<PAGE>
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED MAY 26, 1998)
- --------------------------------------------------------------------------------
$189,560,000
(APPROXIMATE)
GE CAPITAL MORTGAGE SERVICES, INC.
(SELLER AND SERVICER)
HOME EQUITY LOAN PASS-THROUGH CERTIFICATES, SERIES 1998-HE2
PRINCIPAL AND INTEREST PAYABLE MONTHLY, BEGINNING JULY 27, 1998.
- --------------------------------------------------------------------------------
The Home Equity Loan Pass-Through Certificates, Series 1998-HE2 (the
'Certificates') will evidence beneficial ownership interests in a trust fund
(the 'Trust Fund'). The assets of the Trust Fund will consist primarily of a
pool (the 'Mortgage Pool') of closed-end, fixed-rate home equity loans (the
'Mortgage Loans') secured by first or second liens on one- to four-family
residential properties, having original terms to maturity of approximately 5
years to 30 years and sold by GE Capital Mortgage Services, Inc. (the
'Company'). See 'Description of the Mortgage Pool and the Mortgaged Properties'
herein.
(Cover continued on next page)
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NEITHER THESE CERTIFICATES NOR THE UNDERLYING MORTGAGE LOANS ARE INSURED OR
GUARANTEED BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY.
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 SUPPLEMENT OR
THE ACCOMPANYING PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
As described further herein, the Class M, Class B1 and Class B2 Certificates
may not be acquired by ERISA Plans (as defined herein). The Class R1 and Class
R2 Certificates (the 'Residual Certificates') may not be purchased by or
transferred to (i) a Disqualified Organization or Book-Entry Nominee (as defined
in the accompanying Prospectus), (ii) except under limited circumstances, a
person who is not a U.S. Person (as defined in the accompanying Prospectus),
(iii) an ERISA Plan or (iv) any person or entity who the transferor has reason
to believe intends to impede the assessment or collection of any federal, state
or local taxes legally required to be paid with respect thereto. See 'ERISA
Considerations' and 'Description of the Certificates--Restrictions on Transfer
of the Residual Certificates' herein.
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FOR A DESCRIPTION OF CERTAIN FACTORS RELEVANT TO AN INVESTMENT IN THE
CERTIFICATES OFFERED HEREBY, SEE 'RISK FACTORS' BEGINNING ON PAGE S-15 HEREIN.
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There is currently no secondary market for the Certificates offered hereby.
Prudential Securities Incorporated (the 'Underwriter') expects to make a
secondary market in the Certificates (other than the Residual Certificates)
offered hereby, but has no obligation to do so. There can be no assurance that a
secondary market for such Certificates will develop or, if it does develop, will
continue. See 'Summary of Terms--Liquidity Considerations' herein.
<TABLE>
<CAPTION>
ORIGINAL CLASS
CERTIFICATE
PRINCIPAL CERTIFICATE PRICE TO UNDERWRITING PROCEEDS TO
BALANCE(1) INTEREST RATE PUBLIC(4) DISCOUNT THE COMPANY(4)
-------------- ------------- ---------- ------------ -----------------
<S> <C> <C> <C> <C> <C>
Class A1 Certificates.............. $ 59,500,000 6.3650% 99.990769% 0.225% 99.765769%
Class A2 Certificates.............. 21,500,000 6.1050 99.997384 0.225 99.772384
Class A3 Certificates.............. 27,600,000 6.1800 99.978600 0.225 99.753600
Class A4 Certificates.............. 13,400,000 6.2750 99.972715 0.225 99.747715
Class A5 Certificates.............. 15,100,000 6.3150 99.959644 0.225 99.734644
Class A6 Certificates.............. 23,478,000 (2) 99.932077 0.225 99.707077
Class A7 Certificates.............. 17,800,000 6.2150 99.958523 0.225 99.733523
Class R1 Certificates.............. 500 (3) (5) (5) (5)
Class R2 Certificates.............. 500 (3) (5) (5) (5)
Class M Certificates............... 4,861,000 (2) (5) (5) (5)
Class B1 Certificates.............. 4,375,000 (2) (5) (5) (5)
Class B2 Certificates.............. 1,945,000 (2) (5) (5) (5)
</TABLE>
(1) Approximate, subject to adjustment as described herein.
(2) Interest will accrue on the Class A6, Class M, Class B1 and Class B2
Certificates during the initial Interest Accrual Period (as defined herein)
at Certificate Interest Rates of 6.645%, 6.660%, 6.905% and 7.495% per
annum, respectively, and during each subsequent Interest Accrual Period at
Certificate Interest Rates equal to the lesser of (i) 6.645%, 6.660%, 6.905%
and 7.495% per annum, respectively, and (ii) the Weighted Average Net
Mortgage Rate (as defined herein) of the Mortgage Loans for the related
Interest Accrual Period.
(3) The Class R1 and Class R2 Certificates are principal-only Certificates and
will not accrue interest.
(4) Plus interest at the applicable Certificate Interest Rate accrued from June
1, 1998.
(5) The Class R1, Class R2, Class M, Class B1 and Class B2 Certificates offered
hereby will be acquired by the Underwriter from the Company, and such
Certificates are being offered by the Underwriter from time to time in
negotiated transactions or otherwise at varying prices to be determined at
the time of sale.
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The aggregate proceeds to the Company from the sale of the Certificates
offered hereby will be approximately 99.745910% of the aggregate initial Class
Certificate Principal Balance of the Certificates offered hereby (other than the
Residual Certificates), plus accrued interest thereon from the Cut-off Date,
before deducting expenses payable by the Company, estimated at $250,000, and the
amount paid by the Company to the Underwriter in respect of the sale of the
Residual Certificates. See 'Plan of Distribution' herein.
The Certificates are offered by the Underwriter when, as and if issued,
delivered to and accepted by the Underwriter and subject to certain other
conditions. It is expected that delivery of the Residual Certificates will be
made at the offices of the Underwriter in certificated form and that delivery of
the other Certificates offered hereby will be made against payment therefor in
book-entry form through the book-entry facilities of The Depository Trust
Company, in each case on or about June 26, 1998.
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PRUDENTIAL SECURITIES INCORPORATED
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS JUNE 23, 1998.
<PAGE>
(Continued from Cover)
The Certificates offered hereby will be issued in the classes (each, a
'Class') and with the characteristics set forth on the cover hereof.
The Certificates will consist of ten Classes of senior certificates (the
'Class A1, Class A2, Class A3, Class A4, Class A5, Class A6, Class A7, Class R1,
Class R2 and Class S Certificates' and, collectively, the 'Senior Certificates')
and six Classes of subordinated certificates (the 'Class M, Class B1, Class B2,
Class B3, Class B4 and Class B5 Certificates' and, collectively, the 'Junior
Certificates'). The Junior Certificates are subordinate in right of distribution
to the Senior Certificates to the extent described herein. The initial aggregate
Certificate Principal Balance of the Junior Certificates will equal
approximately 8.25% of the initial aggregate Certificate Principal Balance of
all of the Certificates.
The Class M Certificates are subordinate to the Senior Certificates to the
extent described herein. The Class B1, Class B2, Class B3, Class B4 and Class B5
Certificates (collectively, the 'Class B Certificates') are subordinate to the
Senior Certificates and the Class M Certificates, and each Class of Class B
Certificates is subordinate to the Class or Classes of Class B Certificates
having a lower numerical designation (i.e., the Class B5 Certificates are
subordinate to the Class B4 Certificates, the Class B4 Certificates are
subordinate to the Class B3 Certificates, and so on) to the extent described
herein. The initial aggregate Certificate Principal Balance of the Class B3,
Class B4 and Class B5 Certificates will equal approximately 2.50% of the initial
aggregate Certificate Principal Balance of all of the Certificates and
approximately 30.31% of the initial aggregate Certificate Principal Balance of
all of the Junior Certificates.
The Class B3, Class B4, Class B5 and Class S Certificates are not offered
hereby.
Interest will accrue on each Class of the Certificates offered hereby (other
than the Residual Certificates) at the respective Certificate Interest Rates set
forth or described on the cover hereof. Interest will be distributable on the
Certificates (other than the Residual Certificates) on each Distribution Date
(as defined herein) commencing in July 1998. On each Distribution Date, to the
extent funds are available therefor, the amount of interest distributable on
each Certificate offered hereby (other than the Residual Certificates) will
equal 30 days of interest at the applicable Certificate Interest Rate on the
Certificate Principal Balance thereof immediately prior to such Distribution
Date, less such Certificate's share of any Net Interest Shortfall, any Unpaid
Net Simple Interest Shortfall, the interest portion of any Excess Losses through
the Cross-Over Date and, after the Cross-Over Date, the interest portion of any
Realized Losses (each as defined herein).
Principal of the Certificates offered hereby will be distributable on each
Distribution Date commencing in July 1998 to the extent and in the manner
described herein.
------------------------
The yields to maturity on the Certificates will be affected, in varying
degrees, by the rate and timing of principal payments (including prepayments) on
the Mortgage Loans, which may be prepaid at any time, without penalty except as
described herein. Investors in the Certificates offered hereby should consider,
in the case of any such Certificates purchased at a discount, the risk that a
slower than anticipated rate of principal prepayments on the Mortgage Loans
could result in a significant extension in the weighted average lives of such
Certificates and actual yields to investors that are significantly lower than
the anticipated yields and, in the case of any such Certificates purchased at a
premium, the risk that a faster than anticipated rate of principal prepayments
on the Mortgage Loans could result in a significant reduction in the weighted
average lives of such Certificates and actual yields to investors that are
significantly lower than the anticipated yields. In addition, the yields on the
Certificates may be affected by the timing of receipts of payments on Simple
Interest Mortgage Loans (as defined herein).
The yields to maturity on the Class M, Class B1 and Class B2 Certificates
will be sensitive, in varying degrees, to defaults on the Mortgage Loans (and
the timing thereof). Investors should fully consider the risks associated with
an investment in such Certificates, including the possibility that such
investors may not fully recoup their initial investment as a result of Realized
Losses on the Mortgage Loans. See 'Yield and Weighted Average Life
Considerations' herein.
Beneficial interests in the Certificates offered hereby, other than the
Residual Certificates, will be held by investors only through the book-entry
facilities of the Depository (as defined herein). Distributions on such Classes
of Certificates, and transfers of beneficial interests therein, will be made as
described herein. No person will be entitled to receive a physical certificate
representing such Certificates except under the limited circumstances described
herein. See 'Description of the Certificates-- Book-Entry Certificates' herein.
------------------------
For federal income tax purposes, the Trust Fund will consist of two 'real
estate mortgage investment conduits' (each a 'REMIC' or the 'Lower-Tier REMIC'
and the 'Upper-Tier REMIC,' as the case may be, except as otherwise set forth
herein). All Classes of Certificates other than the Class R1 and Class R2
Certificates will be designated as regular interests in the Upper-Tier REMIC and
will generally be treated as debt instruments for federal income tax purposes.
The Class R1 and Class R2 Certificates will constitute the residual interests in
the Lower-Tier and Upper-Tier REMIC, respectively. Prospective investors are
cautioned that the Class R1 and Class R2 Certificateholders' REMIC taxable
income and the tax liability thereon may exceed
S-2
<PAGE>
cash distributions to such holders during certain periods, in which event such
holders must have sufficient alternative sources of funds to pay such tax
liability. See 'Summary of Terms--Certain Federal Income Tax Consequences' and
'Certain Federal Income Tax Consequences' herein and 'Certain Federal Income Tax
Consequences' in the Prospectus.
------------------------
THE CERTIFICATES OFFERED HEREBY CONSTITUTE A PART OF A SERIES OF
PASS-THROUGH CERTIFICATES BEING OFFERED BY THE COMPANY FROM TIME TO TIME
PURSUANT TO ITS PROSPECTUS DATED MAY 26, 1998 OF WHICH THIS PROSPECTUS
SUPPLEMENT IS A PART. THIS PROSPECTUS SUPPLEMENT DOES NOT CONTAIN COMPLETE
INFORMATION ABOUT THE OFFERING OF THE CERTIFICATES. ADDITIONAL INFORMATION IS
CONTAINED IN THE PROSPECTUS AND PURCHASERS ARE URGED TO READ BOTH THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS IN FULL. SALES OF THE CERTIFICATES
MAY NOT BE CONSUMMATED UNLESS THE PURCHASER HAS RECEIVED BOTH THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS.
------------------------
Until 90 days after the date of this Prospectus Supplement, all dealers
effecting transactions in the Certificates offered hereby, whether or not
participating in this distribution, may be required to deliver a Prospectus
Supplement and Prospectus to which it relates. This is in addition to the
obligation of dealers to deliver a Prospectus Supplement and Prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
The Underwriter may engage in transactions that stabilize, maintain or
otherwise affect the price of the Class A1, Class A2, Class A3, Class A4, Class
A5, Class A6 and Class A7 Certificates. Such transactions may include
stabilizing and the purchase of such Certificates to cover the Underwriter's
short positions. For a description of these activities, see 'Plan of
Distribution' herein.
S-3
<PAGE>
SUMMARY OF TERMS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere herein and in the Prospectus.
Capitalized terms used herein and not otherwise defined have the meanings
assigned in the Prospectus. For a description of certain factors relevant to an
investment in the Certificates offered hereby, see 'Risk Factors' herein.
<TABLE>
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SECURITIES OFFERED....... Home Equity Loan Pass-Through Certificates, Series
1998-HE2 (the 'Certificates'), in the Classes and
aggregate original Certificate Principal Balances
(each, a 'Class Certificate Principal Balance'),
set forth on the cover hereof, subject to the
variance described herein. The aggregate
Principal Balance (as defined herein) of the
Mortgage Loans underlying the Certificates (the
'Mortgage Loans') will be approximately
$194,423,720 as of the Cut-off Date, subject to a
permitted variance such that the aggregate
Principal Balance of such Mortgage Loans will not
be less than $184,702,534 or greater than
$204,144,906.
The Certificates will consist of ten classes of
senior certificates (the 'Class A1, Class A2,
Class A3, Class A4, Class A5, Class A6, Class A7,
Class R1, Class R2 and Class S Certificates' and,
collectively, the 'Senior Certificates') and six
classes of subordinated certificates (the 'Class
M, Class B1, Class B2, Class B3, Class B4 and
Class B5 Certificates' and, collectively, the
'Junior Certificates'). The Junior Certificates
are subordinate in right of distribution to the
Senior Certificates to the extent described
herein. The initial aggregate Certificate
Principal Balance of the Junior Certificates will
equal approximately 8.25% of the initial
aggregate Certificate Principal Balance of all of
the Certificates.
The Class M Certificates are subordinate to the
Senior Certificates to the extent described
herein. The Class B1, Class B2, Class B3, Class
B4 and Class B5 Certificates (collectively, the
'Class B Certificates') are subordinate to the
Senior Certificates and the Class M Certificates,
and each Class of Class B Certificates is
subordinate to the Class or Classes of Class B
Certificates having a lower numerical designation
(i.e., the Class B5 Certificates are subordinate
to the Class B4 Certificates, the Class B4
Certificates are subordinate to the Class B3
Certificates, and so on) to the extent described
herein. The initial aggregate Certificate
Principal Balance of the Class B3, Class B4 and
Class B5 Certificates will equal approximately
2.50% of the initial aggregate Certificate
Principal Balance of all of the Certificates and
approximately 30.31% of the initial aggregate
Certificate Principal Balance of all of the
Junior Certificates.
The Class B3, Class B4, Class B5 and Class S
Certificates are not offered hereby.
The Class S Certificates will not have a Class
Certificate Principal Balance and will bear
interest at the rate described herein. The
Company will initially retain and may
subsequently transfer the Class S Certificates.
The Classes of Certificates offered hereby, other
than the Class R1 and Class R2 Certificates
(together, the 'Residual Certificates'), will
each be registered as a single certificate held
by a nominee of The Depository Trust Company (the
'Depository'), and beneficial interests therein
will
</TABLE>
S-4
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<S> <C>
be held by investors through the book-entry
facilities of the Depository, as described
herein, in minimum denominations in Certificate
Principal Balance of $25,000 (in the case of the
Class A1, Class A2, Class A3, Class A4, Class A5,
Class A6 and Class A7 Certificates) or $100,000
(in the case of the Class M, Class B1 and Class
B2 Certificates), and, in each case, integral
multiples of $1,000 in excess thereof. The
Residual Certificates will be issued in
certificated form as a single Certificate per
Class representing the entire Class Certificate
Principal Balance thereof. The Residual
Certificates are principal-only Certificates and
will not accrue interest.
SELLER AND SERVICER...... GE Capital Mortgage Services, Inc., a New Jersey
corporation (the 'Company'). See 'GE Capital
Mortgage Services, Inc.' and 'The Pooling and
Servicing Agreement--Servicing Arrangement with
Respect to the Mortgage Loans' herein.
TRUSTEE.................. The First National Bank of Chicago, a national
banking association having its principal office in
Chicago, Illinois (the 'Trustee'). See 'The
Pooling and Servicing Agreement--Trustee' herein.
CUT-OFF DATE............. June 1, 1998.
CLOSING DATE............. On or about June 26, 1998.
MORTGAGE POOL............ The Certificates will represent the entire
beneficial ownership interest in a trust fund (the
'Trust Fund'). The assets of the Trust Fund will
consist primarily of a pool (the 'Mortgage Pool')
of closed-end, fixed-rate, home equity loans (the
'Mortgage Loans') secured by first or second
liens on one- to four-family residential
properties (the 'Mortgaged Properties'). The
aggregate Principal Balance of the Mortgage Loans
as of the Cut-off Date is expected to be
approximately $194,423,720 subject to a permitted
variance as described herein. The Mortgage Loans
will have original terms to maturity of
approximately 5 years to 30 years. It is expected
that (i) approximately 7.44% of the Mortgage
Loans will be secured by second-priority
mortgages on the related Mortgaged Properties,
(ii) approximately 6.24% of the Mortgage Loans
will be Simple Interest Mortgage Loans (as
defined herein) and (iii) approximately 22.12% of
the Mortgage Loans will be Balloon Loans (as
defined herein), in each case by Principal
Balance as of the Cut-off Date. The weighted
average of the Mortgage Rates (as defined herein)
as of the Cut-off Date is expected to be
approximately 9.136% per annum. The weighted
average remaining months to stated maturity for
the Mortgage Loans as of the Cut-off Date is
expected to be approximately 244 months. The
weighted average of the Second-Lien Combined
Loan-to-Value Ratios (as defined herein) of the
second-lien Mortgage Loans as of the Cut-off Date
is expected to be approximately 72.25%. See
'Description of the Mortgage Pool and the
Mortgaged Properties' herein.
DESCRIPTION OF THE
CERTIFICATES........... The Certificates will be issued pursuant to a
Pooling and Servicing Agreement, to be dated as of
the Cut-off Date (the 'Agreement'), between the
Company and the Trustee. To the extent funds are
available therefor in the Certificate Account,
distributions on the Certificates will be made on
the 25th day of each month or, if such 25th day
is not a business day, on the succeeding business
day (each, a 'Distribution Date'), commencing in
July 1998, to holders of record on the close of
</TABLE>
S-5
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business on the last business day of the month
preceding the month of such Distribution Date
(the 'Record Date').
DISTRIBUTIONS ON THE
CERTIFICATES........... General. On each Distribution Date, the Available
Interest Funds (as defined herein) for such
Distribution Date will be allocated first, to pay
interest due the holders of the Senior
Certificates pro rata; and second, to pay
interest due the holders of the Junior
Certificates in order of priority among the
Classes of Junior Certificates. In addition, the
Senior Principal Distribution Amount (as defined
herein) for such Distribution Date will be
allocated to pay principal due the holders of the
Senior Certificates; and the Junior Principal
Distribution Amount (as defined herein) for such
Distribution Date will be allocated to pay
principal due the holders of the Junior
Certificates. See 'Description of the
Certificates--Distributions on the
Certificates--Interest' and '--Principal' herein.
In the event that substantial defaults on the
Mortgage Loans occur (and delinquent interest in
respect thereof is not advanced as described
herein), the holders of the Junior Certificates
may receive principal payments from Available
Principal Funds (as defined herein) on the
related Distribution Date, notwithstanding that
the holders of the Senior Certificates may
receive a lesser amount of interest payments from
Available Interest Funds on such Distribution
Date than would have been the case in the absence
of such defaults.
Interest. Interest will accrue on each Class of
the Certificates offered hereby (other than the
Residual Certificates) at the respective
Certificate Interest Rates set forth or described
on the cover hereof during each one-month period
ending on the last day of the month preceding the
month in which each Distribution Date occurs
(each, an 'Interest Accrual Period').
On each Distribution Date, interest will be
distributable on each Class of Certificates
(other than the Residual Certificates) from the
Available Interest Funds for such Distribution
Date in an aggregate amount equal to the Accrued
Certificate Interest for such Class on such
Distribution Date (less the portion of any Unpaid
Net Simple Interest Shortfall (as defined herein)
allocated to such Class), plus any Accrued
Certificate Interest thereon remaining
undistributed from previous Distribution Dates
(including amounts undistributed due to any
Unpaid Net Simple Interest Shortfalls on previous
Distribution Dates).
The 'Accrued Certificate Interest' for any
Certificate (other than a Residual Certificate)
for any Distribution Date will equal the interest
accrued during the related Interest Accrual
Period at the applicable Certificate Interest
Rate on the Certificate Principal Balance (or, in
the case of a Class S Certificate, the Notional
Principal Balance) of such Certificate
immediately prior to such Distribution Date, less
such Certificate's share of any Net Interest
Shortfall, the interest portion of any Excess
Losses through the Cross-Over Date and, after the
Cross-Over Date, the interest portion of any
Realized Losses (as each such term is defined
herein).
Excess Losses consist of all Bankruptcy Losses,
Fraud Losses and Special Hazard Losses (each a
type of Realized Loss) occurring after the
Bankruptcy Coverage Termination Date, the Fraud
Coverage
</TABLE>
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Termination Date and the Special Hazard
Termination Date, respectively, as more fully
described herein.
Any Unpaid Net Simple Interest Shortfall or Net
Interest Shortfall, or the interest portion of
any Excess Losses through the Cross-Over Date
and, after the Cross-Over Date, the interest
portion of any Realized Losses will be allocated
among the Certificates (other than the Residual
Certificates) in proportion to the amount of
Accrued Certificate Interest that would have been
allocated thereto in the absence of such
shortfalls or losses. Interest will be calculated
on the Certificates (other than the Residual
Certificates) on the basis of a 360-day year
consisting of twelve 30-day months.
The aggregate 'Notional Principal Balance' of the
Class S Certificates as of any Distribution Date
will equal the aggregate Principal Balance (as
defined herein) of the Mortgage Loans with
respect to such Distribution Date. See
'Description of the Certificates--Distribution on
the Certificates--Interest' herein.
Principal. Principal will be distributable on the
Senior Certificates (other than the Class S
Certificates) on each Distribution Date in an
amount equal to the Senior Principal Distribution
Amount (as defined herein) for such Distribution
Date to the extent of the Available Principal
Funds for such Distribution Date. The Senior
Principal Distribution Amount will be allocated
among the Senior Certificates (other than the
Class S Certificates) in the manner described
herein. No distribution of principal will be made
on the Class A7 Certificates prior to the
Distribution Date occurring in July 2001, unless
the Class Certificate Principal Balance of each
other Class of Senior Certificates (other than
the Class S Certificates) has been reduced to
zero on or prior to such date or the Cross-Over
Date has occurred.
Principal will be distributable on each Class of
Junior Certificates on each Distribution Date to
the extent of Available Principal Funds for such
date in an aggregate amount equal to such Class's
Allocable Share (as defined herein) for such
Distribution Date to the extent of the Junior
Principal Distribution Amount. Distributions of
principal will be made on a pro rata basis among
the Junior Certificates on each Distribution Date
on which the Class Prepayment Distribution
Trigger (as defined herein) for each Class of
Class B Certificates has been satisfied.
Distributions of principal of a Class of
Certificates will be made on a pro rata basis
among all outstanding Certificates of such Class.
See 'Description of the
Certificates--Distributions on the Certificates--
Principal' herein.
</TABLE>
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<TABLE>
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ADDITIONAL RIGHTS
OF THE RESIDUAL
CERTIFICATEHOLDERS..... In addition to distributions of principal, (a) the
holders of the Class R2 Certificates will be
entitled to receive the proceeds, if any, of the
assets of the Trust Fund remaining in the
Upper-Tier REMIC after the Class Certificate
Principal Balances of all Classes of Certificates
have each been reduced to zero and (b) the
holders of the Class R1 Certificates will be
entitled to receive the proceeds, if any, of the
assets of the Trust Fund remaining in the
Lower-Tier REMIC after the regular interests in
the Lower-Tier REMIC and the Class Certificate
Principal Balance of the Class R1 Certificates
have been reduced to zero. It is not anticipated
that any material assets will be remaining for
such distributions at any such time. See
'Description of the Certificates--Additional
Rights of the Residual Certificateholders'
herein.
ADVANCES................. The Company will be obligated to advance
delinquent installments of interest (net of the
related Servicing Fees) on the Mortgage Loans
under certain circumstances (each such advance,
an 'Advance'). The Company will not be obligated
to advance delinquent installments of principal.
See 'The Pooling and Servicing
Agreement--Advances' herein.
PRINCIPAL PAYMENT
ENTITLEMENT
AMONG THE SENIOR
CERTIFICATES........... The entire amount of any payments of principal
(including scheduled payments, prepayments and
other unscheduled recoveries of principal) with
respect to a Mortgage Loan allocable to the
Senior Certificates (other than the Class S
Certificates) will be allocated to the Class A1,
Class A2, Class A3, Class A4, Class A5, Class A6,
Class R1 and Class R2 Certificates during the
first three years after the Cut-off Date (with
such allocation being subject to reduction
thereafter as described herein), except as
otherwise described herein on or following the
Distribution Date on which the Class Certificate
Principal Balances of such Classes of
Certificates have each been reduced to zero (the
'Senior Transition Date'), provided that such
amount will be allocated pro rata among the
Senior Certificates (other than the Class S
Certificates) after the Cross-Over Date (as
defined herein). This allocation prior to the
Senior Transition Date has the effect of
accelerating the amortization of the Class A1,
Class A2, Class A3, Class A4, Class A5, Class A6,
Class R1 and Class R2 Certificates while
increasing the percentage interest in the
principal balance of the Mortgage Loans evidenced
by the Class A7 Certificates. See 'Description of
the Certificates--Distributions on the
Certificates-- Principal' herein.
PREPAYMENT AND YIELD
CONSIDERATIONS......... The rate of principal distributions on the
Certificates, the aggregate amount of each
interest distribution on the Certificates and the
yield to maturity of the Certificates are related
to the rate and timing of principal payments on
or in respect of the Mortgage Loans. Mortgage
principal payments may be in the form of
scheduled principal payments, voluntary
prepayments by the mortgagors (such as, for
example, prepayments in full due to refinancings,
including refinancings made by the Company in the
ordinary course of conducting its mortgage
banking business, some of which refinancings may
be solicited by the Company,
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or prepayments in connection with biweekly
payment programs, participation in which may be
solicited by the Company) and prepayments
resulting from default, foreclosure, casualty,
condemnation and similar events and certain
repurchases by the Company of the Mortgage Loans
under the circumstances described herein.
Mortgage prepayment rates are likely to fluctuate
significantly. In general, when prevailing
mortgage interest rates decline significantly
below the interest rates on the Mortgage Loans,
the prepayment rate on such Mortgage Loans is
likely to increase, and when prevailing mortgage
interest rates rise significantly above the
interest rates on the Mortgage Loans, the
prepayment rate on such Mortgage Loans is likely
to decrease, although other economic, geographic
and social factors also may influence the
prepayment rate. In addition, Mortgagors are
permitted to prepay the Mortgage Loans, in whole
or in part, at any time, although it is expected
that no more than approximately 21.69% of the
Mortgage Loans, by Principal Balance as of the
Cut-off Date, required the Mortgagor to pay a
prepayment premium in the amounts described
herein that had not expired as of the Cut-off
Date. Substantially all of the prepayment
premiums are scheduled to expire by the end of
June 2003. See 'Description of the Mortgage Pool
and the Mortgaged Properties--Terms of the
Mortgage Loans' and 'Yield and Weighted Average
Life Considerations--Principal Distributions;
Prepayments.'
The entire amount of any prepayment in full, any
prepayment in part with respect to a
Self-Amortizing Mortgage Loan (other than an
Early Installment (as defined herein)) and any
other unscheduled recovery of principal (as
described herein) with respect to a Mortgage Loan
will be allocated solely to the outstanding
Senior Certificates (other than the Class S
Certificates) during the first five years after
the Cut-off Date, with such allocation being
subject to reduction thereafter as described
herein. Among such Senior Certificates, such
amounts will be allocated solely to the Class A1,
Class A2, Class A3, Class A4, Class A5, Class A6,
Class R1 and Class R2 Certificates during the
first three years after the Cut-off Date (with
such allocation being subject to reduction
thereafter as described herein), except as
otherwise provided herein on or after the Senior
Transition Date, provided that such amounts will
be allocated pro rata among the Senior
Certificates (other than the Class S
Certificates) after the Cross-Over Date. See
'Description of the Certificates--Distributions
on the Certificates--Principal' herein.
Voluntary prepayments of principal in full on the
Mortgage Loans received from the sixteenth day
(or, in the case of the month of the Cut-off
Date, from the Cut-off Date) through the last day
of each month, any payments made on Simple
Interest Mortgage Loans less than 30 days after
the prior payment was received on such Mortgage
Loans and any voluntary partial prepayments of
principal on the Self-Amortizing Mortgage Loans
(other than an Early Installment) in each month,
will reduce the amount of interest available for
distribution to Certificateholders in the
following month from the amount which would have
been available in the absence of such
prepayments. Any shortfalls in interest as a
result of such voluntary prepayments of principal
in respect of the Mortgage Loans, to the extent
not offset by a Compensating Interest Payment or
a Simple Interest Payment (each as defined
herein), generally will produce a lower yield on
the Certificates
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(other than the Residual Certificates) than would
otherwise be the case. The interest distributable
on the Certificates offered hereby will also be
reduced by such Certificates' share of the
interest portion of any Excess Losses through the
Cross-Over Date and the entire amount of the
interest portion of all Realized Losses after the
Cross-Over Date.
Because the Certificate Interest Rate applicable
to the Class A6, Class M, Class B1 and Class B2
Certificates on any Distribution Date will not be
permitted to exceed the weighted average of the
Net Mortgage Rates on the Mortgage Loans as of
the first day of the related Interest Accrual
Period, payments of principal (both scheduled and
unscheduled) of Mortgage Loans with Net Mortgage
Rates which exceed the weighted average of the
Net Mortgage Rates may reduce the yield on each
such Certificate. See 'Yield and Weighted Average
Life Consideration-- The Class A6, Class M, Class
B1 and Class B2 Certificates' herein.
Approximately 6.24% of the Mortgage Loans (by
Principal Balance as of the Cut-off Date) are
expected to be Simple Interest Mortgage Loans.
The making of a payment on a Simple Interest
Mortgage Loan in any month less than 30 days
after the previous payment may result in the
collection of less than 30 days' interest on such
Mortgage Loan. Conversely, if a payment on a
Simple Interest Mortgage Loan in any month is
made more than 30 days after the previous
payment, the collection of interest on such
Mortgage Loan for such month may be greater than
30 days' interest on such Mortgage Loan. Any
shortfalls in interest attributable to the early
receipt of payments on Simple Interest Mortgage
Loans, to the extent not offset by a Simple
Interest Payment or excess interest received with
respect to Simple Interest Mortgage Loans which
pay more than 30 days after the previous payment,
generally will produce a lower yield on the
Certificates (other than the Residual
Certificates) than would otherwise be the case.
In addition, the extent to which Simple Interest
Morgage Loans experience such early or late
payments will correspondingly change the amount
of principal received during a month and
accordingly may change the amount of principal to
be distributed on the related Distribution Date
in respect of the Certificates.
If a Mortgagor on a Simple Interest Mortgage Loan
pays more than one installment at a time, the
entire amount of the additional installment will
be treated as a regular principal payment and
will be passed through as principal on the
applicable Certificates on the Distribution Date
immediately following the calendar month in which
such payment was received. Because each such
Mortgagor will not be required to pay the next
regularly scheduled installment, there may be
extended periods of time during which such
Mortgage Loans are not amortizing, despite being
considered current. See 'Description of the
Mortgage Pool and the Mortgaged Properties--Terms
of the Mortgage Loans.'
If a Mortgagor on a Self-Amortizing Mortgage Loan
both (x) pays more than one installment at a time
and (y) designates such additional installment as
an advance installment of a scheduled principal
and interest payment (an 'Early Installment'),
the principal portion of such Early Installment
will also be passed through as principal in
reduction of the Certificate Principal Balance of
such Certificates on the Distribution Date
immediately following the calendar month in which
such payment was received. A portion of each
Early Installment equal to the aggregate
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amount of interest due in each month (other than
the month of payment) covered by such Early
Installment will initially be retained by the
Company, as servicer. An amount equal to the
interest due in each month covered by such Early
Installment will be passed through to
Certificateholders on the Distribution Date
immediately following such month.
The yields to investors will be sensitive in
varying degrees to the rate and timing of
Mortgage Loan prepayments (including unscheduled
recoveries of principal). The extent to which the
yield to maturity of a Certificate is sensitive
to prepayments and other unscheduled receipts of
principal will depend upon the degree to which it
is purchased at a discount or premium. In the
case of Certificates purchased at a premium,
faster than anticipated rates of principal
payments on the Mortgage Loans could result in
actual yields to such investors that are lower
than the anticipated yields and could result in a
reduction in the weighted average lives of such
Certificates. In the case of Certificates
purchased at a discount, slower than anticipated
rates of principal payments on the Mortgage Loans
could result in actual yields to investors that
are lower than the anticipated yields and could
result in an extension of the weighted average
lives of such Certificates.
Rapid rates of prepayments on the Mortgage Loans
are likely to coincide with periods of low
prevailing interest rates. During such periods, the
yields at which an investor in the Certificates may
be able to reinvest amounts received as payments on
the investor's Certificates may be lower than the
yield on such Certificates. Conversely, slow rates
of prepayments on the Mortgage Loans are likely to
coincide with periods of high prevailing interest
rates. During such periods, the amount of payments
available to an investor for reinvestment at such
high rates may be relatively low.
The Certificates offered hereby were structured on
the basis of, among other things, a prepayment
assumption that equals a 20% Prepayment Assumption
(as defined herein) and corresponding weighted
average lives as described herein. The weighted
average lives of the Certificates offered hereby at
such prepayment assumption, based on the assumptions
described under 'Yield and Weighted Average Life
Considerations--Weighted Average Lives of the
Certificates--Table of Class Certificate Principal
Balances' herein, are set forth in the Table that
appears under such heading. The Mortgage Loans are
not likely to prepay at the percentages of the
Prepayment Assumption set forth above or any other
constant rate, and the actual weighted average lives
of the Certificates are likely to differ from those
shown in such Table.
On each Distribution Date, Available Interest
Funds will be allocated first, to pay interest
due the holders of the Senior Certificates (other
than the Residual Certificates); and second, to
pay interest due the holders of the Junior
Certificates in order of priority among the
Classes thereof. In addition, the principal
portion of any Realized Loss (other than any
Realized Loss that constitutes an Excess Loss, as
described below) will be allocated, to the extent
described herein, among the Certificates (other
than the Class S Certificates) in inverse order
of priority, beginning with the Class B5
Certificates and ending with the Senior
Certificates (other than the Class S Certificates).
Furthermore, no distributions in respect of
prepayments in full, any prepayment in part
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with respect to a Self-Amortizing Mortgage Loan
(other than an Early Installment) and certain
other unscheduled distributions in respect of the
Certificates will be made with respect to any
Class B Certificate on any Distribution Date on
which the Class Prepayment Distribution Trigger
for such Certificate has not been satisfied.
The yields on the Class M, Class B1 and Class B2
Certificates will be sensitive, in varying
degrees, to the liquidation of and any subsequent
loss experience on the Mortgage Loans and to the
timing of any such losses. Among the Junior
Certificates offered herein, such yield
sensitivity will generally be greatest among the
Class B2 Certificates relative to the Class M and
Class B1 Certificates, greater among the Class B1
Certificates than the Class M Certificates and
greater among the Class M Certificates than the
Senior Certificates. Certain Realized Loss
scenarios could result in the failure of
investors in the Class M, Class B1 and Class B2
Certificates to fully recover their investment.
See 'Yield and Weighted Average Life
Considerations--The Class M, Class B1 and Class
B2 Certificates' herein.
The prepayment, yield, loss and other assumptions
to be used for pricing purposes for the
Certificates may vary as determined at the time
of sale. Each prospective investor is urged to
make an investment decision with respect to the
Certificates proposed to be purchased by such
investor based upon a comparison of the desired
yield to the anticipated yield on such
Certificates resulting from the price to be paid
by such investor for such Certificates and such
investor's own determination as to the antici-
pated rate of prepayments, defaults and losses on
the Mortgage Pool.
The weighted average lives of all Classes of the
Certificates will be affected in part by the
prepayment experience of the Mortgage Loans and
the resulting allocation of principal payments on
the Certificates.
OPTIONAL TERMINATION..... The Company may, at its option, repurchase from
the Trust Fund all of the Mortgage Loans, and
thereby effect the early retirement of the
Certificates, on any Distribution Date after the
aggregate Principal Balance of the Mortgage Loans
is less than 10% of the aggregate Principal
Balance thereof as of the Cut-off Date. See 'The
Pooling and Servicing Agreement--Termination'
herein.
FINAL DISTRIBUTION
DATES.................. The rate of distribution of principal of the
Certificates will depend on the rate of payment of
principal of the Mortgage Loans which, in turn,
will depend on the characteristics of the
Mortgage Loans, the level of prevailing interest
rates and other economic, geographic and social
factors. No assurance can be given as to the
actual payment experience of the Mortgage Loans.
DOUBLE REMIC STRUCTURE... Two separate REMIC elections will be made with
respect to the assets underlying the Certificates.
The Certificates, other than the Class R1
Certificates, will represent interests in an
'Upper-Tier REMIC' the assets of which will
consist of all the 'regular interests' in a
Lower-Tier REMIC. The 'Lower-Tier REMIC' will
consist of the Mortgage Loans and the related
assets described herein. The Certificates other
than the Class R1 and Class R2 Certificates will
be designated as 'regular interests,' and the
Class R2 Certificates will be designated as the
'residual interest' in the Upper-Tier REMIC. The
Class R1 Certificates will be designated as the
'residual interest' in the Lower-Tier REMIC. See
'Certain Federal Income Tax Consequences' herein.
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CERTAIN FEDERAL INCOME
TAX CONSEQUENCES....... The Certificates other than the Residual
Certificates (the 'Regular Certificates') will be
treated as regular interests in the Upper-Tier
REMIC and generally will be treated as debt
instruments issued by that REMIC for federal
income tax purposes. Certain Classes of the
Regular Certificates may be issued with original
issue discount. The prepayment assumption that
will be used in determining the rate of accrual
of any original issue discount on the Regular
Certificates for federal income tax purposes (and
whether such original issue discount is de
minimis), and that may be used by a holder of a
Regular Certificate to amortize premium, will be
a 20% Prepayment Assumption. No representation is
made that the Mortgage Loans will prepay at such
rate or at any other rate. The holders of the
Residual Certificates will be subject to special
federal income tax rules that may significantly
reduce the after-tax yield of such Certificates.
Further, significant restrictions apply to the
transfer of the Residual Certificates. The amount
of income reported by a holder of a Junior
Certificate may exceed cash distributions as a
result of the preferential right of other Classes
of Regular Certificates to receive cash
distributions in the event of losses or
delinquencies on the Mortgage Loans. See
'Description of the Certificates--Restrictions on
Transfer of the Residual Certificates' herein.
See 'Certain Federal Income Tax Consequences'
herein and 'Certain Federal Income Tax
Consequences--REMIC Certificates' in the
Prospectus.
LEGAL INVESTMENT......... The Certificates offered hereby will not
constitute 'mortgage related securities' for
purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ('SMMEA'). The
appropriate characterization of the Certificates
under various legal investment restrictions
applicable to the investment activities of
certain institutions, and thus the ability of
investors subject to these restrictions to
purchase the Certificates, may be subject to
significant interpretive uncertainties. All
investors whose investment authority is subject
to legal restrictions should consult their own
legal advisors to determine whether, and to what
extent, the Certificates will constitute legal
investments for them. See 'Legal Investment
Matters' herein and in the Prospectus.
ERISA CONSIDERATIONS..... Fiduciaries of employee benefit plans subject to
the Employee Retirement Income Security Act of
1974, as amended ('ERISA'), or plans subject to
Section 4975 of the Internal Revenue Code of 1986
(the 'Code') should carefully review with their
legal advisors whether the purchase or holding of
the Certificates offered hereby could give rise
to a transaction prohibited or not otherwise
permissible under ERISA or the Code. The Class M,
Class B1 and Class B2 Certificates and the
Residual Certificates may not be acquired by an
ERISA Plan (as defined herein) and transfer
thereof is subject to the restrictions described
herein. See 'ERISA Considerations' herein.
CERTIFICATE RATINGS...... It is a condition of issuance of the Certificates
that the Senior Certificates offered hereby be
rated 'AAA' by Fitch IBCA, Inc. ('Fitch') and
'Aaa' by Moody's Investors Service, Inc.
('Moody's'), and that the Class M, Class B1, and
Class B2 Certificates be rated 'Aa2,' 'A2,' and
'Baa2,' respectively, by Moody's. The ratings of
the Certificates should be evaluated
independently from similar ratings on other types
of securities. A security rating is not a
recommendation to buy, sell or hold
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securities and may be subject to revision or
withdrawal at any time by the assigning rating
agency. The ratings do not address the
possibility that Certificateholders may suffer a
lower than anticipated yield.
LIQUIDITY
CONSIDERATIONS......... There is currently no secondary market for the
Certificates offered hereby, and there can be no
assurance that such a market will develop. The
Underwriter intends to make a market in the
Certificates offered hereby (other than the
Residual Certificates), but has no obligation to
do so. There can be no assurance that a secondary
market for such Certificates will develop or, if
it does develop, will continue for the life of
the Certificates or provide investors with
liquidity of investment. In addition, there can
be no assurance that an investor in a Certificate
will be able to sell such Certificate at a price
that is equal to or greater than the price at
which such investor purchased such Certificate.
Information available to investors that desire to
sell their Certificates in the secondary market
may be limited. In particular, price quotations
regarding specific Classes of the Certificates
are not currently available in any newspaper or
other source that is widely available to
investors.
The Company believes that a number of dealers
which engage in the mortgage-backed and
asset-backed securities markets currently offer
price quotations for the Company's mortgage
pass-through certificates and home equity
pass-through certificates to investors that
desire to buy or sell such certificates. However,
there is no assurance that such dealers will
continue to provide such a service or that any
such dealer will offer a price quotation for any
particular series or class of the Company's
certificates. In addition, there is no assurance
that any such dealer will offer a price quotation
to any particular investor, and non-institutional
investors in particular may not have access to
such quotations. The lack of availability of
price information concerning the Certificates
offered hereby may affect their liquidity.
The Company currently maintains an electronic
bulletin board (the 'Bulletin Board') which
provides certain loan-level information about
loans included in various series of mortgage
pass-through securities which have been publicly
offered by the Company. The Company intends to
make information about the Mortgage Loans
available on the Bulletin Board as of the first
Distribution Date and thereafter while the
Bulletin Board is maintained. The loan-level
information appearing on the Bulletin Board is
accessible by computer modem. The Company makes
no representation or warranty that such
information will be suitable for any particular
purpose and the Company assumes no responsibility
for the accuracy or completeness of any
information that is generated therefrom. The
Company has no obligation to maintain the
Bulletin Board and may cease to do so at any
time. For further information concerning the
Bulletin Board, please call 800-544-3466,
extension 5515.
USE OF PROCEEDS.......... The net proceeds from the sale of the Certificates
offered hereby will be used by the Company for
general corporate purposes, including the
acquisition of residential mortgage and home
equity loans and servicing rights.
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RISK FACTORS
THE MORTGAGE LOANS
Second Mortgages. It is expected that approximately 7.44% of the Mortgage
Loans (by Principal Balance as of the Cut-off Date) will be secured by mortgages
that are each junior to one other mortgage held by another lender or investor.
The rights of the Trustee as mortgagee under a junior mortgage are subordinate
to those of the mortgagee under the senior mortgage. If the senior mortgagee
causes the related Mortgaged Property to be sold upon default under the senior
mortgage, the Trustee's interest under the related junior mortgage may be
extinguished and the Trustee will receive funds only to the extent the sales
proceeds exceed the amounts due in respect of the senior mortgage, unless the
Company, as servicer, on behalf of the Trustee, makes an advance sufficient to
satisfy the defaulted senior mortgage in full. The Company will not be under any
obligation to make such an advance to satisfy a senior mortgage, and will not do
so if it believes in its sole judgment that the advance will not be recoverable
from proceeds from the disposition of the related Mortgaged Property. See 'The
Pooling and Servicing Agreement--Servicing Arrangement with Respect to the
Mortgage Loans' herein. In most states no notice of default under the senior
mortgage is required to be given by a senior mortgagee to a junior mortgagee,
and such notices are seldom given to the junior mortgagee. In several states, no
notice is required to be given by the senior mortgagee to the junior mortgagee
in the case of foreclosure or sale of property subject to a junior mortgage. See
'Certain Legal Aspects of the Mortgage Loans and Contracts--The Mortgage Loans--
Junior Mortgages; Rights of Senior Mortgagees' in the Prospectus.
Balloon Loans. It is expected that 22.12% of the Mortgage Loans (by
Principal Balance as of the Cut-off Date) will have original terms to maturity
that are shorter than their amortization schedules, leaving final payments
('Balloon Payments') due on the maturity dates that are significantly larger
than other monthly payments (such loans, 'Balloon Loans'). The Balloon Loans are
generally expected to have original terms to maturity of 15 years and
amortization schedules based on a 30-year maturity. The ability of the Mortgagor
to repay a Balloon Loan at maturity frequently will depend on such Mortgagor's
ability to refinance such loan. Neither the Company nor the Trustee is obligated
to refinance any Mortgage Loan. Any loss on a Balloon Loan as a result of the
Mortgagor's inability to refinance such loan will be borne by
Certificateholders. See 'Description of the Mortgage Pool and the Mortgaged
Properties' herein.
