Furthermore, if a REMIC specifies the first day in the 90-day
liquidation period in a statement attached to its final tax return, the REMIC
will be considered to have adopted a plan of liquidation on that date.
TREATMENT BY THE REMIC OF ORIGINAL ISSUE DISCOUNT, MARKET DISCOUNT, AND
AMORTIZABLE PREMIUM
Original Issue Discount. Generally, the REMIC's deductions for original
issue discount expense on its REMIC regular securities will be determined in the
same manner as for determining the original issue discount income of the holders
of the securities, as described in "Material Federal Income Tax Consequences --
REMIC Securities -- Original Issue Discount" without regard to the de minimis
rule described in that section.
Market Discount. In general, the REMIC will have market discount income
with respect to its qualified mortgages if the basis of the REMIC in the
mortgages is less than the adjusted issue prices of the mortgages. The REMIC's
aggregate initial basis in its qualified mortgages and any other assets
transferred to the REMIC on the startup day equals the aggregate of the issue
prices of the regular and residual interests in the REMIC. That basis is
allocated among the REMIC's qualified mortgages based on their relative fair
market values. Any market discount that accrues on the REMIC's qualified
mortgages will be recognized currently as an item of REMIC ordinary income. The
amount of market discount income to be recognized in any period is determined in
a manner generally similar to that used in the determination of original issue
discount, as if the qualified mortgages had been issued (i) on the date they
were acquired by the REMIC and (ii) for a price equal to the REMIC's initial
basis in the qualified mortgages. The pricing prepayment assumptions are used to
compute the yield to maturity of the REMIC's qualified mortgages.
Premium. Generally, if the basis of the REMIC in its qualified
mortgages exceeds the unpaid principal balances of those mortgages, the REMIC
will be considered to have acquired the mortgages at a premium equal to the
amount of that excess. As stated above, the REMIC's initial basis in its
qualified mortgages equals the aggregate of the issue prices of the regular and
residual interests in the REMIC. As described above under "Material Federal
Income Tax Consequences -- REMIC Securities -- Amortizable Premium," a REMIC
that holds a qualified mortgage as a capital asset generally may elect under
Internal Revenue Code section 171 to amortize premium on that mortgage under a
constant interest method, to the extent the mortgages were originated, or
treated as originated, after September 27, 1985. The legislative history to the
1986 Act indicates that, while the deduction for amortization of premium will
not be subject to the limitations on miscellaneous itemized deductions of
individuals, it will be treated as interest expense for purposes of other
provisions in the 1986 Act limiting the deductibility of interest for
non-corporate taxpayers. Because substantially all of the mortgagors on the
mortgage loans that comprise or underlie the qualified mortgages are expected to
be individuals, section 171 will not be available for the amortization of
premium on the mortgage loans to the extent they were originated on or prior to
September 27, 1985. The premium may be amortizable under more general provisions
and principles of federal income tax law in accordance with a reasonable
139
<PAGE> 232
method regularly employed by the holder of the mortgage loans. The allocation of
the premium pro rata among principal payments should be considered a reasonable
method; however, the IRS may argue that the premium should be allocated in a
different manner, such as allocating the premium entirely to the final payment
of principal.
REMIC-LEVEL TAXES
Income from some transactions by the REMIC, called prohibited
transactions, will not be part of the calculation of the REMIC's income or loss
that is includable in the federal income tax returns of residual
securityholders, but rather will be taxed directly to the REMIC at a 100 percent
rate. In addition, net income from one prohibited transaction may not be offset
by losses from other prohibited transactions. Prohibited transactions generally
include:
o the disposition of qualified mortgages other than in
connection with (a) the repurchase of a defective mortgage,
(b) the substitution for a defective mortgage within two years
of the closing date, (c) a substitution for any qualified
mortgage within three months of the closing date, (d) the
foreclosure, default, or imminent default of a qualified
mortgage, (e) the bankruptcy or insolvency of the REMIC, (f)
the sale of a convertible mortgage loan upon its conversion
for an amount equal to the mortgage loan's current principal
balance plus accrued but unpaid interest, and provided that
other requirements are met or (g) a qualified liquidation of
the REMIC;
o the receipt of income from assets that are not the type of
mortgages or investments that the REMIC is permitted to hold;
o the receipt of compensation for services by the REMIC; and
o the receipt of gain from the disposition of cash-flow
investments other than in connection with a qualified
liquidation of the REMIC.
A disposition of a qualified mortgage or cash flow investment will not
give rise to a prohibited transaction, however, if the disposition was:
o required to prevent default on a regular interest resulting
from a default on one or more of the REMIC's qualified
mortgages; and
o made to facilitate a clean-up call.
The REMIC regulations define a clean-up call as the redemption of a
class of regular interests when, by reason of prior payments with respect to
those interests, the administrative costs associated with servicing the class
outweigh the benefits of maintaining the class. Under those regulations, the
redemption of a class of regular interests with an outstanding principal balance
of no more than 10 percent of the original principal balance qualifies as a
clean-up call. The REMIC regulations also provide that the modification of a
mortgage loan generally will not be treated as a disposition of that loan if it
is occasioned by a default or a reasonably foreseeable default, an assumption of
the mortgage loan, the waiver of a due-on-sale or encumbrance clause, or the
conversion of an interest rate by a mortgagor under the terms of a convertible
adjustable rate mortgage loan.
140
<PAGE> 233
In addition, a REMIC generally will be taxed at a 100 percent rate on
any contribution to the REMIC after the closing date unless the contribution is
a cash contribution that (a) takes place within the three-month period beginning
on the closing date, (b) is made to facilitate a clean-up call, as described in
the preceding paragraph or a qualified liquidation, (c) is a payment in the
nature of a guarantee, (d) constitutes a contribution by the holder of the
residual securities in the REMIC to a qualified reserve fund, or (e) is
otherwise permitted by Treasury regulations yet to be issued. The structure and
operation of series REMICs generally will be designed to avoid the imposition of
both the 100 percent tax on contributions and the 100 percent tax on prohibited
transactions.
To the extent that a REMIC derives some types of income from
foreclosure property, generally income relating to dealer activities of the
REMIC, it will be taxed on the income at the highest corporate income tax rate.
It is not anticipated that any series REMIC will receive significant amounts of
these types of income, although the relevant law is unclear.
The organizational documents governing the REMIC regular and residual
securities will be designed to prevent the imposition of the foregoing taxes on
the related series REMIC in any material amounts. If any of the foregoing taxes
is imposed on a series REMIC, the trustee will seek to place the tax burden on
the person whose action or inaction gave rise to the taxes. To the extent that
the trustee is unsuccessful in doing so, the burden of the taxes will be borne
by any outstanding subordinated class of securities before it is borne by a more
senior class of securities.
REMIC QUALIFICATION
The trust underlying a series or one or more designated pools of assets
held by the trust will qualify under the Internal Revenue Code as a REMIC in
which the REMIC regular securities and the residual securities will constitute
the regular interests and the residual interests, respectively, if a REMIC
election is in effect and tests concerning (a) the composition of the REMIC's
assets and (b) the nature of the securityholders' interests in the REMIC are met
on a continuing basis.
ASSET COMPOSITION
In order for a trust or one or more designated pools of assets held by
a trust to be eligible for REMIC status, substantially all of the assets of the
trust or the designated pool must consist of qualified mortgages and permitted
investments as of the close of the third month beginning after the closing date
and at all times after such date. This requirement is known as the asset
qualification test. A REMIC will be deemed to satisfy the asset qualification
test if no more than a de minimis amount of its assets, i.e., assets with an
aggregate adjusted basis that is less than 1 percent of the aggregate adjusted
basis of all the REMIC's assets, are assets other than qualified mortgages and
permitted investments. A qualified mortgage is any obligation that is
principally secured by an interest in real property, including a regular
interest in another REMIC, that is either transferred to the REMIC on the
closing date or purchased by the REMIC under a fixed price contract within a
three-month period after the closing date. A qualified mortgage also includes a
qualified replacement mortgage, which is any property that would have been
treated as a qualified mortgage if it were transferred to the REMIC on the
closing date and that is received
141
<PAGE> 234
either in exchange for a defective mortgage within a two-year period beginning
on the closing date or in exchange for any qualified mortgage within a
three-month period beginning on that date. The assets of each series REMIC will
be treated as qualified mortgages.
Permitted investments include cash flow investments, qualified reserve
assets, and foreclosure property. Cash flow investments are investments of
amounts received with respect to qualified mortgages for a temporary period not
to exceed thirteen months before distribution to holders of regular or residual
interests in the REMIC. Qualified reserve assets are intangible investment
assets other than REMIC residual interests that are part of a reasonably
required reserve, called a qualified reserve fund, that is maintained by the
REMIC to provide for full payment of expenses of the REMIC or amounts due on the
regular interests in the event of defaults or delinquencies on qualified
mortgages, lower than expected returns on cash-flow investments, or interest
shortfalls on qualified mortgages caused by prepayments of those mortgages. A
qualified reserve fund will be disqualified if more than 30 percent of the gross
income from the assets in a fund for the year is derived from the sale of
property held for less than three months, unless a sale was required to prevent
a default on the regular interests caused by a default on one or more qualified
mortgages. To the extent that the amount in a qualified reserve fund exceeds a
reasonably required amount, it must be reduced promptly and appropriately.
Foreclosure property generally is property acquired by the REMIC in connection
with the default or imminent default of a qualified mortgage. Property so
acquired by the REMIC, however, will not be qualifying foreclosure property if
the foreclosure was anticipated at the time that the related qualified mortgage
was transferred to the REMIC. Furthermore, foreclosure property may not be held
for more than three taxable years after the taxable year of acquisition, unless
it is established to the satisfaction of the Secretary of the Treasury that an
extension of the three-year period is necessary for the orderly liquidation of
the foreclosure property. The Secretary of the Treasury may grant an extension,
but any extension shall not extend the grace period beyond the date which is six
years after the date the foreclosure property is acquired.
INVESTORS' INTERESTS
In addition to the foregoing asset qualification requirements, the
various interests in a REMIC must meet other specific requirements. All of the
interests in a REMIC must be issued on the closing date or within a specified
10-day period and belong to either of the following: (a) one or more classes of
regular interests or (b) a single class of residual interests on which
distributions are made pro rata. In the case of a series that includes residual
securities, the residual interest will be represented by the residual
securities.
If the interest payable on any REMIC regular interest is
disproportionately high relative to the specified principal amount of the
interest, that interest may be treated, in whole or in part, as a second
residual interest, which could result in the disqualification of the REMIC.