Geographic Concentration. It is expected that Mortgaged Properties
relating to Mortgage Loans that represent more than 5% of the Principal Balance
of all the Mortgage Loans as of the Cut-off Date will be located in each of the
following states in the following approximate concentrations (by Principal
Balance as of the Cut-off Date): Florida (17.30%), New York (13.68%), Maryland
(7.24%), Ohio (5.63%), New Jersey (5.38%), North Carolina (5.05%) and Illinois
(5.02%). An adverse circumstance in the real estate market or economy of any of
these states is likely to have a disproportionate impact on payments in respect
of the Mortgage Loans. See 'Description of the Mortgage Pool and the Mortgaged
Properties' herein.
Prepayment Considerations. The Company is not aware of any publicly
available studies or statistics on prepayment rates for home equity loans
similar to the Mortgage Loans. A number of factors suggest that the prepayment
behavior of a pool of closed-end, home equity loans may be significantly
different from that of a pool of first-priority, one- to four-family,
purchase-money mortgage loans with equivalent interest rates and maturities,
although these factors could give rise to prepayments on home equity loans at
either a faster or slower rate than prepayments on first-priority,
purchase-money mortgage loans. No assurance can be given as to the rate at which
prepayments will be made on the Mortgage Loans. The yields on and the weighted
average lives of the Certificates will depend in part on the rate of principal
payments, including prepayments, received in respect of the Mortgage Loans. See
'Yield and Weighted Average Life Considerations' herein.
Delinquency Status. None of the Mortgage Loans is 30 days or more
delinquent in payment as of the Cut-off Date. However, approximately 11.10% (by
aggregate Principal Balance as of the Cut-off Date) of the Mortgage Loans had
been 30 days or more delinquent (but less than 60 days delinquent) in payment
more than once during the 12 months preceding the Cut-off Date. See 'Description
of the Mortgage Pool and the Mortgaged Properties--The Mortgage Loans.'
THE CERTIFICATES
Limited Liquidity. There is currently no secondary market for the
Certificates offered hereby, and there can be no assurance that such a market
will develop. The Underwriter intends to make a market in the Certificates
offered hereby (other than the Residual Certificates), but has no obligation to
do so. There can be no assurance that a secondary market for the Certificates
offered hereby will develop or, if it does develop, that it will provide
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holders of the Certificates of any Class with liquidity of investment or will
continue for the life of the Certificates.
Subordination--Limited Protection Afforded to Senior Certificates. The
rights of the holders of the Junior Certificates to receive interest
distributions with respect to the Mortgage Loans will be subordinate to the
rights of the holders of the Senior Certificates to receive such interest
distributions. The subordination of the Junior Certificates relative to the
Senior Certificates is intended to enhance the likelihood of regular receipt by
the holders of the Senior Certificates of the full amount of the monthly
interest allocable to them, and to afford such holders protection against
losses. As to interest, the holders of Senior Certificates will have a right to
receive their full Accrued Certificate Interest prior to the receipt by the
holders of the Junior Certificates of any interest distributions. As to
principal, however, the entitlement of the holders of the Senior Certificates to
receive principal distributions will be calculated by reference to the amount of
principal actually received by the Company in the month prior to the month of
such distribution, and not by reference to any schedule of principal
distributions in respect of either the Senior Certificates or the Mortgage
Loans. Accordingly, the holders of Junior Certificates will receive principal
distributions in a month in which principal distributions in respect of the
Certificates will be reduced due to defaults or delinquencies on the Mortgage
Loans. The entitlement of the Junior Certificates in respect of principal will
be reduced only when there are Realized Losses on the Mortgage Loans, which will
(except in the case of Excess Losses) be allocated to the Junior Certificates
before they are allocated to the Senior Certificates. See 'Summary of
Terms--Distributions on the Certificates--General' and 'Description of the
Certificates--Distributions on the Certificates--Interest' and '--Principal'
herein.
Subordination--Allocation of Losses to Junior Certificates. The principal
portion of Realized Losses (other than Excess Losses) in respect of the Mortgage
Loans will be allocated in reduction of the Class Certificate Principal Balance
of the Certificates in inverse order of priority. In addition, holders of the
Senior Certificates will be entitled to receive a disproportionate share of
prepayments in full, any prepayment in part with respect to a Self-Amortizing
Mortgage Loan (other than an Early Installment) and certain other unscheduled
distributions in respect of the Certificates. Accordingly, the holders of each
Class of Junior Certificates will bear a greater risk of loss due to defaults
and delinquencies in respect of the Mortgage Loans than the holders of any more
senior Class of Certificates.
The yields to maturity on the Class M, Class B1 and Class B2 Certificates
will be sensitive, in varying degrees, to defaults on the Mortgage Loans (and
the timing thereof). Investors should fully consider the risks associated with
an investment in the Class M, Class B1 or Class B2 Certificates, including the
possibility that such investors may not fully recover their initial investment
as a result of Realized Losses on the Mortgage Loans. See 'Description of the
Certificates--Subordination' and 'Yield and Weighted Average Life
Consideration--The Class M, Class B1 and Class B2 Certificates' herein.
DESCRIPTION OF THE MORTGAGE POOL AND THE MORTGAGED PROPERTIES
GENERAL
The Certificates will represent the entire beneficial ownership interest in
a trust fund (the 'Trust Fund'). The assets of the Trust Fund will consist
primarily of a pool (the 'Mortgage Pool') of closed-end, fixed-rate, home equity
loans (the 'Mortgage Loans'). The Mortgage Loans are secured by mortgages, deeds
of trust or other security instruments (each, a 'Mortgage') creating first or
second liens on one- to four-family residential properties (the 'Mortgaged
Properties').
Certain data with respect to the Mortgage Loans are set forth below. A
description of the Mortgage Pool on a Current Report on Form 8-K (the 'Detailed
Description') will be available to purchasers of the Certificates at or before,
and will be filed with the Securities and Exchange Commission within fifteen
days after, the initial delivery of the Certificates offered hereby. The
Detailed Description will indicate the extent to which the characteristics of
the Mortgage Loans vary from those set forth herein. The Detailed Description
will specify the precise aggregate Principal Balance (as defined herein) of the
Mortgage Loans as of the Cut-off Date and will also include the following
information (to the extent such information differs from that set forth herein)
regarding the Mortgage Loans: the years of origination, the mortgage interest
rates borne by the Mortgage Loans (the 'Mortgage Rates'), whether such Mortgage
Loans are Simple Interest or Self-Amortizing Mortgage Loans, the Second-Lien
Combined Loan-to-Value Ratios, Home Equity Loan-to-Value Ratios and Home Equity
Loan Ratios, whether such Mortgage Loans are Balloon Loans, the types of
properties securing the Mortgage Loans, the priority of the liens on such
properties and the geographical distribution of the Mortgage Loans by state. The
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Detailed Description also will specify the original Class Certificate Principal
Balance (or, in the case of the Class S Certificates, the original Notional
Principal Balance) of each Class of Certificates on the date of issuance of the
Certificates, the initial Senior Percentage, Junior Percentage and Class A7
Certificate Percentage, and the Bankruptcy Loss Amount, Fraud Loss Amount and
Special Hazard Loss Amount as of the Cut-off Date.
The 'Principal Balance' of a Mortgage Loan as of any Distribution Date is
(a) in the case of a Self-Amortizing Mortgage Loan, the unpaid principal balance
of such Mortgage Loan as specified in the amortization schedule at the time
relating thereto as of the month preceding the month of such Distribution Date,
before giving effect to any scheduled payments of principal due in such month
and after giving effect to any principal prepayments in full received through
and including the 15th day of such month from the related borrower (the
'Mortgagor'), and (b) in the case of a Simple Interest Mortgage Loan, the unpaid
principal balance thereof as of the calendar month preceding the month of such
Distribution Date, before giving effect to the regularly scheduled payment due
in such month and after giving effect to any principal prepayments in full
received through and including the 15th day of such month from the Mortgagor.
The Principal Balance of any Mortgage Loan as of the Cut-off Date will be the
unpaid principal balance thereof as of such date. The 'Due Date' for a Mortgage
Loan is the date during any month on which a payment is first due.
Each Mortgage Loan is required to be covered by a standard hazard insurance
policy. See 'Servicing of the Mortgage Loans and Contracts--Hazard Insurance' in
the Prospectus.
THE MORTGAGE LOANS
The Mortgage Loans will have an aggregate Principal Balance as of the
Cut-off Date, after application of payments of principal made before such date,
of approximately $194,423,720, subject to a permitted variance such that the
aggregate Principal Balance will not be less than $184,702,534 or greater than
$204,144,906.
The Mortgage Rates borne by the Mortgage Loans are expected to range from
approximately 7.05% to 15.00% per annum, and the weighted average of the
Mortgage Rates as of the Cut-off Date of the Mortgage Loans is expected to be
approximately 9.136% per annum. The original principal balances of the Mortgage
Loans are expected to range from approximately $7,500 to $450,000 and, as of the
Cut-off Date, the average Principal Balance of the Mortgage Loans is expected to
be approximately $70,063 after application of payments made before the Cut-off
Date. It is expected that the month and year of the earliest origination date of
any Mortgage Loan will be May 1994, and the month and year of the latest
scheduled maturity date of any such Mortgage Loan will be May 2028. All of the
Mortgage Loans will have original terms to maturity of approximately 5 years to
30 years. The remaining months to stated maturity for the Mortgage Loans as of
the Cut-off Date are expected to range from approximately 45 months to 360
months, and the weighted average remaining months to stated maturity of the
Mortgage Loans as of the Cut-off Date is expected to be approximately 244
months. It is expected that approximately 22.12% of the Mortgage Loans (by
Principal Balance as of the Cut-off Date) will be Balloon Loans. The weighted
average remaining term to stated maturity of the Balloon Loans is expected to be
approximately 177 months. The Home Equity Loan-to-Value Ratios (as defined
herein) of the Mortgage Loans at origination are expected to range from
approximately 1.416% to 90.595%, and the weighted average of the Home Equity
Loan-to-Value Ratios of the Mortgage Loans at origination is expected to be
approximately 71.84%. The Second-Lien Combined Loan-to-Value Ratio (as defined
herein) of the second-lien Mortgage Loans at origination is expected to range
from approximately 8.256% to 96.979%, and the weighted average of the
Second-Lien Combined Loan-to-Value Ratios of such Mortgage Loans at origination
is expected to be approximately 72.25%. No more than approximately 0.45% of the
Mortgage Loans (by Principal Balance as of the Cut-off Date) will be secured by
Mortgaged Properties located in any one postal zip code area.
No more than approximately 0.88% of the Mortgage Loans (by Principal
Balance as of the Cut-off Date) are expected to have been originated under the
NIV program (as described herein). Approximately 3.31% of the Mortgage Loans (by
Principal Balance as of the Cut-off Date) will be 'Consumer Direct' loans (as
described herein) originated by the Company with borrowers who currently have
loans serviced by the Company. In addition, no more than approximately 1.57% of
the Mortgage Loans (by Principal Balance as of the Cut-off Date) are expected to
have been originated under the Streamlined Portfolio program (as described
herein). See 'The Home Equity Loan Program--Underwriting Procedures Relating to
Home Equity Loans' herein.
At the time that the Company originated or acquired approximately 0.88% of
the first-lien Mortgage Loans (by Principal Balance as of the Cut-off Date)
expected to be included in the Mortgage Pool, the Company also originated or
acquired second-lien mortgage loans secured by the same Mortgaged Properties.
These second-lien mortgage loans are not included in the Mortgage Pool. The
weighted average Home Equity Loan-to-Value Ratio
S-17
<PAGE>
of these first-lien Mortgage Loans is expected to be approximately 80.86%. The
weighted average total combined loan-to-value ratio (the 'Total Combined
Loan-to-Value Ratio') of these first-lien Mortgage Loans (representing the ratio
of the sum of the original principal balance of each such Mortgage Loan and the
related second-lien mortgage loan to the appraised value of the related
Mortgaged Property taken into account at the time of origination) is expected to
be approximately 94.31%.
Approximately 3.47% of the Mortgage Loans (by Principal Balance as of the
Cut-off Date) are expected to be purchase-money loans used by the borrowers to
acquire the related Mortgaged Properties.
Set forth below is a description of certain additional characteristics of
the Mortgage Pool and the Mortgage Loans expected to be included therein,
subject to the variance described herein (the sum of the balances may not equal
100% due to rounding):
CUT-OFF DATE PRINCIPAL BALANCES
<TABLE>
<CAPTION>
PERCENTAGE OF
RANGE OF CUT-OFF DATE NUMBER OF CUT-OFF DATE CUT-OFF DATE AGGREGATE
PRINCIPAL BALANCES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------------------------- -------------- ----------------- ------------------------
<S> <C> <C> <C>
$ 0.00- 10,000.00.............................. 8 $ 71,494.97 0.04%
10,000.01- 20,000.00............................... 165 2,659,908.11 1.37
20,000.01- 30,000.00............................... 234 6,078,455.72 3.13
30,000.01- 40,000.00............................... 296 10,469,939.37 5.39
40,000.01- 50,000.00............................... 375 16,951,007.89 8.72
50,000.01- 60,000.00............................... 376 20,785,886.47 10.69
60,000.01- 75,000.00............................... 381 25,671,383.54 13.20
75,000.01-100,000.00............................... 448 39,224,502.51 20.17
100,000.01-150,000.00............................... 347 42,085,272.07 21.65
150,000.01-200,000.00............................... 83 14,356,772.42 7.38
200,000.01-250,000.00............................... 34 7,438,242.18 3.83
250,000.01-300,000.00............................... 17 4,622,542.21 2.38
300,000.01-350,000.00............................... 4 1,287,181.51 0.66
350,000.01-400,000.00............................... 6 2,271,130.70 1.17
400,000.01 & Above.................................. 1 450,000.00 0.23
------ ----------------- -------
Total........................................... 2,775 $ 194,423,719.67 100.00%
------ ----------------- -------
------ ----------------- -------
</TABLE>
MORTGAGE RATES
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF CUT-OFF DATE CUT-OFF DATE AGGREGATE
RANGE OF MORTGAGE RATES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------------------------- -------------- ----------------- ------------------------
<S> <C> <C> <C>
0.000- 7.500%....................................... 11 $ 1,059,518.94 0.54%
7.501- 8.000........................................ 153 12,876,772.72 6.62
8.001- 8.500........................................ 743 57,919,497.89 29.79
8.501- 9.000........................................ 570 42,662,795.25 21.94
9.001- 9.500........................................ 383 24,577,652.40 12.64
9.501-10.000........................................ 385 24,621,111.19 12.66
10.001-10.500........................................ 179 10,956,445.52 5.64
10.501-11.000........................................ 195 11,385,540.05 5.86
11.001-11.500........................................ 57 3,193,034.56 1.64
11.501-12.000........................................ 49 2,878,975.16 1.48
12.001-12.500........................................ 16 858,496.91 0.44
12.501-13.000........................................ 21 874,265.42 0.45
13.001-13.500........................................ 5 284,571.19 0.15
13.501-14.000........................................ 2 102,587.19 0.05
14.001-15.000........................................ 6 172,455.28 0.09
------ ----------------- -------
Total........................................... 2,775 $ 194,423,719.67 100.00%
------ ----------------- -------
------ ----------------- -------
</TABLE>
S-18
<PAGE>
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF CUT-OFF DATE CUT-OFF DATE AGGREGATE
STATE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------------------------------- -------------- ----------------- ----------------------
<S> <C> <C> <C>
Alabama................................................ 73 $ 3,610,494.94 1.86%
Arizona................................................ 17 813,734.20 0.42
Arkansas............................................... 7 569,297.32 0.29
California............................................. 45 2,665,409.16 1.37
Colorado............................................... 92 7,192,878.42 3.70
Connecticut............................................ 51 4,594,882.04 2.36
Delaware............................................... 3 147,698.79 0.08
District of Columbia................................... 59 4,273,904.18 2.20
Florida................................................ 559 33,626,304.86 17.30
Georgia................................................ 58 3,187,676.88 1.64
Idaho.................................................. 4 319,285.24 0.16
Illinois............................................... 142 9,768,141.76 5.02
Indiana................................................ 106 5,132,960.17 2.64
Iowa................................................... 6 309,764.46 0.16
Kansas................................................. 4 217,967.88 0.11
Kentucky............................................... 16 835,755.11 0.43
Louisiana.............................................. 16 832,481.31 0.43
Maryland............................................... 160 14,067,170.26 7.24
Massachusetts.......................................... 74 6,944,919.91 3.57
Michigan............................................... 73 4,701,686.45 2.42
Minnesota.............................................. 4 264,846.34 0.14
Mississippi............................................ 3 172,076.22 0.09
Missouri............................................... 54 3,415,714.15 1.76
Montana................................................ 1 102,755.78 0.05
Nebraska............................................... 7 521,911.40 0.27
Nevada................................................. 2 71,213.29 0.04
New Hampshire.......................................... 1 95,147.99 0.05
New Jersey............................................. 114 10,457,869.97 5.38
New Mexico............................................. 16 785,051.54 0.40
New York............................................... 303 26,592,984.80 13.68
North Carolina......................................... 163 9,827,898.25 5.05
Ohio................................................... 158 10,940,863.24 5.63
Oklahoma............................................... 5 260,937.35 0.13
Oregon................................................. 7 393,351.42 0.20
Pennsylvania........................................... 77 5,693,478.22 2.93
Rhode Island........................................... 18 1,252,044.67 0.64
South Carolina......................................... 67 4,223,322.05 2.17
South Dakota........................................... 2 337,348.66 0.17
Tennessee.............................................. 63 4,479,680.84 2.30
Texas.................................................. 1 63,652.10 0.03
Utah................................................... 35 2,761,543.14 1.42
Virginia............................................... 80 5,973,607.56 3.07
Washington............................................. 8 434,931.09 0.22
West Virginia.......................................... 2 125,098.89 0.06
Wisconsin.............................................. 18 1,274,925.04 0.66
Wyoming................................................ 1 89,052.33 0.05
------ ----------------- -------
Total.............................................. 2,775 $194,423,719.67 100.00%
------ ----------------- -------
------ ----------------- -------
</TABLE>
PRIORITY OF MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF CUT-OFF DATE CUT-OFF DATE AGGREGATE
PRIORITY MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------------------------------- -------------- ----------------- ----------------------
<S> <C> <C> <C>
First-priority......................................... 2,336 $179,952,154.72 92.56%
Second-priority........................................ 439 14,471,564.95 7.44
------ ----------------- -------
Total.............................................. 2,775 $194,423,719.67 100.00%
------ ----------------- -------
------ ----------------- -------
</TABLE>
S-19
<PAGE>
YEAR OF ORIGINATION
<TABLE>
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE
AGGREGATE
NUMBER OF CUT-OFF DATE PRINCIPAL
YEAR OF ORIGINATION MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- --------------------------------------------------------------- -------------- ----------------- -------------
<S> <C> <C> <C>
1998........................................................... 2,048 $ 141,695,876.89 72.88%
1997........................................................... 722 52,417,327.72 26.96
1996........................................................... 3 150,740.46 0.08
1995........................................................... 1 119,855.46 0.06
1994........................................................... 1 39,919.14 0.02
------ ----------------- -------------
Total..................................................... 2,775 $ 194,423,719.67 100.00%
------ ----------------- -------------
------ ----------------- -------------
</TABLE>
MONTHS REMAINING TO STATED MATURITY AS OF THE CUT-OFF DATE
<TABLE>
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF MONTHS AGGREGATE
REMAINING NUMBER OF CUT-OFF DATE PRINCIPAL
TO STATED MATURITY MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- --------------------------------------------------------------- -------------- ----------------- -------------
<S> <C> <C> <C>
36-59......................................................... 23 $ 460,599.85 0.24%
60-83......................................................... 15 341,388.77 0.18
84-107........................................................ 2 38,748.28 0.02
108-131........................................................ 224 8,480,006.37 4.36
132-155........................................................ 10 543,169.28 0.28
156-179........................................................ 1,000 66,838,648.41 34.38
180-239........................................................ 694 49,010,524.75 25.21
240 and Above.................................................. 807 68,710,633.96 35.34
------ ----------------- -------------
Total..................................................... 2,775 $ 194,423,719.67 100.00%
------ ----------------- -------------
------ ----------------- -------------
</TABLE>
TYPES OF MORTGAGED PROPERTIES(1)
<TABLE>
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE
AGGREGATE
NUMBER OF CUT-OFF DATE PRINCIPAL
PROPERTY TYPE MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- --------------------------------------------------------------- -------------- ----------------- -------------
<S> <C> <C> <C>
Single-family detached......................................... 2,471 $ 170,853,280.55 87.88%
Single-family attached......................................... 130 8,764,774.93 4.51
2-4 family..................................................... 128 11,891,549.16 6.12
Condominium.................................................... 46 2,914,115.03 1.50
------ ----------------- -------------
Total..................................................... 2,775 $ 194,423,719.67 100.00%
------ ----------------- -------------
------ ----------------- -------------
</TABLE>
- ------------------
(1) Approximately 3.40% of the single-family detached units will be manufactured
homes.
USE OF MORTGAGED PROPERTIES(1)
<TABLE>
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE
AGGREGATE
NUMBER OF CUT-OFF DATE PRINCIPAL
USE MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- --------------------------------------------------------------- -------------- ----------------- -------------
<S> <C> <C> <C>
Primary residence.............................................. 2,697 $ 190,482,691.25 97.97%
Non-primary residence(2)....................................... 78 3,941,028.42 2.03
------ ----------------- -------------
Total..................................................... 2,775 $ 194,423,719.67 100.00%
------ ----------------- -------------
------ ----------------- -------------
</TABLE>
- ------------------
(1) Based on information supplied by the Mortgagor in the loan application.
(2) The Company believes that the majority of the non-primary residences are
investment properties.
S-20
<PAGE>
SECOND-LIEN COMBINED LOAN-TO-VALUE RATIO(1)(2)
(FOR SECOND-LIEN MORTGAGE LOANS)
<TABLE>
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE
AGGREGATE
PRINCIPAL
NUMBER OF BALANCE OF
MORTGAGE LOANS MORTGAGE
IN A LOANS IN A
RANGE OF SECOND-LIEN SECOND-LIEN CUT-OFF DATE SECOND-LIEN
COMBINED LOAN-TO-VALUE RATIOS POSITION PRINCIPAL BALANCE POSITION
- ---------------------------------------------------------------- -------------- ----------------- -------------
<S> <C> <C> <C>
0.00-10.00%.................................................... 1 $ 26,000.00 0.18%
10.01-20.00..................................................... 5 130,590.51 0.90
20.01-30.00..................................................... 4 115,485.82 0.80
30.01-40.00..................................................... 6 189,418.43 1.31
40.01-50.00..................................................... 19 723,049.26 5.00
50.01-60.00..................................................... 28 936,939.10 6.47
60.01-70.00..................................................... 78 2,439,610.37 16.87
70.01-75.00..................................................... 56 1,947,512.81 13.46
75.01-80.00..................................................... 121 4,050,939.26 27.99
80.01-85.00..................................................... 119 3,829,735.13 26.46
85.01 & Above................................................... 2 82,284.26 0.57
------ ----------------- -------------
Total...................................................... 439 $ 14,471,564.95 100.00%
------ ----------------- -------------
------ ----------------- -------------
</TABLE>
- ------------------
(1) The 'Second-Lien Combined Loan-to-Value Ratio' of a second-lien Mortgage
Loan is the ratio (expressed as a percentage) that the sum of the original
principal balance of such Mortgage Loan and the then current principal
balance of the related first-lien mortgage loan, bears to the appraised
value of the related Mortgaged Property at the time such Mortgage Loan was
originated (or if the proceeds of such Mortgage Loan were used to refinance
an existing mortgage, the appraised value based on a recent appraisal).
(2) The weighted average of the Second-Lien Combined Loan-to-Value Ratio of the
second-lien Mortgage Loans is expected to be approximately 72.25%.
HOME EQUITY LOAN-TO-VALUE RATIO(1)(2)
<TABLE>
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE
AGGREGATE
PRINCIPAL
CUT-OFF DATE BALANCE OF
RANGE OF HOME EQUITY NUMBER OF PRINCIPAL MORTGAGE
LOAN-TO-VALUE RATIOS MORTGAGE LOANS BALANCE LOANS
- -------------------------------------------------------------- --------------- --------------- -------------
<S> <C> <C> <C>
0.00-10.00%.................................................. 44 $ 808,750.24 0.42%
10.01-20.00................................................... 204 5,864,838.15 3.02
20.01-30.00................................................... 155 5,595,603.93 2.88
30.01-40.00................................................... 112 4,997,345.27 2.57
40.01-50.00................................................... 135 7,127.198.29 3.67
50.01-60.00................................................... 159 8,956,970.44 4.61
60.01-70.00................................................... 287 19,014,095.63 9.78
70.01-75.00................................................... 254 20,923,874.90 10.76
75.01-80.00................................................... 921 77,024,908.75 39.62
80.01-85.00................................................... 271 23,732,503.38 12.21
85.01-90.00................................................... 231 20,146,627.09 10.36
90.01 & Above................................................. 2 231,003.60 0.12
------ --------------- -------------
Total.................................................... 2,775 $194,423,719.67 100.00%
------ --------------- -------------
------ --------------- -------------
</TABLE>
- ------------------
(1) The 'Home Equity Loan-to-Value Ratio' of a Mortgage Loan is the ratio
(expressed as a percentage) that the original principal balance of such
Mortgage Loan bears to the appraised value (or, with respect to
approximately 3.47% of the Mortgage Loans, the lesser of (i) the appraised
value or (ii) the selling price) of the related Mortgaged Property at the
time such Mortgage Loan was originated (or if the proceeds of such Mortgage
Loan were used to refinance an existing mortgage, the appraised value based
on a recent appraisal).
(2) The weighted average of the Home Equity Loan-to-Value Ratios of the Mortgage
Loans is expected to be approximately 71.84%. The weighted average of the
Home Equity Loan-to-Value Ratios for the first-lien Mortgage Loans and the
second-lien Mortgage Loans is expected to be approximately 75.61% and
24.89%, respectively.
S-21
<PAGE>
HOME EQUITY LOAN RATIO(1)(2)
(FOR SECOND-LIEN MORTGAGE LOANS)
<TABLE>
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE
AGGREGATE PRINCIPAL
BALANCE OF
NUMBER OF MORTGAGE
MORTGAGE LOANS LOANS IN A
RANGE OF HOME EQUITY IN A SECOND- CUT-OFF DATE SECOND-LIEN
LOAN RATIOS LIEN POSITION PRINCIPAL BALANCE POSITION
- ---------------------------------------------------------- -------------- ----------------- -------------------
<S> <C> <C> <C>
0.00- 9.99%............................................. 9 $ 189,518.82 1.31%
10.00-19.99.............................................. 109 2,483,242.66 17.16
20.00-29.99.............................................. 137 3,982,021.61 27.52
30.00-39.99.............................................. 87 3,430,171.44 23.70
40.00-49.99.............................................. 35 1,750,726.01 12.10
50.00-59.99.............................................. 23 1,116,147.14 7.71
60.00-69.99.............................................. 15 595,666.20 4.12
70.00-74.99.............................................. 6 205,480.54 1.42
75.00-79.99.............................................. 4 165,883.66 1.15
80.00-84.99.............................................. 2 73,662.47 0.51
85.00-89.99.............................................. 4 139,994.12 0.97
90.00-99.99.............................................. 3 188,379.13 1.30
100.00.................................................... 5 150,671.65 1.04
------ ----------------- -------
Total................................................ 439 $ 14,471,564.95 100.00%
------ ----------------- -------
------ ----------------- -------
</TABLE>
- ------------------
(1) The 'Home Equity Loan Ratio' of a second-lien Mortgage Loan is the ratio
(expressed as a percentage) that the original principal balance of such
Mortgage Loan bears to the total of the original principal balance of such
Mortgage Loan plus the outstanding amount of the related first-lien mortgage
loan at the time such Mortgage Loan was originated.
(2) The weighted average of the Home Equity Loan Ratios of the second-lien
Mortgage Loans is expected to be approximately 35.57%.
LOAN TYPE
<TABLE>
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE
AGGREGATE
NUMBER OF CUT-OFF DATE PRINCIPAL
TYPE MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- --------------------------------------------------------------- -------------- ----------------- -------------
<S> <C> <C> <C>
Fully amortizing............................................... 2,315 $ 151,413,141.14 77.88%
Balloon........................................................ 460 43,010,578.53 22.12
------ ----------------- -------------
Total..................................................... 2,775 $ 194,423,719.67 100.00%
------ ----------------- -------------
------ ----------------- -------------
</TABLE>
MONTHS REMAINING TO STATED MATURITY AS OF THE CUT-OFF DATE
(FOR BALLOON LOANS)
<TABLE>
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF MONTHS AGGREGATE
REMAINING TO PRINCIPAL
STATED MATURITY NUMBER OF BALLOON CUT-OFF DATE BALANCE OF
AS OF CUT-OFF DATE MORTGAGE LOANS PRINCIPAL BALANCE BALLOON LOANS
- ------------------------------------------------------------- ----------------- ----------------- -------------
<S> <C> <C> <C>
150-180...................................................... 460 $ 43,010,578.53 100.00%
--- ----------------- -------------
Total................................................... 460 $ 43,010,578.53 100.00%
--- ----------------- -------------
--- ----------------- -------------
</TABLE>
S-22
<PAGE>
The following describes certain delinquency characteristics as of the
Cut-off Date of the Mortgage Loans expected to comprise the Mortgage Pool:
None of the Mortgage Loans is 30 days or more delinquent in payment as of
the Cut-off Date.
During the 12 months preceding the Cut-off Date, 297 Mortgage Loans, with
an aggregate Principal Balance as of the Cut-off Date of approximately
$21,580,724 and comprising approximately 11.10% of the Mortgage Pool (by
Principal Balance as of the Cut-off Date), had been delinquent in payment for a
period of at least 30 days (but less than 60 days) two or more times. See
'Delinquency, Foreclosure and Loan Loss Experience of the Company's Home Equity
Loan Servicing Portfolio' herein.
Federal emergency aid has been made available to property owners in several
areas of California and several other states as a result of recent flooding, ice
storms and in California, landslides. Approximately 10.06% (by Scheduled
Principal Balance as of the Cut-off Date) of the Mortgage Loans (11.05% of which
are located in California) are secured by Mortgaged Properties located in the 73
counties (18 of which counties are located in California) known to be affected
by such conditions, and it is unknown whether additional areas may be affected
by such conditions. The Company has not undertaken the physical inspection of
any such Mortgaged Property and, as a result, there can be no assurance that
material damage to any Mortgaged Property in such affected areas has not
occurred. In addition, due to recent wildfires occurring in widespread areas of
Florida, the Federal Emergency Management Agency has announced that federal
emergency aid will be available to homeowners throughout Florida affected by
such fires. Approximately 17.30% (by Scheduled Principal Balance as of the Cut-
off Date) of the Mortgage Loans are secured by Mortgaged Properties located in
Florida.
Under the Agreement (as defined herein), the Company will represent and
warrant that each Mortgaged Property is free of material damage and in good
repair as of the date of issuance of the Certificates. In the event of an
uncured breach of such representation and warranty that materially and adversely
affects the interests of Certificateholders, the Company will be required to
repurchase the affected Mortgage Loan or substitute another mortgage loan
therefor. If any damage caused by the flooding occurs after the Closing Date,
the Company will have no such obligation. In addition, the standard hazard
policies covering the Mortgaged Properties generally do not cover damage caused
by flooding and flood insurance may not have been obtained with respect to such
Mortgaged Properties. To the extent that any insurance proceeds received with
respect to any damaged Mortgaged Properties are not applied to the restoration
thereof, such proceeds will be used to prepay the related Mortgage Loans in
whole or in part. Any repurchases or prepayments of the Mortgaged Loans may
reduce the weighted average lives of the Certificates offered hereby and will
reduce the yields on the classes of Certificates purchased at a premium.
TERMS OF THE MORTGAGE LOANS
The Mortgage Loans accrue interest on a simple interest basis ('Simple
Interest Mortgage Loans') or a self-amortizing basis ('Self-Amortizing Mortgage
Loans'). Approximately 93.76% of the Mortgage Loans are expected to be
Self-Amortizing Mortgage Loans, and approximately 6.24% of the Mortgage Loans
are expected to be Simple Interest Mortgage Loans, in each case by Principal
Balance as of the Cut-off Date.
For Simple Interest Mortgage Loans, the amount of the loan is amortized
over a series of equal monthly payments. Each monthly interest payment is
calculated by multiplying the outstanding principal balance of the loan by the
stated interest rate. Such product is then multiplied by a fraction, the
numerator of which is the number of days elapsed since the preceding payment of
interest was made and the denominator of which is either 365 or 360, depending
on applicable state law. Payments received on a Simple Interest Mortgage Loan
are applied first to interest accrued to the date payment is received and second
to reduce the unpaid principal balance of the Mortgage Loan. Accordingly, if a
Mortgagor makes a payment on the Mortgage Loan less than 30 days after the
previous payment, the interest collected for the period since the preceding
payment was made will be less than 30 days' interest, and the amount of
principal repaid in such month will be correspondingly greater. Conversely, if a
Mortgagor makes a payment on the Mortgage Loan more than 30 days after the
previous payment, the interest collected for the period since the preceding
payment was made will be greater than 30 days' interest, and the amount of
principal repaid in the month will be correspondingly reduced. As a result,
based on the payment characteristics of a particular Mortgagor, the principal
due on the final Due Date of a Simple Interest
S-23
<PAGE>
Mortgage Loan may vary from the principal payment that would be made if payments
for such Mortgage Loan were always made on their Due Dates.
For Self-Amortizing Mortgage Loans, interest will be calculated based on a
360-day year of twelve 30-day months. When a full prepayment of principal is
made on a Self-Amortizing Mortgage Loan during a month, the Mortgagor is charged
interest only on the days of the month actually elapsed up to the date of such
prepayment, at a daily interest rate that is applied to the principal amount of
the loan so prepaid. When a partial prepayment of principal is made on a
Self-Amortizing Mortgage Loan (other than an Early Installment as defined
herein) during a month, the Mortgagor generally is not charged interest on the
amount of the partial prepayment during the month in which such prepayment is
made.
If a Mortgagor pays more than one installment on a Simple Interest Mortgage
Loan at a time, the regular installment will be treated as described above.
However, the entire amount of the additional installment will be treated as a
receipt of one or more regular principal payments and applied to reduce the
principal balance of the related Mortgage Loan. Although each such Mortgagor
will not be required to make the next monthly installment, interest will
continue to accrue on the principal balance of such Mortgage Loan, as reduced by
the application of the early installment. As a result, when such Mortgagor pays
the next required installment on a Simple Interest Mortgage Loan, such payment
may be insufficient to cover the interest that has accrued since the last
payment by the Mortgagor. Notwithstanding such insufficiency, such Mortgage Loan
would be considered to be current. This situation would continue until the
monthly installments are once again sufficient to cover all accrued interest and
to reduce the principal balance of such Mortgage Loan. Depending on the
principal balance and interest rate of the related Mortgage Loan and on the
number of installments paid early, there may be extended periods of time during
which Simple Interest Mortgage Loans in respect of which such additional
installments have been made are not amortizing and are considered current.
It is expected that approximately 22.12% of the Mortgage Loans will be
Balloon Loans. Upon the maturity of a Balloon Loan, the Mortgagor will be
required to make a Balloon Payment, which will be significantly larger than such
Mortgagor's previous monthly payments. The ability of a Mortgagor to make the
Balloon Payment and to repay such a Mortgage Loan at maturity frequently will
depend on such Mortgagor's ability to refinance such Mortgage Loan. Any loss on
a Balloon Loan as a result of the Mortgagor's inability to refinance such loan
will be borne by Certificateholders.
The various Mortgage Loans have different Due Dates throughout each month
based on their respective loan closing dates. The monthly Due Date for each
Mortgage Loan is fixed at loan closing, except that all Mortgagors who are
current in their loan payments have one opportunity during the life of their
loans to change their respective monthly Due Dates to a date up to fifteen days
later than their respective original Due Dates. The Company will service
Mortgage Loans whose Due Dates have been so moved based on the new Due Dates and
will require the Mortgagors to pay a one-time interest charge, which the Company
will retain as servicing compensation, for the number of days that the Due Date
has been extended. However, the Company, as servicer, will advance interest to
the Trust Fund based on the original payment Due Dates for the life of any
Mortgage Loans that have become subject to such a change in Due Date, subject to
any determination by the Company that an Advance made on such a Mortgage Loan is
a Nonrecoverable Advance (as defined herein). See 'The Pooling and Servicing
Agreement--Advances' herein.
Borrowers may prepay their loans, in whole or in part, at any time. It is
expected that no more than approximately 21.69% of the Mortgage Loans, by
Principal Balance as of the Cut-off Date, required the Mortgagor to pay a
prepayment premium that had not expired as of the Cut-off Date. Prepayment
premiums are generally expected to range from 1.00% to 9.00% of the principal
amount prepaid and substantially all of the prepayment premiums are scheduled to
expire by the end of June 2003.
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DESCRIPTION OF THE CERTIFICATES
GENERAL
The Certificates will be issued pursuant to a Pooling and Servicing
Agreement to be dated as of the Cut-off Date (the 'Agreement'), between the
Company, as seller and servicer, and the Trustee. Reference is made to the
Prospectus for important additional information regarding the terms and
conditions of the Agreement and the Certificates. The Certificates will be
issued in the twelve Classes offered hereby, together with the Class B3, Class
B4, Class B5 and Class S Certificates, which are not offered hereby, and in the
aggregate original Certificate Principal Balance of approximately $194,423,720,
subject to a permitted variance such that the aggregate original Certificate
Principal Balance will not be less than $184,702,534 or greater than
$204,144,906.
As described below, each Class of Certificates offered hereby, other than
the Residual Certificates, will be issued in book-entry form, and beneficial
interests therein will be held by investors through the book-entry facilities of
the Depository (as defined below), in minimum denominations in Certificate
Principal Balance of $25,000 (in the case of the Class A1, Class A2, Class A3,
Class A4, Class A5, Class A6 and Class A7 Certificates) or $100,000 (in the case
of the Class M, Class B1 and Class B2 Certificates), and, in each case, integral
multiples of $1,000 in excess thereof. The Residual Certificates will each be
issued in certificated form as a single Certificate representing the entire
Class Certificate Principal Balance thereof. Notwithstanding the minimum
denominations of the Certificates described herein, one Certificate of each
Class other than the Residual Certificates may evidence an additional amount
equal to the remaining Class Certificate Principal Balance thereof.
BOOK-ENTRY CERTIFICATES
Each Class of the Certificates offered hereby other than the Residual
Certificates (collectively, the 'Book-Entry Certificates') will be registered as
a single certificate held by a nominee of The Depository Trust Company (together
with any successor depository selected by the Company, the 'Depository').
Beneficial interests in the Book-Entry Certificates will be held by investors
through the book-entry facilities of the Depository, as described herein. The
Company has been informed by the Depository that its nominee will be Cede & Co.
('Cede'). Accordingly, Cede is expected to be the holder of record of the
Book-Entry Certificates. Except as described below, no person acquiring a
Book-Entry Certificate (each, a 'beneficial owner') will be entitled to receive
a physical certificate representing such Certificate (a 'Definitive
Certificate').
The beneficial owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a 'Financial Intermediary') that maintains the
beneficial owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Certificate will be recorded on the
records of the Depository (or of a participating firm that acts as agent for the
Financial Intermediary (each, a 'Participant'), whose interest will in turn be
recorded on the records of the Depository, if the beneficial owner's Financial
Intermediary is not a Participant). Therefore, the beneficial owner must rely on
the foregoing procedures to evidence its beneficial ownership of a Book-Entry
Certificate. Beneficial ownership of a Book-Entry Certificate may only be
transferred by compliance with the procedures of such Financial Intermediaries
and Participants.
The Depository, which is a New York-chartered limited purpose trust
company, performs services for its Participants, some of which (and/or their
representatives) own the Depository. In accordance with its normal procedures,
the Depository is expected to record the positions held by each Participant in
the Book-Entry Certificates, whether held for its own account or as a nominee
for another person. In general, beneficial ownership of Book-Entry Certificates
will be subject to the rules, regulations and procedures governing the
Depository and Participants as in effect from time to time.
Distributions of principal of and interest on the Book-Entry Certificates
will be made on each Distribution Date by the Trustee to the Depository. The
Depository will be responsible for crediting the amount of such payments to the
accounts of the applicable Participants in accordance with the Depository's
normal procedures. Each Participant will be responsible for disbursing such
payments to the beneficial owners of the Book-Entry Certificates that it
represents and to each Financial Intermediary for which it acts as agent. Each
such Financial Intermediary will be responsible for disbursing funds to the
beneficial owners of the Book-Entry Certificates that it represents.
AS A RESULT, UNDER A BOOK-ENTRY FORMAT, BENEFICIAL OWNERS OF THE BOOK-ENTRY
CERTIFICATES MAY EXPERIENCE SOME DELAY IN THEIR RECEIPT OF PAYMENTS. BECAUSE THE
DEPOSITORY CAN ONLY ACT ON BEHALF OF FINANCIAL
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INTERMEDIARIES, THE ABILITY OF A BENEFICIAL OWNER TO PLEDGE BOOK-ENTRY
CERTIFICATES TO PERSONS OR ENTITIES THAT DO NOT PARTICIPATE IN THE DEPOSITORY
SYSTEM, OR OTHERWISE TAKE ACTIONS IN RESPECT OF SUCH BOOK-ENTRY CERTIFICATES,
MAY BE LIMITED DUE TO THE LACK OF PHYSICAL CERTIFICATES FOR SUCH BOOK-ENTRY
CERTIFICATES. IN ADDITION, ISSUANCE OF THE BOOK-ENTRY CERTIFICATES IN BOOK-ENTRY
FORM MAY REDUCE THE LIQUIDITY OF SUCH CERTIFICATES IN THE SECONDARY MARKET SINCE
CERTAIN POTENTIAL INVESTORS MAY BE UNWILLING TO PURCHASE CERTIFICATES FOR WHICH
THEY CANNOT OBTAIN PHYSICAL CERTIFICATES.
The Depository has advised the Company and the Trustee that, unless and
until Definitive Certificates are issued, the Depository will take any action
permitted to be taken by a Certificateholder under the Agreement only at the
direction of one or more Financial Intermediaries to whose Depository accounts
the Book-Entry Certificates are credited. The Depository may take conflicting
actions with respect to other Book-Entry Certificates to the extent that such
actions are taken on behalf of Financial Intermediaries whose holdings include
such Book-Entry Certificates.
Definitive Certificates will be issued to beneficial owners of the related
Book-Entry Certificates, or their nominees, rather than to the Depository, only
if (a) the Depository or the Company advises the Trustee in writing that the
Depository is no longer willing, qualified or able to discharge properly its
responsibilities as nominee and depository with respect to the Certificates and
the Company or the Trustee is unable to locate a qualified successor; (b) the
Company, at its sole option, elects to terminate the book-entry system through
the Depository; or (c) after the occurrence of an Event of Default (as described
in the accompanying Prospectus) beneficial owners of the Book-Entry Certificates
aggregating not less than 51% of the aggregate voting rights allocated thereto
advise the Trustee and the Depository through the Financial Intermediaries in
writing that the continuation of a book-entry system through the Depository (or
a successor thereto) is no longer in the best interests of beneficial owners of
the Certificates.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all beneficial
owners of the occurrence of such event and the availability through the
Depository of Definitive Certificates. Upon surrender by the Depository of the
global certificate or certificates representing the Certificates and
instructions for re-registration, the Trustee will issue the Definitive
Certificates, and thereafter the Trustee will recognize the holders of such
Definitive Certificates as Certificateholders under the Agreement. Following the
issuance of Definitive Certificates, distribution of principal and interest on
the Certificates will be made by the Trustee directly to holders of Definitive
Certificates in accordance with the procedures set forth in the Agreement.
The Agreement will provide that, if Definitive Certificates are issued in
respect of the Class M, Class B1 or Class B2 Certificates, no transfer of a
Class M, Class B1 or Class B2 Certificate may be made unless the Trustee has
received (i) a certificate to the effect that the proposed transferee is not an
ERISA Plan (as defined herein) or that the transferee is an insurance company
investing assets of its general account and the exemption provided by Section
III(a) of the Department of Labor Prohibited Transaction Class Exemption 95-60,
60 Fed. Reg. 35925 (July 12, 1995), applies to such transferee's acquisition and
holding of such Certificate or (ii) an opinion of counsel relating to such
transfer in form and substance satisfactory to the Trustee and the Company. See
'ERISA Considerations' herein.
NON-BOOK-ENTRY CERTIFICATES
The Residual Certificates (the 'Non-Book-Entry Certificates') will be
issued in fully-registered, certificated form. The Non-Book-Entry Certificates
will be transferable and exchangeable on a Certificate Register to be maintained
at the corporate trust office in the city in which the Trustee is located or
such other office or agency maintained for such purposes by the Trustee in New
York City. Under the Agreement, the Trustee will initially be appointed as the
Certificate Registrar. No service charge will be made for any registration of
transfer or exchange of the Non-Book-Entry Certificates, but payment of a sum
sufficient to cover any tax or other governmental charge may be required by the
Trustee. The Residual Certificates will be subject to certain restrictions on
transfer. See '--Restrictions on Transfer of the Residual Certificates' herein.
Distributions of principal and interest, if any, on each Distribution Date
on the Non-Book-Entry Certificates will be made to the persons in whose names
such Certificates are registered at the close of business on the last business
day of the month immediately preceding the month of such Distribution Date.