Under the REMIC regulations, interest payments or similar amounts are considered
disproportionately high if the issue price of the REMIC regular interest exceeds
125 percent of the specified principal amount of the regular interest. Under the
REMIC regulations, however, interest payable at a disproportionately high rate
will not cause a REMIC regular security to be recharacterized as a
142
<PAGE> 235
residual interest if interest payments on the security consist of a specified
portion of the interest payments on qualified mortgages and that portion does
not vary during the period that the security is outstanding. None of the REMIC
regular securities will have an issue price that exceeds 125 percent of their
respective specified principal amounts unless interest payments on those
securities consist of a specified nonvarying portion of the interest payments on
one or more of the REMIC's qualified mortgages.
A REMIC interest qualifies as a regular interest if:
o it is issued on the startup day with fixed terms;
o it is designated as a regular interest;
o it entitles its holder to a specified principal amount; and
o if it pays interest, that interest either (a) constitutes a
specified nonvarying portion of the interest on one or more of
the REMIC's qualified mortgages, (b) is payable at a fixed
rate with respect to the principal amount of the regular
interest, or (c) to the extent permitted under the REMIC
regulations, is payable at a variable rate with respect to
that principal amount.
Under the REMIC regulations, the following rates are permissible
variable rates for REMIC regular interests:
o a qualified floating rate set at a current value as described
in "Material Federal Income Tax Consequences -- REMIC
Securities -- Original Issue Discount -- Variable Rate
Securities" without regard to the rules in the OID regulations
limiting the use of caps, floors, and governors with respect
to the rate;
o a rate equal to the highest, lowest, or average of two or more
qualified floating rates, e.g., a rate based on the average
cost of funds of one or more financial institutions; and
o a rate equal to the weighted average of the interest rates on
some or all of the qualified mortgages held by the REMIC
provided, however, that the qualified mortgages taken into
account in determining the weighted average rate bear interest
at a fixed rate or a rate that would be a permissible variable
rate for a REMIC regular interest as described in this
sentence.
Under the REMIC regulations, the presence of a ceiling or floor on the
interest payable on a variable rate interest will not prevent the interest from
qualifying as a regular interest. In addition, a qualifying variable rate may be
expressed as a multiple of, or a constant number of basis points more or less
than, one of the permissible types of variable rates described above. Finally, a
limitation on the amount of interest to be paid on a variable rate regular
interest based on the total amount available for distribution is permissible,
provided that it is not designed to avoid the restrictions on qualifying
variable rates. The REMIC regulations also provide that the specified principal
amount of a REMIC regular interest may be zero if the interest associated with
the regular interest constitutes a specified nonvarying portion of the interest
on one or more of the REMIC's qualified mortgages.
143
<PAGE> 236
The Internal Revenue Code requires that some arrangements be made with
respect to all REMICs. Those arrangements, which are intended to prevent
acquisitions of REMIC residual interests by organizations that are not subject
to federal income tax, are described in "Material Federal Income Tax
Consequences -- REMIC Securities -- Taxation of Residual Securityholders --
Ownership of Residual Interests by Disqualified Organizations." Series REMICs
will be structured to provide for those arrangements.
CONSEQUENCES OF DISQUALIFICATION
If a series REMIC fails to comply with one or more of the Internal
Revenue Code's ongoing requirements for REMIC status during any taxable year,
the Internal Revenue Code provides that its REMIC status may be lost for that
year and the following years. If REMIC status is lost, the treatment of the
former REMIC and the interests in the REMIC for federal income tax purposes is
uncertain. The former REMIC might be entitled to treatment as a grantor trust
under Subpart E, Part 1 of Subchapter J of the Internal Revenue Code or as a
partnership, in which case no entity-level tax would be imposed on the former
REMIC. Alternatively, the REMIC regular securities may continue to be treated as
debt instruments for federal income tax purposes, but the arrangement could be
treated as a taxable mortgage pool, as described in "Material Federal Income Tax
Consequences -- REMIC Securities -- Taxable Mortgage Pools." If a series REMIC
were treated as a taxable mortgage pool, any residual income of the REMIC, i.e.,
interest and discount income from the mortgage loans less interest and original
issue discount expense allocable to the REMIC regular securities and any
administrative expenses of the REMIC, would be subject to corporate income tax
at the taxable mortgage pool level. On the other hand, the arrangement could be
treated under Treasury regulations as a separate association taxable as a
corporation and the REMIC regular securities would be treated as stock interests
in that corporation, rather than debt instruments. In that case, none of the
payments made with respect to the REMIC regular securities would be deductible
by the former REMIC. In the latter two cases, the residual securities also would
be treated as stock interests in the taxable mortgage pool or association,
respectively. The Internal Revenue Code authorizes the Treasury to issue
regulations that address situations where a failure to meet the requirements for
REMIC status occurs inadvertently and in good faith. The regulations have not
yet been issued. The conference report accompanying the 1986 Act indicates that
disqualification relief may be accompanied by sanctions, such as the imposition
of a corporate tax on all or a portion of the REMIC's income for the period of
time in which the requirements for REMIC status are not satisfied.
TAXABLE MORTGAGE POOLS
Corporate income tax can be imposed on the net income of some entities
issuing non-REMIC debt obligations secured by real estate mortgages. These
entities are called taxable mortgage pools. Any entity other than a REMIC, a
FASIT or a REIT will be considered to be a taxable mortgage pool if:
o substantially all of the assets of the entity consist of debt
obligations and more than 50 percent of the obligations
consist of real estate mortgages;
o the entity is the obligor under debt obligations with two or
more maturities; and
144
<PAGE> 237
o under the terms of the debt obligations on which the entity is
the obligor, payments on the obligations bear a relationship
to payments on the obligations held by the entity.
Furthermore, a group of assets held by an entity can be treated as a
separate taxable mortgage pool if the assets are expected to produce significant
cash flow that will support one or more of the entity's issues of debt
obligations. The depositor generally will structure offerings of non-REMIC bonds
to avoid the application of the taxable mortgage pool rules.
TAXATION OF SOME FOREIGN HOLDERS OF REMIC SECURITIES
REMIC Regular Securities
Interest, including original issue discount, paid on a REMIC regular
security to a nonresident alien individual, foreign corporation, or other
non-United States person, i.e., a foreign person, generally will be treated as
portfolio interest and, therefore, will not be subject to any United States
withholding tax, provided that (a) the interest is not effectively connected
with a trade or business in the United States of the securityholder, (b) the
trustee or other person who would otherwise be required to withhold tax is
provided with appropriate certification, called foreign person certification,
that the beneficial owner of the security is a foreign person, (c) the foreign
person is not a 10 percent shareholder within the meaning of section
871(h)(3)(B) of the Internal Revenue Code or a controlled foreign corporation as
described under section 881(c)(3)(C) of the Internal Revenue Code, and (d) the
foreign person is not a bank receiving interest on a loan made in the ordinary
course of business. If the securityholder fails to meet the conditions listed
above, interest, including original issue discount, paid on a security may be
subject to either a 30 percent withholding tax or 31 percent backup withholding.
See "Material Federal Income Tax Consequences -- REMIC Securities -- Backup
Withholding."
Residual Securities
Amounts paid to residual securityholders who are foreign persons are
treated as interest for purposes of the 30 percent, or lower treaty rate, United
States withholding tax. Under Treasury regulations, non-excess inclusion income
received by residual securityholders who are foreign persons generally qualifies
as portfolio interest exempt from the 30 percent withholding tax only to the
extent that (a) the assets of the trust REMIC are mortgage certificates that are
issued in registered form, (b) the mortgage loans underlying the mortgage
certificates were originated after July 18, 1984 and (c) the securityholder
meets the requirements listed under "Material Federal Income Tax Consequences --
REMIC Securities -- Taxation of Some Foreign Holders of REMIC Securities --
REMIC Regular Securities." Because mortgage loans are not issued in registered
form, amounts received by residual securityholders who are foreign persons will
not be exempt from the 30 percent withholding tax to the extent the amounts
relate to mortgage loans held directly, rather than indirectly through mortgage
certificates, by the related REMIC. If the portfolio interest exemption is
unavailable, the amounts paid generally will be subject to United States
withholding tax when paid or otherwise distributed, or when the residual
security is disposed of, under rules similar to those for withholding on debt
instruments that have original issue discount. However, the Internal Revenue
Code grants the Treasury authority to issue regulations requiring that those
amounts be taken into account earlier than otherwise provided where necessary to
prevent avoidance of tax, i.e., where the residual securities, as a class, do
not have significant value. Further, a residual securityholder will not be
entitled to any
145
<PAGE> 238
exemption from the 30 percent withholding tax or a reduced treaty rate on excess
inclusion income.
Under the REMIC regulations, a transfer of a residual security that has
tax avoidance potential will be disregarded for federal income tax purposes if
the transferee is a foreign person. A residual security is deemed to have tax
avoidance potential unless, at the time of the transfer, the transferor
reasonably expects that, for each accrual of excess inclusion, the REMIC will
distribute to the transferee an amount that will equal at least 30 percent of
the excess inclusion, and that such amount will be distributed no later than the
close of the calendar year following the calendar year of accrual. This is known
as the 30 percent test. A transferor of a residual security to a foreign person
will be presumed to have had a reasonable expectation that the residual security
satisfies the 30 percent test if that test would be satisfied for all mortgage
loan prepayment rates between 50 percent and 200 percent of the pricing
prepayment assumption. See "Material Federal Income Tax Consequences -- REMIC
Securities -- Original Issue Discount." If a foreign person transfers a residual
security to a United States person and the transfer, if respected, would permit
avoidance of withholding tax on accrued excess inclusion income, the transfer
will be disregarded for federal income tax purposes and distributions with
respect to the residual security will continue to be subject to 30 percent
withholding as though the foreign person still owned the residual security. We
suggest that investors who are foreign persons consult their own tax advisors
regarding the specific tax consequences to them of owning and disposing of a
residual security.
Backup Withholding
Under federal income tax law, a securityholder may be subject to backup
withholding under certain circumstances. Backup withholding may apply to a
securityholder who is a United States person if the securityholder, among other
things:
o fails to furnish his social security number or other taxpayer
identification number, or TIN, to the trustee;
o furnishes the trustee an incorrect TIN;
o fails to report properly interest and dividends; and
o under certain circumstances, fails to provide the trustee or
the securityholder's securities broker with a certified
statement, signed under penalties of perjury, that the TIN
provided to the trustee is correct and that the securityholder
is not subject to backup withholding.
Backup withholding applies, under some circumstances, to a
securityholder who is a foreign person if the securityholder fails to provide
the trustee or the securityholder's securities broker with foreign person
certification. Backup withholding applies to reportable payments, which include
interest payments and principal payments to the extent of accrued original issue
discount, as well as distributions of proceeds from the sale of REMIC regular
securities or REMIC residual securities. The backup withholding rate is 31
percent for payments made on or after January 1, 1993. Backup withholding,
however, does not apply to payments on a security made to some exempt
recipients, such as tax-exempt organizations, and to some foreign persons.
146
<PAGE> 239
We suggest that securityholders consult their tax advisors for additional
information concerning the potential application of backup withholding to
payments received by them with respect to a security.
REPORTING AND TAX ADMINISTRATION
REMIC Regular Securities
Reports will be made at least annually to holders of record of REMIC
regular securities, other than those with respect to whom reporting is not
required, and to the IRS as may be required by statute, regulation, or
administrative ruling with respect to (a) interest paid or accrued on the
securities, (b) original issue discount, if any, accrued on the securities, and
(c) information necessary to compute the accrual of any market discount or the
amortization of any premium on the securities.
Residual Securities
For purposes of federal income tax reporting and administration, a
series REMIC generally will be treated as a partnership, and the related
residual securityholders as its partners. A series REMIC will file an annual
return on Form 1066 and will be responsible for providing information to
residual securityholders sufficient to enable them to report properly their
shares of the REMIC's taxable income or loss, although it is anticipated that
this information actually will be supplied by the trustee or the master
servicer. The REMIC regulations require reports to be made by a REMIC to its
residual securityholders each calendar quarter in order to permit the
securityholders to compute their taxable income accurately. A person that holds
a residual security as a nominee for another person is required to furnish those
quarterly reports to the person for whom it is a nominee within 30-days of
receiving the reports. A REMIC is required to file all of the quarterly reports
for a taxable year with the IRS as an attachment to the REMIC's income tax
return for that year. As required by the Internal Revenue Code, a series REMIC's
taxable year will be the calendar year.
Residual securityholders should be aware that their responsibilities as
holders of the residual interest in a REMIC, including the duty to account for
their shares of the REMIC's income or loss on their returns, continue for the
life of the REMIC, even after the principal and interest on their residual
securities have been paid in full.
Under the REMIC regulations, a residual securityholder must be
designated as the REMIC's tax matters person, or TMP. The TMP generally has
responsibility for overseeing and providing notice to the other residual
securityholders of administrative and judicial proceedings regarding the REMIC's
tax affairs, although other holders of the residual securities of the same
series would be able to participate in the proceedings in appropriate
circumstances. It is expected that either the depositor, the master servicer or
an affiliate of either will acquire a portion of the residual interest in each
series REMIC in order to permit it to be designated as TMP for the REMIC or will
obtain from the residual securityholders an irrevocable appointment to perform
the functions of the REMIC's TMP and will prepare and file the REMIC's federal
and state income tax and information returns.
147
<PAGE> 240
Treasury regulations provide that a holder of a residual security is
not required to treat items on its return consistently with their treatment on
the REMIC's return if a holder owns 100 percent of the residual securities for
the entire calendar year. Otherwise, each holder of a residual security is
required to treat items on its returns consistently with their treatment on the
REMIC's return, unless the holder of a residual security either files a
statement identifying the inconsistency or establishes that the inconsistency
resulted from incorrect information received from the REMIC. The IRS may assess
a deficiency resulting from a failure to comply with the consistency requirement
without instituting an administrative proceeding at the REMIC level. A series
REMIC typically will not register as a tax shelter under Internal Revenue Code
section 6111 because it generally will not have a net loss for any of the first
five taxable years of its existence. Any person that holds a residual security
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 for whom the interest is held and other specified information.
New Withholding Regulations
The Treasury Department has issued new regulations which make some
modifications to the withholding, backup withholding and information reporting
rules described above. The new withholding regulations generally will be
effective for payments made after December 31, 2000, subject to various
transition rules. We suggest that prospective investors consult their tax
advisors regarding the new withholding regulations.
NON-REMIC CERTIFICATES
Treatment of the Trust Fund for Federal Income Tax Purposes
In the case of each series of mortgage pass-through certificates with
respect to which no REMIC election is made, the trust fund will be classified as
a grantor trust under Subpart E, Part I of subchapter J of the Internal Revenue
Code and not as an association taxable as a corporation. For federal income tax
purposes, the owner of a non-REMIC certificate will be treated as the beneficial
owner of an appropriate portion of the principal and interest payments,
according to the characteristics of the certificate in question, to be received
on the assets assigned to a trust fund.
TREATMENT OF THE NON-REMIC CERTIFICATES FOR FEDERAL INCOME TAX PURPOSES
Generally
The types of non-REMIC certificates offered in a series may include:
o securities evidencing ownership interests only in the interest
payments on the assets assigned to a trust fund, net of fees,
called IO securities;
o securities evidencing ownership interests in the principal,
but not the interest, payments on the assets, called PO
securities;
o securities evidencing ownership interests in differing
percentages of both the interest payments and the principal
payments on the assets, called ratio securities; and
148
<PAGE> 241
o securities evidencing ownership in equal percentages of the
principal and interest payments on the assets, called
pass-through securities.
The federal income tax treatment of non-REMIC securities other than
pass-through securities, called strip securities, will be determined in part by
section 1286 of the Internal Revenue Code. Little administrative guidance has
been issued under that section and, thus, many aspects of its operation are
unclear, particularly the interaction between that section and the rules
pertaining to discount and premium. Hence, significant uncertainty exists with
respect to the federal income tax treatment of the strip securities, and we
suggest that potential investors consult their own tax advisors concerning the
treatment of these securities.
Several Internal Revenue Code sections provide beneficial treatment to
some taxpayers that invest in particular types of mortgage assets. For purposes
of those Internal Revenue Code sections, pass-through securities will be
characterized with reference to the assets in the trust, but it is not clear
whether the strip securities will be so characterized. The IRS could take the
position that the character of the assets is not attributable to the strip
securities for purposes of those sections. However, because the strip securities
represent sole ownership rights in the principal and interest payments on the
assets, the strip securities, like the pass-through securities, should be
considered to represent real estate assets within the meaning of section
856(c)(4)(A) of the Internal Revenue Code, and loans secured by an interest in
real property within the meaning of section 7701(a)(19)(C)(v) of the Internal
Revenue Code, and interest income attributable to the securities should be
considered to represent interest on obligations secured by mortgages on real
property within the meaning of section 856(c)(3)(B) of the Internal Revenue
Code, to the extent that the trust assets would qualify for the treatment.
One or more classes of non-REMIC certificates may be subordinated to
one or more other classes of certificates of the same series. In general, this
subordination should not affect the federal income tax treatment of either the
subordinated or senior non-REMIC certificates. However, to the extent indicated
in the relevant prospectus supplement, holders of the subordinated non-REMIC
certificates will be allocated losses that otherwise would have been borne by
the holders of the more senior certificates. Holders of the subordinated
non-REMIC certificates should be able to recognize any losses no later than the
taxable year in which they become realized losses. We suggest that employee
benefit plans subject to ERISA consult their own tax advisors before purchasing
any subordinated non-REMIC certificate. See "ERISA Considerations" in the
prospectus supplement.
Treatment of Pass-Through Securities
The holder of a pass-through security generally will be treated as
owning a pro rata undivided interest in each of the assets of the trust fund.
Accordingly, each pass-through securityholder will be required to include in
income its pro rata share of the entire income from the trust assets, including
interest and discount income, if any. The securityholder generally will be able
to deduct from its income its pro rata share of the administrative fees and
expenses incurred with respect to the trust assets, provided that these fees and
expenses represent reasonable compensation for the services rendered. An
individual, trust, or estate that holds a pass-through security directly or
through a pass-through entity will be entitled to deduct these fees and expenses
under section 212 only to the extent that the amount of the fees and expenses,
149
<PAGE> 242
when combined with its other miscellaneous itemized deductions for the taxable
year in question, exceeds 2 percent of its adjusted gross income.
In addition, Internal Revenue Code section 68 provides that the amount
of itemized deductions otherwise allowable for the taxable year for an
individual whose adjusted gross income exceeds the applicable amount, $128,500,
or $64,475 in the case of a separate return by a married individual within the
meaning of Internal Revenue Code section 7703 for taxable year 2000 and adjusted
for inflation each following year, will be reduced by the lesser of (a) 3
percent of the excess of adjusted gross income over the applicable amount, and
(b) 80 percent of the amount of itemized deductions otherwise allowable for the
taxable year. Non-corporate holders of pass-through securities also should be
aware that miscellaneous itemized deductions are not deductible for purposes of
the AMT. Each pass-through securityholder generally will determine its net
income or loss with respect to the trust in accordance with its own method of
accounting, although income arising from original issue discount must be taken
into account under the accrual method even though the securityholder otherwise
would use the cash receipts and disbursements method.
The Internal Revenue Code provisions concerning original issue
discount, market discount, and amortizable premium will apply to the trust
assets. The rules regarding discount and premium that are applicable to
non-REMIC certificates generally are the same as those that apply to REMIC
regular securities. See the discussions under "Material Federal Income Tax
Consequences -- REMIC Securities -- Original Issue Discount -- Variable Rate
Securities" and "Material Federal Income Tax Consequences -- REMIC Securities --
Market Discount" and "-- Amortizable Premium."
For instruments to which it applies, Internal Revenue Code section
1272(a)(6) requires the use of an income tax accounting methodology that
utilizes (a) a single constant yield to maturity and (b) the pricing prepayment
assumptions. As in the case of REMIC regular securities, Internal Revenue Code
section 1272(a)(6) applies to non-REMIC securities, but no regulations have been
issued describing the application of that section to the non-REMIC securities.
Nonetheless, unless and until administrative guidance to the contrary is
released, the tax administrator intends to account for the non-REMIC
certificates in the same manner as it would account for a class of REMIC regular
securities with the same terms. There can be no assurance, however, that the IRS
ultimately will sanction the tax administrator's position.