Distributions will be made by check or money order mailed to the person entitled
thereto at the address appearing in the Certificate
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Register or, upon written request by the Certificateholder to the Trustee, by
wire transfer to a United States depository institution designated by such
Certificateholder and acceptable to the Trustee or by such other means of
payment as such Certificateholder and the Trustee may agree; provided, however,
that the final distribution in retirement of the Non-Book-Entry Certificates
will be made only upon presentation and surrender of such Certificates at the
office or agency of the Trustee specified in the notice to the holders thereof
of such final distribution.
AVAILABLE FUNDS
The amount of funds constituting all payments on account of principal
received in respect of the Mortgage Loans ('Available Principal Funds') and all
payments on account of interest received in respect of the Mortgage Loans
('Available Interest Funds') that will be available for distribution to holders
of the Certificates on each Distribution Date is as described in the
accompanying Prospectus under 'Servicing of the Mortgage Loans and
Contracts--Loan Payment Record.' Notwithstanding the foregoing, (i) any Simple
Interest Payment or any advance by the Company in respect of delinquent interest
payments on a Mortgage Loan as described herein relating to a Distribution Date
will be included in the Available Interest Funds for such Distribution Date,
(ii) any Nonrecoverable Advances (as defined herein) reimbursed to the Company
will be deducted from Available Interest Funds and (iii) the Available Principal
Funds for any Distribution Date will include principal payments in respect of
the Mortgage Loans that are actually received by the Company as servicer during
the calendar month immediately preceding such Distribution Date (except that
principal prepayments in full with respect to any Mortgage Loan will be included
in the Available Principal Funds as provided under 'Servicing of the Mortgage
Loans and Contracts--Loan Payment Record' in the Prospectus).
DISTRIBUTIONS ON THE CERTIFICATES
Interest. Interest on the Certificates will be distributed monthly on each
Distribution Date commencing in July 1998 in an aggregate amount equal to the
Available Interest Funds for such Distribution Date. On each Distribution Date,
the Available Interest Funds will be distributed in the following order of
priority among the Certificates:
first, pro rata to the Classes of Senior Certificates (other than the
Residual Certificates), the Accrued Certificate Interest on each such Class
of Certificates for such Distribution Date, less the applicable Simple
Interest Shortfall Percentage (as defined below) of any Unpaid Net Simple
Interest Shortfall) any shortfall in available amounts being allocated
among such Classes in proportion to the amount of Accrued Certificate
Interest otherwise distributable thereon;
second, pro rata to the Classes of Senior Certificates (other than the
Residual Certificates), any Accrued Certificate Interest thereon remaining
undistributed from previous Distribution Dates (including any related
Unpaid Net Simple Shortfalls previously allocated to such Classes), to the
extent of remaining Available Interest Funds, any shortfall in available
amounts being allocated among such Classes in proportion to the amount of
such Accrued Certificate Interest remaining undistributed for each Class
for such Distribution Date;
third, to the Class M Certificates, to the extent of remaining
Available Interest Funds, in the following order: (a) the Accrued
Certificate Interest thereon for such Distribution Date (less the
applicable Simple Interest Shortfall Percentage of any Unpaid Net Simple
Interest Shortfall) and (b) any Accrued Certificate Interest thereon
remaining undistributed from previous Distribution Dates (including any
related Unpaid Net Simple Interest Shortfall previously allocated to such
Class);
fourth to the Class B1 Certificates, to the extent of remaining
Available Interest Funds, in the following order: (a) the Accrued
Certificate Interest thereon for such Distribution Date (less the
applicable Simple Interest Shortfall Percentage of any Unpaid Net Simple
Interest Shortfall) and (b) any Accrued Certificate Interest thereon
remaining undistributed from previous Distribution Dates (including any
related Unpaid Net Simple Interest Shortfall previously allocated to such
Class);
fifth to the Class B2 Certificates, to the extent of remaining
Available Interest Funds, in the following order: (a) the Accrued
Certificate Interest thereon for such Distribution Date (less the
applicable Simple Interest Shortfall Percentage of any Unpaid Net Simple
Interest Shortfall) and (b) any Accrued Certificate Interest thereon
remaining undistributed from previous Distribution Dates (including any
related Unpaid Net Simple Interest Shortfall previously allocated to such
Class); and
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sixth, sequentially, to the Class B3, Class B4 and Class B5
Certificates, to the extent of remaining Available Interest Funds, in the
following order: (a) the Accrued Certificate Interest thereon for such
Distribution Date (less the applicable Simple Interest Shortfall Percentage
of any Unpaid Net Simple Interest Shortfall) and (b) any Accrued
Certificate Interest thereon remaining undistributed from previous
Distribution Dates (including any related Unpaid Net Simple Interest
Shortfall previously allocated to such Class).
The 'Simple Interest Shortfall Percentage' is, with respect to any Class of
Certificates and any Distribution Date, the ratio (expressed as a decimal
carried to six places) of the Accrued Certificate Interest for such Class to the
Accrued Certificate Interest for all Classes, in each case with respect to such
Distribution Date.
Interest will accrue on the Certificates offered hereby (other than the
Residual Certificates) at the respective Certificate Interest Rates set forth or
described on the cover hereof during each one-month period ending on the last
day of the month preceding the month in which each Distribution Date occurs
(each, an 'Interest Accrual Period'). Interest will be calculated on the basis
of a 360-day year consisting of twelve 30-day months.
Interest will accrue on the Class A6, Class M, Class B1 and Class B2
Certificates during the initial Interest Accrual Period at a Certificate
Interest Rate of 6.645%, 6.660%, 6.905% and 7.495% per annum, respectively, and
during each subsequent Interest Accrual Period at a Certificate Interest Rate
equal to the lesser of (i) 6.645%, 6.660%, 6.905% and 7.495% per annum,
respectively, and (ii) the Weighted Average Net Mortgage Rate for the related
Interest Accrual Period. Interest will accrue on the Class B3, Class B4 and
Class B5 Certificates at the Weighted Average Net Mortgage Rate during each
Interest Accrual Period.
Interest will accrue on the Class S Certificates during each Interest
Accrual Period at a per annum Certificate Interest Rate equal to the Weighted
Average Net Mortgage Rate less the weighted average (by Class Certificate
Principal Balance) of the Certificate Interest Rates of the other Classes of
Certificates. The per annum Certificate Interest Rate on the Class S
Certificates for the first Interest Accrual Period is expected to be
approximately 2.228%.
The 'Weighted Average Net Mortgage Rate' for any Interest Accrual Period is
the weighted average (by Principal Balance) of the Net Mortgage Rates on the
Mortgage Loans as of the first day of such Interest Accrual Period as determined
by the Company as servicer. Any Mortgage Loans which have been prepaid in full
(or, in the case of a Mortgage Loan master-serviced by the Company, of which the
Company receives notice) on or prior to the fifteenth day of the month in which
such Interest Accrual Period occurs will not be included in the above
calculation. The 'Net Mortgage Rate' of any Mortgage Loan equals the Mortgage
Rate of such Mortgage Loan net of the applicable Servicing Fee (as defined
herein). See 'The Pooling and Servicing Agreement--Servicing Compensation,
Compensating Interest and Payment of Expenses' herein. The Weighted Average Net
Mortgage Rate for the first Interest Accrual Period will be the weighted average
(by Principal Balance) of the Net Mortgage Rates on the Mortgage Loans as of the
Cut-off Date and is expected to be approximately 8.636% per annum.
The 'Accrued Certificate Interest' for any Certificate (other than a
Residual Certificate) for any Distribution Date will equal the interest accrued
during the related Interest Accrual Period at the applicable Certificate
Interest Rate on the Certificate Principal Balance of such Certificate
immediately prior to such Distribution Date, less such Certificate's share of
any allocable Net Interest Shortfall (as defined below), the interest portion of
any Excess Losses through the Cross-Over Date and, after the Cross-Over Date,
the interest portion of any Realized Losses including Excess Losses.
The 'Certificate Principal Balance' of any Certificate as of any
Distribution Date will equal such Certificate's Certificate Principal Balance on
the Closing Date as reduced, but not below zero, by (w) all amounts distributed
on previous Distribution Dates on such Certificate on account of principal, (x)
the principal portion of all Realized Losses previously allocated to such
Certificate and (y) in the case of a Junior Certificate, such Certificate's pro
rata share, if any, of the Junior Certificate Writedown Amount for previous
Distribution Dates. As of any Distribution Date, the 'Junior Certificate
Writedown Amount' will equal the amount by which the sum of the Class
Certificate Principal Balances of all the Certificates (after giving effect to
the distribution of principal and the application of Realized Losses in
reduction of the Certificate Principal Balances of the Certificates on such
Distribution Date) exceeds the aggregate Principal Balance of the Mortgage Loans
on the first day of the month of such Distribution Date.
The aggregate 'Notional Principal Balance' of the Class S Certificates as
of any Distribution Date will equal the aggregate Principal Balance of the
Mortgage Loans with respect to such Distribution Date.
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The 'Net Simple Interest Shortfall' for any Distribution Date will be equal
to the excess, if any, of (i) 30 days' interest at the weighted average of the
Net Mortgage Rates of the Simple Interest Mortgage Loans as of the first day of
the applicable Interest Accrual Period, as determined by the Company, as
servicer, on an amount equal to the aggregate Principal Balance of the Simple
Interest Mortgage Loans with respect to such Distribution Date, calculated on
the basis of a 360-day year consisting of twelve 30-day months, over (ii) the
amount of interest received by the Company as servicer in the month preceding
the month in which such Distribution Date occurs in respect of such Simple
Interest Mortgage Loans, net of the related Servicing Fees. The 'Net Simple
Interest Excess' for any Distribution Date will be the excess, if any, of the
amount set forth in clause (ii) of the preceding sentence over the amount set
forth in clause (i) of the preceding sentence. For this purpose, the amount of
interest received in respect of the Simple Interest Mortgage Loans in any month
shall be deemed (a) to include any advances of interest made by the Company as
servicer in such month in respect of such Simple Interest Mortgage Loans, and
(b) to be reduced by any amounts paid to the Company as servicer in such month
in reimbursement of advances previously made by the Company in respect of such
Simple Interest Mortgage Loans (including Simple Interest Mortgage Loans that,
at the time of reimbursement, are no longer part of the Trust Fund).
The 'Unpaid Net Simple Interest Shortfall' for any Distribution Date will
be equal to the excess, if any, of (i) any Net Simple Interest Shortfall for
such Distribution Date, over (ii) any Simple Interest Payment (as defined under
'The Pooling and Servicing Agreement--Simple Interest Payments' herein) for such
Distribution Date.
With respect to any Distribution Date, the 'Net Interest Shortfall'
allocable to the Certificates (other than the Residual Certificates) will equal
the excess of the aggregate Interest Shortfalls with respect to such
Distribution Date over the Compensating Interest Payment (as defined under 'The
Pooling and Servicing Agreement--Servicing Compensation, Compensating Interest
and Payment of Expenses' herein), if any, for such Distribution Date.
With respect to any Distribution Date, an 'Interest Shortfall' in respect
of a Self-Amortizing Mortgage Loan will result from (i) any voluntary prepayment
of principal in full on such Mortgage Loan received from the sixteenth day (or,
in the case of the first Distribution Date, from the Cut-off Date) through the
last day of the month preceding such Distribution Date and (ii) any partial
prepayment of principal on such Self-Amortizing Mortgage Loan (other than an
Early Installment) by the Mortgagor during the month preceding such Distribution
Date. With respect to any Distribution Date, an 'Interest Shortfall' in respect
of either a Self-Amortizing Mortgage Loan or a Simple Interest Mortgage Loan
will result from a reduction in the interest rate on such Mortgage Loan due to
the application of the Soldiers' and Sailors' Civil Relief Act of 1940 whereby,
in general, members of the Armed Forces who entered into mortgages prior to the
commencement of military service may have the interest rates on those mortgage
loans reduced for the duration of their active military service. See 'Certain
Legal Aspects of the Mortgage Loans and Contracts--The Mortgage Loans--Soldiers'
and Sailors' Civil Relief Act' in the Prospectus. As to any Distribution Date
and any Self-Amortizing Mortgage Loan with respect to which a prepayment in full
has occurred as described above, the resulting 'Interest Shortfall' generally
will equal the difference between (a) one month's interest at the Net Mortgage
Rate on the Principal Balance of such Mortgage Loan, and (b) the amount of
interest at the Net Mortgage Rate actually received with respect to such
Mortgage Loan. In the case of a partial prepayment in respect of a
Self-Amortizing Mortgage Loan (other than an Early Installment), the resulting
'Interest Shortfall' will equal one month's interest at the applicable Net
Mortgage Rate on the amount of such prepayment.
Any Net Interest Shortfall, the interest portion of any Excess Losses
through the Cross-Over Date and, after the Cross-Over Date, the interest portion
of any Realized Losses (see 'Allocation of Realized Losses on the Certificates')
will, on each Distribution Date, be allocated among all the outstanding
Certificates (other than the Residual Certificates) in proportion to the amount
of Accrued Certificate Interest that would have been allocated thereto in the
absence of such shortfall and losses.
The interest portion of any Realized Losses (other than Excess Losses)
occuring prior to the Cross-Over Date will not be allocated among any
Certificates, but will reduce the amount of Available Interest Funds on the
related Distribution Date. As a result of the subordination of the Junior
Certificates in right of distribution, such losses will be borne first by the
Junior Certificates (to the extent then outstanding) in inverse order of
priority.
If the Available Interest Funds are insufficient on any Distribution Date
to distribute the aggregate Accrued Certificate Interest on the Senior
Certificates (after taking into account any related Unpaid Net Simple Interest
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<PAGE>
Shortfall, any shortfall in available amounts will be allocated among the
Classes of Senior Certificates in proportion to the amounts of Accrued
Certificate Interest otherwise distributable thereon. The amount of any such
undistributed Accrued Certificate Interest (including any related Unpaid Net
Simple Interest Shortfalls) will be added to the amount to be distributed in
respect of interest on the Senior Certificates on subsequent Distribution Dates
in accordance with priority second under '--Interest' above. No interest will
accrue on any Accrued Certificate Interest remaining undistributed from previous
Distribution Dates.
Principal. Principal on the Certificates will be distributed monthly on
each Distribution Date commencing in July 1998 in an aggregate amount equal to
the Available Principal Funds for such Distribution Date.
On each Distribution Date, the Senior Principal Distribution Amount will be
distributed to the Senior Certificates (other than the Class S Certificates), in
reduction of the Class Certificate Principal Balances thereof in the following
order of priority:
(a) to the Class A7 Certificates, the Class A7 Principal Distribution
Amount (as defined below), if any, for such Distribution Date, until the
Class Certificate Principal Balance thereof has been reduced to zero; and
(b) to the Class A1, Class A2, Class A3, Class A4, Class A5, Class A6,
Class R1 and Class R2 Certificates, an amount equal to the Senior Principal
Distribution Amount for such Distribution Date less the Class A7 Principal
Distribution Amount, if any, for such date, in the following order of
priority:
(1) pro rata, to the Class R1 and Class R2 Certificates, until the
Class Certificate Principal Balances thereof have each been reduced to
zero;
(2) to the Class A1 Certificates, until the Class Certificate
Principal Balance thereof has been reduced to zero;
(3) to the Class A2 Certificates, until the Class Certificate
Principal Balance thereof has been reduced to zero;
(4) to the Class A3 Certificates, until the Class Certificate
Principal Balance thereof has been reduced to zero;
(5) to the Class A4 Certificates, until the Class Certificate
Principal Balance thereof has been reduced to zero;
(6) to the Class A5 Certificates, until the Class Certificate
Principal Balance thereof has been reduced to zero; and
(7) to the Class A6 Certificates, until the Class Certificate
Principal Balance thereof has been reduced to zero.
On each Distribution Date after the Distribution Date on which the
respective Class Certificate Principal Balances of the Junior Certificates are
reduced to zero (the 'Cross-Over Date'), distributions of principal on the
outstanding Senior Certificates (other than the Class S Certificates) will be
made pro rata among all such Certificates, regardless of the allocation, or
sequential nature, of principal payments described in the preceeding paragraph.
The Class A7 Certificates will receive no distributions of principal during the
first three years after the Cut-off Date, except as otherwise described herein
on the earlier of the Senior Transition Date or the Cross-Over Date.
On each Distribution Date, each Class of Junior Certificates will be
entitled to receive such Class's Allocable Share (as defined herein) for such
Distribution Date.
The 'Senior Principal Distribution Amount' with respect to each
Distribution Date will be an amount equal to the sum of (i) the Senior
Percentage (as defined below) of all payments of principal actually received by
the Company on each Mortgage Loan in the calendar month preceding the month in
which the Distribution Date occurs (including the principal portion of any Early
Installment) other than those payments of principal described in clauses (ii)
through (v) below, (ii) the Senior Prepayment Percentage (as defined below) of
the Principal Balance of each Mortgage Loan which was the subject of a
prepayment in full received by the Company (or, in the case of a Mortgage Loan
master-serviced by the Company, of which the Company receives notice) during the
applicable Prepayment Period (as defined below), (iii) the Senior Prepayment
Percentage of all partial prepayments of principal received with respect to
Self-Amortizing Mortgage Loans (other than Early Installments) during the
related Prepayment Period, (iv) the Senior Prepayment Percentage of the sum of
(w) the net liquidation proceeds allocable to principal on each Mortgage Loan
which became a Liquidated Mortgage
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<PAGE>
Loan during the related Prepayment Period (other than Mortgage Loans described
in clause (x)) and (x) the principal balance of each Mortgage Loan that was
purchased by a private mortgage insurer during the related Prepayment Period as
an alternative to paying a claim under the related insurance policy, and (v) the
Senior Prepayment Percentage of the sum of (a) the Principal Balance of each
Mortgage Loan which was repurchased by the Company in connection with such
Distribution Date and (b) the difference, if any, between the Principal Balance
of a Mortgage Loan that has been replaced by the Company with a substitute
Mortgage Loan pursuant to the Agreement in connection with such Distribution
Date and the Principal Balance of such substitute Mortgage Loan.
With respect to any Mortgage Loan that was the subject of a voluntary
prepayment in full and any Distribution Date, the 'Prepayment Period' is the
period from the sixteenth day of the month preceding the month of such
Distribution Date (or, in the case of the first Distribution Date, from the
Cut-off Date) through the fifteenth day of the month of such Distribution Date.
With respect to any other unscheduled prepayment of principal of any Mortgage
Loan and any Distribution Date, the 'Prepayment Period' is the month preceding
the month of such Distribution Date.
The 'Senior Percentage' on any Distribution Date will equal the lesser of
(i) 100% and (ii) the percentage (carried to six places rounded up) obtained by
dividing the aggregate Certificate Principal Balances of all the Senior
Certificates immediately preceding such Distribution Date by the aggregate
Certificate Principal Balances of all the Certificates immediately preceding
such Distribution Date. The initial Senior Percentage is expected to be
approximately 91.75%.
The 'Senior Prepayment Percentage' on any Distribution Date occurring
during the periods set forth below will be as follows:
<TABLE>
<CAPTION>
PERIOD (DATES INCLUSIVE) SENIOR PREPAYMENT PERCENTAGE
- ------------------------ ------------------------------------------------
<S> <C>
July 1998 - June 2003 100%
July 2003 - June 2004 Senior Percentage plus 70% of the Junior
Percentage
July 2004 - June 2005 Senior Percentage plus 60% of the Junior
Percentage
July 2005 - June 2006 Senior Percentage plus 40% of the Junior
Percentage
July 2006 - June 2007 Senior Percentage plus 20% of the Junior
Percentage
July 2007 and thereafter Senior Percentage
</TABLE>
Notwithstanding the foregoing, if the Senior Percentage on any Distribution Date
exceeds the Senior Percentage as of the Cut-off Date, the Senior Prepayment
Percentage for such Distribution Date will equal 100%.
In addition, the reduction of the Senior Prepayment Percentage below the
level in effect for the most recent prior period specified in the table above
shall be effective on any Distribution Date only if, as of the last day of the
month preceding such Distribution Date, (i) the aggregate Principal Balance of
Mortgage Loans delinquent 60 days or more (including for this purpose any
Mortgage Loans in foreclosure and Mortgage Loans with respect to which the
related Mortgaged Property has been acquired by the Trust Fund) does not exceed
50% of the aggregate Class Certificate Principal Balance of the Junior
Certificates as of such date and (ii) cumulative Realized Losses do not exceed
(a) 30% of the aggregate Class Certificate Principal Balance of the Junior
Certificates as of the date of issuance of the Certificates (the 'Original
Junior Principal Balance') if such Distribution Date occurs between and
including July 2003 and June 2004, (b) 35% of the Original Junior Principal
Balance if such Distribution Date occurs between and including July 2004 and
June 2005, (c) 40% of the Original Junior Principal Balance if such Distribution
Date occurs between and including July 2005 and June 2006, (d) 45% of the
Original Junior Principal Balance if such Distribution Date occurs between and
including July 2006 and June 2007, and (e) 50% of the Original Junior Principal
Balance if such Distribution Date occurs during or after July 2007 (such
limitation being the 'Senior Prepayment Percentage Stepdown Limitation').
The 'Class A7 Principal Distribution Amount' with respect to any
Distribution Date will be an amount, not to exceed the Senior Principal
Distribution Amount, equal to the product of (x) the Senior Principal
Distribution Amount for such Distribution Date, (y) the Class A7 Certificate
Percentage for such Distribution Date and (z) the Class A7 Distribution
Percentage for such Distribution Date; provided that on the Distribution Date on
which the Class Certificate Principal Balances of the Class A1, Class A2, Class
A3, Class A4, Class A5, Class A6, Class R1 and Class R2 Certificates are reduced
to zero (the 'Senior Transition Date'), the Class A7 Principal Distribution
Amount will be equal to the remaining Senior Principal Distribution Amount for
such Distribution Date after distributions of principal on such Classes.
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<PAGE>
The 'Class A7 Certificate Percentage' with respect to any Distribution Date
is the percentage obtained by dividing (x) the Class Certificate Principal
Balance of the Class A7 Certificates immediately preceding such Distribution
Date by (y) the aggregate Certificate Principal Balance of all the Senior
Certificates (other than the Class S Certificates) immediately preceding such
Distribution Date.
The 'Class A7 Distribution Percentage' for any Distribution Date occuring
during the periods set forth below will be as follows:
<TABLE>
<CAPTION>
PERIOD (DATES INCLUSIVE) CLASS A7 DISTRIBUTION PERCENTAGE
- ------------------------------------------- --------------------------------
<S> <C>
July 1998-June 2001........................ 0%
July 2001-June 2003........................ 45%
July 2003-June 2004........................ 80%
July 2004-June 2005........................ 100%
July 2005 and thereafter................... 300%
</TABLE>
provided that on any Distribution Date following the Senior Transition Date, the
Class A7 Distribution Percentage will equal 100% for such Distribution Date.
The 'Junior Percentage' on any Distribution Date will equal 100% minus the
Senior Percentage. The 'Junior Prepayment Percentage' will equal 100% minus the
Senior Prepayment Percentage, except that on any Distribution Date after the
respective Class Certificate Principal Balances of the Senior Certificates have
each been reduced to zero (the 'Final Senior Distribution Date'), the Junior
Prepayment Percentage will equal 100%. The initial Junior Percentage is expected
to be approximately 8.25%.
The 'Junior Principal Distribution Amount' with respect to each
Distribution Date will be an amount equal to the sum of (i) the Junior
Percentage of all payments of principal actually received by the Company on each
outstanding Mortgage Loan in the calendar month preceeding the month in which
the Distribution Date occurs (including the principal portion of any Early
Installment) other than those payments described in clauses (ii) through (v)
below, (ii) the Junior Prepayment Percentage of the Principal Balance of each
Mortgage Loan which was the subject of a prepayment in full received by the
Company (or, in the case of a Mortgage Loan master-serviced by the Company, of
which the Company receives notice) during the applicable Prepayment Period,
(iii) the Junior Prepayment Percentage of all partial prepayments of principal
received with respect to Self-Amortizing Mortgage Loans (other than Early
Installments) during the related Prepayment Period, (iv) the Junior Prepayment
Percentage of the sum of (a) the net liquidation proceeds allocable to principal
received during the related Prepayment Period in respect of each Liquidated
Mortgage Loan (other than Mortgage Loans described in clause (b)) and (b) the
principal balance of each Mortgage Loan that was purchased by a private mortgage
insurer during the related Prepayment Period as an alternative to paying a claim
under the related insurance policy, and (v) the Junior Prepayment Percentage of
the sum of (a) the Principal Balance of each Mortgage Loan which was repurchased
by the Company in connection with such Distribution Date and (b) the difference,
if any, between the Principal Balance of a Mortgage Loan that has been replaced
by the Company with a substitute Mortgage Loan pursuant to the Agreement in
connection with such Distribution Date and the Principal Balance of such
substitute Mortgage Loan.
The 'Allocable Share' with respect to any Class of Junior Certificates on
any Distribution Date will generally equal such Class's pro rata share (based on
the Class Certificate Principal Balance of each Class entitled thereto) of each
of the components of the Junior Principal Distribution Amount described above;
provided, that, except as described in the second succeeding sentence, no Class
B Certificate shall be entitled on any Distribution Date to receive
distributions pursuant to clauses (ii), (iii) and (v) of the definition of
Junior Principal Distribution Amount unless the Class Prepayment Distribution
Trigger for the related Class is satisfied for such Distribution Date. The
'Class Prepayment Distribution Trigger' for a Class of Class B Certificates for
any Distribution Date is satisfied if the fraction (expressed as a percentage),
the numerator of which is the aggregate Class Certificate Principal Balance of
such Class and each Class subordinate thereto, if any, and the denominator of
which is the Pool Principal Balance with respect to such Distribution Date,
equals or exceeds such percentage calculated as of the Closing Date. If, on any
Distribution Date, the Class Certificate Principal Balance of the Class M
Certificates or of any Class of Class B Certificates for which the related Class
Prepayment Distribution Trigger was satisfied on such Distribution Date is
reduced to zero, any amounts distributable to such Class pursuant to clauses
(ii), (iii) and (v) of the definition of Junior Principal Distribution Amount,
to the extent of such Class's remaining Allocable Share, shall be distributed to
the remaining Classes of
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<PAGE>
Junior Certificates in reduction of their respective Class Certificate Principal
Balances in order of priority. If the Class Prepayment Distribution Trigger is
not satisfied for any Class of Class B Certificates on any Distribution Date,
this may have the effect of accelerating the amortization of more senior ranking
Classes of Junior Certificates because the amount otherwise distributable to
such Class pursuant to clauses (ii), (iii) and (v) of the definition of Junior
Principal Distribution Amount will be distributable among the outstanding Class
M Certificates and each Class of the Class B Certificates as to which the
related Class Prepayment Distribution Trigger has been satisfied on a pro rata
basis subject to the priority of payments described herein.
ALLOCATION OF REALIZED LOSSES ON THE CERTIFICATES
A 'Realized Loss' with respect to a Mortgage Loan is (i) a Bankruptcy Loss
(as defined below) or (ii) as to any Liquidated Mortgage Loan, the unpaid
principal balance thereof plus accrued and unpaid interest thereon at the Net
Mortgage Rate through the last day of the month of liquidation less the net
proceeds from the liquidation of, and any insurance proceeds from, such Mortgage
Loan and the related Mortgaged Property. A 'Liquidated Mortgage Loan' is any
defaulted Mortgage Loan as to which the Company has determined that all amounts
which it expects to recover from or on account of such Mortgage Loan have been
recovered.
In the event of a personal bankruptcy of a Mortgagor, the bankruptcy court
may establish the value of the Mortgaged Property at an amount less than the
then outstanding principal balance of the Mortgage Loan secured by such
Mortgaged Property and could reduce the secured debt to such value. In such
case, the holder of such Mortgage Loan would become an unsecured creditor to the
extent of the difference between the outstanding principal balance of such
Mortgage Loan and such reduced secured debt (such difference, a 'Deficient
Valuation').
A 'Bankruptcy Loss' with respect to any Mortgage Loan is a Deficient
Valuation.
A 'Fraud Loss' is any Realized Loss attributable to fraud in the
origination of the related Mortgage Loan.
A 'Special Hazard Loss' is a Realized Loss attributable to damage or a
direct physical loss suffered by a Mortgaged Property (including any Realized
Loss due to the presence or suspected presence of hazardous wastes or substances
on a Mortgaged Property) other than any such damage or loss covered by a hazard
policy or a flood insurance policy required to be maintained in respect of such
Mortgaged Property under the Agreement or any loss due to normal wear and tear
or certain other causes.
The principal portion of any Realized Loss (other than an Excess Loss) on a
Mortgage Loan for any Distribution Date will not be allocated to any of the
Senior Certificates until the Cross-Over Date. Prior to the Cross-Over Date (and
on such date under certain circumstances), any such Realized Loss will be
allocated among the outstanding Classes of Junior Certificates, in inverse order
of priority, until the Class Certificate Principal Balance of each such Class
has been reduced to zero (i.e., such Realized Losses will be allocated first to
the Class B5 Certificates while such Certificates are outstanding, second to the
Class B4 Certificates, and so on). The principal portion of any Excess Loss on a
Mortgage Loan for any Distribution Date will be allocated pro rata among all
outstanding Classes of Certificates (other than the Class S Certificates) based
on their Class Certificate Principal Balances. An 'Excess Loss' is any
Bankruptcy Loss, Fraud Loss and Special Hazard Loss (each a type of Realized
Loss) occurring after the Bankruptcy Coverage Termination Date, Fraud Coverage
Termination Date and Special Hazard Termination Date, respectively, as described
more fully below. Commencing on the Cross-Over Date, the principal portion of
any Realized Loss will be allocated among the outstanding Classes of Senior
Certificates (other than the Class S Certificates) pro rata based upon their
Class Certificate Principal Balances.
No reduction of the Class Certificate Principal Balance of any Class shall
be made on any Distribution Date on account of any Realized Loss to the extent
that such reduction would have the effect of reducing the aggregate Certificate
Principal Balance of all of the Certificates as of such Distribution Date to an
amount less than the aggregate Principal Balance of the Mortgage Loans as of the
first day of the month of such Distribution Date (such limitation being the
'Loss Allocation Limitation').
All allocations of Realized Losses to a Class of Certificates will be
accomplished on a Distribution Date by reducing the applicable Class Certificate
Principal Balance by the appropriate pro rata share of any such losses occurring
during the month preceding the month of such Distribution Date and, accordingly,
will be taken into account in determining the distributions of principal and
interest on the Certificates commencing on the following Distribution Date.
S-33
<PAGE>
The interest portion of all Realized Losses will be allocated among the
outstanding Classes of Certificates offered hereby (other than the Residual
Certificates) to the extent described under '--Distributions on the
Certificates--Interest' above.
Any Bankruptcy Loss will on each Distribution Date be allocated solely to
the outstanding Junior Certificates until the Bankruptcy Coverage Termination
Date. The 'Bankruptcy Coverage Termination Date' is the Distribution Date upon
which the Bankruptcy Loss Amount has been reduced to zero or a negative number
(or the Cross-Over Date, if earlier). On each Distribution Date, the 'Bankruptcy
Loss Amount' will equal approximately $50,000 (approximately 0.03% of the
aggregate Principal Balances of the Mortgage Loans as of the Cut-off Date),
subject to reduction as described in the Agreement, minus the aggregate amount
of previous Bankruptcy Losses. The Bankruptcy Loss Amount and the manner of
reduction thereof described in the Agreement may be reduced or modified upon
written confirmation from Fitch and Moody's (each as defined herein) that such
reduction or modification will not adversely affect the then current ratings of
the Senior Certificates by Fitch and Moody's. Such reduction may adversely
affect the coverage provided by subordination with respect to Bankruptcy Losses.
Any Fraud Loss will on each Distribution Date be allocated solely to the
outstanding Junior Certificates until the Fraud Coverage Termination Date. The
'Fraud Coverage Termination Date' is the Distribution Date upon which the Fraud
Loss Amount has been reduced to zero or a negative number (or the Cross-Over
Date, if earlier). Upon the initial issuance of the Certificates, the 'Fraud
Loss Amount' will equal approximately $3,888,474 (approximately 2% of the
aggregate Principal Balances of the Mortgage Loans as of the Cut-off Date). As
of any Distribution Date prior to the first anniversary of the Cut-off Date, the
Fraud Loss Amount will equal approximately $3,888,474, minus the aggregate
amount of Fraud Losses that would have been allocated to the Junior Certificates
in the absence of the Loss Allocation Limitation since the Cut-off Date. As of
any Distribution Date from the first through the fourth anniversaries of the
Cut-off Date, the Fraud Loss Amount will equal (1) the lesser of (a) the Fraud
Loss Amount as of the most recent anniversary of the Cut-off Date and (b) 1% of
the aggregate outstanding principal balance of all of the Mortgage Loans as of
the most recent anniversary of the Cut-off Date minus (2) the Fraud Losses that
would have been allocated to the Junior Certificates in the absence of the Loss
Allocation Limitation since the most recent anniversary of the Cut-off Date.
After the fourth anniversary of the Cut-off Date, the Fraud Loss Amount shall be
zero.
Any Special Hazard Loss will on each Distribution Date be allocated solely
to the outstanding Junior Certificates until the Special Hazard Termination
Date. The 'Special Hazard Termination Date' is the Distribution Date upon which
the Special Hazard Loss Amount has been reduced to zero or a negative number (or
the Cross-Over Date, if earlier). Upon the initial issuance of the Certificates,
the 'Special Hazard Loss Amount' will equal approximately $1,944,237
(approximately 1% of the aggregate Principal Balances of the Mortgage Loans as
of the Cut-off Date). As of any Distribution Date, the Special Hazard Loss
Amount will equal approximately $1,944,237, minus the sum of (i) the aggregate
amount of Special Hazard Losses that would have been previously allocated to the
Junior Certificates in the absence of the Loss Allocation Limitation and (ii)
the Adjustment Amount. For each anniversary of the Cut-off Date, the 'Adjustment
Amount' shall be equal to the amount, if any, by which the Special Hazard Loss
Amount (without giving effect to the deduction of the Adjustment Amount for such
anniversary) exceeds the lesser of (A) an amount calculated by the Company and
approved by each of Fitch and Moody's, which amount shall not be less than
$500,000, and (B) the greater of (x) 1% (or if greater than 1%, the highest
percentage of Mortgage Loans by principal balance secured by Mortgaged
Properties in any California zip code) of the outstanding principal balance of
all the Mortgage Loans on the Distribution Date immediately preceding such
anniversary and (y) twice the outstanding principal balance of the Mortgage Loan
which has the largest outstanding principal balance on the Distribution Date
immediately preceding such anniversary.
ADDITIONAL RIGHTS OF THE RESIDUAL CERTIFICATEHOLDERS
In addition to distributions of principal, (a) the holders of the Class R2
Certificates will be entitled to receive the proceeds, if any, of the assets of
the Trust Fund remaining in the Upper-Tier REMIC after the Class Certificate
Principal Balances of all Classes of Certificates have been reduced to zero and
(b) the holders of the Class R1 Certificates will be entitled to receive the
proceeds, if any, of the assets of the Trust Fund remaining in the Lower-Tier
REMIC after the regular interests in the Lower-Tier REMIC and the Class
Certificate Principal Balance of the Class R1 Certificates have been reduced to
zero. It is not anticipated that any material assets will
S-34
<PAGE>
be remaining for such distributions at any such time. See 'Certain Federal
Income Tax Consequences--Residual Certificates' herein.
SUBORDINATION
Priority of Senior Certificates. As of the date of the initial issuance of
the Certificates, the aggregate Certificate Principal Balance of the Junior
Certificates will equal approximately 8.25% of the aggregate Certificate
Principal Balance of all the Classes of Certificates. The rights of the holders
of the Junior Certificates to receive interest distributions with respect to the
Mortgage Loans will be subordinate to such rights of the holders of the Senior
Certificates to receive interest distributions to the extent described above.
The subordination of the Junior Certificates is intended (a) to enhance the
likelihood of regular receipt by the holders of the Senior Certificates (to the
extent of the subordination of the Junior Certificates) of the full amount of
the monthly distributions of interest allocable to the Senior Certificates and
(b) to afford the holders of the Senior Certificates (to the extent of the
subordination of the Junior Certificates) protection against Realized Losses, to
the extent described above. If Realized Losses exceed the credit support
provided to the Senior Certificates through subordination, or if Excess Losses
occur, all or a portion of such losses will be borne by the Senior Certificates.
The protection afforded to the holders of Senior Certificates by means of
the subordination feature will be accomplished by (i) the preferential right of
such holders to receive interest distributions prior to any such distributions
being made on a Distribution Date in respect of the Junior Certificates in
accordance with the paydown rules specified above under '--Distributions on the
Certificates--Interest' and (ii) the allocation to the Junior Certificates of
the principal portion of any Realized Loss (other than an Excess Loss) to the
extent set forth herein. The allocation of the principal portion of Realized
Losses (as set forth herein) to the Junior Certificates on any Distribution Date
will decrease the protection provided to the Senior Certificates then
outstanding on future Distribution Dates by reducing the aggregate Certificate
Principal Balance of the Junior Certificates then outstanding.
In addition, in order to extend the period during which the Junior
Certificates remain available as credit enhancement for the Senior Certificates,
the entire amount of any prepayment in full or certain other unscheduled
recovery of principal as described herein with respect to a Mortgage Loan and
any prepayment in part with respect to a Self-Amortizing Mortgage Loan (other
than an Early Installment) will be allocated to the Senior Certificates (other
than the Class S Certificates) during the first five years after the Cut-off
Date with such allocation being subject to reduction thereafter as described
herein. This allocation has the effect of accelerating the amortization of the
Senior Certificates while, in the absence of losses in respect of the Mortgage
Loans, increasing the percentage interest in the principal balance of the
Mortgage Loans evidenced by the Junior Certificates. Among such Senior
Certificates, such amounts will be allocated solely to the Class A1, Class A2,
Class A3, Class A4, Class A5, Class A6, Class R1 and Class R2 Certificates
during the first three years after the Cut-off Date, with such allocation being
subject to reduction thereafter as described herein (except as otherwise
described herein on or following the Senior Transition Date), except that such
amounts will be allocated pro rata among all the Senior Certificates (other than
the Class S Certificates) after the Cross-Over Date.
After the payment of interest distributable in respect of the Senior
Certificates on each Distribution Date, the Junior Certificates will be entitled
on such date to the remaining portion, if any, of the Available Interest Funds
in an aggregate amount equal to the Accrued Certificate Interest on the Junior
Certificates for such date and any remaining undistributed Accrued Certificate
Interest thereon from previous Distribution Dates. Amounts so distributed to
Junior Certificateholders will not be available to cover any delinquencies or
any Realized Losses in respect of subsequent Distribution Dates.
Priority Among Junior Certificates. As of the date of the initial issuance
of the Certificates, the aggregate Certificate Principal Balance of the Class
B3, Class B4 and Class B5 Certificates, all of which are subordinate in right as
to respective distributions of interest to the Junior Certificates offered
hereby, will equal approximately 2.50% of the initial aggregate Certificate
Principal Balance of all of the Certificates and approximately 30.31% of the
initial aggregate Certificate Principal Balance of all of the Junior
Certificates. On each Distribution Date, the holders of any particular Class of
Junior Certificates, other than the Class B5 Certificates, will have a
preferential right to receive the amounts due them in respect of interest on
such Distribution Date out of Available Interest Funds prior to any distribution
being made on such date on each Class of Certificates ranking junior to such
Class. The effect of the allocation of such Realized Losses to a Class of Junior
Certificates will be to reduce
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<PAGE>
future distributions allocable to such Class and increase the relative portion
of distributions allocable to more senior Classes of Certificates.
In order to maintain the relative levels of subordination among the Junior
Certificates, prepayments in full, prepayments in part with respect to
Self-Amortizing Mortgage Loans (other than Early Installments) and certain other
unscheduled recoveries of principal as described herein in respect of the
Mortgage Loans (which will not be distributable to the Junior Certificates for
at least the first five years, except as otherwise described herein on or
following the Final Senior Distribution Date) will not be distributable to the
holders of any Class of Class B Certificates on any Distribution Date for which
the related Class Prepayment Distribution Trigger is not satisfied, except as
described above. See '--Distributions on the Certificates--Principal.' If the
Class Prepayment Distribution Trigger is not satisfied with respect to any Class
of Class B Certificates, the amortization of more senior ranking Classes of
Junior Certificates may occur more rapidly than would otherwise have been the
case and, in the absence of losses in respect of the Mortgage Loans, the
percentage interest in the principal balance of the Mortgage Loans evidenced by
such Class B Certificates may increase.
As a result of the subordination of any Class of Certificates, such Class
of Certificates will be more sensitive than more senior ranking Classes of
Certificates to the rate of delinquencies and defaults on the Mortgage Loans,
and under certain circumstances investors in such Certificates may not recover
their initial investment.
RESTRICTIONS ON TRANSFER OF THE RESIDUAL CERTIFICATES
The Residual Certificates will be subject to the restrictions on transfer
described in the Prospectus under 'Certain Federal Income Tax
Consequences--REMIC Certificates--Transfers of Residual Certificates--
Disqualified Organizations,' '--Foreign Investors' and '--Noneconomic Residual
Interests.' In addition, the Agreement provides that the Residual Certificates
may not be acquired by an ERISA Plan. The Residual Certificates will contain a
legend describing the foregoing restrictions.
YIELD AND WEIGHTED AVERAGE LIFE CONSIDERATIONS
YIELD
The effective yield on the Certificates will depend upon, among other
things, the price at which the Certificates are purchased and the rate and
timing of payments of principal (including both scheduled and unscheduled
payments) of the Mortgage Loans underlying the Certificates.
The yields to investors will be sensitive in varying degrees to the rate of
prepayments on the Mortgage Loans. The extent to which the yield to maturity of
a Certificate is sensitive to prepayments will depend upon the degree to which
it is purchased at a discount or premium. In the case of Certificates purchased
at a premium, faster than anticipated rates of principal payments on the
Mortgage Loans could result in actual yields to investors that are lower than
the anticipated yields. In the case of Certificates purchased at a discount,
slower than anticipated rates of principal payments on such Mortgage Loans could
result in actual yields to investors that are lower than the anticipated yields.
Rapid rates of prepayments on the Mortgage Loans are likely to coincide
with periods of low prevailing interest rates. During such periods, the yields
at which an investor in the Certificates may be able to reinvest amounts
received as payments on the investor's Certificates may be lower than the yield
on such Certificates. Conversely, slow rates of prepayments on the Mortgage
Loans are likely to coincide with periods of high rates. During such periods,
the amount of payments available to an investor for reinvestment at such high
rates may be relatively low.
The Mortgage Loans will not prepay at any constant rate, nor will all of
the Mortgage Loans prepay at the same rate at any one time. The timing of
changes in the rate of prepayments may affect the actual yield to an investor,
even if the average rate of principal prepayments is consistent with the
investor's expectation. In general, the earlier a prepayment of principal on a
Mortgage Loan, the greater the effect on the yield to an investor in the related
Certificates. As a result, the effect on the yield of principal prepayments on
the Mortgage Loans occurring at a rate higher (or lower) than the rate
anticipated by the investor during the period immediately following the issuance
of the related Certificates is not likely to be offset by a later equivalent
reduction (or increase) in the rate of principal prepayments.
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<PAGE>
The entire amount of any principal payment (including scheduled payments
and prepayments and other unscheduled recoveries of principal) with respect to a
Mortgage Loan allocable to the Senior Certificates will be allocated solely to
the Class A1, Class A2, Class A3, Class A4, Class A5, Class A6, Class R1 and
Class R2 Certificates during the first three years after the Cut-off Date (with
such allocation being subject to reduction thereafter as described herein),
except as otherwise described herein on or following the Senior Transition Date,
provided that such amounts will be allocated pro rata among all Senior
Certificates (other than the Class S Certificates) after the Cross-Over Date.
This allocation prior to the Senior Transition Date is designed to accelerate
the allocation of principal payments and certain other unscheduled recoveries on
the Mortgage Loans to the holders of the Class A1, Class A2, Class A3, Class A4,
Class A5, Class A6, Class R1 and Class R2 Certificates while increasing the
percentage interest in the principal balance of the Mortgage Loans evidenced by
the Class A7 Certificates.
The yields on the Certificates will be adversely affected if any Unpaid Net
Simple Interest Shortfalls occur in respect of the related Mortgage Loans. See
'Description of the Certificates--Distributions on the Certificates--Interest'
herein.
The effective yield to holders of the Certificates (other than the Residual
Certificates) will be lower than the yield otherwise produced by the applicable
Certificate Interest Rate and the applicable purchase prices thereof because,
while interest will accrue from the first day of each month, the distribution of
such interest will not be made until the 25th day (or if such day is not a
business day, the immediately following business day) of the month following the
month of accrual. In addition, the effective yield on the Certificates (other
than the Residual Certificates) will be affected by any Net Interest Shortfall
and the interest portion of certain Realized Losses. See 'Description of the
Certificates' herein.
THE CLASS A6, CLASS M, CLASS B1 AND CLASS B2 CERTIFICATES
The Certificate Interest Rate applicable to the Class A6, Class M, Class B1
and Class B2 Certificates on any Distribution Date other than the first
Distribution Date will equal the lesser of (a) 6.645%, 6.660%, 6.905% and 7.495%
per annum, respectively, and (b) the Weighted Average Net Mortgage Rate on the
Mortgage Loans. As a result, payments of principal (including prepayments) of
the Mortgage Loans having Net Mortgage Rates which exceed the Weighted Average
Net Mortgage Rate on the Mortgage Loans may reduce the Certificate Interest Rate
and yield on the Class A6, Class M, Class B1 and Class B2 Certificates. The Net
Mortgage Rates of such Mortgage Loans are expected to range from approximately
6.549% to 14.50% per annum initially, and under certain scenarios it is likely
that principal payments will be concentrated among Mortgage Loans with higher
Net Mortgage Rates, thus potentially reducing the Certificate Interest Rate on
the Class A6, Class M, Class B1 and Class B2 Certificates. The Weighted Average
Net Mortgage Rate on the Mortgage Loans as of the Cut-off Date is expected to be
approximately 8.636% per annum.