It is anticipated that most or all of the assets securing any series
will be subject to the original issue discount, market discount, and amortizable
premium rules. Although most mortgage loans nominally are issued at their
original principal amounts, original issue discount could arise from the payment
of points or some other origination charges by the borrower if the discount
attributable to the payments exceeds the de minimis amount. If the trust
contains assets purchased for a price below its outstanding principal amount,
pass-through securityholders generally will be required to take into account
original issue discount not previously accrued to the prior holder of the
assets. Moreover, if the assets were purchased for less than their adjusted
issue prices, pass-through securityholders generally will be required to take
into account market discount, unless the amount of the market discount is de
minimis under the market discount
150
<PAGE> 243
rules. Finally, pass-through securityholders generally may elect to amortize any
premium paid for assets over their outstanding principal amounts. For a more
complete elaboration of the rules pertaining to original issue discount, market
discount, and acquisition premium, see the discussion under "Material Federal
Income Tax Consequences -- REMIC Securities -- Tax Treatment of REMIC Regular
Securities."
Treatment of Strip Securities
Many aspects of the federal income tax treatment of the strip
securities are uncertain. The discussion below describes the treatment that tax
counsel believes is appropriate, but there can be no assurance that the IRS will
not take a contrary position. We suggest that potential investors, consult their
own tax advisors with respect to the federal income tax treatment of the strip
securities.
Under section 1286 of the Internal Revenue Code, the separation of
ownership of the right to receive some or all of the interest payments on an
obligation from ownership of the right to receive some or all of the principal
payments on the obligation results in the creation of stripped coupons with
respect to the separated rights to interest payments and stripped bonds with
respect to the principal and any unseparated interest payments associated with
that principal. The issuance of IO or PO securities effects a separation of the
ownership of the interest and principal payments on some or all of the assets in
the trust. In addition, the issuance of ratio securities effectively separates
and reallocates the proportionate ownership of the interest and principal
payments on the assets. Therefore, strip securities will be subject to section
1286.
For federal income tax accounting purposes, section 1286 treats a
stripped bond or a stripped coupon as a new debt instrument issued (a) on the
date that the stripped interest is purchased and (b) at a price equal to its
purchase price or, if more than one stripped interest is purchased, the share of
the purchase price allocable to the stripped interest. Each stripped bond or
coupon generally will have original issue discount equal to the excess of its
stated redemption price at maturity or, in the case of a stripped coupon, the
amount payable on the due date of the coupon over its issue price. Treasury
regulations under section 1286, called the stripping regulations, however,
provide that the original issue discount on a stripped bond or stripped coupon
is zero if the amount of the original issue discount would be de minimis under
rules generally applicable to debt instruments. For purposes of determining
whether the amount would be de minimis, (a) the number of complete years to
maturity is measured from the date the stripped bond or stripped coupon is
purchased, (b) an aggregation approach similar to the aggregation rule, as
described in "Material Federal Income Tax Consequences -- REMIC Securities --
Original Issue Discount," may be applied, and (c) unstripped coupons may be
treated as stated interest with respect to the related bonds and, therefore, may
be excluded from the stated redemption price at maturity in appropriate
circumstances. In addition, the stripping regulations provide that, in some
circumstances, the excess of a stripped bond's stated redemption price at
maturity over its issue price is treated as market discount, rather than as
original issue discount. See "Material Federal Income Tax Consequences --
Non-REMIC Certificates -- Treatment of Strip Securities -- Determination of
Income With Respect to Strip Securities."
151
<PAGE> 244
The application of section 1286 to the strip securities is not entirely
clear under current law. That section could be interpreted as causing:
o in the case of an IO security, each interest payment due on
the assets to be treated as a separate debt instrument;
o in the case of a ratio security entitled to a
disproportionately high share of principal, each excess
principal amount, i.e., the portion of each principal payment
on the assets that exceeds the amount to which the ratio
securityholder would have been entitled if he had held an
undivided interest in the assets to be treated as a separate
debt instrument; and
o in the case of a ratio security entitled to a
disproportionately high share of interest, each excess
interest amount to be treated as a separate debt instrument.
In addition, section 1286 requires the purchase price of a strip
security to be allocated among each of the rights to payment on the assets to
which the securityholder is entitled that are treated as separate debt
instruments. Despite the foregoing, it may be appropriate to treat stripped
coupons and stripped bonds issued to the same holder in connection with the same
transaction as a single debt instrument, depending on the facts and
circumstances surrounding the issuance. Facts and circumstances considered
relevant for this purpose should include the likelihood of the debt instruments
trading as a unit and the difficulty of allocating the purchase price of the
unit among the individual payments.
Strip securities are designed to trade as whole investment units and,
to the extent that any underwriter develops a secondary market for the strip
securities, it anticipates that the strip securities would trade in the market
as whole units. In addition, because no market exists for individual payments on
assets, the proper allocation of the security's purchase price to each separate
payment on the assets in the trust would be difficult and burdensome to
determine. Based on those facts and circumstances, it appears that all payments
of principal and interest to which the holder of a strip security is entitled
should be treated as a single installment obligation. Although the OID
regulations do not refer directly to debt instruments that are governed by
section 1286 of the Internal Revenue Code, the application of the OID
regulations to these instruments is consistent with the overall statutory and
regulatory scheme. Therefore, the tax administrator intends to treat each strip
security as a single debt instrument for income tax accounting purposes.
Determination of Income with Respect to Strip Securities
For purposes of determining the amount of income on a strip security
that accrues in any period, the rules described above under "Material Federal
Income Tax Consequences -- REMIC Securities -- Original Issue Discount --
Variable Rate Securities," "-- Interested Weighted Securities and Non-VRDI
Securities," "-- Anti-Abuse Rule," "-- Market Discount" and "-- Amortizable
Premium" will apply. PO securities, and some classes of ratio securities, will
be issued at a price that is less than their stated principal amount and thus
generally will be issued with original issue discount. A strip security that
would meet the definition of an interest weighted security or a weighted average
security if it were a REMIC regular security is subject to the same tax
accounting considerations applicable to the REMIC regular security to which it
152
<PAGE> 245
corresponds. Thus, as described in "Material Federal Income Tax Consequences --
REMIC Securities -- Original Issue Discount -- Interest Weighted Securities and
Non-VRDI Securities" above, some aspects of the tax accounting treatment of
those strip securities are unclear. Unless and until the IRS provides
administrative guidance to the contrary, the tax administrator will account for
a strip security in the manner described for the corresponding REMIC regular
security. See "Material Federal Income Tax Consequences -- REMIC Securities --
Original Issue Discount --Interest Weighted Securities and Non-VRDI Securities."
If a PO security or a ratio security that is not considered a
contingent payment obligation, known as an ordinary ratio security, subsequently
is sold, the purchaser apparently would be required to treat the difference
between the purchase price and the stated redemption price at maturity as
original issue discount. The holders of the securities generally will be
required to include the original issue discount in income as described under
"Material Federal Income Tax Consequences -- REMIC Securities -- Original Issue
Discount." PO securities and ordinary ratio securities issued at a price less
than their stated principal amount will be treated as issued with market
discount rather than with original issue discount if, after the most recent
disposition of the related security, either:
o the amount of original issue discount on the security is
considered to be de minimis under the stripping regulations;
and
o the annual stated rate of interest payable on the security is
no more than one percent lower than the annual stated rate of
interest payable on the mortgage loan from which the security
was stripped.
The holders of the securities generally would be required to include
market discount in income in the manner described under "Material Federal Income
Tax Consequences -- REMIC Securities -- Market Discount." Some classes of
ordinary ratio securities may be issued at prices that exceed their stated
principal amounts. Subject to the discussion of super-premium securities in
"Material Federal Income Tax Consequences -- REMIC Securities -- Original Issue
Discount," holders of the ordinary ratio securities generally will be able to
amortize that premium as described in "Material Federal Income Tax
Consequences -- REMIC Securities -- Amortizable Premium."
Purchase of Complementary Classes of Strip Securities
Strip securities of some classes of the same series, called
complementary securities, when held in combination, may provide an aggregate
economic effect equivalent to that of a pass-through security based upon the
same assets in the trust. When an investor purchases complementary securities,
it appears that, for federal income tax purposes, each security should be
treated separately and should be subject to the rules described above. The IRS
could assert, however, that complementary securities held in combination should
be treated as a single pass-through type instrument, with the result that the
rules governing stripped bonds and stripped coupons under section 1286 of the
Internal Revenue Code would not be applied. Consequently, we suggest that
investors who acquire complementary securities consult their own tax advisors as
to the proper treatment of the securities.
153
<PAGE> 246
Possible Alternative Characterizations
The IRS could assert that the strip securities should be characterized
for tax purposes in a manner different from that described above. For example,
the IRS could contend that each ratio security whose interest rate is higher
than the net interest rate distributed from the trust fund taking into account
all of the securities of that series, called the net series rate, is to be
treated as being composed of two securities: (a) a pass-through security of the
same principal amount as the ratio security but generating interest at the net
series rate; and (b) an IO security representing the excess of the rate on the
ratio security over the net series rate. Similarly, a ratio security whose
interest rate is lower than the net series rate could be treated as composed of
a pass-through security with an interest rate equal to the net series rate and a
PO security. Alternatively, the IRS could interpret section 1286 to require that
each individual interest payment with respect to an IO security or a ratio
security be treated as a separate debt instrument for original issue discount
purposes. The IRS also might challenge the manner in which original issue
discount is calculated, contending that the stated maturity should be used to
calculate yield on the non-REMIC certificates, the contingent payment
regulations should not apply to the IO securities, or the contingent payment
regulations should apply to the ordinary ratio securities. Given the variety of
alternative treatments of the non-REMIC certificates and the different federal
income tax consequences that could result from each alternative, we suggest that
a potential investor consult its own tax advisor regarding the proper treatment
of the non-REMIC securities for federal income tax purposes.
Limitations on Deductions with Respect to Strip Securities
The holder of a strip security will be treated as owning an interest in
each of the assets of the related trust and will recognize an appropriate share
of the income and expenses associated with those assets. Accordingly, an
individual, trust, or estate that holds a strip security directly or through a
pass-through entity will be subject to the same limitations on deductions with
respect to the security as are applicable to holders of pass-through securities.
See "Material Federal Income Tax Consequences -- Non-REMIC Certificates --
Treatment of Pass-Through Securities."
Sale of a Non-REMIC Certificate
A sale of a non-REMIC certificate prior to its maturity will result in
gain or loss equal to the difference, if any, between the amount received and
the holder's adjusted basis in the certificate. The rules for computing the
adjusted basis of a non-REMIC certificate are the same as in the case of a REMIC
regular security. See "Material Federal Income Tax Consequences -- REMIC
Securities -- Gain or Loss on Disposition." Gain or loss from the sale or other
disposition of a non-REMIC certificate generally will be capital gain or loss to
a certificateholder if the certificate is held as a capital asset within the
meaning of section 1221 of the Internal Revenue Code, and will be long-term or
short-term depending on whether the certificate has been held for the long-term
capital gain holding period, which is currently more than twelve months.
Ordinary income treatment, however, will apply to the extent mandated by the
original issue discount and market discount rules or if the certificateholder is
a financial institution described in section 582 of the Internal Revenue Code.
See "Material Federal Income Tax Consequences -- REMIC Securities -- Gain or
Loss on Disposition."
154
<PAGE> 247
Taxation of Some Foreign Holders of Non-REMIC Certificates
Interest, including original issue discount, paid on a non-REMIC
certificate to a foreign person generally is treated as portfolio interest and,
therefore, is not subject to any United States tax, provided that (a) the
interest is not effectively connected with a trade or business in the United
States of the securityholder, and (b) the trustee or other person who would
otherwise be required to withhold tax is provided with foreign person
certification. If foreign person certification is not provided, interest,
including original issue discount, paid on a non-REMIC certificate may be
subject to either a 30 percent withholding tax or 31 percent backup withholding.
In the case of some series, portfolio interest treatment will not be
available for interest paid with respect to some classes of non-REMIC
certificates. Interest on debt instruments issued on or before July 18, 1984
does not qualify as portfolio interest and, therefore, is subject to United
States withholding tax at a 30 percent rate or lower treaty rate, if applicable.
IO securities and PO securities generally are treated, and ratio securities
generally should be treated, as having been issued when they are sold to an
investor. In the case of pass-through securities, however, the issuance date of
the security is determined by the issuance date of the mortgage loans underlying
the trust. Thus, to the extent that the interest received by a holder of a
pass-through security is attributable to mortgage loans issued on or before July
18, 1984, the interest will be subject to the 30 percent withholding tax.
Moreover, to the extent that a ratio security is characterized as a pass-through
type security and the underlying mortgage loans were issued on or before July
18, 1984, interest generated by the security may be subject to the withholding
tax. See "Material Federal Income Tax Consequences -- Non-REMIC Certificates --
Possible Alternative Characterizations." Although recently enacted tax
legislation denies portfolio interest treatment to some types of contingent
interest, that legislation generally applies only to interest based on the
income, profits, or property values of the debtor. Accordingly, it is not
anticipated that the legislation will apply to deny portfolio interest to
certificateholders who are foreign persons. However, because the scope of the
new legislation is not entirely clear, investors who are foreign persons should
consult their own tax advisors regarding the potential application of the
legislation before purchasing a certificate.
Backup Withholding
The application of backup withholding to non-REMIC certificates
generally is the same as in the case of REMIC securities. See "Material Federal
Income Tax Consequences -- REMIC Securities -- Backup Withholding."
Reporting and Tax Administration
For purposes of reporting and tax administration, the holders of
non-REMIC certificates will be treated in the same fashion as the holders of
REMIC regular securities. See "Material Federal Income Tax Consequences -- REMIC
Securities -- Reporting and Tax Administration."
NON-REMIC COLLATERALIZED MORTGAGE BONDS
For each series of non-REMIC collateralized mortgage bonds, counsel to
the depositor has rendered an opinion, based upon the facts as they exist, that
in counsel's opinion, the bonds
155
<PAGE> 248
will be treated for federal income tax purposes as indebtedness, and not as an
ownership interest in the assets or an equity interest in a separate association
taxable as a corporation. However, there are no regulations, published rulings
or judicial decisions involving the characterization for federal income tax
purposes of securities with terms substantially the same as the bonds.
Accordingly, although that opinion will be based on existing law, there can be
no assurance that the law will not change or that contrary positions will not be
taken by the IRS. If the IRS were to make and prevail upon the contention that
the bonds did not constitute indebtedness for federal income tax purposes, the
bonds could be treated as equity interests in an association taxable as a
corporation, which would result in the imposition of a federal income tax at the
entity level. The imposition of the tax could result in a delay or shortfall in
payments on the bonds.
Because in counsel's opinion, the bonds will be treated as evidence of
indebtedness for federal income tax purposes and not as ownership interests in
the assets, securityholders should be aware that:
o bonds held by a domestic building and loan association will
not constitute qualifying assets for the building and loan
association;
o bonds held by a REIT will not constitute real estate assets or
government securities within the meaning of Internal Revenue
Code section 856(c)(4)(A); and
o income derived from the bonds will not be considered interest
on obligations secured by mortgages on real property or on
interests in real property within the meaning of Internal
Revenue Code section 856(c)(3)(B).
Bonds held by a regulated investment company will not constitute
government securities within the meaning of Internal Revenue Code section
851(b)(4)(A)(i).
Payments received by bondholders on the bonds generally should be
accorded the same tax treatment under the Internal Revenue Code as payments
received on other taxable corporate bonds. Original issue discount will accrue
on the bonds and will be taxable to bondholders in advance of receipt of the
cash attributable to the accruals in the same manner in which original issue
discount accrues on REMIC regular securities. See "Material Federal Income Tax
Consequences -- REMIC Securities -- Original Issue Discount" above. The trustee
will report annually to the IRS and to bondholders of record with respect to
accruals of original issue discount on the bonds. The rules regarding market
discount and premium that are applicable to non-REMIC bonds generally are the
same as those that apply to REMIC regular securities. See the discussions under
"Material Federal Income Tax Consequences -- REMIC Securities -- Original Issue
Discount -- Variable Rate Securities" and "Material Federal Income Tax
Consequences -- REMIC Securities -- Market Discount" and " -- Amortizable
Premium."
Sale of a Non-REMIC Bond
A sale of a non-REMIC bond prior to its maturity will result in gain or
loss equal to the difference, if any, between the amount received and the
holder's adjusted basis in the bond. The rules for computing the adjusted basis
of a non-REMIC bond are the same as in the case of a REMIC regular security. See
"Material Federal Income Tax Consequences -- REMIC Securities -- Gain or Loss on
Disposition."
156
<PAGE> 249
Taxation of Some Foreign Holders of Non-REMIC Bonds
Interest, including original issue discount, paid on a non-REMIC bond
to a foreign person generally is treated as portfolio interest and, therefore,
is not subject to any United States tax, provided that:
o the interest is not effectively connected with a trade or
business in the United States of the bondholder;
o the trustee or other person who would otherwise be required to
withhold tax is provided with foreign person certification;
o the foreign person is not a 10 percent shareholder within the
meaning of section 871(b)(3)(B) of the Internal Revenue Code
or a controlled foreign corporation as described under section
881(c)(3)(C) of the Internal Revenue Code; and
o the foreign person is not a bank receiving interest on a loan
made in the ordinary course of business.
If the securityholder fails to meet the conditions listed above,
interest, including original issue discount, paid on a non-REMIC bond may be
subject to either a 30 percent withholding tax or 31 percent backup withholding.
Interest, including original issue discount, paid on bonds to bondholders who
are foreign persons will not be subject to withholding if the interest is
effectively connected with a United States business conducted by the bondholder.
The interest, including original issue discount, will, however, generally be
subject to the regular United States income tax.
Backup Withholding
The application of backup withholding to non-REMIC bonds generally is
the same as in the case of REMIC securities. See "Material Federal Income Tax
Consequences -- REMIC Securities -- Backup Withholding."
Reporting and Tax Administration
For purposes of reporting and tax administration, the holders of
non-REMIC bonds will be treated in the same fashion as the holders of REMIC
regular securities. See "Material Federal Income Tax Consequences -- REMIC
Securities -- Reporting and Tax Administration."
PARTNERSHIP TRUST FUNDS
Classification of Partnership Trust Funds
With respect to each series of partnership certificates or partnership
bonds, Hunton & Williams is of the opinion that the trust fund will not be a
taxable mortgage pool or an association, or publicly traded partnership, taxable
as a corporation for federal income tax purposes. This opinion generally will be
based on the assumption that the terms of the related agreement and related
documents will be complied with and on counsel's conclusion that the nature of
the income of the trust fund will except it from the rule that some publicly
traded partnerships are taxable as corporations.
157
<PAGE> 250
Characterization of Investments in Partnership Certificates and Partnership
Bonds
For federal income tax purposes:
o partnership certificates and partnership bonds held by a
thrift institution taxed as a domestic building and loan
association will not constitute loans secured by an interest
in real property which is residential real property within the
meaning of Internal Revenue Code section 7701(a)(19)(C)(v);
o interest on partnership bonds held by a real estate investment
trust will not be treated as interest on obligations secured
by mortgages on real property or on interests in real property
within the meaning of Internal Revenue Code section
856(c)(3)(B);
o partnership bonds held by a real estate investment trust will
not constitute real estate assets within the meaning of
Internal Revenue Code section 856(c)(5)(A); and
o interest on partnership certificates held by a real estate
investment trust will qualify as interest on obligations
secured by mortgages on real property or on interests in real
property within the meaning of Internal Revenue Code section
856(c)(3)(B), and partnership certificates will constitute
real estate assets within the meaning of Internal Revenue Code
section 856(c)(5)(A), in each case based on the real estate
investments trust's proportionate interest in the assets of
the partnership trust fund, determined based on capital
accounts.
TAXATION OF PARTNERSHIP BONDHOLDERS
Treatment of the Partnership Bonds as Indebtedness
The depositor will agree, and the bondholders will agree by their
purchase of partnership bonds, to treat the partnership bonds as debt for
federal income tax purposes. No regulations, published rulings, or judicial
decisions exist that discuss the characterization for federal income tax
purposes of securities with terms substantially the same as the partnership
bonds. However, with respect to each series of partnership bonds, Hunton &
Williams is of the opinion that the partnership bonds will be classified as
indebtedness for federal income tax purposes. The discussion below assumes this
characterization of the partnership bonds is correct.
If, contrary to the opinion of counsel, the IRS successfully asserted
that the partnership bonds were not debt for federal income tax purposes, the
partnership bonds might be treated as equity interests in the partnership trust
fund. In that event, the timing and amount of income allocable to holders of the
partnership bonds may be different than as described in the following paragraph.
In addition, if the partnership bonds are publicly offered or otherwise readily
tradeable, the partnership trust fund could be treated as a publicly traded
partnership taxable as a corporation for federal income tax purposes.
Partnership bonds generally will be subject to the same rules of
taxation as regular securities issued by a REMIC, as described above, except
that (a) income reportable on partnership bonds is not required to be reported
under the accrual method unless the holder otherwise uses the accrual method and
(b) the special rule treating a portion of the gain on sale or exchange of a
regular security as ordinary income is inapplicable to partnership bonds. See
158
<PAGE> 251
"Material Federal Income Tax Consequences -- REMIC Securities -- Gain or Loss on
Disposition."