PRINCIPAL DISTRIBUTIONS; PREPAYMENTS
The rate of distribution of principal of the Certificates (and the
aggregate amount of interest payable on the Class S Certificates) will be
affected primarily by the amount and timing of principal payments received on or
in respect of the related Mortgage Loans. Such principal payments will include
scheduled payments and disproportionately high principal payments arising from
early payments of monthly installments on Simple Interest Mortgage Loans, as
well as voluntary prepayments by Mortgagors (such as, for example, prepayments
in full due to refinancings, including refinancings made by the Company in the
ordinary course of conducting its mortgage banking business, some of which
refinancings may be solicited by the Company, or prepayments of Mortgage Loans
in connection with biweekly payment programs, participation in which may be
solicited by the Company) and prepayments resulting from foreclosure,
condemnation and other dispositions of the Mortgaged Properties and from
repurchase by the Company of any Mortgage Loan as to which there has been a
material breach of warranty or defect in documentation (or deposit of certain
amounts in respect of delivery of a substitute Mortgage Loan therefor).
Mortgagors are permitted to prepay the Mortgage Loans, in whole or in part, at
any time. It is expected that no more than approximately 21.69% of the Mortgage
Loans, by Principal Balance as of the Cut-off Date, required the Mortgagor to
pay a prepayment premium that had not expired as of the Cut-off Date.
Substantially all of the prepayment premiums are scheduled to expire by the end
of June 2003. Any prepayment premiums received by the Company will be retained
as servicing compensation. See 'Description of the Mortgage Pool and the
Mortgaged Properties--Terms of the Mortgage Loans.'
S-37
<PAGE>
A number of social, economic, tax, geographic, demographic, legal and other
factors may influence prepayments of the Mortgage Loans. These factors may
include the age of such Mortgage Loans, the geographic distribution of the
Mortgaged Properties, the payment terms of such Mortgage Loans, the
characteristics of the Mortgagors, homeowner mobility, economic conditions
generally and in the geographic area in which the Mortgaged Properties are
located, enforceability of due-on-sale clauses, prevailing interest rates in
relation to the interest rates on such Mortgage Loans, the availability of
mortgage funds, the use of the properties as second or vacation homes, the
extent of the mortgagors' net equity in the Mortgaged Properties, tax-related
considerations and, where investment properties are securing such Mortgage
Loans, the availability of other investments. The rate of principal payment may
also be subject to seasonal variations.
The Company is not aware of any publicly available studies relating to the
prepayment of home equity mortgage loans substantially similar to the Mortgage
Loans. A number of factors suggest that the prepayment behavior of a pool of
closed-end home equity loans may be significantly different from that of a pool
of first-priority, one- to four-family, purchase money mortgage loans with
equivalent interest rates and maturities, although these factors could give rise
to prepayments on home equity loans at either a faster or slower rate than
prepayments on first-priority, purchase money mortgage loans. No assurance can
be given as to the rate at which prepayments will be made on the Mortgage Loans.
The yields on and the weighted average lives of the Certificates will depend in
part on the rate of principal payments, including prepayments, received in
respect of the Mortgage Loans. See 'Risk Factors--The Mortgage Loans--Prepayment
Considerations' herein.
The rate of principal prepayments on pools of mortgage loans has fluctuated
significantly in recent years. Generally, if prevailing interest rates were to
fall significantly below the interest rates on the Mortgage Loans, the Mortgage
Loans would be expected to prepay at higher rates than if prevailing rates were
to remain at or above the interest rates on the Mortgage Loans. Conversely, if
interest rates were to rise significantly above the interest rates on the
Mortgage Loans, the Mortgage Loans would be expected to prepay at lower rates
than if prevailing rates were to remain at or below the interest rates on the
Mortgage Loans.
Voluntary prepayments in full of principal on the Mortgage Loans received
by the Company (or, in the case of Mortgage Loans master-serviced by the
Company, of which the Company receives notice) from the first day through the
fifteenth day of each month (other than the month of the Cut-off Date) are
passed through to the related Certificateholders in the month of receipt or
payment. See 'The Pooling and Servicing Agreement-- Certain Modifications and
Refinancings' in the Prospectus. Voluntary prepayments of principal in full
received from the sixteenth day (or, in the case of the month of the Cut-off
Date, from the Cut-off Date) through the last day of each month, and all
voluntary partial prepayments of principal on the Self-Amortizing Mortgage Loans
(including the principal portion of Early Installments) are passed through to
the related Certificateholders in the month following the month of receipt or
payment. Any prepayment of a Mortgage Loan or liquidation of a Mortgage Loan (by
foreclosure proceedings or by virtue of the purchase of a Mortgage Loan in
advance of its stated maturity as required or permitted by the Agreement) will
generally have the effect of passing through to the related Certificateholders
principal amounts (or, in the case of the related Class S Certificates, reducing
the Notional Principal Balance thereof) which would otherwise be passed through
(or reduced) in amortized increments over the remaining term of such Mortgage
Loan.
The entire amount of any prepayment in full, any prepayment in part with
respect to a Self-Amortizing Mortgage Loan (other than an Early Installment) and
any unscheduled recovery of principal as described herein with respect to a
Mortgage Loan will be allocated solely to the outstanding Senior Certificates
(other than the Class S Certificates) during the first five years after the
Cut-off Date (with such allocation being subject to reduction thereafter as
described herein). This allocation has the effect of accelerating the
amortization of the Senior Certificates while, in the absence of losses in
respect of the Mortgage Loans, increasing the percentage interest in the
aggregate principal balance of the Mortgage Loans evidenced by the Junior
Certificates. Among the Senior Certificates, the amounts described in the first
sentence hereof will be allocated solely to the Class A1, Class A2, Class A3,
Class A4, Class A5, Class A6, Class R1 and Class R2 Certificates during the
first three years after the Cut-off Date (with such allocation being subject to
reduction thereafter as described herein), except as otherwise provided herein
on or after the Senior Transition Date, provided that such amounts will be
allocated pro rata among all Senior Certificates (other than the Class S
Certificates) after the Cross-Over Date. This allocation between the Senior
Certificates is designed to accelerate the allocation of prepayments and certain
other unscheduled recoveries on the Mortgage Loans to holders of the Class A1,
Class A2, Class A3, Class A4,
S-38
<PAGE>
Class A5, Class A6, Class R1 and Class R2 Certificates relative to the Class A7
Certificates. See 'Description of the Certificates--Distributions on the
Certificates--Principal' herein.
If a Mortgagor on a Self-Amortizing Mortgage Loan both (x) pays more than
one installment at a time and (y) designates such additional installment as an
advance installment of a scheduled principal and interest payment (an 'Early
Installment'), the principal portion of such Early Installment will also be
passed through as principal in reduction of the Certificate Principal of such
Certificates on the Distribution Date immediately following the calendar month
in which such payment was received. A portion of each Early Installment equal to
the aggregate amount of interest due in each month (other than the month of
payment) covered by such Early Installment will be retained by the Company, as
servicer, pending payment to Certificateholders. An amount equal to the interest
due in each month covered by such Early Installment will be passed through to
Certificateholders on the Distribution Date immediately following such month.
When a full prepayment is made on a Mortgage Loan, the Mortgagor is charged
interest ('Prepayment Interest') on the days in the month actually elapsed up to
the date of such prepayment, at a daily interest rate (determined by dividing
the Mortgage Rate by 360, or 365 in the case of certain Simple Interest Mortgage
Loans) which is applied to the principal amount of the loan so prepaid. When
such a prepayment is made during the period from the sixteenth day through the
last day of any month (and from the Cut-off Date through the fifteenth day of
the month of the Cut-off Date), such Prepayment Interest is passed through to
the related Certificateholders in the month following its receipt and the amount
of interest thus distributed to such Certificateholders, to the extent not
offset by a Compensating Interest Payment or a Simple Interest Payment, will be
less than the amount which would have been distributed in the absence of such
prepayment. The payment of a claim under certain insurance policies may also
cause a reduction in the amount of interest passed through. Shortfalls described
in this paragraph will be borne by the related Certificateholders to the extent
described herein. See 'Description of the Certificates--Distributions on the
Certificates--Interest' herein.
Any partial prepayment on a Self-Amortizing Loan will be applied to the
balance of the related Mortgage Loan as of the first day of the month of
receipt, will be passed through to the related Certificateholders in the
following month and, to the extent not offset by a Compensating Interest
Payment, will reduce the aggregate amount of interest distributable to such
Certificateholders in such month in an amount equal to 30 days of interest at
the related Net Mortgage Rate on the amount of such prepayment.
PAYMENTS ON SIMPLE INTEREST MORTGAGE LOANS
Approximately 6.24% of the Mortgage Loans (by Principal Balance as of the
Cut-off Date) are expected to be Simple Interest Mortgage Loans. In addition to
principal prepayments in full, the making of a payment on a Simple Interest
Mortgage Loan in any month less than 30 days after the previous payment may
result in the collection of less than 30 days' interest on such Mortgage Loan in
such month. Conversely, if a payment on a Simple Interest Mortgage Loan in any
month is made more than 30 days after the previous payment, the collection of
interest on such Mortgage Loan for such month may be greater than 30 days'
interest on such Mortgage Loan. In the event that a Mortgagor makes a monthly
payment prior to its Due Date, the Company will be required to make a Simple
Interest Payment (up to the amount of its Servicing Fee, less any Compensating
Interest Payments and certain other amounts described herein) to compensate for
any resulting Net Simple Interest Shortfall. See 'The Pooling and Servicing
Agreement--Simple Interest Payments' herein. Any shortfalls in interest
attributable to the receipt of payments on Simple Interest Mortgage Loans less
than 30 days after the previous payment, to the extent not offset by a Simple
Interest Payment or excess interest received with respect to Simple Interest
Mortgage Loans which pay more than 30 days after the previous payment, will
produce a lower yield on the related Certificates than would otherwise be the
case. In addition, the extent to which Simple Interest Mortgage Loans experience
early or late payments will correspondingly change the amount of principal
received during a month and accordingly may change the amount of principal to be
distributed on the related Distribution Date.
If a Mortgagor on a Simple Interest Mortgage Loan pays more than one
installment at a time, the entire amount of the additional installment will be
treated as a regular principal payment and will be passed through as principal
on the related Certificates on the Distribution Date immediately following the
calendar month in which such payment was received. Because each such Mortgagor
will not be required to make the next regularly scheduled installment, interest
will continue to accrue on the principal balance of the related Mortgage Loan,
as
S-39
<PAGE>
reduced by the application of the early installment. As a result, when such
Mortgagor on a Simple Interest Mortgage pays the next required installment, the
installment so paid may be insufficient to cover the interest that has accrued
since the last payment by such Mortgagor. Notwithstanding such insufficiency,
the related Mortgage Loan would be considered to be current (although the
Company may be required to make a Simple Interest Payment, to the limited extent
described herein). In addition, other than its obligation to make any required
Simple Interest Payment, the Company will not be required to advance the amount
of such insufficiency. This situation will continue until the installments are
once again sufficient to cover all accrued interest and to reduce the Principal
Balance of such Mortgage Loan. Depending on the Principal Balance and Mortgage
Rate of the Simple Interest Mortgage Loans that pay early and on the number of
installments that are paid early, there may be extended periods of time during
which such Mortgage Loans that are not amortizing are nonetheless considered
current. See 'Description of the Mortgage Pool and the Mortgaged
Properties--Terms of the Mortgage Loans.'
THE CLASS M, CLASS B1 AND CLASS B2 CERTIFICATES
The rate of payment of principal, the aggregate amount of distributions and
the yield to maturity of the Class M, Class B1 and Class B2 Certificates will be
affected by the rate of prepayments on the Mortgage Loans, as well as the rate
of Mortgagor defaults resulting in Realized Losses, by the severity of those
losses and by the timing thereof. See 'Description of the
Certificates--Distributions on the Certificates--Allocation of Realized Losses
on the Certificates' herein for a description of the manner in which such losses
are borne by the holders of the Certificates. If the purchaser of a Class M,
Class B1 or Class B2 Certificate calculates its anticipated yield based on an
assumed rate of default and amount of Realized Losses that is lower than the
default rate and the amount of losses actually incurred, its actual yield to
maturity may be lower than that so calculated and could be negative. The timing
of defaults and losses will also affect an investor's actual yield to maturity,
even if the average rate of defaults and severity of losses are consistent with
an investor's expectations. In general, the earlier a loss occurs, the greater
the effect on an investor's yield to maturity.
The yields to maturity on the Classes of Class B Certificates with higher
numerical designations will be more sensitive to losses due to liquidations of
defaulted Mortgage Loans than will the yields on such Classes with lower
numerical designations, and the yields to maturity on all of the Class B
Certificates will be more sensitive to such losses than will the yields on the
other Classes of Certificates. The yields to maturity on the Class M
Certificates will be more sensitive to such losses than will the yields on the
Senior Certificates and less sensitive than the yields on the Class B
Certificates. The Junior Certificates will be more sensitive to losses due to
liquidations of defaulted Mortgage Loans because the entire amount of such
losses will be allocable to such Certificates in inverse order of priority,
except as provided herein. To the extent not covered by the Company's advances
of delinquent monthly payments of interest, delinquencies on the Mortgage Loans
may also have a relatively greater effect (i) on the yields to investors in the
Class B Certificates with higher numerical designations than on the yields to
investors in those Class B Certificates with lower numerical designations, (ii)
on the yields to investors in the Class B Certificates than on the yields to
investors in the other Classes of the Certificates, and (iii) on the yields to
investors in the Class M Certificates than on the yields to investors in the
Senior Certificates. As described above under 'Description of the
Certificates--Distributions on the Certificates--Interest,' '--Principal,'
'--Allocation of Realized Losses on the Certificates' and '--Subordination,'
amounts otherwise distributable to holders of any Class of Class B Certificates
will be made available to protect the holders of the more senior ranking Classes
of the Certificates against interruptions in distributions due to certain
mortgagor delinquencies. Amounts otherwise distributable to holders of the Class
M Certificates will be made available to protect the holders of the Senior
Certificates against interruptions in distributions due to certain mortgagor
delinquencies. Such delinquencies, even if subsequently cured, may affect the
timing of the receipt of distributions by the holders of the Junior
Certificates.
To the extent that the Class M, Class B1 or Class B2 Certificates are being
purchased at discounts from their initial Class Certificate Principal Balances,
if the purchaser of such a Certificate calculates its yield to maturity based on
an assumed rate of payment of principal faster than that actually received on
such Certificate, its actual yield to maturity may be lower than that so
calculated.
S-40
<PAGE>
FINAL PAYMENT CONSIDERATIONS
The rate of payment of principal of the Certificates will depend on the
rate of payment of principal of the related Mortgage Loans (including
prepayments, defaults, delinquencies and liquidations) which, in turn, will
depend on the characteristics of the Mortgage Loans, the level of prevailing
interest rates and other economic, geographic, social and other factors, and no
assurance can be given as to the actual payment experience. As of the Cut-off
Date, the month and year of the latest scheduled maturity of a Mortgage Loan is
expected to be May 2028. In addition, to the extent delinquencies and defaults
are not offset by the effect of the subordination of the Certificates junior to
the Certificates offered hereby, delinquencies and defaults could affect the
actual maturity of the Certificates offered hereby.
WEIGHTED AVERAGE LIVES OF THE CERTIFICATES
The weighted average life of a Certificate is determined by (a) multiplying
the reduction, if any, in the Certificate Principal Balance thereof on each
Distribution Date by the number of years from the date of issuance to such
Distribution Date, (b) summing the results and (c) dividing the sum by the
aggregate reductions in the Certificate Principal Balance of such Certificate.
The weighted average lives of the Certificates will be affected, to varying
degrees, by the rate of principal payments on the related Mortgage Loans, the
timing of changes in such rate of payments and the priority sequence of
distributions of principal of such Certificates. The interaction of the
foregoing factors may have different effects on the various Classes of the
Certificates and the effects on any Class may vary at different times during the
life of such Class. Further, to the extent the prices of Classes of Certificates
represent discounts or premiums to their respective original Class Certificate
Principal Balances, variability in the weighted average lives of such Classes of
Certificates could result in variability in the related yields to maturity.
The model used in this Prospectus Supplement is the prepayment assumption
(the 'Prepayment Assumption') which represents an assumed, variable annualized
rate of prepayment each month relative to the then outstanding principal balance
of a pool of mortgage loans for the life of such mortgage loans. The Prepayment
Assumption assumes that a pool of loans prepays in the first month at a constant
prepayment rate that corresponds to one-tenth of the percentage rate that
applies in the tenth month and increases by an additional one-tenth each month
thereafter until the tenth month. A 20% Prepayment Assumption assumes constant
prepayment rates of 2.0% per annum of the then outstanding principal balance of
the Mortgage Loans in the first month following the origination of such Mortgage
Loans and an additional 2.0% per annum in each month thereafter until the tenth
month. Beginning in the tenth month and in each month thereafter during the life
of such mortgage loans, a 20% Prepayment Assumption assumes a constant
prepayment rate of 20% per annum each month.
As used in the table below, 0% Prepayment Assumption assumes prepayment
rates equal to 0% of the Prepayment Assumption, i.e., no prepayments. Prepayment
Assumptions of 16%, 19%, 23% and 25% represent assumed, variable rates of
prepayments determined on the same basis as a 20% Prepayment Assumption, with
16%, 19%, 23% and 25% and 1.6%, 1.9%, 2.3% and 2.5%, as applicable, substituted
for 20% and 2.0%, respectively, in the calculation. The model does not purport
to be either a historical description of the prepayment experience of any pool
of mortgage loans or a prediction of the anticipated rate of prepayment of any
pool of mortgage loans, including the Mortgage Loans.
Table of Class Certificate Principal Balances. The tables on the following
pages set forth the percentages of the initial Class Certificate Principal
Balance of each Class of Certificates offered hereby that would be outstanding
after each of the dates shown at the specified percentages of the Prepayment
Assumption and the corresponding weighted average life of each such Class of
Certificates. For purposes of calculations under the columns at the indicated
percentages of the Prepayment Assumption set forth in the tables, it is assumed
with respect to the Mortgage Loans (the 'Modeling Assumptions') that (i) the
distributions in respect of the Certificates are made and received in cash on
the 25th day of each month commencing in July 1998, (ii) the Mortgage Loans
prepay (without prepayment premiums) at the specified percentages of the
Prepayment Assumption, (iii) the aggregate outstanding principal balance of the
Mortgage Loans as of the Cut-off Date is $194,423,720 (iv) no defaults or
delinquencies in the payment by Mortgagors of principal of and interest on the
Mortgage Loans are experienced and the Company does not repurchase any of the
Mortgage Loans as permitted or required by the Agreement, (v) the Company does
not exercise its option to repurchase all the Mortgage Loans
S-41
<PAGE>
in the Trust Fund as described under the caption 'The Pooling and Servicing
Agreement--Termination' herein, (vi) scheduled monthly payments on the Mortgage
Loans are received on the Due Dates in each month, and are computed prior to
giving effect to prepayments received in the prior month, (vii) prepayments
representing payment in full of individual Mortgage Loans are received on the
last day of each month (commencing June 1998) and include 30 days' interest
thereon, and no Interest Shortfalls occur in respect of the Mortgage Loans,
(viii) the scheduled monthly payment for each Mortgage Loan has been calculated
based on its outstanding balance, interest rate and remaining term to maturity
such that the Mortgage Loan will amortize in amounts sufficient to repay the
remaining balance of the Mortgage Loan by its remaining term to maturity (except
with respect to Balloon Payments), (ix) if the Mortgage Loan is a Balloon Loan,
the last payment made on such Mortgage Loan is made on its Due Date together
with 30 days' interest thereon and, therefore, no Interest Shortfall results
from such final payment, (x) the initial Class Certificate Principal Balance and
Certificate Interest Rate for each Class of Certificates offered hereby are as
set forth or described on the cover page hereof, (xi) the date of the initial
issuance of the Certificates is June 26, 1998, (xii) the Mortgage Pool consists
of five Mortgage Loans having the characteristics set forth below, (xiii) the
Net Mortgage Rate of each Mortgage Loan equals the Mortgage Rate for such
Mortgage Loan, less 0.50% per annum, (xiv) the amount distributable to
Certificateholders are not reduced by the incurrence of any expenses by the
Trust Fund, and (xv) no Net Simple Interest Shortfalls or Net Simple Interest
Excesses occur with respect to the Simple Interest Loans.
For purposes of the tables on the following pages it is also assumed that
the Mortgage Pool consists of Mortgage Loans having the following
characteristics:
<TABLE>
<CAPTION>
ORIGINAL REMAINING REMAINING
AMORTIZATION NET AMORTIZATION TERM TO
TERM TO MATURITY MORTGAGE TERM MATURITY AGE
AMORTIZATION TYPE (IN MONTHS) CURRENT BALANCE RATE (IN MONTHS) (IN MONTHS) (IN MONTHS)
- ----------------------------- ---------------- --------------- -------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Fully Amortizing............. 115 $ 9,297,807.95 8.6370% 113 113 2
Fully Amortizing............. 179 36,728,125.48 8.6240 176 176 3
Fully Amortizing............. 240 43,329,371.75 8.5850 237 237 3
Fully Amortizing............. 359 62,057,835.96 8.4730 355 355 4
Balloon...................... 360 43,010,578.53 8.9320 357 177 3
---------------
Total........................ $194,423,719.67 8.6360%(1)
---------------
---------------
</TABLE>
- ------------------
(1) Represents the Weighted Average Net Mortgage Rate of the assumed Mortgage
Pool.
It is not likely that the Mortgage Loans will prepay at a constant rate. In
addition, if the actual terms and payment and performance characteristics of the
Mortgage Loans included in the Mortgage Pool differ from those assumed in the
Modeling Assumptions used in calculating the percentages set forth in this
table, the actual Class Certificate Principal Balance of each Class of
Certificates outstanding at any time and the actual weighted average life of
each Class of Certificates may differ (which difference could be material) from
the corresponding information in the table for each indicated percentage of the
Prepayment Assumption.
S-42
<PAGE>
PERCENT OF ORIGINAL CLASS CERTIFICATE PRINCIPAL BALANCE
OUTSTANDING OF THE CERTIFICATES
<TABLE>
<CAPTION>
CLASS A1 CLASS A2
--------------------------------------- ---------------------------------------
PREPAYMENT ASSUMPTION PREPAYMENT ASSUMPTION
--------------------------------------- ---------------------------------------
DISTRIBUTION DATE 0% 16% 19% 20% 23% 25% 0% 16% 19% 20% 23% 25%
- ------------------------------ ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage............ 100 100 100 100 100 100 100 100 100 100 100 100
June 1999..................... 95 51 43 41 32 27 100 100 100 100 100 100
June 2000..................... 89 3 0 0 0 0 100 100 67 54 15 0
June 2001..................... 82 0 0 0 0 0 100 0 0 0 0 0
June 2002..................... 76 0 0 0 0 0 100 0 0 0 0 0
June 2003..................... 69 0 0 0 0 0 100 0 0 0 0 0
June 2004..................... 61 0 0 0 0 0 100 0 0 0 0 0
June 2005..................... 53 0 0 0 0 0 100 0 0 0 0 0
June 2006..................... 46 0 0 0 0 0 100 0 0 0 0 0
June 2007..................... 38 0 0 0 0 0 100 0 0 0 0 0
June 2008..................... 30 0 0 0 0 0 100 0 0 0 0 0
June 2009..................... 22 0 0 0 0 0 100 0 0 0 0 0
June 2010..................... 13 0 0 0 0 0 100 0 0 0 0 0
June 2011..................... 2 0 0 0 0 0 100 0 0 0 0 0
June 2012..................... 0 0 0 0 0 0 74 0 0 0 0 0
June 2013..................... 0 0 0 0 0 0 0 0 0 0 0 0
June 2014..................... 0 0 0 0 0 0 0 0 0 0 0 0
June 2015..................... 0 0 0 0 0 0 0 0 0 0 0 0
June 2016..................... 0 0 0 0 0 0 0 0 0 0 0 0
June 2017..................... 0 0 0 0 0 0 0 0 0 0 0 0
June 2018..................... 0 0 0 0 0 0 0 0 0 0 0 0
June 2019..................... 0 0 0 0 0 0 0 0 0 0 0 0
June 2020..................... 0 0 0 0 0 0 0 0 0 0 0 0
June 2021..................... 0 0 0 0 0 0 0 0 0 0 0 0
June 2022..................... 0 0 0 0 0 0 0 0 0 0 0 0
June 2023..................... 0 0 0 0 0 0 0 0 0 0 0 0
June 2024..................... 0 0 0 0 0 0 0 0 0 0 0 0
June 2025..................... 0 0 0 0 0 0 0 0 0 0 0 0
June 2026..................... 0 0 0 0 0 0 0 0 0 0 0 0
June 2027..................... 0 0 0 0 0 0 0 0 0 0 0 0
June 2028..................... 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average
Life (in years)(1)........... 7.3 1.1 0.9 0.9 0.8 0.8 14.4 2.5 2.2 2.1 1.8 1.7
<CAPTION>
CLASS A3 CLASS A4
-------------------------------------- ---------------------------------------
PREPAYMENT ASSUMPTION PREPAYMENT ASSUMPTION
-------------------------------------- ---------------------------------------
DISTRIBUTION DATE 0% 16% 19% 20% 23% 25% 0% 16% 19% 20% 23% 25%
- ------------------------------ ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage............ 100 100 100 100 100 100 100 100 100 100 100 100
June 1999..................... 100 100 100 100 100 100 100 100 100 100 100 100
June 2000..................... 100 100 100 100 100 92 100 100 100 100 100 100
June 2001..................... 100 97 58 45 9 0 100 100 100 100 100 73
June 2002..................... 100 32 0 0 0 0 100 100 79 53 0 0
June 2003..................... 100 0 0 0 0 0 100 55 0 0 0 0
June 2004..................... 100 0 0 0 0 0 100 0 0 0 0 0
June 2005..................... 100 0 0 0 0 0 100 0 0 0 0 0
June 2006..................... 100 0 0 0 0 0 100 0 0 0 0 0
June 2007..................... 100 0 0 0 0 0 100 0 0 0 0 0
June 2008..................... 100 0 0 0 0 0 100 0 0 0 0 0
June 2009..................... 100 0 0 0 0 0 100 0 0 0 0 0
June 2010..................... 100 0 0 0 0 0 100 0 0 0 0 0
June 2011..................... 100 0 0 0 0 0 100 0 0 0 0 0
June 2012..................... 100 0 0 0 0 0 100 0 0 0 0 0
June 2013..................... 34 0 0 0 0 0 100 0 0 0 0 0
June 2014..................... 18 0 0 0 0 0 100 0 0 0 0 0
June 2015..................... 0 0 0 0 0 0 99 0 0 0 0 0
June 2016..................... 0 0 0 0 0 0 59 0 0 0 0 0
June 2017..................... 0 0 0 0 0 0 15 0 0 0 0 0
June 2018..................... 0 0 0 0 0 0 0 0 0 0 0 0
June 2019..................... 0 0 0 0 0 0 0 0 0 0 0 0
June 2020..................... 0 0 0 0 0 0 0 0 0 0 0 0
June 2021..................... 0 0 0 0 0 0 0 0 0 0 0 0
June 2022..................... 0 0 0 0 0 0 0 0 0 0 0 0
June 2023..................... 0 0 0 0 0 0 0 0 0 0 0 0
June 2024..................... 0 0 0 0 0 0 0 0 0 0 0 0
June 2025..................... 0 0 0 0 0 0 0 0 0 0 0 0
June 2026..................... 0 0 0 0 0 0 0 0 0 0 0 0
June 2027..................... 0 0 0 0 0 0 0 0 0 0 0 0
June 2028..................... 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average
Life (in years)(1)........... 15.2 3.8 3.2 3.0 2.6 2.4 18.2 5.1 4.3 4.1 3.5 3.2
</TABLE>
- ------------------
(1) The weighted average life of a Certificate is determined by (a) multiplying
the reduction, if any, in the Certificate Principal Balance thereof on each
Distribution Date by the number of years from the date of issuance to such
Distribution Date, (b) summing the results and (c) dividing the sum by the
aggregate reductions in the Certificate Principal Balance of such
Certificate.
S-43
<PAGE>
PERCENT OF ORIGINAL CLASS CERTIFICATE PRINCIPAL BALANCE
OUTSTANDING OF THE CERTIFICATES
<TABLE>
<CAPTION>
CLASS A5 CLASS A6
-------------------------------------------------- --------------------------------------------------
PREPAYMENT ASSUMPTION PREPAYMENT ASSUMPTION
-------------------------------------------------- --------------------------------------------------
DISTRIBUTION DATE 0% 16% 19% 20% 23% 25% 0% 16% 19% 20% 23% 25%
- ------------------------- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage....... 100 100 100 100 100 100 100 100 100 100 100 100
June 1999................ 100 100 100 100 100 100 100 100 100 100 100 100
June 2000................ 100 100 100 100 100 100 100 100 100 100 100 100
June 2001................ 100 100 100 100 100 100 100 100 100 100 100 100
June 2002................ 100 100 100 100 81 41 100 100 100 100 100 100
June 2003................ 100 100 74 51 0 0 100 100 100 100 94 71
June 2004................ 100 81 12 0 0 0 100 100 100 95 61 43
June 2005................ 100 30 0 0 0 0 100 100 80 69 41 27
June 2006................ 100 10 0 0 0 0 100 100 72 62 38 25
June 2007................ 100 0 0 0 0 0 100 90 59 50 30 19
June 2008................ 100 0 0 0 0 0 100 75 47 40 23 15
June 2009................ 100 0 0 0 0 0 100 61 37 31 17 11
June 2010................ 100 0 0 0 0 0 100 49 29 24 13 8
June 2011................ 100 0 0 0 0 0 100 39 22 18 9 5
June 2012................ 100 0 0 0 0 0 100 30 17 13 7 4
June 2013................ 100 0 0 0 0 0 100 16 8 7 3 2
June 2014................ 100 0 0 0 0 0 100 12 6 5 2 1
June 2015................ 100 0 0 0 0 0 100 9 5 4 2 1
June 2016................ 100 0 0 0 0 0 100 7 3 3 1 1
June 2017................ 100 0 0 0 0 0 100 5 2 2 1 0
June 2018................ 78 0 0 0 0 0 100 4 2 1 0 0
June 2019................ 62 0 0 0 0 0 100 3 1 1 0 0
June 2020................ 44 0 0 0 0 0 100 2 1 1 0 0
June 2021................ 25 0 0 0 0 0 100 2 1 0 0 0
June 2022................ 4 0 0 0 0 0 100 1 0 0 0 0
June 2023................ 0 0 0 0 0 0 88 1 0 0 0 0
June 2024................ 0 0 0 0 0 0 72 1 0 0 0 0
June 2025................ 0 0 0 0 0 0 54 0 0 0 0 0
June 2026................ 0 0 0 0 0 0 34 0 0 0 0 0
June 2027................ 0 0 0 0 0 0 13 0 0 0 0 0
June 2028................ 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average
Life (in years)(1)...... 21.7 6.8 5.4 5.1 4.4 4.0 27.1 12.6 10.5 9.8 8.0 6.9
<CAPTION>
CLASS A7
------------------------------------------
PREPAYMENT ASSUMPTION
------------------------------------------
DISTRIBUTION DATE 0% 16% 19% 20% 23% 25%
- ------------------------- ---- --- --- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Initial Percentage....... 100 100 100 100 100 100
June 1999................ 100 100 100 100 100 100
June 2000................ 100 100 100 100 100 100
June 2001................ 100 100 100 100 100 100
June 2002................ 99 90 88 88 85 84
June 2003................ 98 81 77 76 72 69
June 2004................ 95 67 61 59 53 49
June 2005................ 92 53 46 43 36 31
June 2006................ 81 25 19 17 11 9
June 2007................ 70 12 8 7 4 2
June 2008................ 61 6 4 3 1 1
June 2009................ 52 3 2 1 1 0
June 2010................ 44 2 1 1 0 0
June 2011................ 36 1 0 0 0 0
June 2012................ 28 0 0 0 0 0
June 2013................ 0 0 0 0 0 0
June 2014................ 0 0 0 0 0 0
June 2015................ 0 0 0 0 0 0
June 2016................ 0 0 0 0 0 0
June 2017................ 0 0 0 0 0 0
June 2018................ 0 0 0 0 0 0
June 2019................ 0 0 0 0 0 0
June 2020................ 0 0 0 0 0 0
June 2021................ 0 0 0 0 0 0
June 2022................ 0 0 0 0 0 0
June 2023................ 0 0 0 0 0 0
June 2024................ 0 0 0 0 0 0
June 2025................ 0 0 0 0 0 0
June 2026................ 0 0 0 0 0 0
June 2027................ 0 0 0 0 0 0
June 2028................ 0 0 0 0 0 0
Weighted Average
Life (in years)(1)...... 11.1 6.9 6.6 6.4 6.1 6.0
</TABLE>
- ------------------
(1) The weighted average life of a Certificate is determined by (a) multiplying
the reduction, if any, in the Certificate Principal Balance thereof on each
Distribution Date by the number of years from the date of issuance to such
Distribution Date, (b) summing the results and (c) dividing the sum by the
aggregate reductions in the Certificate Principal Balance of such
Certificate.
S-44
<PAGE>
PERCENT OF ORIGINAL CLASS CERTIFICATE PRINCIPAL BALANCE
OUTSTANDING OF THE CERTIFICATES
<TABLE>
<CAPTION>
CLASS R1 AND CLASS R2 CLASS M, CLASS B1 AND CLASS B2
-------------------------------------------------- --------------------------------------------------
PREPAYMENT ASSUMPTION PREPAYMENT ASSUMPTION
-------------------------------------------------- --------------------------------------------------
DISTRIBUTION DATE 0% 16% 19% 20% 23% 25% 0% 16% 19% 20% 23% 25%
- ------------------------- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage....... 100 100 100 100 100 100 100 100 100 100 100 100
June 1999................ 0 0 0 0 0 0 98 98 98 98 98 98
June 2000................ 0 0 0 0 0 0 96 96 96 96 96 96
June 2001................ 0 0 0 0 0 0 94 94 94 94 94 94
June 2002................ 0 0 0 0 0 0 92 92 92 92 92 92
June 2003................ 0 0 0 0 0 0 89 89 89 89 89 89
June 2004................ 0 0 0 0 0 0 86 82 81 81 80 79
June 2005................ 0 0 0 0 0 0 83 74 72 71 69 68
June 2006................ 0 0 0 0 0 0 80 64 61 60 57 55
June 2007................ 0 0 0 0 0 0 76 53 49 48 44 42
June 2008................ 0 0 0 0 0 0 73 42 38 36 32 30
June 2009................ 0 0 0 0 0 0 69 34 29 28 24 21
June 2010................ 0 0 0 0 0 0 65 27 22 21 17 15
June 2011................ 0 0 0 0 0 0 61 21 17 16 12 11
June 2012................ 0 0 0 0 0 0 56 16 13 12 9 7
June 2013................ 0 0 0 0 0 0 34 8 6 6 4 3
June 2014................ 0 0 0 0 0 0 32 6 5 4 3 2
June 2015................ 0 0 0 0 0 0 29 5 3 3 2 2
June 2016................ 0 0 0 0 0 0 26 4 3 2 1 1
June 2017................ 0 0 0 0 0 0 23 3 2 2 1 1
June 2018................ 0 0 0 0 0 0 20 2 1 1 1 0
June 2019................ 0 0 0 0 0 0 18 2 1 1 0 0
June 2020................ 0 0 0 0 0 0 17 1 1 1 0 0
June 2021................ 0 0 0 0 0 0 15 1 1 0 0 0
June 2022................ 0 0 0 0 0 0 14 1 0 0 0 0
June 2023................ 0 0 0 0 0 0 12 0 0 0 0 0
June 2024................ 0 0 0 0 0 0 9 0 0 0 0 0
June 2025................ 0 0 0 0 0 0 7 0 0 0 0 0
June 2026................ 0 0 0 0 0 0 5 0 0 0 0 0
June 2027................ 0 0 0 0 0 0 2 0 0 0 0 0
June 2028................ 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average
Life (in years)(1)...... 0.1 0.1 0.1 0.1 0.1 0.1 14.4 9.7 9.3 9.2 8.8 8.6
</TABLE>
- ------------------
(1) The weighted average life of a Certificate is determined by (a) multiplying
the reduction, if any, in the Certificate Principal Balance thereof on each
Distribution Date by the number of years from the date of issuance to such
Distribution Date, (b) summing the results and (c) dividing the sum by the
aggregate reductions in the Certificate Principal Balance of such
Certificate.
S-45
<PAGE>
GE CAPITAL MORTGAGE SERVICES, INC.
The Company, a wholly-owned subsidiary of GE Capital Mortgage Corporation,
is a New Jersey corporation originally incorporated in 1949. The principal
executive office of the Company is located at Three Executive Campus, Cherry
Hill, New Jersey 08002, telephone (609) 661-6100. For a general description of
the Company and its activities, see 'GE Capital Mortgage Services, Inc.' in the
accompanying Prospectus.
THE HOME EQUITY LOAN PROGRAM
GENERAL
The Company is engaged in the business of acquiring and servicing
residential mortgage loans secured by liens on one- to four-family homes. The
Company, through its Home Equity Services unit, originates, acquires and
services closed-end, fixed rate and adjustable rate, first-and second-lien
mortgage loans ('Home Equity Loans'). The Company originates Home Equity Loans
through its retail lending program and acquires Home Equity Loans through its
wholesale program. 'Retail loans' are generally originated through mortgage
brokers eligible to refer Home Equity Loan applications to the Company. Such
loans are generally underwritten by the Company and processed primarily by the
mortgage broker and closed by the Company in the Company's name. It is expected
that approximately 17.51% of the Mortgage Loans (by Principal Balance as of the
Cut-off Date) will be retail loans that were originated by the Company.
'Wholesale loans' are purchased from approved correspondent lenders, and in
negotiated transactions from other third parties. Home Equity Loans acquired
from correspondent lenders are generally closed in the name of the applicable
correspondent lenders and are subsequently sold and assigned to the Company.
Correspondent lenders selling Home Equity Loans to the Company are generally
required to follow the Company's loan underwriting policies, which are described
below, or, with respect to Home Equity Loans acquired by the Company from
correspondent lenders in negotiated transactions, the Company underwrites such
Home Equity Loans in accordance with the Company's loan underwriting policies
before acquiring them. It is expected that approximately 82.49% of the Mortgage
Loans by Principal Balance as of the Cut-off Date will be wholesale loans that
will have been originated by correspondent lenders. It is expected that the
remaining Mortgage Loans (approximately 3.31% by Principal Balance as of the
Cut-off Date) will be 'Consumer Direct' loans originated by the Company with
borrowers who currently have loans serviced by the Company. It is expected that
none of the Mortgage Loans will have been acquired from other third parties in
negotiated transactions.
UNDERWRITING PROCEDURES RELATING TO HOME EQUITY LOANS
The Company's underwriting procedures are intended to evaluate the
prospective mortgagor's credit standing and ability to repay the Home Equity
Loan, as well as the value and adequacy of the underlying mortgaged property
that serves as collateral for the Home Equity Loan.
All Home Equity Loan applications received by the Company are subject to a
credit investigation. As part of such investigation, the Company (i) reviews at
least two independent credit bureau reports (which may consist of a merged
report), (ii) obtains verification of employment, which generally includes a
current pay stub and the borrower's most recent W-2 form or federal tax return
(or, for self-employed individuals, tax returns from the previous two years),
(iii) conducts a title search and (iv) obtains an independent appraisal of the
property, as described further below. In addition, the Company generally obtains
a written or telephone verification of the current first-lien mortgage loan
balance and payment history.
After the investigation is completed, a decision is made to accept or
reject the loan application. Generally, borrowers must have a debt-to-income
ratio not greater than 60% for their application to be approved.
The Company generally has not made first-lien Home Equity Loans with a Home
Equity Loan-to-Value Ratio exceeding 90%. However, the Total Combined
Loan-to-Value Ratio may exceed 90% in cases where the Company substantially
simultaneously made or acquired a second-lien Home Equity Loan secured by the
related Mortgaged Property to certain borrowers with high credit ratings, as in
the case of certain first-lien Mortgage Loans included in the Mortgage Pool, as
described under 'Description of the Mortgage Pool and the Mortgaged
Properties--The Mortgage Loans' herein. The Company also generally has not made
second-lien Home Equity Loans when the Second-Lien Combined Loan-to-Value Ratio
has exceeded 85%, except in connection with its
S-46
<PAGE>
'High LTV' program, under which the Company has originated or acquired
second-lien Home Equity Loans with Second-Lien Combined Loan-to-Value Ratios of
up to 100%. Under the High LTV program, certain borrowers with high credit
ratings have been permitted to borrow up to $50,000 under second-lien mortgage
loans with Second-Lien Combined Loan-to-Value Ratios not exceeding 90% and up to
an amount generally not exceeding $35,000 under second-lien mortgage loans with
Second-Lien Combined Loan-to-Value Ratios not exceeding 100%. It is expected
that no more than approximately 0.25% of the Mortgage Loans as of the Cut-off
Date will have been originated under the High LTV program. The Company's
determination of an acceptable Total Combined Loan-to-Value Ratio or Second-Lien
Combined Loan-to-Value Ratio, as the case may be, for a particular Home Equity
Loan application is based on the credit rating of the borrower, the quality,
condition and appreciation history of the related property and prospective
market conditions with regard to such property.
The Company classifies Home Equity Loans on the basis of the credit
histories of the borrowers. At origination, the credit histories of the
borrowers with respect to approximately 8.17% of the Mortgage Loans (by
Principal Balance as of the Cut-off Date) did not satisfy the Company's criteria
for classification in its highest generic category. Mortgage Loans classified in
lower categories may experience a higher rate of payment default than Mortgage
Loans classified in the highest category.
Certain Home Equity Loans may be originated under the Company's No Income
Verification ('NIV') program. In order to qualify for the NIV program, a
borrower generally must have a debt-to-income ratio of no greater than 50%, a
Total Combined Loan-to-Value Ratio or Second-Lien Combined Loan-to-Value Ratio,
as the case may be, of no greater than 80% and a high credit rating. The credit
investigation of an applicant for a loan under the NIV program is generally the
same as described above, except that the income of the borrower will not be
verified.
Certain Home Equity Loans (approximately 3.31% by Principal Balance as of
the Cut-off Date) which are Consumer Direct Loans may be originated under the
Company's streamlined portfolio ('Streamlined Portfolio') program. Under the
Streamlined Portfolio program, if the Company is currently the servicer of a
borrower's first-lien mortgage loan, the Company may originate a second-lien
Home Equity Loan that requires only a title search and a title bring-down to
determine such Home Equity Loan's lien position at the time of closing. No new
title insurance will be required to close such second-lien Home Equity Loans. No
more than approximately 1.57% (by aggregate Principal Balance as of the Cut-off
Date) of the Mortgage Loans will be second-lien Home Equity Loans originated
without new title insurance under the Streamlined Portfolio program. With
respect to appraisals under the Streamlined Portfolio program, if the Company is
currently the servicer of a borrower's first-lien mortgage loan which is being
refinanced by a first-lien Home Equity Loan and the original appraisal is less
than twelve months old, generally either a copy of the original appraisal and a
recertification of value or a 'drive-by' appraisal will be required to close
such first-lien Home Equity Loan. In the case of a second-lien Home Equity Loan
with a principal balance not in excess of $100,000, if the Company is currently
the servicer of a borrower's first-lien mortgage loan, generally only a
'drive-by' appraisal with comparable photos will be required to close such
second-lien Home Equity Loan. Notwithstanding the two preceding sentences, a
Home Equity Loan under the Streamlined Portfolio program will not be eligible
for a 'drive-by' appraisal if the mortgaged property underlying such Home Equity
Loan is in a geographical area designated as a soft housing market, as
determined by the Company in its sole discretion, from time to time. None of the
Mortgage Loans will be second-lien Home Equity Loans originated with a
'drive-by' appraisal under the Streamlined Portfolio program.
For further information respecting the underwriting standards applicable to
Home Equity Loans, see 'The Trust Fund--The Mortgage Loans--Loan Underwriting
Policies' in the Prospectus.
S-47
<PAGE>
DELINQUENCY, FORECLOSURE AND LOAN LOSS EXPERIENCE OF THE COMPANY'S
HOME EQUITY LOAN SERVICING PORTFOLIO
The following tables set forth certain information concerning the
delinquency and foreclosure (including pending foreclosures) experience on Home
Equity Loans included in the Company's servicing portfolio (the 'Servicing
Portfolio').
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF DECEMBER 31, AS OF DECEMBER 31,
1995 1996 1997
----------------------- ----------------------- -----------------------
BY NO. BY DOLLAR BY NO. BY DOLLAR BY NO. BY DOLLAR
OF AMOUNT OF OF AMOUNT OF OF AMOUNT OF
LOANS LOANS LOANS LOANS LOANS LOANS
--------- ------------ --------- ------------ --------- ------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Total Home Equity Loan portfolio.......... 36,154 $ 2,080,928 40,130 $ 2,626,039 48,826 $ 2,975,681
--------- ------------ --------- ------------ --------- ------------
--------- ------------ --------- ------------ --------- ------------
Period of delinquency(1)
One payment(2)....................... 491 $ 25,631 751 $ 40,502 783 $ 45,052
Two payments(2)...................... 118 5,883 169 9,463 278 16,911
Three payments or more(3)............ 562 35,483 760 47,918 1,234 80,319
--------- ------------ --------- ------------ --------- ------------
Total delinquent loans.................... 1,171 $ 66,997 1,680 $ 97,883 2,295 $ 142,282
--------- ------------ --------- ------------ --------- ------------
--------- ------------ --------- ------------ --------- ------------
Percent of portfolio...................... 3.24% 3.22% 4.19% 3.73% 4.70% 4.78%
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, AS OF MARCH 31,
1997 1998
-------------------- --------------------
BY NO. BY DOLLAR BY NO. BY DOLLAR
OF AMOUNT OF OF AMOUNT OF
LOANS LOANS LOANS LOANS
------ ---------- ------ ----------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Total Home Equity Loan portfolio.................................. 45,332 $2,714,922 48,569 $2,962,710
------ ---------- ------ ----------
------ ---------- ------ ----------
Period of delinquency(1)
One payment(2).................................................. 526 $ 29,042 397 $ 21,296
Two payments(2)................................................. 147 $ 8,548 160 $ 8,822
Three payments or more(3)....................................... 887 $ 55,166 1,303 $ 88,558
------ ---------- ------ ----------
Total delinquent loans............................................ 1,560 $ 92,756 1,860 $ 118,676
------ ---------- ------ ----------
------ ---------- ------ ----------
Percent of portfolio.............................................. 3.44% 3.42% 3.83% 4.01%
</TABLE>
- ------------------------
(1) The indicated periods of delinquency are based on the number of days past
due on a contractual basis. No Home Equity Loan is considered delinquent for
these purposes until after the monthly anniversary of its contractual due
date (e.g., a mortgage loan with a payment due on January 1st would first be
considered one payment delinquent after February 1st). The delinquencies
reported above were determined as of the dates indicated.