TAXATION OF OWNERS OF PARTNERSHIP CERTIFICATES
Treatment of the Partnership Trust Fund as a Partnership
If so specified in the applicable prospectus supplement, the depositor
will agree, and the partnership bondholders and certificateholders will agree by
their purchase of partnership certificates or partnership bonds 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 holders of the partnership
certificates, including the depositor, and the partnership bonds, if any, being
debt of the partnership. However, the proper characterization of the arrangement
involving the partnership trust fund, the partnership certificates, the
partnership bonds, and the depositor is not clear, because there is no authority
on transactions closely comparable to that contemplated in this prospectus.
A variety of alternative characterizations are possible. For example,
if one or more of the classes of partnership certificates have some features
characteristic of debt, the partnership certificates might be considered debt of
the depositor of the partnership trust fund. That 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 partnership, described below. 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 that 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 trust fund's assets, including appropriate adjustments for market
discount, original issue discount and bond premium, and any gain upon collection
or disposition of trust fund's assets. The partnership trust fund's deductions
will consist primarily of interest accruing with respect to the partnership
bonds, servicing and other fees, and losses or deductions upon collection or
disposition of partnership bonds.
The tax items of a partnership are allocable to the partners in
accordance with the Internal Revenue Code, Treasury regulations and the
partnership agreements here, the agreement and related documents. The 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:
o 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 rates for the
due period and interest on amounts previously due on the
partnership certificates but not yet distributed;
159
<PAGE> 252
o any partnership trust fund income attributable to discount on
the trust fund's assets that corresponds to any excess of the
principal amount of the partnership certificates over their
initial issue price; and
o 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 the trust fund's assets that corresponds to any excess
of the issue price of the 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 the foregoing method of allocation,
certificateholders may be allocated income equal to the entire pass-through rate
plus the other items described above even through the trust fund might not have
sufficient cash to make current cash distributions of that amount. Thus, cash
basis holders will in effect be required to report income from the 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 the taxes.
Part or 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 may constitute unrelated business
taxable income generally taxable to a holder under the Internal Revenue 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 "Material Federal Income Tax
Consequences -- Non-REMIC Certificates -- Treatment of Pass-Through Securities."
Accordingly, these deductions might be disallowed to the individual in whole or
in part and might result in the 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 the trust
fund's assets would be calculated in a manner similar to the description above
under "Material Federal Income Tax Consequences -- Non-REMIC Certificates --
Treatment of Pass-Through Securities" and "-- Premium and Discount."
Notwithstanding the 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 with respect to the trust fund's assets
rather than on an asset-by-asset basis. If the IRS were to require that the
calculations be made separately for each asset, 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 trust fund's assets will have been issued with
original issue discount and, therefore, the
160
<PAGE> 253
partnership trust fund should not have original issue discount income. However,
the purchase price paid by the partnership trust fund for the assets may be
greater or less than the remaining principal balance of the assets at the time
of the purchase. If so, assets will have been acquired at a premium or discount,
as the case may be. See "Material Federal Income Tax Consequences -- Non-REMIC
Certificates -- Treatment of Pass-Through Securities." As indicated above, the
partnership trust fund will make this calculation on an aggregate basis, but
might be required to recompute it on a mortgage loan-by-mortgage loan basis.
If the partnership trust fund acquires assets at a market discount or
premium, the partnership trust fund will elect to include any related discount
in income currently as it accrues over the life of the assets or to offset any
related premium against interest income on the assets. As indicated above, a
portion of the market discount income or premium deduction may be allocated to
certificateholders.
Section 708 Termination
Under section 708 of the Internal Revenue Code, the partnership trust
fund will be deemed to terminate for federal income tax purposes if 50 percent
or more of the capital and profits interests in the partnership trust fund are
sold or exchanged within a 12-month period. If a termination occurs, it would
cause a deemed contribution of the assets of a partnership trust fund, known as
the old partnership, to a new partnership trust fund, known as the new
partnership, in exchange for interests in the new partnership. The interests
would be deemed distributed to the partners of the old partnership in
liquidation of the partnership, which would not constitute a sale or exchange.
The partnership trust fund will not comply with some technical requirements that
might apply when a constructive termination occurs. As a result, the partnership
trust fund may be subject to some tax penalties and may incur additional
expenses if it is required to comply with those requirements. Furthermore, the
partnership trust fund might not be able to comply due to lack of data.
Disposition of Partnership 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 a 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 a partnership certificate. In addition, both the tax basis in the
partnership certificates and the amount realized on a sale of a partnership
certificate would include the holder's share of the partnership bonds and other
liabilities of the partnership trust fund. A holder acquiring partnership
certificates at different prices may be required to maintain a single aggregate
adjusted tax basis in the 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 a partnership certificate attributable to the
holder's share of unrecognized accrued market discount on the trust fund assets
generally would be treated as
161
<PAGE> 254
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 these special reporting considerations. Thus, to
avoid those special reporting requirements, it is anticipated that a 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
described above, over the life of the partnership certificates that exceeds the
aggregate cash distributions with respect to the certificates, 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 the 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 accrual 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 certificate does not exceed the adjusted basis
of the certificateholder's interest in the certificates. 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 or loss, the purchasing certificateholder will have a
higher or lower basis in the partnership certificates than the selling
certificateholder had. 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
Internal Revenue Code. In order to avoid the administrative complexities that
would be involved in keeping accurate accounting records, as well as potentially
onerous information reporting requirements, the partnership trust fund will not
make the section 754 election. As a result, certificateholders might be
allocated a greater or lesser
162
<PAGE> 255
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. The 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 for 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 the 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 of the inconsistencies.
Under section 6031 of the Internal Revenue 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 some
information on the nominee, the beneficial owners and the partnership
certificates so held. The information includes:
o the name, address and taxpayer identification number of the
nominee, and
o as to each beneficial owner (a) the name, address and
identification number of the person, (b) whether the person is
a United States person, a tax-exempt entity or a foreign
government, an international organization, or any wholly-owned
agency or instrumentality of either of the foregoing, and (c)
certain information on partnership certificates that were
held, brought or sold on behalf of the 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 TMP in the pooling and
servicing agreement and, as such, will be responsible for representing the
certificateholders in any dispute with the IRS. The Internal Revenue 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
163
<PAGE> 256
partnership trust fund by the appropriate taxing authorities could result in an
adjustment of the returns of the certificateholders, and, under some
circumstances, 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.
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-U.S. persons, because there is no
clear authority dealing with that issue under facts substantially similar to
those described in this prospectus. Although it is not expected that the
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
certificateholders who are non-U.S. persons under section 1446 of the Internal
Revenue Code, as if that income were effectively connected to a U.S. trade or
business, at a rate of 35 percent for non-U.S. persons that are taxable as
corporations and 39.6 percent for all other foreign holders. Amounts withheld
will be deemed distributed to the non-U.S. person 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 BEN, Form W-8 ECI, IRS Form W-9, or the applicable
successor forms, or the holder's certification of nonforeign status signed under
penalties of perjury.
Each non-U.S. person 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 non-U.S.
person must obtain a taxpayer identification number from the IRS and submit that
number to the partnership trust fund on the applicable Form W-8 BEN or Form
W-8 ECI (or successors forms) in order to assure appropriate crediting of the
taxes withheld. A non-U.S. person 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 non-U.S. person may be
considered guaranteed payments to the extent the 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 may not be
considered portfolio interest. As a result, certificateholders who are non-U.S.
persons may be subject to United States federal income tax and withholding tax
at a rate of 30 percent, unless reduced or eliminated under an applicable
treaty. In such case, a non-U.S. person would 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.
The Treasury Department has enacted new withholding regulations that
generally will be effective after December 31, 2000. See "Material Federal
Income Tax Consequences -- Reporting and Tax Administration -- New Withholding
Rules."
164
<PAGE> 257
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 percent if, in general, the certificateholder fails to comply with
some identification and certification procedures, unless the holder is an exempt
recipient under applicable provisions of the Internal Revenue Code.
PROPOSED LEGISLATION
The President's released budget proposal contains tax legislative
proposals that could affect the tax consequences to you of the purchase,
ownership, and disposition of the certificates. Under one legislative proposal,
a REMIC itself would be secondarily liable for taxes on phantom income and would
be required to pay the taxes to the extent that they were not paid by the REMICs
residual holders on the applicable due date. Under current law, only the REMIC
residual holder is liable for the payment of taxes on phantom income. See
"Material Federal Income Tax Consequences -- Tax Treatment of Residual
Securities -- Taxation of Residual Securityholders." If this legislative
proposal were enacted in its present form, it would be effective for REMICs
formed after the date of enactment. In addition, the President's budget proposes
legislation that in its current form would require holders of debt instruments
that use an accrual method of accounting to include market discount in income on
a constant yield basis as it accrues. Under current law, a holder of a debt
instrument with market discount generally recognizes income attributable to
market discount only as principal is received or when the holder disposes of the
debt instrument. See "Material Federal Income Tax Consequences -- Tax Treatment
of REMIC Regular Interests -- Market Discount." The proposal would be effective
for debt instruments acquired on or after the date of enactment. Finally, the
President's budget proposal would require mandatory basis adjustments, without
the need for an election under section 754 of the Internal Revenue Code, with
respect to any partner whose share of the net built-in loss in the partnership's
property is equal to the greater of (a) $250,000 or (b) 10 percent of such
partner's total share of partnership assets, whichever is greater, if the
partnership either distributes property to such partner or the partner transfers
his interest in such partnership. Under current law, the basis of partnership
property is not adjusted upon a distribution of property unless an election
under section 754 of the Internal Revenue Code is in effect. See "Material
Federal Income Tax Consequences -- Taxation of Owners of Partnership
Securities -- Section 754 Election." The proposal would apply to distributions
and transfers made after the date of enactment. We suggest that prospective
investors in REMIC certificates and partnership certificates consult their tax
advisors regarding the proposed legislation discussed above.
Due to the complexity of the federal income tax rules applicable to you
and the considerable uncertainty that exists regarding many aspects of those
rules, we suggest that you consult your own tax advisor regarding the tax
treatment of the acquisition, ownership, and disposition of securities.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in
"Material Federal Income Tax Consequences," potential investors should consider
the state income tax consequences of the acquisition, ownership, and disposition
of the securities. State income tax
165
<PAGE> 258
law may differ substantially from the corresponding federal law, and this
discussion does not purport to describe any aspect of the income tax laws of any
state. Therefore, we suggest that potential investors consult their own tax
advisors with respect to the various state tax consequences of an investment in
the securities.
ERISA CONSIDERATIONS
In considering an investment in a security of the assets of an employee
benefit plan, a fiduciary should consider, among other things:
o the purposes, requirements, and liquidity needs of the plan;
o the definition of plan assets under ERISA, and the U.S.
Department of Labor regulations regarding the definition of
plan assets;
o whether the investment satisfies the diversification
requirements of section 404(a)(1)(C) of ERISA; and
o whether the investment is prudent, considering the nature of
an investment in a security and the fact that no market in
which the fiduciary can sell or otherwise dispose of
securities is expected to arise.
The prudence of a particular investment must be determined by the
responsible fiduciary usually the trustee or investment manager with respect to
each employee benefit plan taking into account all of the facts and
circumstances of the investment.
Section 403 of ERISA requires that all plan assets be held in trust.
However, under regulations that became effective on June 17, 1982, even if the
underlying assets of an issuer of securities are deemed to be plan assets of an
employee benefit plan investing in the securities, the holding in trust
requirement of section 403 of ERISA will be satisfied if the securities are held
in trust on behalf of the plan.
Section 406 of ERISA and section 4975 of the Internal Revenue Code
prohibit some transactions that involve:
o an employee benefit plan subject to ERISA or section 4975 of
the Internal Revenue Code, including individual retirement
accounts and some Keogh Plans, each a plan, and any party in
interest or disqualified person with respect to the plan; and
o plan assets.
Regulations of the Department of Labor set forth in 29 C.F.R.
2510.3-101, called the plan asset regulations, define plan assets to include not
only securities such as the securities held by a plan but also the underlying
assets of the issuer of any equity securities, unless one or more exceptions
specified in the regulations are satisfied. Thus, under the plan asset
regulations, a plan that acquires a security could be treated for ERISA purposes
as having acquired a direct interest in some or all of the assets in the trust.
This treatment could cause some transactions with respect to the assets to be
deemed prohibited transactions under ERISA and, in addition, could result in a
finding of an improper delegation by the plan fiduciary of its duty to manage
plan
166
<PAGE> 259
assets. The plan asset regulations will not apply, however, if (a) the security
is registered under the Exchange Act, is freely transferable and is part of a
class of securities that is held by more than 100 unrelated investors or (b)
immediately after the most recent acquisition of an equity interest, benefit
plan investors do not own 25 percent or more of the value of any class of equity
interests in the trust. Prior to purchasing a security, a plan should consult
with its counsel to determine whether the exception for publicly offered
securities, the exception for insignificant participation by benefit plan
investors, or any other exception to the plan asset regulations would apply to
the purchase of the security.
The Department of Labor has issued several exemptions from some of the
prohibited transaction rules of ERISA and the related excise tax provisions of
section 4975 of the Internal Revenue Code. Those exemptions include, but are not
limited to:
o Prohibited Transaction Class Exemption or PTCE 96-23,
regarding investment decisions made by in-house asset
managers;
o PTCE 95-60, regarding investments by insurance company general
accounts;
o PTCE 91-38, regarding investments by bank collective
investment funds;
o PTCE 90-1, regarding investments by insurance company pooled
separate accounts;
o PTCE 84-14, regarding investment decisions made by a qualified
professional asset manager;
o PTCE 83-1, regarding acquisitions by plans of interests in
mortgage pools; and
o various underwriter exemptions.
Before purchasing any securities, we suggest that a plan subject to the
fiduciary responsibility provisions of ERISA or described in section 4975(e)(1)
of the Internal Revenue Code consult with its counsel to determine whether the
conditions of any exemption would be met. A purchaser of securities should be
aware, however, that some of the exemptions may not apply to the purchase, sale,
and holding of subordinated securities in certain circumstances. Moreover, a
purchaser of securities also should be aware that even if the conditions
specified in one or more exemptions are met, the scope of the relief provided by
an exemption might not cover all acts that might be construed as prohibited
transactions.
Because the purchase or holding of securities may result in unfavorable
consequences for a plan or its fiduciaries under the plan asset regulations or
the prohibited transaction provisions of ERISA or the Internal Revenue Code,
some classes of securities will not be offered for sale to, and are not
transferable to, any benefit plan investor unless the benefit plan investor
provides the depositor with a benefit plan opinion. A benefit plan opinion is an
opinion of counsel satisfactory to the depositor and upon which the depositor,
trustee, TMP, and their respective counsel are authorized to rely that the
ownership of a security of the class (A) will not be treated as, or result in, a
prohibited transaction under sections 406 and 407 of ERISA or section 4975 of
the Internal Revenue Code and (B) either:
167
<PAGE> 260
o will not cause any of the assets in the trust or in the case
of a REMIC series, the REMIC's assets to be regarded as plan
assets for purposes of the plan asset regulation and
o will not give rise to any fiduciary duty under ERISA on the
part of the depositor, the trustee, the master servicer or the
TMP.
The prospectus supplement for an affected series will indicate which
classes of securities are restricted in their availability to benefit plan
investors.
In considering the possible application of the plan asset regulations,
potential plan investors should be aware that, with respect to some series and
under some circumstances, the depositor may have a right to redeem the
securities of the series, at its option. In such cases, the depositor's purpose
for the retention of a redemption right is to enable the depositor to terminate
its administration obligations with respect to the securities in the event the
obligations become unprofitable. The depositor undertakes no obligation to
consider the interests of securityholders in deciding whether to exercise any
redemption right.
As described in "Material Federal Income Tax Consequences," an
investment in a security may produce unrelated business taxable income for
tax-exempt employee benefit plans. Potential investors also should be aware that
ERISA requires that the assets of a plan be valued at their fair market value as
of the close of the plan year. Neither the depositor nor the underwriters
currently intend to provide valuations to securityholders. Plans contemplating
the acquisition of securities should consult their legal advisors with respect
to the ERISA, Internal Revenue Code, and other consequences of an investment in
the securities.
We suggest that any plan fiduciary considering whether to purchase a
security on behalf of a plan consult with its counsel regarding the
applicability of the fiduciary responsibility and prohibited transaction
provisions of ERISA and the Internal Revenue Code to this investment.
The sale of securities to a plan is in no respect a representation by
the depositor or any underwriter that this investment meets all relevant legal
requirements with respect to investments by plans generally or any particular
plan, or that this investment is appropriate for plans generally or any
particular plan.
168
<PAGE> 261
LEGAL INVESTMENT
The prospectus supplement will specify which, if any, of the classes of
securities will constitute mortgage related securities for purposes of SMMEA. If
so, securities designated as qualifying as mortgage related securities will
continue to qualify as such for so long as they are rated in one of the two
highest categories by at least one nationally recognized statistical rating
agency. Classes of securities that qualify as mortgage related securities under
SMMEA will be legal investments for persons, trusts, corporations, partnerships,
associations, business trusts and business entities including depository
institutions, life insurance companies and pension funds created pursuant to or
existing under the laws of the United States or of any state whose authorized
investments are subject to state regulation to the same extent as, under
applicable law, obligations issued by or guaranteed as to principal and interest
by the United States or any agency or instrumentality constitute legal
investments for any entities. Some states have enacted legislation specifically
limiting, to varying degrees, the legal investment authority of the entities
with respect to mortgage related securities, in most cases requiring investors
to rely solely upon existing state law and not SMMEA. In any case in which any
legislation is applicable, the securities will constitute legal investments for
entities subject to legislation only to the extent provided in state
legislation.
SMMEA also amended the legal investment authority of
federally-chartered depository institutions as follows: federal savings and loan
associations and federal savings banks may invest in, sell or otherwise deal in
mortgage-related securities without limitation as to the percentage of their
assets represented thereby; federal credit unions may invest in mortgage related
securities; and national banks may purchase mortgage related securities for
their own account without regard to the limitations generally applicable to
investment securities set forth in 12 U.S.C. section 24, seventh, subject in
each case to regulations as the applicable federal regulatory authority may
prescribe.
The Federal Financial Institutions Examination Council, The Federal
Deposit Insurance Corporation, the Office of Thrift Supervision, the Office of
the Comptroller of the Currency and the National Credit Union Administration
have proposed or adopted guidelines regarding investment in various types of
mortgage-backed securities. In addition, some state regulators have taken
positions that may prohibit regulated institutions subject to their jurisdiction
from holding securities representing residual interests, including securities
previously purchased. There may be other restrictions on the ability of some
investors, including depository institutions, either to purchase securities or
to purchase securities representing more than a specified percentage of the
investor's assets. We suggest that investors consult their own legal advisors in
determining whether and to what extent any particular securities constitute
legal investments for investors.
Securities that do not constitute mortgage related securities under
SMMEA will require registration, qualification or an exemption under applicable
state securities laws, and all securities will require registration,
qualification or an exemption under applicable state securities laws in those
states that have enacted legislation overriding SMMEA's provisions preempting
169
<PAGE> 262
state blue sky laws. In addition, these securities may not be legal investments
to the same extent as mortgage related securities under SMMEA. The appropriate
characterization under various legal investment restrictions of the classes of
securities that do not qualify as mortgage related securities under SMMEA and
thus the ability of investors subject to these restrictions to purchase these
classes of securities, may be subject to significant interpretive uncertainties.
We suggest that all investors whose investment authority is subject to legal
restrictions consult their own legal advisors to determine whether, and to what
extent, the classes of securities that do not qualify as mortgage related
securities will constitute legal investments for them.
PLAN OF DISTRIBUTION
The depositor may sell the securities either directly or through one or
more underwriters, underwriting syndicates or designated agents. The depositor
also may sell the securities to an affiliate, and an affiliate may sell the
security, from time to time, either directly or through one or more
underwriters, underwriting syndicates or through designated agents. The
prospectus supplement with respect to each series of securities will set forth
the terms of the offering of a series of securities and each class within a
series, including the name or names of any underwriter(s), the proceeds to and
their intended use by the depositor, and either the initial public offering
price, the discounts and commissions to any underwriter(s) and any discounts or
concessions allowed or reallowed to some dealers, or the method by which the
price at which the related underwriter(s) will sell the securities will be
determined.
The securities may be acquired by underwriters for their own account
and may be resold from time to time in one or more transactions, including
negotiated transactions, at a fixed public offering price or at varying prices
determined at the time of sale. The obligations of any underwriters will be
subject to some conditions precedent, and the underwriters will be severally
obligated to purchase all the securities of a series offered under the related
prospectus supplement, if any are purchased. If securities of a series are
offered otherwise than through underwriters, the related prospectus supplement
will contain information regarding the nature of an offering and any agreements
to be entered into between the depositor and purchasers of the securities of a
series.