(2) Includes loans for which the borrowers are in bankruptcy.
(3) Includes all loans in foreclosure and loans for which the borrowers are in
bankruptcy.
S-48
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------
1995 1996 1997
------------ ------------ ------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Total Home Equity Loan portfolio...................... $ 2,080,928 $ 2,626,039 $ 2,975,681
Foreclosed loans (Real estate owned ('REO')
properties)(1)...................................... $ 7,732 $ 9,189 $ 5,505
Foreclosure ratio..................................... 0.37% 0.35% 0.18%
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31,
--------------------------
1997 1998
------------ ------------
(DOLLAR AMOUNTS IN
THOUSANDS)
<S> <C> <C>
Total Home Equity Loan portfolio............................. $ 2,714,922 $ 2,962,710
Foreclosed loans (REO properties)(1)......................... $ 9,448 $ 7,300
Foreclosure ratio............................................ 0.35% 0.25%
</TABLE>
- ------------------------
(1) Foreclosed loans represent the amount of funds invested by the Company or an
investor, in properties, the title to each of which has been acquired by the
Company or investors following foreclosure or delivery of a deed in lieu of
foreclosure, and which have not been liquidated at the end of the period
indicated. The amount of funds invested by the Company for a property
includes the principal balance of the related Home Equity Loan, interest
paid to investors through the date of the repurchase of such loan from an
investor pool and expenses associated with foreclosing on such loan, and
maintaining and selling the related property. The length of time necessary
to complete the liquidation of such mortgaged properties may be affected by
prevailing economic conditions and the marketability of the mortgaged
properties.
The following tables set forth certain information concerning net loan loss
experience of the Company for the indicated periods, with respect to Home Equity
Loans included in its Servicing Portfolio. Net Losses for each period below have
been calculated to equal (a) with respect to second-lien mortgage loans written
off as uncollectible, the principal amount of such loan, net of any subsequent
recoveries, together with legal and other fees and expenses associated with
monitoring the foreclosure of the related first lien, which expenses were
incurred prior to the Company's decision to write off such second-lien mortgage
loan as uncollectible, and (b) with respect to foreclosed properties liquidated
during the period, the principal amount of the related mortgage loans less the
net proceeds of the sale of the related properties, together with expenses
associated with maintaining, repairing and selling such properties. Net Losses
also include the amount of interest paid to investors through the date of
repurchase of the mortgage loans referred to in (a) and (b) above from an
investor pool.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1995 1996 1997
---------- ---------- ----------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Number of Home Equity Loans serviced(1)............. 36,154 40,130 48,826
Aggregate loan balance of Home Equity Loans
serviced.......................................... $2,080,928 $2,626,039 $2,975,681
Net Losses(2):
By dollar amount............................... $9,734 $8,756 $8,210
Percentage(3).................................. 0.47% 0.33% 0.28%
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
1997 1998
------------ ------------
(DOLLAR AMOUNTS IN
THOUSANDS)
<S> <C> <C>
Number of Home Equity Loans serviced(1)...................... 45,332 48,569
Aggregate loan balance of Home Equity Loans serviced......... $ 2,714,922 $ 2,962,710
Net Losses(2):
By dollar amount........................................... $ 1,891 $ 1,185
Percentage(1).............................................. 0.07% 0.04%
</TABLE>
- ------------------
(1) As of the end of the indicated period.
(2) Net loss data is given with respect to Home Equity Loans serviced by the
Company, other than Home Equity Loans as to which certain third-party
investors, pursuant to contractual arrangement, assume responsibility for
the liquidation and ultimate disposition of the Mortgaged Properties
securing such Home Equity Loans generally after the foreclosure process is
completed. As of December 31, 1995, December 31, 1996 and December 31, 1997
approximately 30%, 32% and 23%, respectively (by aggregate loan balance), of
the Company's Home Equity Loan servicing portfolio included loans subject to
these arrangements.
(3) As a percentage of aggregate year-end balance.
S-49
<PAGE>
The delinquency, foreclosure and net loss figures set forth above are
historical and are based on the servicing of mortgage loans that may not be
representative of the Mortgage Loans. Consequently, there can be no assurance
that the delinquency, foreclosure and loan loss experience on the Mortgage Loans
will be consistent with the data set forth above. The Servicing Portfolio, for
example, includes mortgage loans having a wide variety of payment
characteristics (e.g., simple interest mortgage loans, self-amortizing mortgage
loans and balloon payment mortgage loans), mortgage loans secured by first- and
second-liens on mortgaged properties, and mortgage loans secured by mortgaged
properties in geographic locations that may not be representative of the
geographic locations of the Mortgage Loans. The Servicing Portfolio also
includes mortgage loans originated in accordance with the Company's then
applicable underwriting policies.
The size of the Servicing Portfolio has significantly increased over the
periods indicated in the tables above as a result of a number of factors, and as
a consequence the Servicing Portfolio includes many mortgage loans which have
not been outstanding long enough to have seasoned to a point where delinquencies
would be fully reflected. It is possible that the delinquency foreclosure and
loan loss percentages experienced in the future could be significantly higher
than those indicated in the tables above.
THE POOLING AND SERVICING AGREEMENT
The Certificates will be issued pursuant to the Agreement. The following
summaries describe certain provisions of the Agreement. See 'The Pooling and
Servicing Agreement' in the accompanying Prospectus for summaries of certain
other provisions of the Agreement. The summaries below do not purport to be
complete and are subject to, and qualified in their entirety by reference to,
the provisions of the Agreement. Where particular provisions or terms used in
the Agreement are referred to, such provisions or terms are as specified in the
Agreement.
ASSIGNMENT OF MORTGAGE LOANS
At the time of issuance of the Certificates, the Company will assign the
Mortgage Loans to the Trustee, together with all principal and interest received
by the Company on or with respect to the Mortgage Loans on or after the Cut-off
Date. The Trustee will, concurrently with such assignment, execute, countersign
and deliver the Certificates to the Company in exchange for the Mortgage Loans.
Each Mortgage Loan will be identified in a schedule appearing as an exhibit to
the Agreement. Any substitute Mortgage Loan will be identified in an amended
schedule maintained by the Trustee. See 'The Pooling and Servicing
Agreement--Repurchase or Substitution' in the Prospectus.
In addition, at the time of issuance of the Certificates the Company will
deliver to the Trustee, as to each Mortgage Loan, the related Mortgage Note (or
a lost-note affidavit), any related assumption and modification agreement and an
assignment of Mortgage to the Trustee in recordable form (other than in respect
of unavailable recording information). The Company will also deliver originals
of the recorded Mortgages and any intervening assignments of the Mortgages with
respect to the Mortgage Loans, and title insurance policies for the Mortgaged
Properties, as promptly as practicable, and in any case within thirty days,
after receiving all such documents for the Mortgage Pool from the applicable
recording offices. Pending such delivery, the Company will retain and furnish to
the Trustee upon request copies of the Mortgages and intervening assignments of
Mortgage delivered for recording. See 'The Pooling and Servicing
Agreement--Assignment of Assets' in the Prospectus.
The Company may refrain from recording the assignments of Mortgage to the
Trustee unless the Company or the Trustee obtains actual notice or knowledge of
the occurrence of any one or more of the following: (i) the Company is not a
wholly-owned direct or indirect subsidiary of General Electric Company or
General Electric Capital Corporation ('GE Capital') does not own (directly or
indirectly) at least two-thirds of the voting shares of the capital stock of the
Company, (ii) the long-term senior unsecured rating of GE Capital is downgraded
by Fitch or Moody's below their two highest long-term rating categories or such
rating is withdrawn, (iii) GE Capital is no longer obligated pursuant to the
terms of a support agreement to maintain the Company's net worth or liquidity
(as such terms are defined in such support agreement) at the levels specified
therein, or that such support agreement, including any amendment thereto, has
been breached, terminated or otherwise held to be unenforceable or (iv) such
support agreement, including any amendment thereto, is amended or modified (each
such event described in (i), (ii), (iii) and
S-50
<PAGE>
(iv) is referred to herein as a 'Trigger Event'); provided, however, that such
recording will not be required if the Company delivers to the Trustee a letter
from each rating agency which originally rated the Certificates to the effect
that the failure to take such action would not cause such rating agency to
withdraw or reduce its then current ratings of such Certificates. For purposes
of the foregoing, the Company will be deemed to have knowledge of any such
downgrading if, in the exercise of reasonable diligence, the Company has or
should have had knowledge thereof. If a Trigger Event occurs, the Company will
also promptly furnish to the Trustee the documents retained by the Company as
described in the preceding paragraph.
Although the recordation of the assignments of Mortgage to the Trustee is
not necessary to make the assignment of the Mortgage Loans to the Trustee
effective, if the Company were to make a sale, assignment, satisfaction or
discharge of any Mortgage Loan prior to recording or filing the assignments to
the Trustee, the other parties to such sale, assignment, satisfaction or
discharge might have rights superior to those of the Trustee. If the Company
were to do so without authority under the Agreement, it would be liable to the
Certificateholders. Moreover, if insolvency proceedings relating to the Company
were commenced prior to such recording or filing, creditors or the trustee-in-
bankruptcy may be able to assert rights in the affected Mortgage Loans superior
to those of the Trustee.
SERVICING ARRANGEMENT WITH RESPECT TO THE MORTGAGE LOANS
It is expected that the Company initially will directly service all of the
Mortgage Loans. The Agreement permits the Company to use other primary servicing
agents from time to time. See 'Servicing of the Mortgage Loans and Contracts' in
the accompanying Prospectus.
The Company, in its capacity as servicer and acting as agent for the
Trustee, will not consent to the placement of a subsequent senior mortgage or
deed of trust on any Mortgaged Property, except in the case of a Permitted
Senior Loan (as defined below). If, notwithstanding the foregoing, any mortgage
loan (other than a Permitted Senior Loan) secured by a lien or liens ranking
senior to that of a Mortgage Loan is consented to by the Company, the Agreement
will require that the Company purchase such Mortgage Loan at the Purchase Price
therefor, but only in the event that foreclosure proceedings are commenced in
respect of such Mortgage Loan. The Agreement will further provide that such
purchase obligation will be the sole remedy available to holders of the
Certificates or the Trustee against the Company respecting such breach. Under
the Agreement, a 'Permitted Senior Loan' is a mortgage loan (i) as to which the
proceeds therefrom were used to refinance an existing mortgage loan ranking
senior to a Mortgage Loan and (ii) as to which certain conditions described in
the Agreement have been satisfied.
Subject to applicable law, all legal expenses in connection with
foreclosure proceedings initiated by the Company are assessed to, and become the
responsibility of, the related Mortgagor.
The Company may not foreclose on any property securing a Mortgage Loan
unless it forecloses subject to any senior mortgage and any outstanding property
taxes. The Company generally will pay the entire amount due on such senior
mortgage loan to the senior mortgagee at or prior to the foreclosure sale. If
any senior mortgage is in default after the Company has initiated its
foreclosure action, the Company may advance funds to keep the senior mortgage
current until such time as the Company satisfies such senior mortgage. In the
event foreclosure proceedings have been instituted on any senior mortgage prior
to the initiation of the Company's foreclosure action, the Company may monitor
the foreclosure proceedings, institute its own foreclosure proceedings, satisfy
the senior mortgage at the time of the foreclosure sale or take other action to
protect its interest in the related property, including bidding on the property
at the time of any foreclosure sale. The Company will be reimbursed for any
expenses incurred or advances made in connection with the liquidation of a
defaulted Mortgage Loan out of liquidation proceeds or insurance proceeds on
such defaulted Mortgage Loan. The Company will not be under any obligation to
make any such advance, and in any event the Company will refrain from taking any
such action based upon its determination that any amounts so paid will not be
recoverable from proceeds from the disposition of the related Mortgaged
Property. See 'Servicing of the Mortgage Loan and Contracts--Collection and
Other Servicing Procedures--The Mortgage Loans' in the Prospectus.
The Agreement will permit the Company, at its option, to grant certain
rights in connection with the foreclosure of defaulted Mortgage Loans to the
holders of the Class B5 Certificates and, when such Certificates are no longer
outstanding, to the holders of the Class B4 Certificates. See 'Servicing of the
Mortgage Loans and Contracts--Collection and Other Servicing Procedures' in the
Prospectus.
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COLLECTION ACCOUNT
The Agreement provides that if the Company or the Trustee obtains actual
notice or knowledge of the occurrence of a Trigger Event, the Company will, in
lieu of the Loan Payment Record described under the caption 'Servicing of the
Mortgage Loans and Contracts--Loan Payment Record' in the accompanying
Prospectus, establish and maintain or cause to be established and maintained a
separate account (the 'Collection Account') for the Certificates for the
collection of payments on the Mortgage Loans; provided, however, that such
action will not be required if the Company delivers to the Trustee a letter from
each rating agency which originally rated the Certificates to the effect that
the failure to take such action would not cause such rating agency to withdraw
or reduce its then current rating of such Certificates. If established, the
Collection Account would be (i) maintained with a depository institution the
debt obligations of which are, at the time of any deposit therein, rated by each
of Fitch and Moody's in one of its two highest long-term rating categories and
by Moody's in its highest short-term rating category, (ii) an account or
accounts the deposits in which are fully insured by either the Bank Insurance
Fund (the 'BIF') of the Federal Deposit Insurance Corporation (the 'FDIC') or
the Savings Association Insurance Fund (as successor to the Federal Savings and
Loan Insurance Corporation) of the FDIC (the 'SAIF'), (iii) an account or
accounts with a depository institution, which accounts are insured by the BIF or
SAIF (to the limits established by the FDIC), and which uninsured deposits are
invested in United States government securities or other high quality
investments, or are otherwise secured to the extent required by Fitch and
Moody's such that, as evidenced by an opinion of counsel, the holders of the
Certificates have a claim with respect to the funds in the account or a
perfected first security interest against any collateral securing such funds
that is superior to claims of any other depositors or creditors of the
depository institution with which the account is maintained, (iv) a trust
account maintained with the corporate trust department of a federal or state
chartered depository institution or of a trust company with trust powers and
acting in its fiduciary capacity for the benefit of the Trustee or (v) an
account as will not cause either Moody's or Fitch to downgrade or withdraw its
then current ratings assigned to the Certificates. If a Collection Account is
established for the Certificates, all amounts credited or debited to the Loan
Payment Record in the manner described under the caption 'Servicing of the
Mortgage Loans and Contracts--Loan Payment Record' will instead be deposited or
withdrawn from the Collection Account. See 'Servicing of the Mortgage Loans and
Contracts--Loan Payment Record' in the accompanying Prospectus.
Prior to the occurrence of a Trigger Event, the Company will transfer to
the Certificate Account, in next-day funds, the Available Funds for the related
Distribution Date on the business day immediately preceding such Distribution
Date (such date, the 'Deposit Date').
ADVANCES
In the event that any Mortgagor fails to make any payment of interest
required under the terms of a Mortgage Loan, the Company, as servicer, will
advance the entire amount of such payment (in the amount that would be due on
the related Due Date, in the case of a Simple Interest Mortgage Loan), net of
the applicable Servicing Fee, less the amount of any such payment that the
Company reasonably believes will not be recoverable out of liquidation proceeds
or otherwise. The amount of any scheduled interest payment required to be
advanced by the Company will not be affected by any agreement between the
Company and a Mortgagor providing for the postponement or modification of the
Due Date or amount of such scheduled interest payment. The Company will be
entitled to reimbursement for any such advance from related late interest
payments on the Mortgage Loan as to which such Advance was made. Furthermore, in
the event that any Mortgage Loan as to which an Advance has been made is
foreclosed while in the Trust Fund, the Company will be entitled to
reimbursement for such Advance from related liquidation proceeds or insurance
proceeds prior to payment to Certificateholders of such proceeds. The Company
will not advance delinquent principal in respect of any Mortgage Loan.
If the Company makes a good faith judgment that all or any portion of any
Advance made by it with respect to any Mortgage Loan may not ultimately be
recoverable from related liquidation or insurance proceeds or other collections
on such Mortgage Loan (a 'Nonrecoverable Advance'), the Company will so notify
the Trustee and the Company will be entitled to reimbursement for such
Nonrecoverable Advance from recoveries on all other unrelated Mortgage Loans.
The Company's judgment that it has made a Nonrecoverable Advance with respect to
any Mortgage Loan will be based upon its assessment of the value of the related
Mortgaged Property and such other facts and circumstances as it may deem
appropriate in evaluating the likelihood of receiving Net
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Liquidation Proceeds equal to or greater than the aggregate amount of
unreimbursed Advances made with respect to such Mortgage Loan.
As a result of the subordination of the Junior Certificates, the effect of
reimbursements to the Company of previous advances from liquidation or insurance
proceeds and of Nonrecoverable Advances will generally be borne by the holders
of the Junior Certificates (to the extent then outstanding) in inverse order of
priority before being borne by holders of the Senior Certificates.
Any failure by the Company to make an Advance as required under the
Agreement will constitute an Event of Default as defined thereunder, in which
case the Trustee, as successor to the Company in its capacity as servicer of the
Mortgage Loans, will be obligated to make any such Advance, in accordance with
the terms of the Agreement unless prohibited by applicable law from doing so.
PURCHASES OF DEFAULTED MORTGAGE LOANS
Under the Agreement, the Company will have the option (but not the
obligation) to purchase any Mortgage Loan as to which the Mortgagor has failed
to make unexcused payment in full of three or more consecutive scheduled
payments of principal and interest (a 'Defaulted Mortgage Loan'). Any such
purchase will be for a price equal to 100% of the outstanding principal balance
of such Mortgage Loan, plus accrued and unpaid interest thereon at the Net
Mortgage Rate (less any amounts representing previously unreimbursed Advances).
The purchase price for any Defaulted Mortgage Loan will be deposited in the
Certificate Account on the business day prior to the Distribution Date on which
the proceeds of such purchase are to be distributed to the related
Certificateholders.
SERVICING COMPENSATION, COMPENSATING INTEREST AND PAYMENT OF EXPENSES
The Company's primary compensation for its servicing activities will come
from the payment to it, with respect to each interest payment on any Mortgage
Loan, of the 'Servicing Fee' at the rate (the 'Servicing Fee Rate') described
below. As to each Mortgage Loan, the Servicing Fee Rate will be a fixed rate per
annum of the outstanding principal balance of such Mortgage Loan. The Servicing
Fee Rate for each Mortgage Loan is expected to be 0.50%. The aggregate servicing
compensation to the Company could vary depending on the prepayment experience of
the Mortgage Loans. The servicing compensation of any direct servicer of any
Mortgage Loan retained by the Company will be paid out of the related Servicing
Fee, and the Company will retain the balance as part of its servicing
compensation (subject to its obligation to make Compensating Interest Payments
and Simple Interest Payments, as described below).
To the extent any voluntary prepayment on a Self-Amortizing Mortgage Loan
results in an Interest Shortfall (as described in clauses (i) and (ii) of the
definition thereof) with respect to any Distribution Date, the Company will be
obligated to remit an amount (such amount, a 'Compensating Interest Payment')
sufficient to pass through to Certificateholders the full amount of interest to
which they would have been entitled in the absence of such prepayment. Such
remittance will not exceed the lesser of (a) 1/12 of 0.125% of the aggregate
Principal Balance of the Mortgage Loans for such Distribution Date and (b) the
aggregate amount received by the Company on account of its Servicing Fees (net
of any servicing compensation paid to any direct servicer) in respect of such
Mortgage Loans in connection with such Distribution Date.
There can be no assurance that the aggregate amount received by the Company
on account of its Servicing Fees (net of any servicing compensation paid to any
direct servicer) will be sufficient to pay any Compensating Interest Payments
and Simple Interest Payments that would otherwise be made if such payments were
not limited by the amount of the Company's servicing compensation.
The Company will retain, as additional servicing compensation, amounts in
respect of interest paid by borrowers in connection with any principal
prepayment in full received by the Company on a Self-Amortizing Mortgage Loan
from the first day through the fifteenth day of each month, other than the month
of the Cut-off Date.
The Company will pay expenses incurred in connection with its
responsibilities under the Agreement, subject to limited reimbursement as
described herein and in the accompanying Prospectus. See 'Servicing of the
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Mortgage Loans and Contracts--Servicing and Other Compensation and Payment of
Expenses' in the accompanying Prospectus for information regarding other
possible compensation to the Company.
SIMPLE INTEREST PAYMENTS
In the event that there is a Net Simple Interest Shortfall for any
Distribution Date, the Company will be obligated to remit to the Trustee on the
related Deposit Date an amount (a 'Simple Interest Payment') equal to the lesser
of (i) the amount of such Net Simple Interest Shortfall and (ii) the sum of (a)
the aggregate amount received by the Company on account of its Servicing Fees
(net of any compensation paid to any direct servicer) in connection with such
Distribution Date, less any Compensating Interest Payment in respect of such
Distribution Date, and (b) the Simple Interest Excess Amount for such
Distribution Date.
In the event that there is a Net Simple Interest Excess on any Distribution
Date, such excess will be applied to the distribution of interest pursuant to
priority second under 'Description of the Certificates--Distributions on the
Certificates--Interest' to the extent of Unpaid Net Simple Interest Shortfalls
for all prior Distribution Dates, less all amounts distributed pursuant to such
priority second in respect of Unpaid Net Simple Interest Shortfalls on such
prior Distribution Dates.
Any remaining Net Simple Interest Excess will be paid to the Company as
additional servicing compensation.
The 'Simple Interest Excess Amount' for any Distribution Date will be equal
to the greater of (i) zero and (ii) the aggregate of any Net Simple Interest
Excess paid to the Company in connection with prior Distribution Dates, minus
any Simple Interest Payments made by the Company in connection with prior
Distribution Dates.
TRUSTEE
The Trustee for the Certificates offered hereby will be The First National
Bank of Chicago, a national banking association. The Corporate Trust Office of
the Trustee is located at One First National Plaza, Suite 0126, Corporate Trust
Services, Chicago, Illinois 60670-0126, except that for certain purposes under
the Agreement such office is located at 14 Wall Street, 8th Floor, New York,
N.Y. 10005. The Trustee (or any of its affiliates), in its individual or any
other capacity, may become the owner or pledgee of Certificates with the same
rights as it would have if it were not Trustee. In addition, the Company (and
its affiliates) maintain banking relationships with the Trustee in the ordinary
course of their respective businesses.
TERMINATION
The Company may, at its option, repurchase all of the Mortgage Loans and
thereby effect the early retirement of the Certificates and cause the
termination of the Trust Fund and the REMICs constituted by the Trust Fund, on
any Distribution Date after the aggregate Principal Balance of the Mortgage
Loans is less than 10% of the aggregate Principal Balance thereof as of the
Cut-off Date, provided that the Trustee has received an opinion of counsel that
the exercise of such option will not subject the Trust Fund to a tax on
prohibited transactions or result in the failure of either the Upper-Tier REMIC
or Lower-Tier REMIC to qualify as a REMIC.
Any such repurchase by the Company of the assets included in the Trust Fund
will be at a price equal to the sum of (a) 100% of the unpaid principal balance
of each Mortgage Loan in the Trust Fund (other than a Mortgage Loan described in
clause (b)) as of such date, plus accrued and unpaid interest thereon at the
related Net Mortgage Rate (less any amounts representing previously unreimbursed
advances), and (b) the appraised value of any property acquired in respect of a
related Mortgage Loan (less any amounts representing previously unreimbursed
advances in respect thereof and a good faith estimate of liquidation expenses).
If the Available Funds on the final Distribution Date are less than the
aggregate Certificate Principal Balance of all outstanding Certificates plus
accrued and unpaid interest thereon, then such shortfall will be allocated on
the final Distribution Date to each Class of Certificates in accordance with the
priorities described under 'Description of the Certificates--Distributions on
the Certificates--Allocation of Available Funds.'
In no event will the Trust Fund created by the Agreement continue beyond
the expiration of 21 years from the death of the last survivor of a certain
person named in such Agreement.
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VOTING RIGHTS
The Class S Certificates in the aggregate will be allocated 6% of the votes
and the other Classes of Certificates in the aggregate will be allocated 94% of
the votes, eligible to be cast in connection with any vote of all
Certificateholders under the Agreement. Votes allocated to the Certificates will
be allocated among such Classes (and among the Certificates within each such
Class) in proportion to their Class Certificate Principal Balances or
Certificate Principal Balances, as the case may be.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
An election will be made to treat each of the Upper-Tier REMIC and the
Lower-Tier REMIC as a REMIC for federal income tax purposes.
The Certificates, other than the Class R1 Certificates, will represent
interests in the Upper-Tier REMIC, the assets of which will consist of all the
'regular interests' in the Lower-Tier REMIC. The Lower-Tier REMIC will consist
of the Mortgage Loans and the related Trust Fund assets described herein. The
Regular Certificates will be designated as 'regular interests' and the Class R2
Certificates will be designated as the 'residual interest' in the Upper-Tier
REMIC. The Class R1 Certificates will be designated as the 'residual interest'
in the Lower-Tier REMIC.
Regular Certificates. The Regular Certificates generally will be treated
as debt instruments issued by the Upper-Tier REMIC for federal income tax
purposes. Income on Regular Certificates must be reported under an accrual
method of accounting. Certain Classes of Regular Certificates may be issued with
original issue discount in an amount equal to the excess of their initial
respective Class Certificate Principal Balances (plus accrued interest from the
last day preceding the issue date corresponding to a Distribution Date through
the issue date) over their issue prices (including all accrued interest). The
prepayment assumption that is to be used in determining the rate of accrual of
original issue discount and whether the original issue discount is considered de
minimis, and that may be used by a holder of a Regular Certificate to amortize
premium, will be a 20% Prepayment Assumption. No representation is made as to
the actual rate at which the Mortgage Loans will prepay. See 'Certain Federal
Income Tax Consequences--REMIC Certificates--Income from Regular Certificates'
in the accompanying Prospectus.
The Class A6, Class M, Class B1 and Class B2 Certificates provide for
interest payments based on a varying interest rate equal to the lesser of (a)
6.645%, 6.660%, 6.905% and 7.495% per annum, respectively, and (b) the Weighted
Average Net Mortgage Rate on the Mortgage Loans. However, the Class A6, Class M,
Class B1 and Class B2 Certificates technically will not constitute 'variable
rate debt instruments' ('VRDIs') within the meaning of the original issue
discount rules of the Internal Revenue Code of 1986, as amended, and the tax
treatment of such Certificates thus is not entirely clear. Nevertheless, until
further guidance is provided, it would appear reasonable to accrue interest
income under the Class A6, Class M, Class B1 and Class B2 Certificates in
accordance with the rules applicable to VRDIs. See 'Certain Federal Income Tax
Consequences--REMIC Certificates--Income from Regular Certificates--Variable
Rate Regular Certificates' in the accompanying Prospectus.
The requirement to report income on a Regular Certificate under an accrual
method may result in the inclusion of amounts in income that are not currently
distributed in cash. In the case of a Junior Certificate, accrued income may
exceed cash distributions as a result of the preferential right of Classes of
Senior Certificates to receive cash distributions in the event of losses or
delinquencies on Mortgage Loans. Prospective purchasers of Junior Certificates
should consult their tax advisors regarding the timing of income from those
Certificates and the timing and character of any deductions that may be
available with respect to principal or accrued interest that is not paid. See
'Certain Federal Income Tax Consequences--REMIC Certificates--Income from
Regular Certificates' in the accompanying Prospectus.
Residual Certificates. The holders of the Class R1 and Class R2
Certificates must include the taxable income of the Lower Tier REMIC and Upper
Tier REMIC, respectively, in their federal taxable income. The resulting tax
liability of the holders may exceed cash distributions to such holders during
certain periods. All or a
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portion of the taxable income from a Residual Certificate recognized by a holder
may be treated as 'excess inclusion' income, which with limited exceptions is
subject to U.S. federal income tax in all events.
Under Treasury regulations, the Residual Certificates may be considered to
be a 'noneconomic residual interest' at the time they are issued, in which event
certain transfers thereof would be disregarded for federal income tax purposes.
Prospective purchasers of a Residual Certificate should consider carefully
the tax consequences of an investment in Residual Certificates discussed in the
Prospectus and should consult their own tax advisors with respect to those
consequences. See 'Certain Federal Income Tax Consequences--REMIC
Certificates--Income from Residual Certificates;--Taxation of Certain Foreign
Investors;--Servicing Compensation and Other REMIC Pool Expense;--Transfers of
Residual Certificates.'
ERISA CONSIDERATIONS
As described in the Prospectus under 'ERISA Considerations,' the Employee
Retirement Income Security Act of 1974, as amended ('ERISA'), and the Code
impose certain duties and restrictions on any person which is an employee
benefit plan within the meaning of Section 3(3) of ERISA or a plan subject to
Section 4975 of the Code or any person utilizing the assets of such employee
benefit plan or other plan (an 'ERISA Plan') and certain persons who perform
services for ERISA Plans. For example, unless exempted, an investment by an
ERISA Plan in the Certificates offered hereby may constitute or give rise to a
prohibited transaction under ERISA or Section 4975 of the Code. See 'ERISA
Considerations' in the accompanying Prospectus.
The United States Department of Labor has issued to Prudential Securities
Incorporated an individual administrative exemption, Prohibited Transaction
Exemption 90-32 (55 Fed. Reg. 23147, June 6, 1990), as amended (the
'Exemption'), from certain of the prohibited transaction provisions of ERISA
with respect to the initial purchase, the holding, and the subsequent resale by
an ERISA Plan of certificates in pass-through trusts that meet the conditions
and requirements of the Exemptions. The Exemptions might apply to the
acquisition, holding and resale of the Senior Certificates offered hereby by an
ERISA Plan, provided that specified conditions are met.
Among the conditions which would have to be satisfied for each of the
Exemptions to apply to the acquisition by an ERISA Plan of such Senior
Certificates offered hereby are the following: (i) the Underwriter is the sole
underwriter or the manager or co-manager of the underwriting syndicate, for such
Certificates, (ii) such Certificates are rated in one of the three highest
generic rating categories by Fitch, Moody's, Standard & Poor's Ratings Services,
a division of the McGraw-Hill Companies, Inc. or Duff & Phelps Credit Rating Co.
at the time of the acquisition of such Certificates by the ERISA Plan, (iii)
such Certificates represent a beneficial ownership interest in, among other
things, obligations that bear interest or are purchased at a discount and which
are secured by single-family residential, multifamily residential or commercial
real property (including obligations secured by leasehold interests on
commercial real property), or fractional undivided interests in such
obligations, (iv) such Certificates are not subordinated to other certificates
issued by the Trust Fund, (v) the ERISA Plan investing in such Certificates is
an 'accredited investor' as defined in Rule 501(a)(1) of Regulation D of the
Securities and Exchange Commission under the Securities Act of 1933, (vi) the
acquisition of such Certificates is on terms that are at least as favorable to
the ERISA Plan as they would be in an arm's length transaction with an unrelated
third party, (vii) the Trustee is not an affiliate of any member of the
'Restricted Group' (as defined below) and (viii) the compensation to the
Underwriter represents not more than reasonable compensation for underwriting
such Certificates, the proceeds to the Company pursuant to the assignment of the
Mortgage Loans (or interests therein) to the Trustee represent not more than the
fair market value of such Mortgage Loans (or interests) and the sum of all
payments made to and retained by the Company represents not more than reasonable
compensation for the Company's services under the Agreement and reimbursement of
the Company's reasonable expenses in connection therewith.
In addition, if certain additional conditions specified in the Exemption
are satisfied, the Exemption may provide an exemption from the prohibited
transaction provisions of ERISA relating to possible self-dealing transactions
by fiduciaries who have discretionary authority, or render investment advice,
with respect to ERISA Plan assets used to purchase the Senior Certificates
offered hereby if the fiduciary (or its affiliate) is an obligor on any of the
Mortgage Loans.
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The Exemption would not be available with respect to ERISA Plans sponsored
by any of the following entities (or any affiliate of any such entity): (i) the
Company, (ii) any Underwriter, (iii) the Trustee, (iv) GE Capital or any other
entity that provides insurance or other credit support to the Trust Fund or (v)
any obligor with respect to Mortgage Loans constituting more than five percent
of the aggregate unamortized principal balance of the assets in the Mortgage
Pool (the 'Restricted Group'). Before purchasing any Certificate offered hereby,
a fiduciary of an ERISA Plan should make its own determination as to the
availability of the exemptive relief provided in the Exemption or the
availability of any other prohibited transaction exemptions, and whether the
conditions of any such exemption will be applicable to such Certificate.
The Exemption does not apply to the initial purchase, the holding or the
subsequent resale of the Class M, Class B1 and Class B2 Certificates because
such Certificates are subordinate to certain other Classes of Certificates.
ACCORDINGLY, ERISA PLANS MAY NOT PURCHASE THE CLASS M, CLASS B1 OR CLASS B2
CERTIFICATES, except that any insurance company may purchase such Certificates
with assets of its general account if the exemptive relief granted by the DOL
for transactions involving insurance company general accounts in Prohibited
Transaction Exemption 95-60, 60 Fed. Reg. 35925 (July 12, 1995) is available
with respect to such investment. Any insurance company proposing to purchase
such Certificates for its general account should consider whether such relief
would be available.
Any fiduciary of an ERISA Plan considering whether to purchase any
Certificate offered hereby should not only consider the applicability of
exemptive relief, but should also carefully review with its own legal advisors
the applicability of the fiduciary duty and prohibited transaction provisions of
ERISA and the Code to such investment. See 'ERISA Considerations' in the
accompanying Prospectus.
A qualified pension plan or other entity that is exempt from federal income
taxation pursuant to Section 501 of the Code (a 'Tax-Exempt Investor')
nonetheless will be subject to federal income taxation to the extent that its
income is 'unrelated business taxable income' within the meaning of Section 512
of the Code. The Residual Certificates constitute the residual interests in the
Upper-Tier REMIC or Lower-Tier REMIC, as the case may be, constituted by the
Trust Fund and all 'excess inclusions' allocated to the Residual Certificates,
if held by a Tax-Exempt Investor, will be considered 'unrelated business taxable
income' and thus will be subject to federal income tax. See 'Certain Federal
Income Tax Consequences--Residual Certificates' herein and 'Certain Federal
Income Tax Consequences--Federal Income Tax Consequences for REMIC
Certificates--Taxation of Residual Certificates' in the Prospectus.
The Agreement provides that the Residual Certificates may not be acquired
by or transferred to an ERISA Plan. See 'Description of the
Certificates--Restrictions on Transfer of the Residual Certificates' herein.
LEGAL INVESTMENT MATTERS
The Certificates offered hereby will not constitute 'mortgage related
securities' for purposes of the Secondary Mortgage Market Enhancement Act of
1984 ('SMMEA'). The appropriate characterization of the Certificates offered
hereby under various legal investment restrictions, and thus the ability of
investors subject to these restrictions to purchase the Certificates offered
hereby, may be subject to significant interpretive uncertainties. All investors
whose investment authority is subject to legal restrictions should consult their
own legal advisors to determine whether, and to what extent, the Certificates
offered hereby will constitute legal investments for them.
The Company makes no representation as to the proper characterization of
the Certificates offered hereby for legal investment of financial institution
regulatory purposes, or as to the ability of particular investors to purchase
the Certificates offered hereby under applicable legal investment restrictions.
The uncertainties described above (and any unfavorable future determinations
concerning legal investment or financial institution regulatory characteristics
of the Certificates offered hereby) may adversely affect the liquidity of the
Certificates offered hereby.
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PLAN OF DISTRIBUTION
Subject to the terms and conditions set forth in an Underwriting Agreement
between the Company and the Underwriter, the Company, as seller, has agreed to
sell to the Underwriter, and the Underwriter has agreed to purchase, each Class
of Certificates offered hereby upon issuance.
In the Underwriting Agreement, the Underwriter has agreed, subject to the
terms and conditions set forth therein, to purchase all of the Certificates
offered hereby, if any are purchased. The Company has been advised by the
Underwriter that it proposes initially to offer the Classes of Senior
Certificates offered hereby (other than the Residual Certificates) to the public
at the respective offering prices set forth or described on the cover page
hereof.
Until the distribution of the Certificates offered hereby is completed,
rules of the Securities and Exchange Commission may limit the ability of the
Underwriter to bid for and purchase such Certificates. As an exception to these
rules, the Underwriter is permitted to engage in certain transactions that
stabilize the price of the Class A1, Class A2, Class A3, Class A4, Class A5,
Class A6 and Class A7 Certificates. Such transactions consist of bids or
purchases for the purpose of pegging, fixing or maintaining the price of such
Certificates. If the Underwriter creates a short position in any such Class of
Certificates in connection with the offering, i.e., if they sell more of any
such Class than is set forth on the cover page of this Prospectus Supplement,
the Underwriter may reduce that short position by purchasing such Certificates
in the open market. In general, purchases of a security for the purpose of
stabilization or to reduce a short position could cause the price of the
security to be higher than it might be in the absence of such purchases.
The Underwriter makes no representation or prediction as to the direction
or magnitude of any effect that the transactions described above may have on the
prices of such Certificates. In addition, the Underwriter makes no
representation that such Underwriter will engage in such transactions or that
such transactions, once commenced, will not be discontinued without notice.
Distribution of the Class R1, Class R2, Class M, Class B1 and Class B2
Certificates will be made by the Underwriter from time to time in negotiated
transactions or otherwise at varying prices to be determined at the time of
sale.
The Company has agreed to indemnify the Underwriter against, or make
contributions to the Underwriter with respect to, certain liabilities, including
liabilities under the Securities Act of 1933, as amended.
Prudential Securities Incorporated has entered into an agreement with the
Company to purchase the Class B3, Class B4 and Class B5 Certificates
simultaneously with the purchase of the Certificates offered hereby, subject to
certain conditions.
CERTIFICATE RATINGS
It is a condition of issuance of the Certificates that the Senior
Certificates offered hereby be rated 'AAA' by Fitch and 'Aaa' by Moody's, and
that the Class M, Class B1 and Class B2 Certificates be rated 'Aa2,' 'A2' and
'Baa2,' respectively, by Moody's.
The ratings assigned by Fitch to mortgage pass-through certificates address
the likelihood of the receipt by Certificateholders of all distributions to
which such Certificateholders are entitled. Fitch's ratings address the
structural and legal aspects associated with the Certificates, including the
nature of the underlying mortgage loans and the credit quality of the credit
support provider. Fitch's ratings on mortgage pass-through certificates do not
represent any assessment of the likelihood or rate of principal prepayments.
The ratings of Moody's on mortgage pass-through certificates address the
likelihood of the receipt by Certificateholders of all distributions to which
such Certificateholders are entitled. Moody's rating opinions address the
structural and legal issues and tax-related aspects associated with the
Certificates, including the nature of the underlying mortgage loans and the
credit quality of the credit support provider, if any. Moody's ratings on
pass-through certificates do not represent any assessment of the likelihood that
principal prepayments may differ from those originally anticipated.
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The ratings of Moody's and Fitch do not address the possibility that, as a
result of principal prepayments, Certificateholders may receive a lower than
anticipated yield.
The ratings of the Certificates should be evaluated independently from
similar ratings on other types of securities. 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 agency.
The Company has not requested a rating of the Certificates offered hereby
by any rating agency other than Moody's and Fitch and the Company has not
provided information relating to the Certificates offered hereby or the Mortgage
Loans to any rating agency other than Moody's and Fitch. However, there can be
no assurance as to whether any other rating agency will rate the Certificates
offered hereby or, if another rating agency rates such Certificates, what rating
would be assigned to such Certificates by such rating agency. Any such
unsolicited rating assigned by another rating agency to the Certificates offered
hereby may be lower than the rating assigned to such Certificates by either, or
both, of Moody's and Fitch.
LEGAL MATTERS
Certain legal matters in respect of the Certificates will be passed upon
for the Company by Cleary, Gottlieb, Steen & Hamilton, New York, New York and
for the Underwriter by Brown & Wood LLP, Washington, D.C.
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INDEX OF CERTAIN PROSPECTUS SUPPLEMENT DEFINITIONS
<TABLE>
<CAPTION>
DEFINED TERM PAGE
- ---------------------------------------------------------------------------------------------------- -----------
<S> <C>
Accrued Certificate Interest........................................................................ S-6
Adjustment Amount................................................................................... S-35
Advance............................................................................................. S-8
Agreement........................................................................................... S-5
Allocable Share..................................................................................... S-33
Available Interest Funds............................................................................ S-28
Available Principal Funds........................................................................... S-28
Balloon Loans....................................................................................... S-15
Balloon Payments.................................................................................... S-15
Bankruptcy Coverage Termination Date................................................................ S-35
Bankruptcy Loss..................................................................................... S-34
Bankruptcy Loss Amount.............................................................................. S-35
beneficial owner.................................................................................... S-26
BIF................................................................................................. S-53
Book-Entry Certificates............................................................................. S-26
Bulletin Board...................................................................................... S-14
Cede................................................................................................ S-26
Certificate Principal Balance....................................................................... S-29
Certificates........................................................................................ Cover Page
Class............................................................................................... S-2
Class A7 Certificate Percentage..................................................................... S-33
Class A7 Distribution Percentage.................................................................... S-33
Class A7 Principal Distribution Amount.............................................................. S-32
Class B Certificates................................................................................ S-2
Class Certificate Principal Balance................................................................. S-4
Class Prepayment Distribution Trigger............................................................... S-33
Code................................................................................................ S-13
Collection Account.................................................................................. S-53
Company............................................................................................. Cover Page
Compensating Interest Payment....................................................................... S-54
Consumer Direct..................................................................................... S-18
Cross-Over Date..................................................................................... S-31
Cut-off Date........................................................................................ S-5
Defaulted Mortgage Loan............................................................................. S-54
Deficient Valuation................................................................................. S-34
Definitive Certificate.............................................................................. S-26
Deposit Date........................................................................................ S-53
Depository.......................................................................................... S-4
Detailed Description................................................................................ S-17
Distribution Date................................................................................... S-5
Due Date............................................................................................ S-17
Early Installment................................................................................... S-10
ERISA............................................................................................... S-13
ERISA Plan.......................................................................................... S-57
Excess Loss......................................................................................... S-34
Exemption........................................................................................... S-57
FDIC................................................................................................ S-53
Final Senior Distribution Date...................................................................... S-33
Financial Intermediary.............................................................................. S-26
</TABLE>
S-60
<PAGE>
<TABLE>
<CAPTION>
DEFINED TERM PAGE
- ---------------------------------------------------------------------------------------------------- -----------
<S> <C>
Fitch............................................................................................... S-13
Fraud Coverage Termination Date..................................................................... S-35
Fraud Loss.......................................................................................... S-34
Fraud Loss Amount................................................................................... S-35
GE Capital.......................................................................................... S-51
High LTV............................................................................................ S-48
Home Equity Loan Ratio.............................................................................. S-23
Home Equity Loan-to-Value Ratio..................................................................... S-22
Home Equity Loans................................................................................... S-47
Interest Accrual Period............................................................................. S-6
Interest Shortfall.................................................................................. S-30
Junior Certificates................................................................................. S-2
Junior Certificate Writedown Amount................................................................. S-29
Junior Percentage................................................................................... S-33
Junior Prepayment Percentage........................................................................ S-33
Junior Principal Distribution Amount................................................................ S-33
Liquidated Mortgage Loan............................................................................ S-34
Loss Allocation Limitation.......................................................................... S-34
Lower-Tier REMIC.................................................................................... S-2
Modeling Assumptions................................................................................ S-42
Moody's............................................................................................. S-13
Mortgage............................................................................................ S-17
Mortgage Loans...................................................................................... Cover Page
Mortgage Pool....................................................................................... Cover Page
Mortgage Rates...................................................................................... S-17
mortgage related securities......................................................................... S-13
Mortgaged Properties................................................................................ S-5
Mortgagor........................................................................................... S-17
Net Interest Shortfall.............................................................................. S-30
Net Mortgage Rate................................................................................... S-29
Net Simple Interest Excess.......................................................................... S-30
Net Simple Interest Shortfall....................................................................... S-30
NIV................................................................................................. S-48
Non-Book-Entry Certificates......................................................................... S-27
Nonrecoverable Advance.............................................................................. S-53
Notional Principal Balance.......................................................................... S-7
Original Junior Principal Balance................................................................... S-32
Participant......................................................................................... S-26
Permitted Senior Loan............................................................................... S-52
Prepayment Assumption............................................................................... S-42
Prepayment Interest................................................................................. S-40
Prepayment Period................................................................................... S-32
Principal Balance................................................................................... S-17
Realized Loss....................................................................................... S-34
Record Date......................................................................................... S-6
Regular Certificates................................................................................ S-13
regular interests................................................................................... S-12
REMIC............................................................................................... S-2
REO................................................................................................. S-50
Residual Certificates............................................................................... Cover Page
residual interest................................................................................... S-12
</TABLE>
S-61
<PAGE>
<TABLE>
<CAPTION>
DEFINED TERM PAGE
- ---------------------------------------------------------------------------------------------------- -----------
<S> <C>
Restricted Group.................................................................................... S-57
Retail loans........................................................................................ S-47
SAIF................................................................................................ S-53
Second-Lien Combined Loan-to-Value Ratio............................................................ S-22
Self-Amortizing Mortgage Loans...................................................................... S-24
Senior Certificates................................................................................. S-2
Senior Percentage................................................................................... S-32
Senior Prepayment Percentage........................................................................ S-32
Senior Prepayment Percentage Stepdown Limitation.................................................... S-32
Senior Principal Distribution Amount................................................................ S-31
Senior Transition Date.............................................................................. S-8
Servicing Fee....................................................................................... S-54
Servicing Fee Rate.................................................................................. S-54
Servicing Portfolio................................................................................. S-49
Simple Interest Excess Amount....................................................................... S-55
Simple Interest Mortgage Loans...................................................................... S-24
Simple Interest Payment............................................................................. S-55
Simple Interest Shortfall Percentage................................................................ S-29
SMMEA............................................................................................... S-13
Special Hazard Loss................................................................................. S-34
Special Hazard Loss Amount.......................................................................... S-35
Special Hazard Termination Date..................................................................... S-35
Streamlined Portfolio............................................................................... S-48
Tax-Exempt Investor................................................................................. S-58
Total Combined Loan-to-Value Ratio.................................................................. S-18
Trigger Event....................................................................................... S-52
Trust Fund.......................................................................................... Cover Page
Trustee............................................................................................. S-5
Underwriter......................................................................................... Cover Page
Unpaid Net Simple Interest Shortfall................................................................ S-30
Upper-Tier REMIC.................................................................................... S-2
VRDIs............................................................................................... S-56
Weighted Average Net Mortgage Rate.................................................................. S-29
Wholesale Loans..................................................................................... S-47
</TABLE>
S-62
<PAGE>
PROSPECTUS
PASS-THROUGH CERTIFICATES (ISSUABLE IN SERIES)
Seller and Servicer:
GE Capital Mortgage Services, Inc.