The place and time of delivery for the securities of a series in
respect of which this prospectus is delivered will be set forth in the related
prospectus supplement.
The securities issued by this registration statement of which this
prospectus is a part may be reregistered and distributed when the securities are
reacquired by the depositor or an affiliate of the depositor and deposited as
part of a new trust fund.
LEGAL MATTERS
Legal matters in connection with the securities, including the material
federal income tax consequences, will be passed upon for the depositor by Hunton
& Williams, Richmond, Virginia.
170
<PAGE> 263
EXPERTS
The balance sheet of Union Planters Home Equity Corp. as of August 31,
2000 is included in this prospectus in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
FINANCIAL INFORMATION
A separate trust fund will be formed with respect to each series of
securities and no trust fund will engage in any business activities or have any
assets or obligations prior to the issuance of the related series of securities.
Accordingly, no financial statements with respect to any trust fund will be
included in this prospectus. If required, financial statements with respect to
the issuer are included in the accompanying prospectus supplement.
RATINGS
It is a condition to the issuance of the securities of each series
offered hereby and by the prospectus supplement that they shall have been rated
in one of the four highest rating categories by the nationally recognized
statistical rating organization or organizations specified in the related
prospectus supplement.
Ratings on securities address the likelihood of receipt by
securityholders of all distributions on the underlying assets. These ratings
address the structural, legal and issuer-related aspects associated with the
securities, the nature of the underlying assets and the credit quality of the
credit enhancer or guarantor, if any. Ratings on securities do not represent any
assessment of the likelihood of principal prepayments by obligors or of the
degree by which the prepayments might differ from those originally anticipated.
As a result, certificateholders might suffer a lower than anticipated yield,
and, in addition, holders of stripped pass-through certificates in extreme cases
might fail to recoup their underlying investments.
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.
AVAILABLE INFORMATION
The depositor has filed with the Securities and Exchange Commission a
registration statement, of which this prospectus forms a part, under the
Securities Act of 1933, as amended, with respect to the securities. This
prospectus and the prospectus supplement relating to each series of securities
contain summaries of the material terms of the documents referred to herein and
therein, but do not contain all of the information set forth in the registration
statement pursuant to the rules and regulations of the commission. For further
information, reference is made to such registration statement and the exhibits.
This registration statement and exhibits can be inspected and copied at
prescribed rates at the public reference facilities maintained by the commission
at its public reference section, 450 Fifth Street, N.W., Washington, D.C. 20549,
and
171
<PAGE> 264
at its Regional Offices located as follows: Midwest Regional Office, Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511; and
Northeast Regional Office, 7 World Trade Center, Suite 1300, New York, New York
10048. In addition, the Commission maintains a Web site at http://www.sec.gov
that contains reports, proxy and information statements and other information
regarding registrants, including the depositor, that file electronically with
the Securities and Exchange Commission.
No person has been authorized to give any information or to make any
representations other than those contained in this prospectus and any prospectus
supplement with respect hereto and, if given or made, such information or
representations must not be relied upon. This prospectus and any prospectus
supplement with respect hereto do not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the securities or an
offer of the securities to any person in any state or other jurisdiction in
which such offer would be unlawful. The delivery of this prospectus at any time
does not imply that information in this prospectus is correct as of any time
subsequent to its date; however, if any material change occurs while this
prospectus is required by law to be delivered, this prospectus will be amended
or supplemented accordingly.
The depositor will be required to file or cause to be filed periodic
reports with the commission with respect to each trust fund in compliance with
the requirements of the Securities Exchange Act of 1934, as amended, the
Exchange Act, and the rules and regulations of the commission. The depositor
does not intend to file periodic reports under the Exchange Act following the
expiration of the reporting period prescribed by Rule 15d-1 of Regulation 15D
under the Exchange Act. If the prospectus supplement for a series of securities
provides that one or more classes of securities are to be issued in book-entry
form, then unless and until definitive securities are issued, such reports will
be sent on behalf of the related trust fund to, Cede, as nominee of DTC and
registered holder of the securities, pursuant to the applicable agreement. These
reports may be available to holders of the securities upon request to their
respective DTC participants. See "Description of the Securities -- Reports to
Securityholders" and "Description of the Agreements -- Evidence as to
Compliance."
INCORPORATION OF INFORMATION BY REFERENCE
The following documents filed or caused to be filed by the depositor or
this issuer with the Securities and Exchange Commission pursuant to the Exchange
Act are incorporated in this prospectus by reference. Further, all other
documents filed or caused to be filed by the depositor or the issuer with the
Securities and Exchange Commission pursuant to Section 12 of the Exchange Act
are incorporated by reference into this prospectus.
All documents and reports filed or caused to be filed with the
Securities and Exchange Commission by the depositor or the issuer with respect
to a trust fund pursuant to section 13(a), 13(c), 14 or 15(d) of the Exchange
Act, after the date of this prospectus and prior to the termination of any
offering of the securities issued by such trust fund, shall be deemed to be
incorporated by reference into this prospectus and to be a part of this
prospectus from the date of such documents. These documents will be filed under
the name of the issuer. Any statement
172
<PAGE> 265
contained in a document incorporated or deemed to be incorporated by reference
in any prospectus supplement or in this prospectus shall be deemed to be
modified or superseded for purposes of such prospectus supplement and this
prospectus to the extent that a statement contained in any prospectus supplement
or in this prospectus modifies or supersedes such statement. Any statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute part of any prospectus supplement. Upon request, 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, a copy of any or all documents or reports incorporated herein by
reference, in each case to the extent these documents or reports relate to one
or more of these classes of these securities, other than the exhibits to such
documents, unless these exhibits are specifically incorporated by reference in
these documents. Requests to the depositor should be directed to Union Planters
Home Equity Corp., 7130 Goodlett Farms Parkway, Cordova, Tennessee 38018,
Attention: President, or by telephone at (901) 580-6000.
173
<PAGE> 266
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated expenses in connection with
the offering of $1,000,000 of the Mortgage Pass-Through Certificates and
Collateralized Mortgage Bonds being registered under this Registration
Statement, other than underwriting discounts and commission:
SEC Registration.............................................. $264
Printing and Engraving............................................*
Legal Fees and Expenses...........................................*
Accounting Fees and Expenses......................................*
Trustee Fees and Expenses.........................................*
Rating Agency Fees................................................*
Miscellaneous ....................................................*
----
TOTAL................................................ $ *
====
* To be provided by amendment.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The registrant is incorporated under the laws of Delaware. Section 145
of the Delaware General Corporation Law provides that a Delaware corporation may
indemnify any persons, including officers and directors, who are, or are
threatened to be made, parties 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 such corporation, by reason of the
fact that such person was an officer, director, employee or agent of such
corporation, or is or was serving at the request of such corporation as a
director, officer, employee or agent of another corporation or enterprise. The
indemnity may include expenses, including attorneys' fees, judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding, provided such person acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
corporation's best interest and, for criminal proceedings, had no reasonable
cause to believe that his conduct was illegal. A Delaware corporation may
indemnify officers and directors in an action by or in the right of the
corporation under the same conditions, except that no indemnification is
permitted without judicial approval if the officer or director is adjudged to be
liable to the corporation. Where an officer or director is successful on the
merits or otherwise in the defense of any action referred to above, the
corporation must indemnify him against the expense which such officer or
director actually and reasonably incurred.
The certificate of incorporation and bylaws of the registrant provide,
in effect, that, subject to certain limited exceptions, such corporation will
indemnify its officers and directors to the extent permitted by the Delaware
General Corporation Law.
The company, either directly or indirectly through its direct or
indirect parents, maintains a directors' and officers' insurance policy.
Pursuant to the form of Underwriting Agreement, the Underwriters will
agree, subject to certain conditions, to indemnify the company, its directors,
certain of its officers and any person who controls the company, within the
meaning of the Securities Act of 1933, as amended, against certain liabilities.
<PAGE> 267
ITEM 16. EXHIBITS.
1.1 Form of Underwriting Agreement*
3.1 Certificate of Incorporation of Union Planters Home Equity Corp.*
3.2 Bylaws of Union Planters Home Equity Corp.*
4.1 Standard Terms to Pooling and Servicing Agreement (September, 2000
Edition)*
4.1(a) Form of Series Supplement to the Pooling and Servicing Agreement*
4.2 Form of Indenture*
4.2(a) Form of Series Supplement to the Indenture*
4.3 Form of Trust Agreement*
4.4 Form of Deposit Trust Agreement*
5.1 Opinion of Hunton & Williams
8.1 Tax Opinion of Hunton & Williams
23.1 Consent of Hunton & Williams is contained in their opinions to be filed
as Exhibits 5.1 and 8.1
23.2 Consent of PricewaterhouseCoopers LLP**
24.1 Power of Attorney*
99.1 Form of Sales Agreement*
99.2 Form of Servicing Agreement*
-------------------------
* Previously Filed
** To be filed by amendment
ITEM 17. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the Prospectus any facts or events
arising after the effective date of the Registration Statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the Registration
Statement. Notwithstanding the foregoing, any increase or
decrease in the volume of securities offered (if the total
dollar value of securities offered would not exceed that which
was registered) and any deviation from the low or high and of
the estimated maximum offering range may be reflected in the
form of prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price
represent no more than a 20 change in the maximum aggregate
offering price set forth in the "Calculation of the
Registration Fee" table in this 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;
<PAGE> 268
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do
not apply if the information required to be included in the
post-effective amendment by those paragraphs 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 included 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) The undersigned 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 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) 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) The undersigned Registrant hereby undertakes to file an application
for the purpose of determining the eligibility of the indenture trustee to act
under subsection (a) of Section 310 of the Trust Indenture Act of 1939, as
amended, in accordance with the rules and regulations prescribed by the
Commission under Section 305(b)(2) of the Trust Indenture Act.
(d) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
<PAGE> 269
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 (including the security rating requirement)
and has duly caused this Pre-Effective Amendment No. 1 to its Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Cordova, State of Tennessee, on December 15, 2000.
UNION PLANTERS HOME EQUITY CORP.
(Registrant)
/s/ Norman J. Burglin
------------------------------------
Norman J. Burglin
President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Capacity Date
--------- -------- ----
/s/ Norman J. Burglin Chairman of the Board December 15, 2000
--------------------------- of Directors and President
Norman J. Burglin (Principal Executive Officer)
/s/ Bobby L. Doxey Director, Vice President December 15, 2000
--------------------------- and Secretary
Bobby L. Doxey (Principal Financial Officer and
Principal Accounting Officer)