Each Certificate offered hereby will evidence a beneficial ownership
interest in one of a number of trust funds (each, a 'Trust Fund') created by GE
Capital Mortgage Services, Inc. (the 'Company') from time to time. As specified
in the related Prospectus Supplement, the assets of a Trust Fund may consist of
(i) a pool of mortgage loans secured by first liens, or a combination of first
and second liens, on one- to four-family residential properties or participation
interests in such loans (the 'Mortgage Loans') originated or acquired by the
Company, (ii) mortgage pass-through securities (the 'Agency Securities') issued
or guaranteed by the Government National Mortgage Association ('GNMA'), the
Federal National Mortgage Association ('FNMA') or the Federal Home Loan Mortgage
Corporation ('FHLMC') or (iii) conditional sales contracts and installment sales
or loan agreements or participation interests therein secured by manufactured
housing (the 'Contracts'). If specified in the related Prospectus Supplement, a
Trust Fund may also include one or more of the following: reinvestment income,
reserve accounts and insurance, guarantees or similar instruments or agreements.
The Certificates may be sold from time to time in one or more series on
terms determined at the time of sale and specified in the Prospectus Supplement
relating to such series. Each series of Certificates will be issued in a single
class or in two or more classes. The Certificates of each class will evidence
the beneficial ownership of (i) any distributions in respect of the assets of
the related Trust Fund that are allocable to principal of the Certificates in
the amount of the aggregate original principal balance, if any, of such class of
Certificates as specified in the related Prospectus Supplement and (ii) any
distributions in respect of the assets of the related Trust Fund that are
allocable to interest on the principal balance or notional principal balance of
such Certificates at the interest rate, if any, applicable to such class of
Certificates as specified in the related Prospectus Supplement. One or more
classes of each series (i) may be entitled to receive distributions allocable to
principal, principal prepayments, interest or any combination thereof prior to
one or more other classes of Certificates of such series or after the occurrence
of certain events and (ii) may be subordinated in the right to receive such
distributions on such Certificates to one or more senior classes of
Certificates, in each case as specified in the related Prospectus Supplement.
Interest on each class of Certificates entitled to distributions allocable to
interest will accrue at a fixed rate or at a rate that is subject to change from
time to time as specified in the related Prospectus Supplement on an actual or
notional principal amount, may represent a specified portion of interest
received on some or all of the assets of the related Trust Fund or may otherwise
be determined as specified in the related Prospectus Supplement. The Company may
retain or hold for sale from time to time one or more classes of a series of
Certificates.
Distributions on the Certificates of a series will be made only from the
proceeds from the assets of the related Trust Fund. The Certificates of any
series will not be insured or guaranteed by any governmental entity or by any
other person. Unless otherwise specified in the related Prospectus Supplement,
the Company's only obligations with respect to a series of Certificates will
consist of its contractual servicing obligations, including any obligation it
may have to advance delinquent payments on the Mortgage Loans or Contracts
included in the related Trust Fund, and its obligations pursuant to certain
representations and warranties made by it. Unless otherwise specified in the
Prospectus Supplement relating to a series, none of General Electric Company,
General Electric Capital Corporation, GE Capital Mortgage Corporation, General
Electric Mortgage Insurance Corporation or any other affiliate of the Company
will have any obligations with respect to the Certificates or the related Trust
Fund.
The yield on each class of Certificates of a series will be affected by the
rate of payment of principal (including prepayments) on the assets in the
related Trust Fund and the timing of receipt of such payments as described
herein and in the related Prospectus Supplement. Each series of Certificates may
be subject to early termination only under the circumstances described herein
and in the related Prospectus Supplement.
If specified in a Prospectus Supplement, an election will be made to treat
the related Trust Fund as a 'real estate mortgage investment conduit' ('REMIC')
for federal income tax purposes, or two REMIC elections may be made with respect
to the related Trust Fund. See 'Certain Federal Income Tax Consequences'.
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. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Offers of the Certificates may be made through one or more different
methods, including offerings through underwriters, as more fully described under
'Plan of Distribution' herein and in the related Prospectus Supplement.
There will have been no public market for any series of Certificates prior
to the offering thereof. There can be no assurance that a secondary market will
develop for the Certificates of any series or, if it does develop, that such
market will continue.
Retain this Prospectus for future reference. This Prospectus may not be
used to consummate sales of Certificates unless accompanied by a Prospectus
Supplement.
THE DATE OF THIS PROSPECTUS IS MAY 26, 1998.
<PAGE>
PROSPECTUS SUPPLEMENT
The Prospectus Supplement relating to a series of Certificates being
offered hereby will, among other things, set forth with respect to such series
of Certificates (i) information as to the assets comprising the Trust Fund,
including the characteristics of the Mortgage Loans, Agency Securities or
Contracts included therein and, if applicable, the insurance, guarantees or
other instruments or agreements included in the Trust Fund and the amount and
source of any reserve accounts; (ii) the aggregate original principal balance of
each class of Certificates entitled to distributions allocable to principal and,
if a fixed rate of interest, the interest rate for each class of such
Certificates entitled to distributions allocable to interest; (iii) information
as to any class of Certificates that has a rate of interest that is subject to
change from time to time and the basis on which such interest rate will be
determined; (iv) information as to any class of Certificates on which interest
will accrue and be added to the principal or, if applicable, the notional
principal balance thereof; (v) information as to the method used to calculate
the amount of interest to be paid on any class entitled to distributions of
interest only; (vi) information as to the nature and extent of subordination
with respect to any class of Certificates that is subordinate in right of
payment to any other class; (vii) the circumstances, if any, under which the
Trust Fund is subject to early termination; (viii) if applicable, the final
distribution date and the first mandatory principal distribution date of each
class of such Certificates; (ix) the method used to calculate the aggregate
amounts of principal and interest required to be distributed on each
distribution date in respect of each class of such Certificates and, with
respect to any series consisting of more than one class, the basis on which such
amounts will be allocated among the classes of such series; (x) the distribution
date for each class of the Certificates, the date on which payments received in
respect of the assets included in the Trust Fund during the related period will
be deposited in the certificate account and, if applicable, the assumed
reinvestment rate applicable to payments received in respect of such assets and
the date on which such payments are assumed to be received for such series of
Certificates; (xi) the name of the trustee of the Trust Fund; (xii) information
with respect to the administrator, if any, of the Trust Fund; (xiii) whether an
election will be made to treat all or a portion of the Trust Fund as a REMIC or
whether two REMIC elections will be made with respect to the Trust Fund and, if
such election is made, the designation of the regular interests and residual
interests therein; and (xiv) information with respect to the plan of
distribution of such Certificates.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the 'Exchange Act') with respect to the series
of Certificates offered hereby and by the related Prospectus Supplement, and in
accordance therewith files reports and other information with the Securities and
Exchange Commission (the 'Commission'). Such reports and other information can
be inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the Commission's Regional Offices at Seven World Trade Center, Suite 1300, New
York, New York 10048, and 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. Copies of such material can be obtained upon written request addressed to
the Commission, Public Reference Section, 450 Fifth Street, N.W., Washington,
D.C. 20549, at prescribed rates.
The Company has filed with the Commission a Registration Statement under
the Securities Act of 1933, as amended, with respect to the Certificates. This
Prospectus, which forms a part of the Registration Statement, omits certain
information contained in such Registration Statement pursuant to the rules and
regulations of the Commission. The Registration Statement can be inspected and
copied at prescribed rates at the public reference facilities maintained by the
Commission as described in the preceding paragraph.
The Commission maintains a Web site at http://www.sec.gov containing
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission, including the Company.
2
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act with respect to a series of Certificates prior to the
termination of the offering of such series of Certificates shall be deemed to be
incorporated by reference in this Prospectus as supplemented by the related
Prospectus Supplement. If so specified in any such document, such document shall
also be deemed to be incorporated by reference in the Registration Statement of
which this Prospectus forms a part.
Any statement contained herein or in a Prospectus Supplement for a series
of Certificates or in a document incorporated or deemed to be incorporated by
reference herein or therein shall be deemed to be modified or superseded for
purposes of this Prospectus and such Prospectus Supplement and, if applicable,
the Registration Statement to the extent that a statement contained herein or
therein or in any subsequently filed document which also is or is deemed to be
incorporated by reference herein or therein modifies or supersedes such
statement, except to the extent that such subsequently filed document expressly
states otherwise. Any such statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
Prospectus or the related Prospectus Supplement or, if applicable, the
Registration Statement.
The Company will provide without charge to each person, including any
beneficial owner, to whom a copy of this Prospectus and the related Prospectus
Supplement is delivered, on the written or oral request of any such person, a
copy of any and all of the documents incorporated herein by reference, except
the exhibits to such documents (unless such exhibits are specifically
incorporated by reference in such documents). Written requests for such copies
should be directed to the Corporate Secretary, GE Capital Mortgage Services,
Inc., Three Executive Campus, Cherry Hill, N.J. 08002. Telephone requests for
such copies should be directed to the Corporate Secretary at (609) 661-6512.
Until 90 days after the date of each Prospectus Supplement, all dealers
effecting transactions in the series of Certificates covered by such Prospectus
Supplement, whether or not participating in the distribution thereof, may be
required to deliver such Prospectus Supplement and this Prospectus. This is in
addition to the obligation of dealers to deliver a Prospectus Supplement and
Prospectus when acting as underwriters of the series of Certificates covered by
such Prospectus Supplement and with respect to their unsold allotments or
subscriptions.
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 as having been authorized. 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 Certificates offered hereby and thereby nor an offer to sell or a
solicitation of an offer to buy the Certificates to any person in any state or
other jurisdiction in which such offer or solicitation would be unlawful.
Neither the delivery of this Prospectus or any Prospectus Supplement with
respect hereto nor any sale made hereunder and thereunder shall, under any
circumstances, create any implication that the information herein or therein is
correct as of any time subsequent to the date of such information.
REPORTS TO CERTIFICATEHOLDERS
The Company will provide to Certificateholders, annually and with respect
to each Distribution Date, reports concerning the Trust Fund related to such
Certificates. See 'The Pooling and Servicing Agreement-- Reports to
Certificateholders'.
3
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Supplement...................................................................................... 2
Available Information...................................................................................... 2
Incorporation of Certain Documents by Reference............................................................ 3
Reports to Certificateholders.............................................................................. 3
Prospectus Summary......................................................................................... 6
Description of the Certificates............................................................................ 14
General.................................................................................................. 14
Classes of Certificates.................................................................................. 15
Distributions of Principal and Interest.................................................................. 16
Example of Distributions................................................................................. 17
Optional Termination of the Trust Fund................................................................... 18
The Trust Fund............................................................................................. 19
The Mortgage Loans....................................................................................... 19
The Agency Securities.................................................................................... 26
Contracts................................................................................................ 29
Credit Support............................................................................................. 30
General.................................................................................................. 30
Purchase of Liquidating Loans............................................................................ 31
Limited Guarantee of the Guarantor....................................................................... 31
Subordination............................................................................................ 32
Cross-Support............................................................................................ 33
Pool Insurance........................................................................................... 33
Special Hazard Insurance................................................................................. 34
Bankruptcy Bond.......................................................................................... 35
Repurchase Bond.......................................................................................... 35
Guaranteed Investment Contracts.......................................................................... 35
Reserve Accounts......................................................................................... 35
Other Insurance, Guarantees and Similar Instruments or Agreements........................................ 36
Yield, Maturity and Weighted Average Life Considerations................................................... 36
Servicing of the Mortgage Loans and Contracts.............................................................. 38
Collection and Other Servicing Procedures................................................................ 39
Private Mortgage Insurance............................................................................... 42
Hazard Insurance......................................................................................... 43
Unanticipated Recoveries of Losses on the Mortgage Loans................................................. 44
Advances................................................................................................. 44
Loan Payment Record...................................................................................... 45
Servicing and Other Compensation and Payment of Expenses................................................. 47
Resignation, Succession and Indemnification of the Company............................................... 48
The Pooling and Servicing Agreement........................................................................ 49
Assignment of Assets..................................................................................... 49
Repurchase or Substitution............................................................................... 51
Certain Refinancings..................................................................................... 52
Evidence as to Compliance................................................................................ 52
List of Certificateholders............................................................................... 52
The Trustee.............................................................................................. 53
Administration of the Certificate Account................................................................ 53
Reports to Certificateholders............................................................................ 54
Events of Default........................................................................................ 54
Rights Upon Event of Default............................................................................. 55
Amendment................................................................................................ 55
Termination.............................................................................................. 56
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
GE Capital Mortgage Services, Inc.......................................................................... 56
General.................................................................................................. 56
Delinquency and Foreclosure Experience................................................................... 57
The Guarantor.............................................................................................. 57
Certain Legal Aspects of the Mortgage Loans and Contracts.................................................. 57
The Mortgage Loans......................................................................................... 57
General.................................................................................................. 57
Foreclosure.............................................................................................. 58
Junior Mortgages; Rights of Senior Mortgagees............................................................ 60
Right of Redemption...................................................................................... 61
Anti-Deficiency Legislation and Other Limitations on Lenders............................................. 61
Enforceability of Certain Provisions..................................................................... 62
Applicability of Usury Laws.............................................................................. 63
Soldiers' and Sailors' Civil Relief Act.................................................................. 63
Environmental Considerations............................................................................. 63
The Contracts.............................................................................................. 64
General.................................................................................................. 64
Security Interests in the Manufactured Homes............................................................. 64
Enforcement of Security Interests in Manufactured Homes.................................................. 66
Consumer Protection Laws................................................................................. 66
Transfers of Manufactured Homes; Enforceability of 'Due-on-Sale' Clauses................................. 66
Applicability of Usury Laws.............................................................................. 67
Soldiers' and Sailors' Civil Relief Act.................................................................. 67
Legal Investment Matters................................................................................... 67
ERISA Considerations....................................................................................... 68
Certain Federal Income Tax Consequences.................................................................... 70
General.................................................................................................. 70
REMIC Elections.......................................................................................... 70
REMIC Certificates....................................................................................... 70
Tax Opinion.............................................................................................. 70
Status of Certificates................................................................................... 71
Income from Regular Certificates......................................................................... 71
Income from Residual Certificates........................................................................ 74
Sale or Exchange of Certificates......................................................................... 76
Taxation of Certain Foreign Investors.................................................................... 77
Transfers of Residual Certificates....................................................................... 77
Servicing Compensation and Other REMIC Pool Expenses..................................................... 79
Reporting and Administrative Matters..................................................................... 79
Non-REMIC Certificates................................................................................... 80
Trust Fund as Grantor Trust.............................................................................. 80
Status of the Certificates............................................................................... 80
Possible Application of Stripped Bond Rules.............................................................. 80
Taxation of Certificates if Stripped Bond Rules Do Not Apply............................................. 81
Taxation of Certificates if Stripped Bond Rules Apply.................................................... 82
Sales of Certificates.................................................................................... 82
Foreign Investors........................................................................................ 82
Reporting................................................................................................ 83
Backup Withholding....................................................................................... 83
Plan of Distribution....................................................................................... 83
Use of Proceeds............................................................................................ 84
Legal Matters.............................................................................................. 84
Financial Information...................................................................................... 84
</TABLE>
5
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and by reference to
the Prospectus Supplement relating to a particular series of Certificates.
Unless otherwise specified, capitalized terms used and not defined in this
Summary of Prospectus have the meanings given to them in this Prospectus and in
the related Prospectus Supplement.
Title of Securities Pass-Through Certificates, issuable in series, as
described in the Prospectus Supplement.
<TABLE>
<S> <C>
The Company............................... GE Capital Mortgage Services, Inc. (the 'Company'), a wholly- owned
subsidiary of GE Capital Mortgage Corporation. The Company will be
the seller of the Mortgage Loans, Agency Securities or Contracts
included in a Trust Fund. Unless otherwise specified in the
Prospectus Supplement, the Company will service, and may act as
master servicer with respect to, the Mortgage Loans or Contracts
included in the related Trust Fund.
Description of Securities................. Each Certificate will represent a beneficial ownership interest in a
Trust Fund created by the Company from time to time pursuant to a
pooling and servicing agreement (each, an 'Agreement') between the
Company and the commercial bank or trust company acting as trustee
specified in the Prospectus Supplement. The assets of a Trust Fund
may consist of (i) a pool of mortgage loans secured by first liens or
a combination of first and second liens on one- to four-family
residential properties, or participation interests in such loans (the
'Mortgage Loans'), originated or acquired by the Company, (ii)
mortgage pass-through securities (the 'Agency Securities') issued or
guaranteed by the Government National Mortgage Association ('GNMA'),
the Federal National Mortgage Association ('FNMA') or the Federal
Home Loan Mortgage Corporation ('FHLMC') or (iii) conditional sales
contracts and installment sales or loan agreements or participation
interests therein secured by manufactured housing (the 'Contracts').
If the pool of Mortgage Loans included in any Trust Fund consists of
a combination of first- and second-lien mortgage loans, the second-
lien mortgage loans will be Home Equity Loans (as defined herein).
The portion of any mortgage pool consisting of first-lien Mortgage
Loans may be comprised of first-lien Home Equity Loans and/or other
first-lien mortgage loans. If specified in the related Prospectus
Supplement, a Trust Fund may also include one or more of the
following: reinvestment income, reserve accounts and insurance,
guarantees or similar instruments or agreements intended to decrease
the likelihood that Certificateholders will experience delays in
distributions of scheduled payments on, or losses in respect of, the
assets in such Trust Fund. The Certificates of any series will be
entitled to payment only from the proceeds from the assets of the
related Trust Fund.
The Certificates of any series may be issued in a single class or in
two or more classes, as specified in the Prospectus Supplement. One
or more classes of Certificates of each series (i) may be entitled to
receive distributions allocable only to principal, only to interest
or to any combination thereof; (ii) may be entitled to receive
distributions only of prepayments of principal throughout the lives
of the Certificates or during specified periods; (iii) may be
subordinated in the right to receive distributions of scheduled
payments of principal,
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
prepayments of principal, interest or any combination thereof to one
or more other classes of Certificates of such series throughout the
lives of the Certificates or during specified periods; (iv) may be
entitled to receive such distributions only after the occurrence of
events specified in the Prospectus Supplement; (v) may be entitled to
receive distributions in accordance with a schedule or formula or on
the basis of collections from designated portions of the assets in
the Trust Fund; (vi) as to Certificates entitled to distributions
allocable to interest, may be entitled to receive interest at a fixed
rate or a rate that is subject to change from time to time; and (vii)
as to Certificates entitled to distributions allocable to interest,
may be entitled to distributions allocable to interest only after the
occurrence of events specified in the Prospectus Supplement and may
accrue interest until such events occur, in each case as specified in
the Prospectus Supplement. The timing and amounts of such
distributions may vary among classes, over time, or otherwise as
specified in the related Prospectus Supplement. More than one Trust
Fund may underlie the Certificates of a series, in which case
specified Certificates of such series will evidence the entire
beneficial interest in each such Trust Fund.
The Company may retain or hold for sale from time to time one or more
classes of a series of Certificates.
Unless otherwise specified in the related Prospectus Supplement, the
Certificates will be offered in fully registered form only in the
denominations specified in the Prospectus Supplement. The
Certificates will not be guaranteed or insured by any governmental
agency or instrumentality or any other issuer and, except as
described in the Prospectus Supplement, the Mortgage Loans or
Contracts included in the related Trust Fund will not be guaranteed
or insured by any governmental agency or instrumentality or any other
person.
Distributions on the Certificates......... Distributions on the Certificates entitled thereto will be made
monthly, quarterly, semiannually or at such other intervals and on
the dates specified in the Prospectus Supplement solely out of the
payments received in respect of the assets of the related Trust Fund.
The amount allocable to payments of principal and interest on any
distribution date will be determined as specified in the Prospectus
Supplement. Unless otherwise specified in the Prospectus Supplement,
all distributions will be made pro rata to Certificateholders of the
class entitled thereto based on such class's outstanding principal
balance.
The aggregate original principal balance of the Certificates will
equal the aggregate distributions allocable to principal that such
Certificates will be entitled to receive. If specified in the
Prospectus Supplement, the Certificates will have an aggregate
original principal balance equal to the aggregate unpaid principal
balance of the Mortgage Loans, Agency Securities or Contracts as of
the first day of the month of creation of the Trust Fund and will
bear interest in the aggregate at a rate equal to the weighted
average interest rate borne by the underlying Mortgage Loans, Agency
Securities or Contracts, net of servicing fees payable to the Company
and any primary or sub-servicers of the Mortgage Loans or Contracts
and
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
any other amounts (including fees payable to the Company as master
servicer, if applicable) specified in the Prospectus Supplement (as
to each Mortgage Loan, the 'Remittance Rate'). If specified in the
Prospectus Supplement, the aggregate original principal balance of
the Certificates and interest rates on the classes of Certificates
will be determined based on the cash flow on the Mortgage Loans,
Agency Securities or Contracts, as the case may be.
The rate at which interest will be passed through to holders of
Certificates entitled thereto may be a fixed rate or a rate that is
subject to change from time to time from the time and for the
periods, in each case as specified in the Prospectus Supplement. Any
such rate may be calculated on a loan-by-loan, weighted average or
other basis, in each case as described in the Prospectus Supplement.
Trust Fund Assets......................... The Trust Fund will include the Mortgage Loans, Agency Securities or
Contracts, payments in respect of such assets and certain accounts,
obligations or agreements, in each case as specified in the
Prospectus Supplement.
A. The Mortgage Loans..................... Unless otherwise specified in the Prospectus Supplement, each pool of
Mortgage Loans will consist of conventional Mortgage Loans originated
or acquired by the Company and secured by first liens or Home Equity
Loans secured by first liens or a combination of first and second
liens on one- to four-family residential properties located in one or
more states of the United States or the District of Columbia. If the
pool of Mortgage Loans included in any Trust Fund consists of a
combination of first- and second-lien mortgage Loans, the second-lien
mortgage loans will be Home Equity Loans (as defined herein). Any
first lien Mortgage Loan in any mortgage pool will be either a
first-lien Home Equity Loan and/or other first-lien mortgage loan. If
so specified in the Prospectus Supplement, the Mortgage Loans may
include cooperative apartment loans secured by security interests in
shares issued by private, non-profit, cooperative housing
corporations ('Cooperatives') and in the related proprietary leases
or occupancy agreements granting exclusive rights to occupy specific
dwelling units in such Cooperatives' buildings. If so specified in
the Prospectus Supplement, the Mortgage Loans may include loans
secured by mortgages on residential long-term leases of real
property. Unless otherwise specified in the Prospectus Supplement,
the principal balance of each Mortgage Loan at origination will not
exceed $1,000,000. Unless otherwise specified in the Prospectus
Supplement, the Mortgage Loans (other than Home Equity Loans) in the
Trust Fund will all have original maturities of 10 to 30 years. If
specified in the Prospectus Supplement, all or a portion of the
Mortgage Loans in the Trust Fund may be closed-end, home equity loans
secured by first or second liens on Mortgaged Properties ('Home
Equity Loans').
The payment terms of the Mortgage Loans to be included in a Trust
Fund will be described in the related Prospectus Supplement and may
include any of the following features or combinations thereof or
other features described in the related Prospectus Supplement:
(a) Interest may be payable at a fixed rate, a rate adjustable from
time to time in relation to an index, a rate that is fixed for a
period
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of time or under certain circumstances and is followed by an
adjustable rate, a rate that otherwise varies from time to time, or
a rate that is convertible from an adjustable rate to a fixed rate.
Changes to an adjustable rate may be subject to periodic
limitations, maximum rates, minimum rates or a combination of such
limitations. Accrued interest may be deferred and added to the
principal of a loan for such periods and under such circumstances
as may be specified in the related Prospectus Supplement. Mortgage
Loans may provide for the payment of interest at a rate lower than
the specified mortgage rate for a period of time or for the life of
the loan with the amount of any difference contributed from funds
supplied by the seller of the mortgaged property or another source.
(b) Principal may be payable on a level-debt-service basis which
fully amortizes the loan over its term, may be calculated on the
basis of an assumed amortization schedule that is significantly
longer than the original term to maturity or on an interest rate
that is different from the interest rate on the Mortgage Loan or
may not be amortized during all or a portion of the original term.
Payment of all or a substantial portion of the principal may be due
on maturity. Principal may include interest that has been deferred
and added to the principal balance of the Mortgage Loan. In the
case of Home Equity Loans which are 'simple interest' loans,
payments are applied first to interest accrued to the date payment
is received, then to principal.
(c) Monthly payments of principal and interest may be fixed for the
life of the loan, may increase over a specified period of time or
may change from period to period. Mortgage Loans may include limits
on periodic increases or decreases in the amount of monthly
payments and may include maximum or minimum amounts of monthly
payments.
(d) Prepayments of principal may be subject to a prepayment fee,
which may be fixed for the life of the loan or may decline over
time, and may be prohibited for the life of the loan or for certain
periods ('lockout periods'). Certain loans may permit prepayments
after expiration of the applicable lockout period and may require
the payment of a prepayment fee in connection with any such
subsequent prepayment. Other loans may permit prepayments without
payment of any prepayment fee and others may require the payment of
a fee if the prepayment occurs during specified time periods. The
loans may include 'due-on-sale' clauses which permit the mortgagee
to demand payment of the entire mortgage loan in connection with
the sale or certain transfers of the related mortgaged property.
Other loans may be assumable by persons meeting the then applicable
underwriting standards of the Company.
B. The Agency Securities.................. The Agency Securities evidenced by a series of Certificates will
consist of (i) mortgage participation certificates issued and
guaranteed as to timely payment of interest and, unless otherwise
specified in the related Prospectus Supplement, ultimate payment of
principal by the Federal Home Loan Mortgage Corporation ('FHLMC
Certificates'), (ii) guaranteed mortgage pass-through
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certificates issued and guaranteed as to timely payment of principal
and interest by the Federal National Mortgage Association ('FNMA
Certificates'), (iii) 'fully modified pass-through' mortgage-backed
certificates guaranteed as to timely payment of principal and
interest by the Government National Mortgage Association ('GNMA
Certificates'), (iv) stripped mortgage-backed securities representing
an undivided interest in all or a part of either the principal
distributions (but not the 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 such distributions) on certain FHLMC, FNMA or GNMA
Certificates and, unless otherwise specified in the Prospectus
Supplement, guaranteed to the same extent as the underlying
securities, or (v) a combination of such Agency Securities. All GNMA
Certificates will be backed by the full faith and credit of the
United States. No FHLMC or FNMA Certificates will be backed, directly
or indirectly, by the full faith and credit of the United States.
The Agency Securities may consist of pass-through securities issued
under FHLMC's Cash or Guarantor Program, the GNMA I Program, the GNMA
II Program or another program specified in the Prospectus Supplement.
Agency Securities may be backed by adjustable, fixed or variable rate
mortgage loans or graduated payment mortgage loans.
C. Contracts.............................. Contracts will consist of conditional sales contracts and installment
sales or loan agreements or participation interests therein secured
by new or used Manufactured Homes (as defined herein). Contracts may
be conventional, insured by the Federal Housing Authority ('FHA') or
partially guaranteed by the Veterans Administration ('VA'), as
specified in the related Prospectus Supplement. Unless otherwise
specified in the related Prospectus Supplement, each Contract will be
fully amortizing and will bear interest at a fixed percentage rate
('APR'). Unless otherwise specified in the related Prospectus
Supplement, Contracts will have had individual principal balances at
origination of not less than $10,000 and not more than $1,000,000 and
original terms to stated maturity of 5 to 30 years.
Certificate Account....................... With respect to each Trust Fund, the Company, as servicer or master
servicer, will be obligated to establish an account with the trustee
into which it will deposit on the dates specified in the related
Prospectus Supplement payments received in respect of the assets in
such Trust Fund. If specified in the Prospectus Supplement, such
payments will be invested for the benefit of Certificateholders for
the periods and in the investments specified in the Prospectus
Supplement.
Advances.................................. Unless otherwise specified in the Prospectus Supplement, the Company,
as servicer or master servicer of the Mortgage Loans or Contracts,
will be obligated to advance delinquent installments of principal and
interest (the latter adjusted to the applicable Remittance Rate) on
the Mortgage Loans or Contracts in a Trust Fund. Any such obligation
to make advances may be limited to amounts due holders of senior
Certificates of the related series, to amounts deemed to be
recoverable from late payments or liquidation proceeds, for specified
periods or any combination thereof, in each
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case as specified in the related Prospectus Supplement. Any such
advance will be recoverable by the Company as specified in the
related Prospectus Supplement.
Credit Support............................ If specified in the Prospectus Supplement, a series of Certificates,
or certain classes within such series, may have the benefit of one or
more of the following types of credit support. The protection against
losses afforded by any such credit support will be limited.
A. Purchase of Liquidating Loans.......... If so specified in the Prospectus Supplement, the Company will have a
limited obligation to cover losses due to defaults with respect to
the Mortgage Loans by purchasing any Mortgage Loan (a 'Liquidating
Loan') as to which either (i) liquidation proceedings have been
commenced and any equitable or statutory right to reinstate such
Mortgage Loan has expired or (ii) the Company has agreed to accept a
deed in lieu of foreclosure. Unless otherwise specified in the
Prospectus Supplement, the purchase price for any Liquidating Loan
will be the Principal Balance thereof plus one month's interest
thereon at the Remittance Rate.
The Company's maximum liability to purchase Liquidating Loans will be
limited as specified in the Prospectus Supplement and, unless
otherwise specified in the Prospectus Supplement, will be reduced by
all unreimbursed payments previously made by the Company with respect
to Delinquent Mortgage Loans (as defined below) and Liquidating
Loans. In the event that at any time the Company's maximum liability
to purchase Liquidating Loans is exhausted with respect to a Trust
Fund, all further losses on the Mortgage Loans will be borne by the
holders of one or more classes of the Certificates of the related
series, unless the amount of the Company's liability is subsequently
restored as a result of recoveries in respect of Liquidating Loans or
Delinquent Mortgage Loans previously purchased by the Company.
Unless otherwise specified in the Prospectus Supplement, in
connection with its obligation to purchase Liquidating Loans, the
Company will have the option to purchase any Mortgage Loan as to
which the mortgagor has failed to make unexcused payment in full of
three or more scheduled payments of principal and interest (a
'Delinquent Mortgage Loan'). If the Company exercises this option
with respect to any Delinquent Mortgage Loan, unless otherwise
specified in the Prospectus Supplement, the Company will purchase
such Delinquent Mortgage Loan for a price equal to 100% of its
Principal Balance plus interest thereon at the applicable Remittance
Rate from the date on which interest was last paid to the first day
of the month in which such purchase price is to be distributed, net
of any unreimbursed advances of principal and interest thereon made
by the Company as servicer.
B. Limited Guarantee...................... If specified in the Prospectus Supplement, certain obligations of the
Company under the related Agreement, including obligations of the
Company to cover certain deficiencies in principal or interest
payments on the Mortgage Loans resulting from the bankruptcy of the
related borrower, may be covered by a financial guarantee policy,
limited guarantee or other similar instrument (the 'Limited
Guarantee'), limited in scope and amount, issued by an entity
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named in the Prospectus Supplement, which may be an affiliate of the
Company (the 'Guarantor'). If so specified, the Guarantor may be
obligated to take one or more of the following actions in the event
the Company fails to do so: make deposits to the Certificate Account
(a 'Deposit Guarantee'), make advances (an 'Advance Guarantee'), or
purchase Liquidating Loans (a 'Liquidating Loan Guarantee'). Any such
Limited Guarantee will be limited in amount and a portion of the
coverage of any such Limited Guarantee may be separately allocated to
certain events. For example, a portion of the aggregate amount of a
Liquidating Loan Guarantee may be separately allocated to Liquidating
Loans due to special hazards not covered by standard hazard insurance
policies, Liquidating Loans due to the bankruptcy of a mortgagor, and
other Liquidating Loans. The scope, amount and, if applicable, the
allocation of any Limited Guarantee will be described in the related
Prospectus Supplement.
C. Subordination.......................... A series of Certificates may include one or more classes that are
subordinate in the right to receive distributions on such
Certificates to one or more senior classes of Certificates of the
same series, but only to the extent described in the related
Prospectus Supplement. If so specified in the related Prospectus
Supplement, the same class of Certificates may constitute senior
Certificates with respect to certain types of payments or certain
losses and subordinated Certificates with respect to other types of
payments or losses. If so specified in the related Prospectus
Supplement, subordination may apply only in the event of certain
types of losses not covered by other forms of credit support, such as
hazard losses not covered by standard hazard insurance policies or
losses resulting from the bankruptcy of the borrower.
If specified in the Prospectus Supplement, a reserve fund may be
established and maintained by the deposit therein of distributions
allocable to the holders of subordinate Certificates until a
specified level is reached. The related Prospectus Supplement will
set forth information concerning the amount of subordination of a
class or classes of subordinate Certificates in a series, the
circumstances in which such subordination will be applicable, the
manner, if any, in which the amount of subordination will decrease
over time, the manner of funding the related reserve fund, if any,
and the conditions under which amounts in any such reserve fund will
be used to make distributions to holders of senior Certificates or
released from the related Trust Fund.
D. Cross-Support.......................... If specified in the Prospectus Supplement, the beneficial ownership
of separate groups of assets included in a Trust Fund may be
evidenced by separate classes of the related series of Certificates.
In such case, and if so specified, credit support may be provided by
a cross-support feature which requires that distributions be made
with respect to Certificates evidencing beneficial ownership of one
or more asset groups prior to distributions to subordinate
Certificates evidencing a beneficial ownership interest in other
asset groups within the same Trust Fund.
If specified in the Prospectus Supplement, the coverage provided by
one or more forms of credit support may apply concurrently to two or
more separate Trust Funds. If applicable, the Prospectus
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Supplement will identify the Trust Funds to which such credit support
relates and the manner of determining the amount of the coverage
provided thereby and of the application of such coverage to the
identified Trust Funds.
E. Pool and Special
Hazard Insurance........................ In order to decrease the likelihood that Certificateholders will
experience losses in respect of the Mortgage Loans or Contracts, if
specified in the Prospectus Supplement, the Company will obtain one
or more insurance policies to cover (i) losses by reason of defaults
by borrowers (a 'Mortgage Pool Insurance Policy') and (ii) losses by
reason of hazards not covered under the standard form of hazard
insurance, in each case up to the amounts, for the periods and
subject to the conditions specified in the Prospectus Supplement. See
'Credit Support--Pool Insurance'.
F. Reserve Accounts, Other Insurance,
Guarantees and Similar
Instruments and Agreements.............. In order to decrease the likelihood that Certificateholders will
experience delays in the receipt of scheduled payments on, and losses
in respect of, the assets in a Trust Fund, if specified in the
related Prospectus Supplement, such Trust Fund may also include
reserve accounts, other insurance, guarantees and similar instruments
and agreements entered into with the entities, in the amounts, for
the purposes and subject to the conditions specified in the
Prospectus Supplement.
Certain Federal Income
Tax Consequences........................ The federal income tax consequences to Certificateholders will depend
on, among other factors, whether an election is made to treat each
Trust Fund or specified portions thereof as a 'real estate mortgage
investment conduit' ('REMIC') under the provisions of the Internal
Revenue Code of 1986, as amended (the 'Code'). See 'Certain Federal
Income Tax Consequences'.
ERISA Considerations...................... A fiduciary of any employee benefit plan subject to the Employee
Retirement Income Security Act of 1974, as amended ('ERISA'), or a
plan subject to Section 4975 of the Code should carefully review with
its own legal advisors whether the purchase or holding of
Certificates could give rise to a transaction prohibited or otherwise
impermissible under ERISA or Section 4975 of the Code. See 'ERISA
Considerations'.
Legal Investment Matters.................. Unless otherwise specified in the Prospectus Supplement, Certificates
of each series offered by this Prospectus and the related Prospectus
Supplement will constitute 'mortgage related securities' under the
Secondary Mortgage Market Enhancement Act of 1984 ('SMMEA') and, as
such, will be legal investments for certain types of institutional
investors to the extent provided in SMMEA, subject, in any case, to
any other regulations which may govern investments by such
institutional investors. If so specified in the Prospectus
Supplement, all or certain classes of the Certificates of the related
series may not constitute 'mortgage related securities' under SMMEA.
See 'Legal Investment Matters'.
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DESCRIPTION OF THE CERTIFICATES
Each series of Certificates will be issued pursuant to a separate pooling
and servicing agreement (each, an 'Agreement') entered into between the Company,
as seller, and a commercial bank or trust company named in the Prospectus
Supplement, as trustee (the 'Trustee') for the benefit of holders of
Certificates of that series. More than one Trust Fund may underlie the
Certificates of a series, in which case specified Certificates of such series
will evidence the entire beneficial interest in one of such Trust Funds. The
provisions of each Agreement will vary depending upon the nature of the
Certificates to be issued thereunder and the nature of the related Trust Fund.
The Agreement will be substantially in one of the forms filed as an exhibit to
the Registration Statement of which this Prospectus is a part, or in such
similar form as will reflect the terms of a series of Certificates described in
the Prospectus Supplement. The following summaries describe certain provisions
which may appear in each Agreement. The Prospectus Supplement for a series of
Certificates will describe any provision of the Agreement relating to such
series that materially differs from the description thereof contained in this
Prospectus. The summaries do not purport to be complete and are subject to, and
are qualified in their entirety by reference to, all of the provisions of the
Agreement for each series of Certificates and the applicable Prospectus
Supplement. The Company will provide Certificateholders, without charge, on
written request a copy of the Agreement for any series. Requests should be
addressed to GE Capital Mortgage Services, Inc., Three Executive Campus, Cherry
Hill, New Jersey 08002, Attention: General Counsel. The Agreement relating to a
series of Certificates will be filed with the Securities and Exchange Commission
within 15 days after the date of issuance of such series of Certificates (the
'Delivery Date').
The Certificates of a series will be entitled to payment only from the
proceeds from the assets included in the Trust Fund related to such series and
will not be entitled to payments in respect of the assets included in any other
trust fund established by the Company. The Certificates will not represent
obligations of General Electric Company, General Electric Capital Corporation,
GE Capital Mortgage Corporation, General Electric Mortgage Insurance
Corporation, the Company or any affiliate of the Company and will not be
guaranteed by any governmental agency or any other person. Unless otherwise
specified in the Prospectus Supplement, the Company's only obligations with
respect to the Certificates will consist of its contractual servicing and/or
master servicing obligations, including any obligation to make advances under
certain limited circumstances specified herein of delinquent installments of
principal and interest (adjusted to the applicable Remittance Rate), its
obligations pursuant to certain representations and warranties made by it and
its obligations to cover certain deficiencies in principal and interest payments
on the Mortgage Loans resulting from the bankruptcy of the related borrower. See
'The Trust Fund' herein.
The Mortgage Loans will not be, and the Contracts may not be, insured or
guaranteed by any governmental entity or, except as specified in the Prospectus
Supplement, by any other person. To the extent that delinquent payments on or
losses in respect of defaulted Mortgage Loans or Contracts are not advanced by
the Company or any other entity or paid from any applicable credit support
arrangement, such delinquencies may result in delays in the distribution of
payments to the holders of one or more classes of Certificates, and such losses
will be borne by the holders of one or more classes of Certificates.
GENERAL
Unless otherwise specified in the Prospectus Supplement, the Certificates
of each series will be issued in fully-registered form only. The minimum
original Certificate Principal Balance or Notional Principal Balance that may be
represented by a Certificate (the 'denomination') will be specified in the
Prospectus Supplement. The original Certificate Principal Balance of each
Certificate will equal the aggregate distributions allocable to principal to
which such Certificate is entitled. Unless otherwise specified in the Prospectus
Supplement, distributions allocable to interest on each Certificate that is not
entitled to distributions allocable to principal will be calculated based on the
Notional Principal Balance of such Certificate. The Notional Principal Balance
of a Certificate will not evidence an interest in or entitlement to
distributions allocable to principal but will be used solely for convenience in
expressing the calculation of interest and for certain other purposes.
The Certificates will be transferable and exchangeable on a Certificate
Register to be maintained at the corporate trust office of the Trustee or such
other office or agency maintained for such purposes by the Trustee in New York
City. Unless otherwise specified in the Prospectus Supplement, under each
Agreement, the Trustee
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will initially be appointed as the Certificate Registrar. Unless otherwise
specified in the Prospectus Supplement, no service charge will be made for any
registration of transfer or exchange of Certificates, but payment of a sum
sufficient to cover any tax or other governmental charge may be required.
CLASSES OF CERTIFICATES
Each series of Certificates will be issued in a single class or in two or
more classes. The Certificates of each class will evidence the beneficial
ownership of (i) any distributions in respect of the assets of the Trust Fund
that are allocable to principal, in the aggregate amount of the original
Certificate Principal Balance, if any, of such class of Certificates as
specified in the Prospectus Supplement and (ii) any distributions in respect of
the assets of the Trust Fund that are allocable to interest on the Certificate
Principal Balance or Notional Principal Balance of such Certificates from time
to time at the Certificate Interest Rate, if any, applicable to such class of
Certificates as specified in the Prospectus Supplement. If specified in the
Prospectus Supplement, one or more classes of a series of Certificates may
evidence beneficial ownership interests in separate groups of assets included in
the related Trust Fund.
If specified in the Prospectus Supplement, the Certificates will have an
aggregate original Certificate Principal Balance equal to the aggregate unpaid
principal balance of the Mortgage Loans, Agency Securities or Contracts as of
the close of business on the first day of the month of creation of the Trust
Fund (the 'Cut-off Date') after deducting payments of principal due on or
before, and prepayments of principal received before, the Cut-off Date and will
bear interest in the aggregate equal to the weighted average of the Remittance
Rates. The Remittance Rate will equal the rate of interest payable on each
Mortgage Loan or Contract minus the Company's servicing fee as described herein,
the servicing fee of any third party servicer of the Mortgage Loans or Contracts
and such other amounts (including fees payable to the Company as master
servicer, if applicable) as are specified in the Prospectus Supplement. If
specified in the Prospectus Supplement, the original Certificate Principal
Balance of the Certificates and the interest rate on the classes of Certificates
will be determined based on the cash flow on the Mortgage Loans, Agency
Securities or Contracts, as the case may be. The Certificates may have an
original Certificate Principal Balance as determined in the manner specified in
the Prospectus Supplement.
Each class of Certificates that is entitled to distributions allocable to
interest will bear interest at a fixed rate or a rate that is subject to change
from time to time (a) in accordance with a schedule, (b) in reference to an
index, or (c) otherwise (each, a 'Certificate Interest Rate'), in each case as
specified in the Prospectus Supplement. One or more classes of Certificates may
provide for interest that accrues, but is not currently payable ('Accrual
Certificates'). With respect to any class of Accrual Certificates, if specified
in the Prospectus Supplement, any interest that has accrued but is not paid on a
given Distribution Date (as defined below under 'Distributions of Principal and
Interest') will be added to the aggregate Certificate Principal Balance of such
class of Certificates on that Distribution Date.
A series of Certificates may include one or more classes entitled only to
distributions (i) allocable to interest, (ii) allocable to principal (and
allocable as between scheduled payments of principal and Principal Prepayments,
as defined below) or (iii) allocable to both principal (and allocable as between
scheduled payments of principal and Principal Prepayments) and interest. A
series of Certificates may consist of one or more classes as to which
distributions will be allocated (i) on the basis of collections from designated
portions of the assets of the Trust Fund, (ii) in accordance with a schedule or
formula, (iii) in relation to the occurrence of events, or (iv) otherwise, in
each case as specified in the Prospectus Supplement. The timing and amounts of
such distributions may vary among classes, over time or otherwise, in each case
as specified in the Prospectus Supplement.
The taking of action with respect to certain matters under the Agreement,
including certain amendments thereto, will require the consent of the holders of
the Certificates. The voting rights allocated to each class of Certificates will
be specified in the Prospectus Supplement. Votes may be allocated in different
proportions among classes of Certificates depending on whether the Certificates
of a class have a Notional Principal Balance or a Certificate Principal Balance.
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DISTRIBUTIONS OF PRINCIPAL AND INTEREST
General. Distributions of principal and interest at the applicable
Certificate Interest Rate (if any) on the Certificates will be made by the
Trustee to the extent of funds available on the dates specified in the
Prospectus Supplement (each, a 'Distribution Date') and may be made monthly,
quarterly, semiannually or at such other intervals as are specified in the
Prospectus Supplement. Distributions will be made to the persons in whose names
the Certificates are registered at the close of business on the dates specified
in the Prospectus Supplement (each, a 'Record Date'). Distributions will be made
by check or money order mailed to the person entitled thereto at the address
appearing in the Certificate Register or, if specified in the Prospectus
Supplement, in the case of Certificates that are of a certain minimum
denomination as specified in the Prospectus Supplement, upon written request by
the Certificateholder, by wire transfer or by such other means as are agreed
upon with the person entitled thereto; provided, however, that the final
distribution in retirement of the Certificates will be made only upon
presentation and surrender of the Certificates at the office or agency of the
Trustee specified in the notice to Certificateholders of such final
distribution.
Distributions allocable to principal and interest on the Certificates will
be made by the Trustee out of, and only to the extent of, funds in a separate
account established and maintained under the Agreement for the benefit of
holders of the Certificates of the related series (the 'Certificate Account'),
including any funds transferred from any Reserve Account. As between
Certificates of different classes and as between distributions of principal
(and, if applicable, between distributions of Principal Prepayments and
scheduled payments of principal) and interest, distributions made on any
Distribution Date will be applied as specified in the Prospectus Supplement.
Unless otherwise specified in the Prospectus Supplement, distributions to any
class of Certificates will be made pro rata to all Certificateholders of that
class. If so specified in the Prospectus Supplement, the amounts received by the
Trustee as described below under 'The Trust Fund' will be invested in the
eligible investments specified herein and in the Prospectus Supplement and all
income or other gain from such investments will be deposited in the Certificate
Account and will be available to make payments on the Certificates on the next
succeeding Distribution Date in the manner specified in the Prospectus
Supplement.
Distributions of Interest. Unless otherwise specified in the Prospectus
Supplement, interest will accrue on the aggregate Certificate Principal Balance
(or, in the case of Certificates entitled only to distributions allocable to
interest, the aggregate Notional Principal Balance) of each class of
Certificates entitled to interest from the date, at the Certificate Interest
Rate and for the periods (each, an 'Interest Accrual Period') specified in the
Prospectus Supplement. To the extent funds are available therefor, interest
accrued during each Interest Accrual Period on each class of Certificates
entitled to interest (other than a class of Accrual Certificates) will be
distributable on the Distribution Dates specified in the Prospectus Supplement
until the aggregate Certificate Principal Balance of the Certificates of such
class has been distributed in full or, in the case of Certificates entitled only
to distributions allocable to interest, until the aggregate Notional Principal
Balance of such Certificates is reduced to zero or for the period of time
designated in the Prospectus Supplement. Unless otherwise specified in the
Prospectus Supplement, distributions of interest on each class of Accrual
Certificates will commence only after the occurrence of the events specified in
the Prospectus Supplement. Unless otherwise specified in the Prospectus
Supplement, prior to such time, the beneficial ownership interest of such class
of Accrual Certificates in the Trust Fund, as reflected in the aggregate
Certificate Principal Balance of such class of Accrual Certificates, will
increase on each Distribution Date by the amount of interest that accrued on
such class of Accrual Certificates during the preceding Interest Accrual Period
but that was not required to be distributed to such class on such Distribution
Date. Any such class of Accrual Certificates will thereafter accrue interest on
its outstanding Certificate Principal Balance as so adjusted.
Distributions of Principal. Unless otherwise specified in the Prospectus
Supplement, the aggregate Certificate Principal Balance of any class of
Certificates entitled to distributions of principal will be the aggregate
original Certificate Principal Balance of such class of Certificates specified
in the Prospectus Supplement, reduced by all distributions reported to the
holders of such Certificates as allocable to principal, and, in the case of
Accrual Certificates, unless otherwise specified in the Prospectus Supplement,
increased by all interest accrued but not then distributable on such Accrual
Certificates. The Prospectus Supplement will specify the method by which the
amount of principal to be distributed on the Certificates on each Distribution
Date will be calculated and the manner in which such amount will be allocated
among the classes of Certificates entitled to distributions of principal.
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If so provided in the Prospectus Supplement, one or more classes of senior
Certificates will be entitled to receive all or a disproportionate percentage of
the payments or other recoveries of principal on a Mortgage Loan which are
received in advance of their scheduled due dates and not accompanied by amounts
of interest representing scheduled interest due after the month of such payments
('Principal Prepayments') in the percentages and under the circumstances or for
the periods specified in the Prospectus Supplement. Any such allocation of
Principal Prepayments to such class or classes of Certificateholders will have
the effect of accelerating the amortization of such senior Certificates while
increasing the interests evidenced by the subordinated Certificates in the Trust
Fund. Increasing the interests of the subordinated Certificates relative to that
of the senior Certificates is intended to preserve the availability of the
subordination provided by the subordinated Certificates. See 'Credit
Support--Subordination'.
Unscheduled Distributions. If specified in the Prospectus Supplement, the
Certificates will be subject to receipt of distributions before the next
scheduled Distribution Date under the circumstances and in the manner described
below and in the Prospectus Supplement. If applicable, the Trustee will be
required to make such unscheduled distributions on the day and in the amount
specified in the Prospectus Supplement if, due to substantial payments of
principal (including Principal Prepayments) on the Mortgage Loans, Agency
Securities or Contracts, low rates then available for reinvestment of such
payments or both, the Trustee determines, based on the assumptions specified in
the Agreement, that the amount anticipated to be on deposit in the Certificate
Account on the next Distribution Date, together with, if applicable, any amounts
available to be withdrawn from any Reserve Account, may be insufficient to make
required distributions on the Certificates on such Distribution Date. Unless
otherwise specified in the Prospectus Supplement, the amount of any such
unscheduled distribution that is allocable to principal will not exceed the
amount that would otherwise have been required to be distributed as principal on
the Certificates on the next Distribution Date. Unless otherwise specified in
the Prospectus Supplement, all unscheduled distributions will include interest
at the applicable Certificate Interest Rate (if any) on the amount of the
unscheduled distribution allocable to principal for the period and to the date
specified in the Prospectus Supplement.
Unless otherwise specified in the Prospectus Supplement, all distributions
allocable to principal in any unscheduled distribution will be made in the same
priority and manner as distributions of principal on the Certificates would have
been made on the next Distribution Date, and with respect to Certificates of the
same class, unscheduled distributions of principal will be made on a pro rata
basis. Notice of any unscheduled distribution will be given by the Trustee prior
to the date of such distribution.
EXAMPLE OF DISTRIBUTIONS
The following chart sets forth an example of hypothetical distributions on
a series of the Certificates for the Distribution Date occurring in March 1998,
assuming such Certificates are issued during January 1998. All references to the
Trust Fund, Certificateholders, Mortgage Loans, Loan Payment Record and
Certificate Account refer to those related to such series of Certificates. The
following discussion of the allocation of Mortgage Loan payments as between
principal and interest would not necessarily apply to simple-interest Home
Equity Loans or Mortgage Loans that do not provide for payments of principal and
interest in arrears on a monthly basis, and if a series of Certificates is
backed by a material amount of such Mortgage Loans, the Prospectus Supplement
will describe the allocation of such payments and the manner in which
distributions thereof will be made to Certificateholders.
<TABLE>
<S> <C>
January 1............... Cut-off Date. The aggregate unpaid principal balance of the Mortgage Loans after
deducting principal payments due and payable on or before January 1 and Principal
Prepayments received before January 1 will be included in the Trust Fund. These deducted
principal payments and Principal Prepayments will be retained by the Company and will
not be included in the Trust Fund or passed through to Certificateholders.
February 1-28........... Voluntary principal prepayments in full (and interest thereon to the date of prepayment)
received from February 16 through February 28 will be passed through to the related
Certificateholders on March 25, 1998. (Voluntary principal prepayments in full received
by the Company (or, in the case of Mortgage Loans master-serviced by
</TABLE>
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<TABLE>
<S> <C>
the Company, of which the Company receives notice) from February 1 through February 15
will be passed through to the Certificateholders (net of any interest thereon) in the
month of their receipt.) Other unscheduled prepayments received at any time during the
month will be passed through to the related Certificateholders on March 25.
February 28............. Record Date. Distributions on March 25 will be made to Certificateholders of record at
the close of business on the last business day of the month immediately preceding the
month of distribution.
March 1-17.............. Through March 15, the Company receives (or, in the case of Mortgage Loans master-
serviced by the Company, receives notice of) any voluntary principal prepayments in full
and interest thereon to the date of prepayment. Such principal prepayments (net of any
interest) will be credited to the Loan Payment Record and deposited into the Certificate
Account for distribution to the related Certificateholders on March 25. Through March
17, the Company receives interest on February 1 principal balances plus principal due
March 1. Payments due on March 1 from Mortgagors will be credited to the Loan Payment
Record as received. Such payments will include the scheduled principal payments
received, plus one month's interest on the February 1 principal balances, less interest
to the extent described above on the prepaid amount of any Mortgage Loan prepaid during
February. Payments received from Mortgagors after March 15 will be subject to a late
charge in accordance with the terms of the related mortgage instruments (with such late
charges being retained by the Company).
March 18................ Determination Date. On the fifth business day preceding the Distribution Date, the
Company determines the aggregate amount of distributions to be made on the Certificates
on the following Distribution Date.
March 23................ The Company furnishes notice of the distribution amount to the Trustee on the second
business day preceding the Distribution Date.
March 24................ Deposit Date. On the business day preceding the Distribution Date, the Company
transfers amounts to be distributed to Certificateholders in the Certificate Account.
March 25................ Distribution Date. On March 25, the Trustee will distribute to Certificateholders the
aggregate amounts set forth in the notice it received from the Company on March 23. If a
payment due March 1 is received from a Mortgagor on or after the Determination Date and
the Company, as servicer, has advanced funds in the amount of such payment to the
Certificateholders, such late payment will be paid to the Company. If no such advance
has been made, such late payment will be passed through to such Certificateholders at
the time of the next distribution.
</TABLE>
OPTIONAL TERMINATION OF THE TRUST FUND
If so specified in the Prospectus Supplement, either the Company or the
holders of one or more classes of Certificates specified in the Prospectus
Supplement may, at its or their option, effect early termination of the Trust
Fund, on any Distribution Date after the time specified in the Prospectus
Supplement, by purchasing all of the Certificates or the assets in the Trust
Fund at a price and in accordance with the procedures specified in the
Prospectus Supplement. The proceeds of such sale will be applied on such
Distribution Date to the distribution in full of the Certificate Principal
Balance of each outstanding Certificate entitled to distributions allocable to
principal and to accrued interest at the applicable Certificate Interest Rate to
the date specified in the Prospectus Supplement on each Certificate entitled to
distributions allocable to interest, or to such other amount as is specified in
the Prospectus Supplement. Notice of such optional termination will be given by
the Trustee prior to such Distribution Date.
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THE TRUST FUND
Each Trust Fund related to a series of Certificates may consist of (i) the
Mortgage Loans, Agency Securities or Contracts, as the case may be, subject to
the Agreement from time to time (subject, if specified in the Prospectus
Supplement, to certain exclusions); (ii) all payments (subject, if specified in
the Prospectus Supplement, to certain exclusions) in respect of such assets
adjusted in the case of interest payments on Mortgage Loans or Contracts, to the
applicable Remittance Rates; (iii) if specified in the Prospectus Supplement,
reinvestment income on such payments; (iv) all property acquired by foreclosure
or deed in lieu of foreclosure with respect to any Mortgage Loan or by
repossession with respect to any Contract; (v) all rights of the Company under
any private mortgage insurance policies and any other insurance policies
required to be maintained in respect of the Mortgage Loans or Contracts; and
(vi) if so specified in the Prospectus Supplement, one or more of the following:
(1) any Reserve Accounts; (2) any Liquidating Loan, Advance or Deposit
Guarantees (as defined herein); and (3) any pool insurance, special hazard
insurance or other insurance, guarantee or similar instruments or agreements.
The Certificates will be entitled to payment only from the assets of the
related Trust Fund and will not be entitled to payments in respect of the assets
of any other trust fund established by the Company, including, in the case of a
series comprised of more than one Trust Fund, the Trust Fund underlying other
specified Certificates of such series. The primary assets of any trust fund will
consist of Mortgage Loans, Agency Securities or Contracts but not a combination
thereof.
Mortgage Loans, Agency Securities and Contracts will be originated or
acquired by the Company. The following is a brief description of the Mortgage
Loans, Agency Securities and Contracts expected to be included in the Trust
Funds. If specific information respecting the Mortgage Loans, Agency Securities
and Contracts is not known at the time the related series of Certificates
initially are offered, more general information of the nature described below
will be provided in the Prospectus Supplement, and specific information will be
set forth in a report on Form 8-K to be filed with the Securities and Exchange
Commission within fifteen days after the initial issuance of such Certificates
(the 'Detailed Description'). A copy of the Agreement with respect to each
series of Certificates will be attached to the Form 8-K and will be available
for inspection at the corporate trust office of the Trustee specified in the
related Prospectus Supplement. A schedule of the Agency Securities, Mortgage
Loans or Contracts, as appropriate, relating to such series, will be attached to
the Agreement delivered to the Trustee upon delivery of the Certificates.
THE MORTGAGE LOANS
Description of the Mortgage Loans. The Mortgage Loans will be evidenced by
promissory notes (the 'Mortgage Notes') secured by mortgages or deeds of trust
(the 'Mortgages') creating first liens, or, in the case of Home Equity Loans (as
defined below), first or second liens, on residential properties (the 'Mortgaged
Properties') or first liens on long-term leases of such properties. Such
Mortgage Loans will be within the broad classification of one- to four-family
mortgage loans, defined generally as loans secured by mortgages on residences
containing one to four dwelling units, loans secured by mortgages on condominium
units and loans secured by mortgages on leasehold estates. The Mortgage Loans
may include cooperative apartment loans ('Cooperative Loans') secured by
security interests in shares issued by private, non-profit, cooperative housing
corporations ('Cooperatives') and in the related proprietary leases or occupancy
agreements granting exclusive rights to occupy specific dwelling units in such
Cooperatives' buildings. The Mortgage Loans will be 'conventional' mortgage
loans; i.e., they will not be insured or guaranteed by any governmental agency.
The Mortgaged Properties securing the Mortgage Loans will be located in one or
more states in the United States, the District of Columbia, Puerto Rico, Guam,
the U.S. Virgin Islands and other territories of the United States and may
include investment properties and vacation and second homes. Each Mortgage Loan
will be selected by the Company for inclusion in a Trust Fund from among those
originated or acquired by the Company in the ordinary course of the Company's
mortgage lending activities, including newly originated loans.
Unless otherwise specified in the Prospectus Supplement, the Mortgage Loans
(other than Home Equity Loans) will have initial principal balances of not less
than the minimum amount permitted under the laws of the state where the related
Mortgaged Property is located and not more than $1,000,000 and will have
original maturities of 10 to 30 years. Unless otherwise specified in the
Prospectus Supplement, principal and interest on
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the Mortgage Loans (other than Home Equity Loans that employ the simple interest
method) will be payable on the first day of each month, and interest will be
calculated based on a 360-day year of twelve 30-day months. When a full payment
of principal is made on a Mortgage Loan during a month, the mortgagor is charged
interest only on the days of the month actually elapsed up to the date of such
prepayment, at a daily interest rate that is applied to the principal amount of
the loan so prepaid. When a partial prepayment of principal is made on a
Mortgage Loan (other than a Home Equity Loan) during a month, the mortgagor
generally will not be charged interest on the amount of the partial prepayment
during the month in which such prepayment is made.
If specified in the Prospectus Supplement, all or a portion of the Mortgage
Loans included in a Trust Fund may be closed-end home equity loans secured by
first or second liens on Mortgaged Properties ('Home Equity Loans'). The Home
Equity Loan portion of any Trust Fund may consist of loans secured by first
liens or by first and second liens. Unless otherwise specified in the Prospectus
Supplement, Home Equity Loans will have initial principal balances within the
ranges permitted under the laws of the state where the related Mortgaged
Property is located and will have original maturities of 5 to 30 years. Interest
on Home Equity Loans will be calculated on the basis of either a 360-day year or
365-day year, depending on applicable state law. As specified in the Prospectus
Supplement, interest on Home Equity Loans will accrue on a simple interest basis
or on a fully-amortizing basis. Under the simple interest method, regularly
scheduled payments (which are based on the amortization of the loan over a
series of equal monthly payments) and other payments are applied first to
interest accrued to the date payment is received, then to principal. See 'Yield,
Maturity and Weighted Average Life Considerations.'
The Company also originates and acquires 'balloon loans.' If specified in
the Prospectus Supplement, the Home Equity Loans may include balloon loans. Such
loans may be originated with a stated maturity of 15 years but may on occasion
be originated with a shorter stated maturity. Notwithstanding the 15-year
maturity, level monthly payments on such a balloon loan would typically be
calculated on an amortization schedule based on a 30-year maturity. As a result,
upon the maturity of a balloon loan, the borrower will be required to make a
'balloon' payment, which will be significantly larger than such borrower's
previous monthly payments. The ability of such borrower to repay the balloon
loan at maturity frequently will depend on such borrower's ability to refinance
the loan.
The Mortgage Loans may be purchase-money loans used by the borrowers to
acquire the related Mortgaged Properties or may be loans used by the borrowers
to refinance existing mortgage loans. A refinancing may be a 'cash-out' loan,
the Principal Balance of which exceeds the sum of the amount needed to repay the
loan being refinanced plus closing costs and 'points' associated with the new
mortgage loan, or may be a 'non-cash-out' or 'rate-and-term' refinancing in
which the borrower refinances the loan solely to change the interest rate or
term of the mortgage loan.
The payment terms of the Mortgage Loans to be included in a Trust Fund will
be described in the related Prospectus Supplement and may include any of the
following features or combinations thereof or other features described in the
related Prospectus Supplement:
(a) Interest may be payable at a fixed rate, a rate adjustable from
time to time in relation to an index, a rate that is fixed for a period of
time or under certain circumstances and is followed by an adjustable rate,
a rate that otherwise varies from time to time, or a rate that is
convertible from an adjustable rate to a fixed rate. Changes to an
adjustable rate may be subject to periodic limitations, maximum rates,
minimum rates or a combination of such limitations. Accrued interest may be
deferred and added to the principal of a loan for such periods and under
such circumstances as may be specified in the related Prospectus
Supplement. Mortgage Loans may provide for the payment of interest at a
rate lower than the specified mortgage rate for a period of time or for the
life of the loan with the amount of any difference contributed from funds
supplied by the seller of the mortgaged property or another source.
(b) Principal may be payable on a level debt service basis to fully
amortize the loan over its term, may be calculated on the basis of an
amortization schedule that is significantly longer than the original term
to maturity or on an interest rate that is different from the interest rate
on the Mortgage Loan or may not be amortized during all or a portion of the
original term. Payment of all or a substantial portion of the principal may
be due on maturity. Principal may include interest that has been deferred
and added to the principal
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<PAGE>
balance of the Mortgage Loan. In the case of Home Equity Loans, payments
are applied first to interest accrued to the date payment is received, then
to principal.
(c) Monthly payments of principal and interest may be fixed for the
life of the loan, may increase over a specified period of time or may
change from period to period. Mortgage Loans may include limits on periodic
increases or decreases in the amount of monthly payments and may include
maximum or minimum amounts of monthly payments.
(d) Prepayments of principal may be subject to a prepayment fee, which
may be fixed for the life of the loan or may decline over time, and may be
prohibited for the life of the loan or for certain periods ('lockout
periods'). Certain loans may permit prepayments after expiration of the
applicable lockout period and may require the payment of a prepayment fee
in connection with any such subsequent prepayment. Other loans may permit
prepayments without payment of a fee unless the prepayment occurs during
specified time periods. The loans may include 'due-on-sale' clauses which
permit the mortgagee to demand payment of the entire mortgage loan in
connection with the sale or certain transfers of the related mortgaged
property. Other Mortgage Loans may be assumable by persons meeting the then
applicable underwriting standards of the Company.
It is anticipated that the Mortgage Loans will consist primarily of
Mortgage Loans secured by Mortgaged Properties determined by the Company to be
the primary residences of the borrowers. The basis for such determination will
be the making of a representation by the borrower that he or she intends to use
the underlying property as his or her primary residence.
The Prospectus Supplement will contain information regarding the interest
rates (the 'Mortgage Rates'), the average Principal Balance and the aggregate
Principal Balance of the Mortgage Loans as of the related Cut-off Date, the
years of origination and original principal balances and the original
loan-to-value ratios of the Mortgage Loans. The 'Principal Balance' of any
Mortgage Loan (other than a Home Equity Loan) will be the unpaid principal
balance of such Mortgage Loan as of the Cut-off Date, after deducting any
principal payments due on or before the Cut-off Date, reduced by all principal
payments, including principal payments advanced pursuant to the Agreement,
previously distributed to Certificateholders with respect to such Mortgage Loan
and reported to them as allocable to principal. The 'Principal Balance' of any
Home Equity Loan as of the Cut-off Date will be the unpaid principal balance
thereof as of such date. The Prospectus Supplement will also contain information
regarding the geographic distribution and nature of the Mortgaged Properties
securing the Mortgage Loans.
Unless otherwise specified in the Prospectus Supplement, the loan-to-value
ratio of any Mortgage Loan will be determined by dividing the amount of such
loan (without taking into account any secondary financing) by the 'Original
Value' of the related Mortgaged Property. The principal amount of the 'loan,'
for purposes of computation of the loan-to-value ratio of any Mortgage Loan,
will include any part of an origination fee that has been financed. The
'Original Value' of a Mortgaged Property is (a) in the case of a purchase money
Mortgage Loan, the lesser of (i) the value of the Mortgaged Property, based on
an appraisal thereof acceptable to the Company, and (ii) the selling price, and
(b) in the case of any non-purchase money Mortgage Loan, the value of the
Mortgaged Property, based on either (i) the appraised value determined in an
appraisal obtained at the time of refinancing or origination of such loan or
(ii) if no such appraisal has been obtained, the value of the related Mortgaged
Property which value generally will be supported by either (1) a representation
by the related correspondent as to such value, (2) a broker's price opinion,
automated appraisal, drive-by appraisal or other certification of value, (3) an
appraisal obtained within twelve months prior to such refinancing or origination
or (4) the sales price, if the Mortgaged Property was purchased within the
previous twelve months.
There can be no assurance that the Original Value will reflect actual real
estate values during the term of a Mortgage Loan. If the residential real estate
market should experience an overall decline in property values such that the
outstanding principal balances of the Mortgage Loans become equal to or greater
than the values of the Mortgaged Properties, the actual rates of delinquencies,
foreclosures and losses could be significantly higher than those now generally
experienced in the mortgage lending industry. In addition, adverse economic
conditions (which may or may not affect real estate values) may affect the
timely and ultimate payment by mortgagors of scheduled payments of principal and
interest on the Mortgage Loans and, accordingly, the actual rates of
delinquencies, foreclosures and losses with respect to the Mortgage Loans.
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In the case of seasoned Mortgage Loans acquired by the Company, the values
used in calculating loan-to-value ratios may no longer be accurate valuations of
the Mortgaged Properties. Under the Company's underwriting standards, a
correspondent or other third-party seller is generally permitted to provide
secondary financing (or subordinate existing secondary financing) to, or obtain
such secondary financing for, a mortgagor contemporaneously with the origination
of a Mortgage Loan, provided that the combined loan-to-value ratio does not
exceed the Company's underwriting guidelines for the specific loan program.
Secondary financing is readily available and may be obtained by a Mortgagor from
a variety of lenders, including the related correspondent or other third-party
seller, at any time (including at origination of the Mortgage Loan).
Loan Production Sources. The Company acquires the mortgage loans that may
underlie a series of Certificates by purchasing mortgage loans originated or
otherwise acquired by its approved correspondents or other approved third
parties, by closing mortgage loans originated through loan brokers eligible to
refer applications to the Company, by refinancing mortgage loans in its own
servicing portfolio and by originating loans with borrowers who currently have
mortgage loans serviced by the Company. The Company may purchase loans from
correspondents or other third parties either for contemporaneous delivery or for
delivery in one or more pools on a 'forward-delivery' basis at some future date.
The Company's mortgage loan correspondents and loan brokers are certain
lending institutions that satisfy the Company's financial and operational
criteria, demonstrate experience in originating mortgage loans and follow the
Company's loan underwriting standards or other loan underwriting standards
approved by the Company. Except as described below, the Company generally
reviews each mortgage loan for compliance with its underwriting standards before
accepting delivery from its correspondents. Under the Company's 'delegated
underwriting' program, however, the Company delegates all underwriting functions
to certain approved correspondents. In such cases, the Company will not perform
any underwriting functions prior to its acquisition of the loans, instead
relying on the representations and warranties of its correspondents and on
post-purchase reviews of the material loan documents and samplings of the loans
for compliance with applicable underwriting standards. Mortgage loans originated
by a correspondent may be closed in the name of such correspondent and acquired
by the Company or, to a lesser extent, closed in the name of the Company.
Mortgage loans originated by the Company through loan brokers are generally
underwritten by the Company, processed by the broker on behalf of the Company as
well as by the Company, and closed in the Company's name.
The Company purchases portfolios of loans from other third-party sellers in
negotiated transactions. Before making such purchases, the Company generally
determines that such sellers satisfy the Company's financial and operational
criteria, have demonstrated experience in originating or acquiring single-family
mortgage loans and have followed loan underwriting standards acceptable to the
Company.
Loans acquired from the Company's correspondents and brokers will generally
have been recently originated. Loans acquired in bulk whole loan sales from
correspondents and from other third parties in negotiated transactions are more
likely to include loans that have been outstanding for a period of time. The
Prospectus Supplement will provide information with respect to the origination
dates and the remaining terms to maturity of the Mortgage Loans included in the
related Trust Fund.
Loan Underwriting Policies. The Mortgage Loans underlying a series of
Certificates will generally have been originated in accordance with the
underwriting standards described below. In the case of mortgage loans sold to
the Company by certain approved correspondents who have exhibited strong
financial performance and have delinquency and foreclosure rates with respect to
their conventional loan portfolios acceptable to the Company, the Company may
vary some of the generally acceptable underwriting standards and program
criteria described herein, such as required documentation levels, loan-to-value
ratios and the mortgagors' debt and income ratios. If a material portion of the
Mortgage Loans included in any Trust Fund has been originated or acquired by the
Company under materially different standards from those described herein, the
related Prospectus Supplement will describe such standards.
The underwriting standards applied by the Company in acquiring or
originating mortgage loans are intended to evaluate the prospective borrower's
credit standing and ability to repay the loan and the value and adequacy of the
underlying mortgaged property as collateral for the loan. In applying these
standards, the Company must be satisfied that the value of the property being
financed supports, and will continue to support, the outstanding loan balance.
The Company may require that mortgage loans that are not eligible for purchase
by FHLMC or FNMA
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be underwritten by a nationally-recognized third-party underwriter approved by
the Company. In such cases (as well as in cases of loans originated under the
Company's delegated underwriting program, as described above in '--Loan
Production Sources' and in the case of loans sold by certain third-party
sellers), the determination of a mortgage loan's compliance with the
underwriting standards described herein will be made by the related underwriter.
In acquiring or originating residential mortgage loans, the Company follows
procedures established to comply with applicable federal and state laws and
regulations. In applying for a loan, a prospective borrower is generally
required to supply detailed information for a loan application designed to
provide pertinent credit information about the prospective mortgagor, the
property to be purchased or that will serve as the security for the loan, and
the type of loan desired. The application generally includes a description of
the prospective borrower's assets and liabilities and income and expenses. The
Company also usually requires a credit report that summarizes the prospective
mortgagor's credit with merchants and lenders and, in the case of second-lien
Home Equity Loans, a written or telephonic verification of the first mortgage
balance and payment history. The Company may, as part of its overall evaluation
of the prospective borrower's creditworthiness, use a credit scoring model
and/or mortgage scoring model to evaluate in a statistical manner the expected
performance of a mortgage loan based on the pertinent credit information
concerning the prospective mortgagor supplied through national credit bureaus,
certain other information provided by the prospective borrower and an assessment
of specific mortgage loan characteristics, including loan-to-value ratio, type
of loan product and geographic location. The Company expects to place greater
reliance on a prospective mortgagor's credit and/or mortgage scores in the
underwriting process.
The extensiveness of the documentation that the Company requires in
connection with the verification of a prospective borrower's employment status,
income, assets and adequacy of funds to close varies from full documentation to
limited documentation, as further described below. The Company may raise or
lower its documentation requirements depending upon such factors as the net
worth and financial performance of the correspondent or other third party
selling the mortgage loans and the performance of such correspondent's mortgage
loan portfolio. In addition, the Company will take into account the performance
of those mortgage loans previously sold to it by such correspondent or third
party seller, as well as factors particular to a mortgage loan such as the
credit history of the individual borrower, the loan-to-value ratio of the loan
and the prospective mortgagor's credit and/or mortgage scores.
Under a typical full or alternative documentation loan approval process,
verification of the prospective borrower's employment status and current salary
is obtained from records prepared by the employer or by other means satisfactory
to the Company. Each prospective borrower who is self-employed is generally
required to submit a copy of his or her federal income tax returns. In the case
of purchase money mortgage loans, the Company also generally requires
verification that the borrower has adequate funds to close the mortgage loan. A
prospective borrower may be eligible for a loan approval process permitting
limited documentation if the amount of the Mortgage Loan, together with, in the
case of a second-lien Home Equity Loan, the unpaid principal balance of the
senior mortgage loan, would not exceed a certain percentage of the Original
Value of the related Mortgaged Property and certain other requirements are
satisfied. The limited documentation process differs from the full or
alternative documentation process primarily in that it does not require a
verification of the borrower's employment, income and/or assets or, in certain
circumstances, verification of funds to close, and generally places greater
reliance on a prospective mortgagor's credit and/or mortgage scores. Certain of
the Company's Programs that utilize the limited documentation loan approval
process are described below. A loan application and credit report and, when
applicable, a mortgage or rental reference are usually obtained. A current
appraisal is also generally obtained, except as described below.
Certain of the Mortgage Loans (other than Home Equity Loans) may have been
originated or acquired under the Company's Relocation Loan program. Under the
Relocation Loan program, the related borrower must be a relocating employee, the
Relocation Loan must be secured by the related borrower's primary residence and
the employer generally must have paid all or a substantial portion of the
relocating employee's closing costs. A relocating employee may be either an
employee transferring from one location to another, a new hire or a participant
in a group relocation. Loan documentation for a Relocation Loan will generally
be similar to that required for other mortgage loans originated or acquired by
the Company, except with respect to the treatment of the income of the spouse of
the relocating employee. If the spouse confirms an intention to seek employment
at
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the new location, under certain circumstances, a portion of such spouse's income
at the old location may be counted for qualifying for a Relocation Loan.
Generally, for all Relocation Loans, the spouse's income at the old location
must also be verified.
Certain of the Mortgage Loans (other than Home Equity Loans) may have been
originated or acquired under the Company's No Income Verification program,
pursuant to which the Company generally will not verify any self-employment or
other income of the borrower. Unless otherwise specified in the Prospectus
Supplement, in order to qualify for the No Income Verification program, the
related borrower generally must have (i) no delinquent mortgage or rental
payments during the preceding 24 months, (ii) a minimum of two months'
principal, interest, tax and insurance payments in reserves after the closing of
the related loan and (iii) acceptable credit scores.
Certain of the Mortgage Loans (other than Home Equity Loans) may have been
originated or acquired under the Company's No Ratio program, pursuant to which
the Company will verify the assets of the borrower but will not require the
borrower to either complete the income section on the loan application or
satisfy any qualifying housing to income or debt to income ratios. Unless
otherwise specified in the Prospectus Supplement, in order to qualify for the No
Ratio program, the related borrower generally must have (i) no delinquent
mortgage or rental payments during the preceding 24 months, (ii) a minimum of
six months' principal, interest, tax and insurance payments in reserves after
the closing of the related loan and (iii) strong credit scores.
Certain of the Mortgage Loans (other than Home Equity Loans) may have been
originated or acquired under the Company's No Income No Asset Verification
program, pursuant to which the Company will not verify any income or assets of
the borrower. This program is only available to certain approved correspondents
who have exhibited strong financial performance and have delinquency and
foreclosure rates with respect to their conventional loan portfolios acceptable
to the Company. Unless otherwise specified in the Prospectus Supplement, in
order to qualify for the No Income No Asset Verification program, the related
borrower generally must have (i) no delinquent mortgage or rental payments
during the preceding 24 months, (ii) a minimum of six months' principal,
interest, tax and insurance payments in reserves after the closing of the
related loan and (iii) strong credit scores.
Certain of the Mortgage Loans (other than Home Equity Loans) may have been
originated or acquired under the Company's Enhanced Streamlined Refinance
program. Under this program, if the Company is currently the servicer of a
borrower's first-lien mortgage loan, the Company may originate a rate-and-term
(rather than 'cash-out') refinance loan which pays off the existing mortgage
loan so long as the existing mortgage loan is current, and the borrower has no
more than one 30-day delinquent mortgage payment on the existing mortgage loan
during the preceding 12 months. Under this program the Company generally will
not verify any income or assets of the borrower, and no new appraisal will be
required. The Company will, however, represent and warrant in the Agreement that
the value of the related Mortgaged Property is no less than the value
established at the time the existing mortgage loan was originated.
Upon receipt of appropriate verification, where required, the credit
report, and, in certain cases, the prospective borrower's credit score or
mortgage score, the Company (or the delegated underwriter) makes a determination
as to whether the prospective borrower has sufficient monthly income to meet the
monthly payment obligations on the proposed mortgage loan (including real estate
taxes and insurance on the subject property), plus other financial obligations
not expected to be fully repaid within the next ten months and normal monthly
living expenses. In the case of a mortgage loan with more than one borrower
where all the borrowers intend to occupy the mortgaged property, the combined
gross income of all such borrowers is considered for the above computation.
However, the Company may depart from a strict application of its guidelines in
favor of other credit considerations, and may permit such a departure in the
case of loans acquired from certain of its approved correspondents and other
third-party sellers. In its evaluation of seasoned mortgage loans which have 24
or more months of payment experience, the Company generally places greater
emphasis on payment history and may take into account market and other economic
trends while placing less emphasis on underwriting factors generally applied to
newly originated mortgage loans.
In assessing the adequacy of properties as collateral for mortgage loans,
an independent appraisal is generally used with respect to each property
considered for financing. Such appraisal generally entails physical inspection
of the property as well as a verification that the property is in good
condition. The appraiser estimates
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the value of the property based on market values of comparable homes and, to a
lesser extent, the cost of replacing the property.
No assurance can be given that values of the Mortgaged Properties have
remained or will remain at the levels which existed on the dates of appraisal of
such Mortgaged Properties. The appraisal of any Mortgaged Property reflects the
individual appraiser's judgment as to value, based on the market value of
comparable homes sold within the recent past in comparable nearby locations and
on the estimated replacement cost. Because of the unique locations and special
features of certain Mortgaged Properties, identifying comparable properties in
nearby locations may be difficult. The appraised values of such Mortgaged
Properties will be based to a greater extent on adjustments made by the
appraisers to the appraised values of reasonably similar properties. If
residential real estate values generally or in particular geographic areas
decline such that the outstanding principal balances of the Mortgage Loans and
any secondary financing on the Mortgaged Properties become equal to or greater
than the values of such Mortgaged Properties, the actual rates of delinquencies,
foreclosures and losses could be significantly higher than those now generally
experienced in the mortgage lending industry and those now experienced on the
Company's servicing portfolios. To the extent that such losses are not covered
by any of the credit enhancement features described herein, they will be borne
by the holders of the related Certificates.
The Company may not require a current appraisal in connection with certain
purchase money mortgage loans, certain refinancings and certain home equity loan
programs. The percentage of Mortgage Loans representing such purchase money
mortgage loans, refinancings and home equity loans (by Principal Balance of all
of the Mortgage Loans included in the related Trust Fund as of the Cut-off Date)
where an appraisal dated within the past year has not been obtained will be
specified in the related Prospectus Supplement, if material. In addition, the
percentage of Mortgage Loans in respect of which no appraisal has been obtained
will be specified in the related Prospectus Supplement, if material. Generally,
appraisals in connection with a Home Equity Loan will be dated within six months
prior to the origination of such mortgage loan. In the event that there has been
a decline in value of the Mortgaged Properties with respect to Mortgage Loans
originated without current appraisals, the use of other methods in establishing
the 'Original Value' of a Mortgaged Property and in calculating the
loan-to-value ratios of such Mortgage Loans may result in substantially lower
loan-to-value ratios than would be the case if new appraisals were obtained at
the time of refinancing. This may be particularly true in geographic areas where
there has been a substantial decline in property values since the date of
origination of the refinanced mortgage loans. In addition, the use of methods
other than a current appraisal to establish the Original Value of a Mortgaged
Property (e.g., a broker's price opinion, an automated appraisal or a drive-by
appraisal) may not provide as thorough a review or as accurate an assessment of
the value of the related Mortgaged Property. In certain circumstances, the
Company may require a current appraisal where, as a result of deterioration in
conditions in the local real estate market since the date of origination of the
refinanced mortgage loan, there is a greater probability that the original
appraisal may not accurately reflect the current market value of the Mortgaged
Property.
Generally, mortgage loans that the Company originates or acquires do not
have loan-to-value ratios in excess of 95% of the Original Value. In certain
cases, secondary financing (or subordination of existing secondary financing) is
permitted, provided that the combined loan-to-value ratio does not exceed the
Company's underwriting guidelines for the specific loan program. Unless
otherwise specified in the Prospectus Supplement, mortgage loans (other than
Home Equity Loans) that the Company acquires or originates which have an
original principal amount exceeding 80% of Original Value will have private
mortgage insurance. The Company generally requires such coverage to continue
until the loan-to-value ratio is 80% or less. See 'Servicing of the Mortgage
Loans and Contracts--Private Mortgage Insurance' below. The Company does not
require private mortgage insurance with respect to Home Equity Loans.
If Home Equity Loans constitute a material portion of the Mortgage Loans
included in a Trust Fund with respect to a series of Certificates, the related
Prospectus Supplement will describe in further detail the underwriting standards
applicable to the Home Equity Loans.
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THE AGENCY SECURITIES
Government National Mortgage Association. GNMA is a wholly-owned corporate
instrumentality of the United States within the United States Department of
Housing and Urban Development. Section 306(g) of Title III of the National
Housing Act of 1934, as amended (the 'Housing Act'), authorizes GNMA to
guarantee the timely payment of the principal of and interest on certificates
which represent an interest in a pool of mortgage loans insured by FHA under the
Housing Act, or Title V of the Housing Act of 1949 ('FHA Loans'), 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 ('VA Loans').
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 guarantee under this subsection.' In order to meet
its obligations under any such guarantee, GNMA may, under Section 306(d) of the
Housing Act, borrow from the United States Treasury in an amount which is at any
time sufficient to enable GNMA, with no limitations as to amount, to perform its
obligations under its guarantee.
GNMA Certificates. Each GNMA Certificate relating to a series (which may
be issued under either the GNMA I program or the GNMA II program) will be a
'fully modified pass-through' mortgage-backed certificate issued and serviced by
a mortgage banking company or other financial concern ('GNMA Issuer') approved
by GNMA or approved by FNMA 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. GNMA will approve the issuance of each such GNMA Certificate in
accordance with a guarantee agreement (a 'Guaranty Agreement') between GNMA and
the GNMA Issuer. Pursuant to 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 such GNMA Certificate, even if the payments received by the
GNMA Issuer on the FHA Loans or VA Loans underlying each such GNMA Certificate
are less than the amounts due on each such 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 such GNMA Certificate will have an
original maturity of not more than 30 years (but may have original maturities of
substantially less than 30 years). Each such GNMA Certificate will be based on
and backed by a pool of FHA Loans or VA Loans secured by one- to four-family
residential property and will provide for the payment by or on behalf of the
GNMA Issuer to the registered holder of such 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 such GNMA Certificate,
less the applicable servicing and guarantee 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 prepayments of principal on the FHA
Loans or VA Loans underlying such GNMA Certificate and liquidation proceeds in
the event of a foreclosure or other disposition of any such 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 promptly notify GNMA and request GNMA to make such payment.
Upon notification and request, GNMA will make such payments directly to the
registered holder of such 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 such
payment, the holder of such GNMA Certificate will have recourse only against
GNMA to obtain such payment. The Trustee or its nominee, as registered holder of
the GNMA Certificates relating to a series, will have the right to proceed
directly against GNMA under the terms of the Guaranty Agreements relating to
such GNMA Certificates for any amounts that are not paid when due.
Regular monthly installment payments on each GNMA Certificate relating to a
series will be comprised of interest due as specified on such GNMA Certificate
plus the scheduled principal payments on the FHA Loans or VA Loans underlying
such GNMA Certificate due on the first day of the month in which the scheduled
monthly installment on such GNMA Certificate is due. Such regular monthly
installments on each such GNMA Certificate are 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
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Certificate relating to a series or any other early recovery of principal on
such loan will be passed through to the Trustee as the registered holder of such
GNMA Certificate.
GNMA Certificates may be backed by graduated payment mortgage loans or by
'buydown' mortgage loans for which funds will have been provided (and deposited
into escrow accounts) for application to the payment of a portion of the
borrowers' monthly payments during the early years of such mortgage loan.
Payments due the registered holders of GNMA Certificates backed by pools
containing 'buydown' mortgage loans will be computed in the same manner as
payments derived from non-'buydown' 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 such mortgage loans, will be less than the
amount of stated interest on such mortgage loans. The interest not so paid will
be added to the principal of such graduated payment mortgage loans and, together
with interest thereon, 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 relating to a series of Certificates are backed by graduated
payment mortgage loans or 'buydown' mortgage loans. No statistics comparable to
the FHA's prepayment experience on level payment, non-'buydown' mortgage loans
are available in respect of graduated payment or 'buydown' mortgages. GNMA
Certificates related to a series of Certificates may be held in book-entry form.
Federal Home Loan Mortgage Corporation. FHLMC is a publicly-held
government-sponsored enterprise created pursuant to Title III of the Emergency
Home Finance Act of 1970, as amended (the 'FHLMC Act'). FHLMC 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 FHLMC currently consists of the purchase of first lien conventional
mortgage loans or participation interests in such mortgage loans and the sale of
the mortgage loans or participations so purchased in the form of mortgage
securities, primarily FHLMC Certificates. FHLMC is confined to purchasing, so
far as practicable, mortgage loans that it deems to be of such quality, type and
class as to meet generally the purchase standards imposed by private
institutional mortgage investors.
FHLMC Certificates. Each FHLMC Certificate represents an undivided
interest in a pool of mortgage loans that may consist of first lien conventional
loans, FHA Loans or VA Loans (a 'FHLMC Certificate group'). FHLMC Certificates
are sold under the terms of a Mortgage Participation Certificate Agreement. A
FHLMC Certificate may be issued under either FHLMC's Cash Program or Guarantor
Program.
Mortgage loans underlying the FHLMC Certificates relating to a series will
consist of residential mortgage loans secured by one- to four-family dwellings.
Each such mortgage loan must meet the applicable standards set forth in the
FHLMC Act. A FHLMC Certificate group may include whole loans, participation
interests in whole loans and undivided interests in whole loans and/or
participations comprising another FHLMC Certificate group. Under the Guarantor
Program any such FHLMC Certificate group may include only whole loans or
participation interests in whole loans.
FHLMC guarantees to each registered holder of a FHLMC Certificate the
timely payment of interest on the underlying mortgage loans to the extent of the
applicable Certificate rate on the registered holder's pro rata share of the
unpaid principal balance outstanding on the underlying mortgage loans in the
FHLMC Certificate group represented by such FHLMC Certificate, whether or not
received. FHLMC also guarantees to each registered holder of a FHLMC Certificate
collection by such holder of all principal on the underlying mortgage loans,
without any offset or deduction, to the extent of such holder's pro rata share
thereof, but does not, except if and to the extent specified in the Prospectus
Supplement for a series, guarantee the timely payment of scheduled principal.
Pursuant to its guarantees, FHLMC indemnifies holders of FHLMC Certificates
against any diminution in principal by reason of charges for property repairs,
maintenance and foreclosure. FHLMC may remit the amount due on account of its
guarantee of collection of principal at any time after default on an underlying
mortgage loan, but not later than (i) 30 days following foreclosure sale, (ii)
30 days following payment of the claim by any mortgage insurer, or (iii) 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 FHLMC
Certificates, including the timing of demand for acceleration, FHLMC
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reserves the right to exercise its judgment with respect to the mortgage loans
in the same manner as for mortgage loans which it has purchased but not sold.
The length of time necessary for FHLMC to determine that a mortgage loan should
be accelerated varies with the particular circumstances of each mortgagor, and
FHLMC has not adopted standards which require that the demand be made within any
specified period.
FHLMC Certificates are not guaranteed by the United States and do not
constitute debts or obligations of the United States or any instrumentality of
the United States other than FHLMC. The obligations of FHLMC under its guarantee
are obligations solely of FHLMC and are not backed by, nor entitled to, the full
faith and credit of the United States. If FHLMC were unable to satisfy such
obligations, distributions to holders of FHLMC Certificates would consist solely
of payments and other recoveries on the underlying mortgage loans and,
accordingly, monthly distributions to holders of FHLMC Certificates would be
affected by delinquent payments and defaults on such mortgage loans.
Registered holders of FHLMC Certificates are entitled to receive their
monthly pro rata share of all principal payments on the underlying mortgage
loans received by FHLMC, including any scheduled principal payments, full and
partial repayments of principal and principal received by FHLMC by virtue of
condemnation, insurance, liquidation or foreclosure, and repurchases of the
mortgage loans by FHLMC or the seller thereof. FHLMC is required to remit each
registered FHLMC Certificateholder's pro rata share of principal payments on the
underlying mortgage loans, interest at the FHLMC pass-through rate and any other
sums such as prepayment fees, within 60 days of the date on which such payments
are deemed to have been received by FHLMC.
Under FHLMC's Cash Program, interest rates on the mortgage loans underlying
a FHLMC Certificate may exceed the pass-through rate on the FHLMC Certificate by
50 to 100 basis points. Under FHLMC's Guarantor Program, interest rates on the
mortgage loans underlying a FHLMC Certificate may range from the pass-through
rate (plus a minimum servicing fee) to 250 basis points higher than such rate.
FHLMC 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 FHLMC
Certificate will be distributed so as to be received normally by the 15th day of
the month following the month in which the purchaser became a registered holder
of the FHLMC Certificates. Thereafter, such 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 FHLMC Certificates sold by FHLMC on or after January 2,
1985, and makes payments of principal and interest each month to the registered
holders thereof in accordance with such holders' instructions.
Federal National Mortgage Association. FNMA is a federally-chartered and
privately-owned corporation organized and existing under the Federal National
Mortgage Association Charter Act (the 'Charter Act'). FNMA 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.
FNMA provides funds to the mortgage market primarily by purchasing mortgage
loans from lenders, thereby replenishing their funds for additional lending.
FNMA 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, FNMA helps to
redistribute mortgage funds from capital-surplus to capital-short areas.
FNMA Certificates. FNMA Certificates are Guaranteed Mortgage Pass-Through
Certificates representing fractional undivided interests in a pool of mortgage
loans formed by FNMA. Each mortgage loan must meet the applicable standards of
the FNMA purchase program. Mortgage loans comprising a pool are either provided
by FNMA from its own portfolio or purchased pursuant to the criteria of the FNMA
purchase program.
Mortgage loans underlying FNMA Certificates relating to a series 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 FNMA 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 rate level payment FHA Loans or VA Loans are expected to be 30 years.
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Mortgage loans underlying a FNMA 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 FNMA Certificate is equal to the lowest interest rate of
any mortgage loan in the related pool, less a specified minimum annual
percentage representing servicing compensation and FNMA's guaranty fee. Under a
regular servicing option (pursuant to which the mortgagee or other servicer
assumes the entire risk of foreclosure losses), the annual interest rates on the
mortgage loans underlying a FNMA Certificate will be between 50 basis points and
250 basis points greater than in its annual pass-through rate and under a
special servicing option (pursuant to which FNMA assumes the entire risk for
foreclosure losses), the annual interest rates on the mortgage loans underlying
a FNMA Certificate will generally be between 55 basis points and 255 basis
points greater than the annual FNMA Certificate pass-through rate. If specified
in the Prospectus Supplement, FNMA Certificates may be backed by adjustable rate
mortgages.
FNMA guarantees to each registered holder of a FNMA Certificate that it
will distribute amounts representing such holder's proportionate share of
scheduled principal and interest payments at the applicable pass-through rate
provided for by such FNMA Certificate on the underlying mortgage loans, whether
or not received, and such holder's proportionate share of the full principal
amount of any foreclosed or other finally liquidated mortgage loan, whether or
not such principal amount is actually recovered. The obligations of FNMA under
its guarantees are obligations solely of FNMA and are not backed by, nor
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 FNMA up to $2.25 billion outstanding at any time, neither the United States
nor any agency thereof is obligated to finance FNMA's operations or to assist
FNMA in any other manner. If FNMA were unable to satisfy its obligations,
distributions to holders of FNMA Certificates would consist solely of payments
and other recoveries on the underlying mortgage loans and, accordingly, monthly
distributions to holders of FNMA Certificates would be affected by delinquent
payments and defaults on such mortgage loans.
FNMA Certificates evidencing interests in pools of mortgage loans formed on
or after May 1, 1985 (other than FNMA 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 FNMA Certificate will be made by FNMA on the 25th day of each
month to the persons in whose name the FNMA Certificate is entered in the books
of the Federal Reserve Banks (or registered on the FNMA Certificate register in
the case of fully registered FNMA Certificates) as of the close of business on
the last day of the preceding month. With respect to FNMA Certificates issued in
book-entry form, distributions thereon will be made by wire, and with respect to
fully registered FNMA Certificates, distributions thereon will be made by check.
Stripped Mortgage-Backed Securities. Agency Securities may consist of one
or more stripped mortgage-backed securities, each as described herein and in the
related Prospectus Supplement. Each such Agency Security will represent an
undivided interest in all or part of either the principal distributions (but not
the 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 such distributions) on certain FHLMC, FNMA or GNMA
Certificates. The underlying securities will be held under a trust agreement by
FHLMC, FNMA or GNMA each as trustee, or by another trustee named in the related
Prospectus Supplement. FHLMC, FNMA or GNMA will guarantee each stripped Agency
Security to the same extent as such entity guarantees the underlying securities
backing such stripped Agency Security, unless otherwise specified in the related
Prospectus Supplement.
CONTRACTS
Each pool of Contracts with respect to a series of Certificates (the
'Contract Pool') will consist of manufactured housing conditional sales
contracts and installment loan agreements or participation interests therein
(collectively, the 'Contracts') originated by the Company or acquired from one
or more manufactured housing dealers in the ordinary course of business. The
Contracts may be conventional manufactured housing contracts or contracts
insured by the FHA or partially guaranteed by the VA. Each Contract is secured
by a Manufactured Home (as defined below). Unless otherwise specified in the
Prospectus Supplement, the Contracts will be fully amortizing and will bear
interest at a fixed annual percentage rate ('APR').
The Manufactured Homes securing the Contracts consist of manufactured homes
within the meaning of 42 United States Code, Section 5402(6), which defines a
'manufactured home' as 'a structure, transportable in one
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or more sections, which, in the traveling mode, is eight body feet or more in
width or forty body feet or more in length, or, when erected on site, is three
hundred twenty or more square feet, and which is built on a permanent chassis
and designed to be used as a dwelling with or without a permanent foundation
when connected to the required utilities, and includes the plumbing, heating,
air-conditioning, and electrical systems contained therein; except that such
term shall include any structure which meets all the requirements of this
paragraph except the size requirements and with respect to which the
manufacturer voluntarily files a certification required by the Secretary of
Housing and Urban Development and complies with the standards established under
this chapter.' Moreover, if an election is made to treat the Trust Fund as a
REMIC as described in 'Certain Federal Income Tax Consequences--REMIC
Certificates', Manufactured Homes will have a minimum of 400 square feet of
living space and a minimum width in excess of 102 inches.
Unless otherwise specified in the related Prospectus Supplement, for
purposes of calculating the loan-to-value ratio of a Contract relating to a new
Manufactured Home, the 'Collateral Value' is no greater than the sum of a fixed
percentage of the list price of the unit actually billed by the manufacturer to
the dealer (exclusive of freight to the dealer site) including 'accessories'
identified in the invoice (the 'Manufacturer's Invoice Price'), plus the actual
cost of any accessories purchased from the dealer, a delivery and set-up
allowance depending on the size of the unit and the cost of state and local
taxes, filing fees and up to three years prepaid hazard insurance premiums.
Unless otherwise specified in the related Prospectus Supplement, the Collateral
Value of a used Manufactured Home is the least of the sales price, the appraised
value, and the National Automobile Dealer's Association book value plus prepaid
taxes and hazard insurance premiums. The appraised value of a Manufactured Home
is based upon the age and condition of the manufactured housing unit and the
quality and condition of the mobile home park in which it is situated, if
applicable.
The related Prospectus Supplement will specify for the Contracts contained
in the related Contract Pool, among other things, the date of origination of the
Contracts; the APRs on the Contracts; the Contract loan-to-value ratios; the
minimum and maximum outstanding principal balances as of the Cut-off Date and
the average outstanding principal balance; the outstanding principal balances of
the Contracts included in the Contract Pool; and the original maturities of the
Contracts and the last maturity date of any Contract.
CREDIT SUPPORT
GENERAL
Credit support may be provided with respect to one or more classes of a
series of Certificates or with respect to the assets in the related Trust Fund.
Credit support may be in the form of the limited obligation of the Company to
purchase Liquidating Loans, a limited financial guarantee policy, limited
guarantee or other similar instrument (a 'Limited Guarantee') issued by an
entity named in the Prospectus Supplement (the 'Guarantor'), which may be an
affiliate of the Company, the subordination of one or more classes of the
Certificates of such series, the establishment of one or more reserve accounts,
the use of a cross-support feature, use of a pool insurance policy, bankruptcy
bond, special hazard insurance policy, repurchase bond, guaranteed investment
contract or another method of credit support described in the related Prospectus
Supplement, or any combination of the foregoing. Unless otherwise specified in
the Prospectus Supplement, any credit support will not provide protection
against all risks of loss and will not guarantee repayment of the entire
principal balance of the Certificates and interest thereon. If losses occur
which exceed the amount covered by credit support or which are not covered by
the credit support, Certificateholders will bear their allocable share of
deficiencies.
If the Prospectus Supplement for a series provides that an institution
other than the Company will act as sole servicer or master servicer of the
related Mortgage Loans, or that the Company will act as master servicer of such
Mortgage Loans under a Supervisory Master Servicing Arrangement (as defined
under 'Servicing of the Mortgage Loans and Contracts') whereby other servicers
will be directly obligated to perform certain servicing duties, if so specified
in such Prospectus Supplement, such other master servicers or servicers may
provide certain of the credit support arrangements described below in lieu of
the Company. In such event, all references to the Company as servicer under the
description of such credit support set forth below should be read to refer to
such other master servicer or servicers, as the case may be.
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PURCHASE OF LIQUIDATING LOANS
The Company, as servicer, may be obligated, if and to the extent described
in the Prospectus Supplement, to purchase any Mortgage Loan (a 'Liquidating
Loan') as to which either (i) liquidation proceedings have been commenced and
any equitable or statutory right to reinstate such Mortgage Loan has expired or
(ii) the Company, as servicer, has agreed to accept a deed in lieu of
foreclosure, in each case for a price equal to 100% of the Principal Balance of
such Mortgage Loan plus, unless otherwise specified in the Prospectus
Supplement, one month's interest thereon at the applicable Remittance Rate. Any
such obligation of the Company, as servicer, may be limited as specified in the
Prospectus Supplement. In particular, the aggregate losses from the purchase of
Liquidating Loans that the Company is obligated to bear (measured as the
difference between the aggregate payments made by the Company into the
Certificate Account in respect of Liquidating Loans and the aggregate net
proceeds received by the Company from the disposition of such Loans) may be
limited to an amount specified in the Prospectus Supplement. After this amount
is exhausted, no further Liquidating Loans will be purchased by the Company,
unless such amount has been restored as described below.
If so specified in the Prospectus Supplement, the Company, as servicer,
will have the option (but not the obligation) to purchase any Mortgage Loan as
to which the mortgagor has failed to make unexcused payment in full of three or
more scheduled payments of principal and interest (a 'Delinquent Mortgage
Loan'). Unless otherwise specified in the Prospectus Supplement, any such
purchase will be for a price equal to 100% of the Principal Balance of such
Mortgage Loan plus interest thereon at the applicable Remittance Rate from the
date on which interest was last paid to the first day of the month in which such
purchase price is to be distributed, net of any unreimbursed advances of
principal and interest thereon made by the Company as servicer. The purchase
price for any Delinquent Mortgage Loan will be deposited in the Certificate
Account on the next Deposit Date (as defined under 'Servicing of the Mortgage
Loans and Contracts--Loan Payment Record').
The purchase by the Company, as servicer, of a Delinquent Mortgage Loan may
result in the diminution of the amount of the Company's obligations, as
servicer, to purchase Liquidating Loans, to the extent that net recoveries upon
the liquidation of such Delinquent Mortgage Loan are, or are estimated by the
Company on the date of such purchase to be, less than the sum of the purchase
price for such Delinquent Mortgage Loan and any previous unreimbursed advances
of delinquent installments of principal and interest (adjusted to the related
Remittance Rate) made by the Company with respect thereto. To the extent that
actual recoveries, net of related expenses, upon the final liquidation of such
Delinquent Mortgage Loan differ from the estimated amount thereof, the amount of
the Company's remaining obligation to purchase Liquidating Loans will be
adjusted up or down accordingly. If a Delinquent Mortgage Loan becomes current
after its purchase by the Company, any related decrease in the amount of the
Company's obligation to purchase Liquidating Loans will be reversed in its
entirety. Liquidation proceeds in connection with the liquidation of any
Mortgaged Property may not be deemed for this purpose to include the entire
principal balance of any mortgage loan made by the Company to facilitate such
sale at a rate less than then prevailing market rates. In estimating the net
amount of proceeds recoverable upon the liquidation of any Delinquent Mortgage
Loan, the Company may treat as related liquidation expenses certain costs
associated with the protection of the Mortgaged Property, property sales
expenses and foreclosure or other similar costs.
Following the purchase by the Company of any Liquidating Loan or Delinquent
Mortgage Loan as described above, and the payment by the Company of the purchase
price therefor, the Company will be entitled to receive an assignment by the
Trustee of such Mortgage Loan, and the Company will thereafter own such Mortgage
Loan free of any further obligation to the Trustee or the Certificateholders
with respect thereto.
LIMITED GUARANTEE OF THE GUARANTOR
If specified in the Prospectus Supplement, certain obligations of the
Company, as servicer, under the related Agreement may be covered by a Limited
Guarantee, limited in scope and amount, issued by the Guarantor. If so
specified, the Guarantor may be obligated to take one or more of the following
actions in the event the Company fails to do so: make deposits to the
Certificate Account (a 'Deposit Guarantee'); make advances (an 'Advance
Guarantee'); or purchase Liquidating Loans (a 'Liquidating Loan Guarantee'). Any
such Limited Guarantee will be limited in amount and a portion of the coverage
of any such Limited Guarantee may be separately allocated to certain events. For
example, a portion of the aggregate amount of a Liquidating Loan Guarantee may
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be separately allocated to Liquidating Loans due to special hazards not covered
by standard hazard insurance policies, Liquidating Loans due to the bankruptcy
of a mortgagor, and other Liquidating Loans. The scope, amount and, if
applicable, the allocation of any Limited Guarantee will be described in the
related Prospectus Supplement.
If and to the extent that the Guarantor is required to make payments under
any such Limited Guarantee, unless otherwise specified in the Prospectus
Supplement, the Guarantor, upon notice from the Trustee, will be obligated to
deposit the amount of such payments in same-day funds in the Certificate Account
on the day after the Deposit Date, all as set forth more specifically in such
Limited Guarantee. If the Guarantor is required to make any payment under a
Limited Guarantee, the Guarantor will be subrogated, to the extent of such
payment, to the rights of holders of the Certificates and shall have all rights
of the Company under the related Agreement as described herein. Any Limited
Guarantee issued by the Guarantor will be limited in amount or duration as
specified in the Prospectus Supplement and may not guarantee the full extent of
the Company's obligations with respect to which such Limited Guarantee was
issued. As described in the Prospectus Supplement, if applicable, the amount of
any Limited Guarantee will be reduced by amounts distributed by the Guarantor,
and not recovered by it, under all Limited Guarantees issued by the Guarantor
with respect to the same series of Certificates and by any reduction in the
Company's obligations with respect to which such Limited Guarantee was issued.
SUBORDINATION
If so specified in the Prospectus Supplement, distributions in respect of
scheduled principal, Principal Prepayments, interest or any combination thereof
that otherwise would have been payable to one or more classes of Certificates of
a series (the 'subordinated Certificates') will instead be payable to holders of
one or more other classes of such series (the 'senior Certificates') under the
circumstances and to the extent specified in the Prospectus Supplement. If
specified in the Prospectus Supplement, delays in receipt of scheduled payments
on the Mortgage Loans or Contracts and losses on defaulted Mortgage Loans or
Contracts will be borne first by the various classes of subordinated
Certificates and thereafter by the various classes of senior Certificates, in
each case under the circumstances and subject to the limitations specified in
the Prospectus Supplement. The aggregate distributions in respect of delinquent
payments on the Mortgage Loans or Contracts over the lives of the Certificates
or at any time, the aggregate losses in respect of defaulted Mortgage Loans or
Contracts which must be borne by the subordinated Certificates by virtue of
subordination and the amount of the distributions otherwise distributable to the
subordinated Certificateholders that will be distributable to senior
Certificateholders on any Distribution Date may be limited as specified in the
Prospectus Supplement. If aggregate distributions in respect of delinquent
payments on the Mortgage Loans or Contracts or aggregate losses in respect of
such Mortgage Loans or Contracts were to exceed the total amounts payable and
available for distribution to holders of subordinated Certificates or, if
applicable, were to exceed the specified maximum amount, holders of senior
Certificates could experience losses on the Certificates.
In addition to or in lieu of the foregoing, if so specified in the
Prospectus Supplement, all or any portion of distributions otherwise payable to
holders of subordinated Certificates on any Distribution Date may instead be
deposited into one or more reserve accounts (the 'Reserve Account') established
by the Trustee. If so specified in the Prospectus Supplement, such deposits may
be made on each Distribution Date, on each Distribution Date for specified
periods or until the balance in the Reserve Account has reached a specified
amount and, following payments from the Reserve Account to holders of senior
Certificates or otherwise, thereafter to the extent necessary to restore the
balance in the Reserve Account to required levels, in each case as specified in
the Prospectus Supplement. If so specified in the Prospectus Supplement, amounts
on deposit in the Reserve Account may be released to the Company or the holders
of any class of Certificates at the times and under the circumstances specified
in the Prospectus Supplement.
If specified in the Prospectus Supplement, one or more classes of
Certificates may bear the risk of certain losses on defaulted Mortgage Loans not
covered by other forms of credit support prior to other classes of Certificates.
Such subordination might be effected by reducing the Certificate Principal
Balance of the subordinated Certificates on account of such losses, thereby
decreasing the proportionate share of distributions allocable to such
Certificates, or by another means specified in the Prospectus Supplement.
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If specified in the Prospectus Supplement, various classes of senior
Certificates and subordinated Certificates may themselves be subordinate in
their right to receive certain distributions to other classes of senior and
subordinated Certificates, respectively, through a cross-support mechanism or
otherwise.
If so specified in the Prospectus Supplement, the same class of
Certificates may constitute senior Certificates with respect to certain types of
payments or certain losses and subordinated Certificates with respect to other
types of payments or losses.
As between classes of senior Certificates and as between classes of
subordinated Certificates, distributions may be allocated among such classes (i)
in the order of their scheduled final distribution dates, (ii) in accordance
with a schedule or formula, (iii) in relation to the occurrence of events, or
(iv) otherwise, in each case as specified in the Prospectus Supplement. As
between classes of subordinated Certificates, payments to holders of senior
Certificates on account of delinquencies or losses and payments to any Reserve
Account will be allocated as specified in the Prospectus Supplement.
Unless otherwise specified in the Prospectus Supplement, the Agreement may
permit the Company, at its option, to grant to the holders of certain classes of
subordinated Certificates certain rights in connection with the foreclosure of
defaulted Mortgage Loans in the related Trust Fund. See 'Servicing of the
Mortgage Loans and Contracts--Collection and Other Servicing Procedures.'
CROSS-SUPPORT
If specified in the Prospectus Supplement, the beneficial ownership of
separate groups of assets included in a Trust Fund may be evidenced by separate
classes of the related series of Certificates. In such case, credit support may
be provided by a cross-support feature which may require that distributions be
made with respect to Certificates evidencing beneficial ownership of one or more
asset groups prior to distributions to subordinated Certificates evidencing a
beneficial ownership interest in other asset groups within the same Trust Fund.
The Prospectus Supplement for a series which includes a cross-support feature
will describe the manner and conditions for applying such cross-support feature.
If specified in the Prospectus Supplement, the coverage provided by one or
more forms of credit support may apply concurrently to two or more separate
Trust Funds. If applicable, the Prospectus Supplement will identify the Trust
Funds to which such credit support relates and the manner of determining the
amount of the coverage provided thereby and of the application of such coverage
to the identified Trust Funds.
POOL INSURANCE
In order to decrease the likelihood that Certificateholders will experience
losses in respect of the Mortgage Loans, if specified in the Prospectus
Supplement, the Company will obtain one or more pool insurance policies. Any
such policies may be in lieu of or in addition to any obligations of the Company
in respect of the Mortgage Loans. Such pool insurance policy will, subject to
the limitations described in the Prospectus Supplement, cover loss by reason of
default in payments on the Mortgage Loans up to the amounts specified in the
Prospectus Supplement or the Detailed Description and for the periods specified
in the Prospectus Supplement. The Company, as servicer, will agree to use its
best reasonable efforts to maintain in effect any such pool insurance policy and
to present claims thereunder to the pool insurer on behalf of itself, the
Trustee and the Certificateholders. The pool insurance policy, however, is not a
blanket policy against loss, since claims thereunder may only be made respecting
particular defaulted Mortgage Loans and only upon satisfaction of certain
conditions precedent described below. The pool insurance policy, if any, will
not cover losses due to a failure to pay or denial of a claim under a primary
mortgage insurance policy, irrespective of the reason therefor.
Unless otherwise specified in the Prospectus Supplement, the original
amount of coverage under any pool insurance policy will be reduced over the life
of the related series of Certificates by the aggregate dollar amount of claims
paid less the aggregate of the net amounts realized by the pool insurer upon
disposition of all foreclosed properties. The amount of claims paid will include
certain expenses incurred by the Company as well as accrued interest on
delinquent Mortgage Loans to the date of payment of the claim. See 'Certain
Legal Aspects of the Mortgage Loans--Foreclosure'. Accordingly, if aggregate net
claims paid under any pool insurance policy reach the original policy limit,
coverage under that pool insurance policy will be exhausted and any further
losses will
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be borne by one or more classes of Certificateholders unless assumed by the
Company or the Guarantor under any obligations they may have in respect of
Liquidating Loans or by some other entity, if and to the extent specified in the
Prospectus Supplement.
Since any mortgage pool insurance policy may require that the property
subject to a defaulted Mortgage Loan be restored to its original condition prior
to claiming against the pool insurer, such policy may not provide coverage
against hazard losses. As described under 'Servicing of the Mortgage
Loans--Hazard Insurance', the hazard policies concerning the Mortgage Loans
typically exclude from coverage physical damage resulting from a number of
causes and even when the damage is covered, may afford recoveries which are
significantly less than the full replacement cost of such losses. Even if
special hazard insurance is applicable as specified in the Prospectus
Supplement, no coverage in respect of special hazard losses will cover all
risks, and the amount of any such coverage will be limited. See 'Special Hazard
Insurance' below. As a result, certain hazard risks will not be insured against
and will therefore be borne by Certificateholders, unless otherwise assumed by
the Company or the Guarantor under any obligations they may have in respect of
Liquidating Loans or by some other entity, as specified in the Prospectus
Supplement.
The terms of any pool insurance policy relating to a pool of Contracts will
be described in the related Prospectus Supplement.
SPECIAL HAZARD INSURANCE
In order to decrease the likelihood that Certificateholders will experience
losses in respect of the Mortgage Loans, if specified in the Prospectus
Supplement, the Company will obtain one or more special hazard insurance
policies with respect to the Mortgage Loans. Any such policies may be in lieu of
or in addition to any obligations of the Company to advance delinquent payments
in respect of the Mortgage Loans. Such a special hazard insurance policy will,
subject to limitations described below and in the Prospectus Supplement, protect
holders of Certificates from (i) loss by reason of damage to Mortgaged
Properties caused by certain hazards (including earthquakes and, to a limited
extent, tidal waves and related water damage) not covered by the standard form
of hazard insurance policy for the respective states in which the Mortgaged
Properties are located or under flood insurance policies, if any, covering the
Mortgaged Properties, and (ii) loss from partial damage caused by reason of the
application of the co-insurance clause contained in hazard insurance policies.
Any special hazard insurance policy may not cover losses occasioned by war,
civil insurrection, certain governmental actions, errors in design, faulty
workmanship or materials (except under certain circumstances), nuclear reaction,
flood (if the Mortgaged Property is located in a federally designated flood
area), chemical contamination and certain other risks. Aggregate claims under
each special hazard insurance policy may be limited to a specified percentage of
the aggregate principal balance as of the Cut-off Date of the Mortgage Loans.
Any special hazard insurance policy may also provide that no claim may be paid
unless hazard and, if applicable, flood insurance on the Mortgaged Property has
been kept in force and other protection and preservation expenses have been paid
by the Company.
Subject to the foregoing limitations, any special hazard insurance policy
may provide that, where there has been damage to property securing a foreclosed
Mortgage Loan (title to which has been acquired by the insured) and to the
extent such damage is not covered by the hazard insurance policy or flood
insurance policy, if any, maintained by the mortgagor or the Company, the
special hazard insurer will pay the lesser of (i) the cost of repair or
replacement of such property or (ii) upon transfer of the property to the
special hazard insurer, the unpaid principal balance of such Mortgage Loan at
the time of acquisition of such property by foreclosure or deed in lieu of
foreclosure, plus accrued interest to the date of claim settlement and certain
expenses incurred by the Company with respect to such property. If the unpaid
principal balance plus accrued interest and certain expenses is paid by the
insurer, the amount of further coverage under the related special hazard
insurance policy will be reduced by such amount less any net proceeds from the
sale of the property. Any amount paid as the cost of repair or replacement of
the property will also reduce coverage by such amount. Restoration of the
property with the proceeds described under clause (i) above will satisfy the
condition under any pool insurance policy that the property be restored before a
claim under such pool insurance policy may be validly presented with respect to
the defaulted Mortgage Loan secured by such property. The payment described
under clause (ii) above will render unnecessary presentation of a claim in
respect of such Mortgage Loan under the related pool insurance policy.
Therefore, so long as a pool insurance policy remains in effect, the payment by
the insurer under a special hazard insurance policy of the cost of repair or
replacement or the unpaid principal balance of the Mortgage Loan
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plus accrued interest and certain expenses will not affect the total insurance
proceeds paid to Certificateholders, but will affect the relative amounts of
coverage remaining under the related special hazard insurance policy and pool
insurance policy.
The terms of any special hazard policy relating to a pool of Contracts will
be described in the related Prospectus Supplement.
BANKRUPTCY BOND
In the event of a bankruptcy of a borrower, the bankruptcy court may
establish the value of the Mortgaged Property securing the related Mortgage Loan
at an amount less than the then outstanding principal balance of such Mortgage
Loan secured by such Mortgaged Property and could reduce the secured debt to
such value. In such case, the holder of such Mortgage Loan would become an
unsecured creditor to the extent of the difference between the outstanding
principal balance of such Mortgage Loan and such reduced secured debt. In
addition, certain other modifications of the terms of a Mortgage Loan can result
from a bankruptcy proceeding, including the reduction in monthly payments
required to be made by the borrower. See 'Certain Legal Aspects of the Mortgage
Loans and Contracts--Enforceability of Certain Provisions'. If so provided in
the related Prospectus Supplement, the Company will obtain a bankruptcy bond or
similar insurance contract (the 'bankruptcy bond') for proceedings with respect
to borrowers under the Bankruptcy Code. The bankruptcy bond will cover certain
losses resulting from a reduction by a bankruptcy court of scheduled payments of
principal of and interest on a Mortgage Loan or a reduction by such court of the
principal amount of a Mortgage Loan and will cover certain unpaid interest on
the amount of such a principal reduction from the date of the filing of a
bankruptcy petition.
The bankruptcy bond will provide coverage in the aggregate amount specified
in the related Prospectus Supplement. Such amount will be reduced by payments
made under such bankruptcy bond in respect of the related Mortgage Loans, unless
otherwise specified in the related Prospectus Supplement, and will not be
restored.
In lieu of a bankruptcy bond, the Company may obtain a Limited Guarantee to
cover such bankruptcy-related losses.
The terms of any bankruptcy bond (or Limited Guarantee in lieu thereof)
relating to a pool of Contracts will be described in the related Prospectus
Supplement.
REPURCHASE BOND
If so specified in the related Prospectus Supplement, the Company, as
servicer, will be obligated to repurchase any Mortgage Loan or Contract (up to
an aggregate dollar amount specified in the related Prospectus Supplement) for
which insurance coverage is denied due to dishonesty, misrepresentation or fraud
in connection with the origination or sale of such Mortgage Loan or Contract.
Such obligation may be secured by a surety bond or other instrument or mechanism
guaranteeing payment of the amount to be paid by the Company.
GUARANTEED INVESTMENT CONTRACTS
If so specified in the Prospectus Supplement, on or prior to the Delivery
Date, the Trustee will enter into a guaranteed investment contract (a 'GIC')
pursuant to which all amounts deposited in the Certificate Account, and if so
specified the Reserve Accounts, will be invested by the Trustee and under which
the issuer of the GIC will pay to the Trustee interest at an agreed rate per
annum with respect to the amounts so invested.
RESERVE ACCOUNTS
If specified in the Prospectus Supplement, cash, U.S. Treasury securities,
instruments evidencing ownership of principal or interest payments thereon,
letters of credit, demand notes, certificates of deposit, other instruments or
obligations or a combination thereof in the aggregate amount specified in the
Prospectus Supplement will be deposited by the Company on the Delivery Date in
one or more accounts (each, a 'Reserve Account') established by the Trustee.
Such cash and the principal and interest payments on such other instruments will
be used to enhance the likelihood of timely payment of principal of, and
interest on, or, if so specified in the Prospectus Supplement, to provide
additional protection against losses in respect of, the assets in the related
Trust
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Fund, to pay the expenses of the Trust Fund or for such other purposes specified
in the Prospectus Supplement. Whether or not the Company has any obligation to
make such a deposit, certain amounts to which the subordinated
Certificateholders, if any, will otherwise be entitled may instead be deposited
into the Reserve Account from time to time and in the amounts as specified in
the Prospectus Supplement. Any cash in the Reserve Account and the proceeds of
any other instrument upon maturity will be invested in Eligible Investments,
which, unless otherwise specified in the Prospectus Supplement, will include
obligations of the United States and certain agencies thereof, certificates of
deposit, certain commercial paper, time deposits and bankers acceptances sold by
eligible commercial banks and certain repurchase agreements of United States
government securities with eligible commercial banks. If a letter of credit is
deposited with the Trustee, such letter of credit will be irrevocable. Unless
otherwise specified in the Prospectus Supplement, any instrument deposited
therein will name the Trustee, in its capacity as trustee for the holders of the
Certificates, as beneficiary and will be issued by an entity acceptable to each
rating agency that rates the Certificates. Additional information with respect
to such instruments deposited in the Reserve Accounts will be set forth in the
Prospectus Supplement.
Any amounts so deposited and payments on instruments so deposited will be
available for withdrawal from the Reserve Account for distribution to the
holders of Certificates for the purposes, in the manner and at the times
specified in the Prospectus Supplement.
OTHER INSURANCE, GUARANTEES AND SIMILAR INSTRUMENTS OR AGREEMENTS
If specified in the Prospectus Supplement, the related Trust Fund may also
include insurance, guarantees, letters of credit or similar arrangements for the
purpose of (i) maintaining timely payments or providing additional protection
against losses on the assets included in such Trust Fund, (ii) paying
administrative expenses or (iii) establishing a minimum reinvestment rate on the
payments made in respect of such assets or principal payment rate on such
assets. Such arrangements may include agreements under which Certificateholders
are entitled to receive amounts deposited in various accounts held by the
Trustee upon the terms specified in the Prospectus Supplement. Such arrangements
may be in lieu of any obligation of the Company to advance delinquent
installments in respect of the Mortgage Loans or Contracts. See 'Servicing of
Mortgage Loans and Contracts--Advances'.
YIELD, MATURITY AND WEIGHTED AVERAGE LIFE CONSIDERATIONS
The yields to maturity and weighted average lives of the Certificates will
be affected primarily by the rate and timing of principal payments received on
or in respect of the Mortgage Loans, Agency Securities or Contracts included in
the related Trust Fund. Such principal payments will include scheduled payments
as well as Principal Prepayments (including refinancings, some of which
refinancings may be solicited by the Company) and prepayments resulting from
foreclosure, condemnation and other dispositions of the Mortgaged Properties or
Manufactured Homes (including amounts paid by insurers under applicable
insurance policies), from repurchase by the Company of any Mortgage Loan or
Contract as to which there has been a material breach of warranty or defect in
documentation (or deposit of certain amounts in respect of delivery of a
substitute Mortgage Loan), repurchase by the Company of Mortgage Loans modified
by it in lieu of refinancing thereof, repurchase by the Company, the Guarantor
or any other entity of any Liquidating Loan or Delinquent Mortgage Loan, if
applicable, and from the repurchase by the Company of all of the Certificates or
all of the Mortgage Loans, Agency Securities or Contracts in certain
circumstances. See 'Description of the Certificates--Optional Termination of
Trust Fund'. The yield to maturity and weighted average lives of the
Certificates may also be affected by the amount and timing of delinquencies and
losses on the Mortgage Loans or Contracts.
After origination of the related Mortgage Loans, certain of the borrowers
may be solicited by the Company to participate in its biweekly payment programs,
under which payments equal to one-half of one full monthly payment are made in
respect of the related Mortgage Loan on a biweekly basis. In contrast to a
Mortgage Loan in respect of which payments are received once every month, a
Mortgage Loan involved in a biweekly payment program will produce thirteen full
monthly payments per calendar year, resulting in additional prepayments of
principal over the life of the Mortgage Loan. All payments of principal received
during a month in respect of a Mortgage Loan in a biweekly payment program will
be applied to the principal balance of such Mortgage Loan on the first business
day of the succeeding month and will not result in interest shortfalls.
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A number of social, economic, tax, geographic, demographic, legal and other
factors may influence prepayments, delinquencies and losses. For a Trust Fund
comprised of Mortgage Loans, these factors may include the age of the Mortgage
Loans, the geographic distribution of the Mortgaged Properties, the payment
terms of the Mortgages, the characteristics of the mortgagors, homeowner
mobility, economic conditions generally and in the geographic area in which the
Mortgaged Properties are located, enforceability of due-on-sale clauses,
servicing decisions, prevailing mortgage market interest rates in relation to
the interest rates on the Mortgage Loans, the availability of mortgage funds,
the use of second or 'home equity' mortgage loans by mortgagors, the
availability of refinancing opportunities, the use of the properties as second
or vacation homes, the extent of the mortgagors' net equity in the Mortgaged
Properties and, where investment properties are securing the Mortgage Loans,
tax-related considerations and the availability of other investments. The rate
of principal payment may also be subject to seasonal variations. The prepayment
experience on Home Equity Loans may differ from those of other Mortgage Loans
and may differ between first-priority and second-priority Home Equity Loans.
Similar types of factors may affect the rate of prepayments, delinquencies and
losses on Contracts.
The rate of principal prepayments on pools of conventional housing loans
has fluctuated significantly in recent years. Generally, if prevailing interest
rates were to fall significantly below the interest rates on the Mortgage Loans,
the Mortgage Loans would be expected to prepay at higher rates than if
prevailing rates were to remain at or above the interest rates on the Mortgage
Loans. Conversely, if interest rates were to rise above the interest rates on
the Mortgage Loans, the Mortgage Loans would be expected to prepay at lower
rates than if prevailing rates were to remain at or below interest rates on the
Mortgage Loans. The timing of changes in the rate of prepayments may
significantly affect a Certificateholder's actual yield to maturity, even if the
average rate of principal payments is consistent with a Certificateholder's
expectation. In general, the earlier a prepayment of principal the greater the
effect on a Certificateholder's yield to maturity. As a result, the effect on a
Certificateholder's yield of principal payments occurring at a rate higher (or
lower) than the rate anticipated by the investor during the period immediately
following the issuance of the related series of Certificates will not be offset
by a subsequent like reduction (or increase) in the rate of principal payments.
When a Mortgage Loan or Contract prepays in full, the borrower will
generally be required to pay interest on the amount of prepayment only to the
prepayment date. When a partial prepayment of principal is made on a Mortgage
Loan (other than a simple interest Home Equity Loan), the borrower generally
will not be required to pay interest on the amount of the partial prepayment
during the month in which such prepayment is made. In addition, unless otherwise
specified in the related Prospectus Supplement, a full or partial prepayment
will not be required to be passed through to Certificateholders until the month
following receipt.
Unless otherwise specified in the Prospectus Supplement, interest with
respect to Home Equity Loans accrues on a simple interest basis. Under the
simple interest method, regularly scheduled payments (which are based on the
amortization of the loan over a series of equal monthly payments) and other
payments are applied first to interest accrued to the date payment is received
and then to reduce the unpaid principal balance of the related loan. Each
regularly scheduled monthly interest payment is calculated by multiplying the
outstanding principal balance of the loan by the stated interest rate. Such
product is then multiplied by a fraction, the numerator of which is the number
of days elapsed since the preceding payment of interest was made and the
denominator of which is either 365 or 360, depending on applicable state law.
As a result of the payment terms of simple interest Home Equity Loans, the
making of a scheduled payment on, or the prepayment of, such a Home Equity Loan
prior to its scheduled due date may result in the collection of less than one
month's interest on such Home Equity Loan for the period since the preceding
payment was made. Conversely, if the scheduled payment on such a Home Equity
Loan is made after its scheduled payment date or the Home Equity Loan is prepaid
after the scheduled due date, the collection of interest on such Home Equity
Loan for such period may be greater than one month's interest on such Home
Equity Loan. In addition, the extent to which simple interest Home Equity Loans
experience early payment or late payment of scheduled payments will
correspondingly change the amount of principal received during a monthly period
and, accordingly, the amount of principal to be distributed on the related
Distribution Date and the amount of unpaid principal due at the stated maturity
of such Home Equity Loans. To the extent shortfalls attributable to prepayments
or the early receipt of a scheduled payment on Home Equity Loans are not
compensated for by any forms of credit enhancement described in the Prospectus
Supplement, the Certificateholders will experience delays or losses in amounts
due them.
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If a Mortgagor pays more than one scheduled installment on a simple
interest Home Equity Loan at a time, the entire amount of the additional
installment will be treated as a principal prepayment and passed through to
Certificateholders in the month following the month of receipt. In such case,
although the Mortgagor will not be required to make the next regularly scheduled
installment, interest will continue to accrue on the principal balance of the
Home Equity Loan, as reduced by the application of the early installment. As a
result, when the Mortgagor pays the next required installment, the installment
so paid may be insufficient to cover the interest that has accrued since the
last payment by the Mortgagor. Notwithstanding such insufficiency, the
Mortgagor's Home Equity Loan would be considered to be current. If specified in
the Prospectus Supplement, the Company will be required to advance the amount of
such insufficiency. This insufficiency will continue until the installment
payments received are once again sufficient to cover all accrued interest and to
reduce the principal balance of the Home Equity Loan. Depending on the principal
balance and interest rate of the related Home Equity Loan and on the number of
installments that were paid early, there may be extended periods of time during
which Home Equity Loans that are current are not amortizing.
Factors other than those identified herein and in the Prospectus Supplement
could significantly affect principal prepayments at any time and over the lives
of the Certificates. The relative contribution of the various factors affecting
prepayment may also vary from time to time. There can be no assurance as to the
rate of payment of principal of the Mortgage Loans, Agency Securities or
Contracts at any time or over the lives of the Certificates.
The Prospectus Supplement relating to a series of Certificates will discuss
in greater detail the effect of the rate and timing of principal payments
(including prepayments), delinquencies and losses on the yield, weighted average
lives and maturities of such Certificates. If a series of Certificates is backed
by a pool of Mortgage Loans that includes Home Equity Loans providing for
balloon payments at maturity, the Prospectus Supplement will contain information
regarding the potential effect of such Mortgage Loans on the weighted average
lives of such Certificates.
SERVICING OF THE MORTGAGE LOANS AND CONTRACTS
With respect to each series of Certificates, the related Mortgage Loans
will be serviced either (i) by the Company as primary servicer, (ii) by the
Company as master servicer, (iii) by another institution as primary servicer or
(iv) by another institution as master servicer. If an institution other than the
Company acts as primary servicer or as master servicer for a series, the Company
may have no servicing obligations with respect to such series. If the Company or
another institution acts as master servicer with respect to a series, the
related Agreement may provide either (i) that the master servicer may delegate
all or a portion of the servicing duties described below to other servicers but
shall remain directly liable for all such servicing duties (a 'Direct Master
Servicing Arrangement'), or (ii) that certain of the servicing duties described
below may be performed directly by other servicers, pursuant to servicing
agreements entered into between such servicers and the Company, as seller, and
assigned to the Trustee, in which event the master servicer will be obligated to
supervise such servicers' performance but will not itself be obligated to
perform such duties (a 'Supervisory Master Servicing Arrangement'). Unless
otherwise specified in the Prospectus Supplement, if the Company is acting as
master servicer under a Direct Master Servicing Arrangement, the servicing
agreement entered into between the Company and the direct servicer will be
deemed to be between the Company and the direct servicer alone, and the Trustee
and the Certificateholders will have no claims, obligations, duties or
liabilities with respect thereto. Each master servicer will have the ability to
terminate any such other servicer upon terms that will be agreed to at or before
the time the related series of Certificates is issued. Unless otherwise
specified in the Prospectus Supplement, in the event that the master servicer is
no longer acting as such for the series, the Trustee or a successor master
servicer shall succeed to the master servicer's rights under the servicing
agreement with the primary servicer.
The Prospectus Supplement for each series will specify whether the Company
or another institution will act as primary servicer or master servicer for such
series, and if there is a master servicer, whether the master servicing
arrangement is a Direct Master Servicing Arrangement or a Supervisory Master
Servicing Arrangement. If the Company acts as master servicer for a series under
a Direct Master Servicing Arrangement, all references herein to the Company as
servicer should be read to refer to the Company as master servicer, as
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appropriate. If the Company acts as master servicer for a series under a
Supervisory Master Servicing Arrangement, such references should be read to
refer to the direct servicers of such series, acting under the supervision of
the Company as master servicer. If an institution other than the Company acts as
primary servicer for a series, or acts as master servicer for such series under
a Direct Master Servicing Arrangement, all references herein to the Company as
servicer should be read to refer to such institution as primary or master
servicer, as appropriate. If an institution other than the Company acts as
master servicer with respect to a series under a Supervisory Master Servicing
Arrangement, such references should be read to refer to the direct servicers of
such series, acting under the supervision of such institution as master
servicer.
With respect to each series of Certificates, except to the extent the
Agreement specifically prescribes other servicing standards, the related
Mortgage Loans will be serviced under servicing standards substantially
equivalent to those required for approval by FNMA or FHLMC.
COLLECTION AND OTHER SERVICING PROCEDURES
Mortgage Loans. The Company, as servicer, will be responsible for making
reasonable efforts to collect all payments called for under the Mortgage Loans
and shall, consistent with each Agreement, follow such collection procedures as
it follows with respect to mortgage loans in its servicing portfolio which are
comparable to the Mortgage Loans. Consistent with the above, the Company, as
servicer, may, in its discretion, (i) waive any late payment charge and (ii) if
a default on the related Mortgage Loan has occurred or is reasonably
foreseeable, arrange with the mortgagor, at any time prior to foreclosure, a
schedule for the payment of principal and interest due and unpaid for a period
of up to two years after the date upon which the arrangement with the mortgagor
is entered into (generally, the arrangement period will not be more than
eighteen months). In the event of any such arrangement the Company will be
responsible for distributing funds with respect to such Mortgage Loan during the
scheduled period in accordance with the original amortization schedule thereof
and without regard to the temporary modification thereof.
The Company, as servicer, will be obligated to follow such normal practices
and procedures as it deems necessary or advisable to realize upon a defaulted
Mortgage Loan. In this regard, the Company, as servicer, may (directly or
through a local assignee) sell the property at a foreclosure or trustee's sale,
negotiate with the mortgagor for a deed in lieu of foreclosure or, in the event
a deficiency judgment is available against the mortgagor or other person (see
'Certain Legal Aspects of the Mortgage Loans and Contracts--Anti-Deficiency
Legislation and Other Limitations on Lenders' for a description of the limited
availability of deficiency judgments), foreclose against such property and
proceed for the deficiency against the appropriate person. The amount of the
ultimate net recovery (including the proceeds of any pool insurance or other
guarantee), after reimbursement to the Company, as servicer, of its expenses
incurred in connection with the liquidation of any such defaulted Mortgage Loan
(including those described in the next paragraph in the case of second-lien Home
Equity Loans) and prior unreimbursed advances of principal and interest,
delinquent taxes, assessments, insurance premiums and comparable items and
property protection expenses with respect thereto, will be credited to the Loan
Payment Record when realized, and will be distributed to Certificateholders on
the next Distribution Date following the month of receipt. If specified in the
Prospectus Supplement, if such net recovery exceeds the Principal Balance of
such Mortgage Loan plus one month's interest thereon at the Remittance Rate, the
excess will be paid to the Company as additional servicing compensation. The
Company will not be required to expend its own funds in connection with any
foreclosure or towards the restoration of any Mortgaged Property unless it shall
determine (i) that such restoration or foreclosure will increase the proceeds of
liquidation of the Mortgaged Loan to Certificateholders after reimbursement to
itself for such expenses and (ii) that such expenses will be recoverable to it
either through liquidation proceeds or insurance proceeds in respect of the
related Mortgage Loan.
The Company, as servicer, will not be obligated to foreclose on any
Mortgaged Property which it believes may be contaminated with or affected by
hazardous or toxic wastes, materials or substances. See 'Certain Legal Aspects
of the Mortgage Loans--Environmental Considerations'. The Company will not be
liable to the Certificateholders of a series if it fails to foreclose on a
Mortgaged Property securing a Mortgage Loan in the related Trust Fund which it
believes may be so contaminated or affected, even if such Mortgaged Property is,
in fact, not so contaminated or affected. If the Company does not foreclose on
such a Mortgaged Property, the Certificateholders of the related series may
experience a loss on the related Mortgage Loan. In addition, the
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Company will not be liable to the Certificateholders if, based on its belief
that no such contamination or effect exists, the Company forecloses on a
Mortgaged Property and takes title to such Mortgaged Property on behalf of the
related Trustee, and thereafter such Mortgaged Property is determined to be so
contaminated or affected.
Unless otherwise specified in the Prospectus Supplement relating to a
series of Certificates, if the Company determines that all amounts which it
expects to recover from or on account of such a Mortgage Loan have been
recovered, the Company's obligation, if any, to advance delinquent installments
of principal and interest on such Mortgage Loan will cease and the Principal
Balance of such Mortgage Loan will be allocated in reduction of the Certificate
Principal Balance of the Certificates of the related series in the manner in
which losses are allocated as specified in such Prospectus Supplement.
The Company may not foreclose on any Mortgaged Property securing a Home
Equity Loan unless it forecloses subject to any senior mortgage on such
Mortgaged Property and any outstanding property taxes. In the event of such
foreclosure, the Company generally will pay, subject to the final sentence of
this paragraph, the entire amount due on such senior mortgage loan to the senior
mortgagee at or prior to the foreclosure sale. If any senior mortgage is in
default after the Company has initiated its foreclosure action, the Company may
advance funds to keep the senior mortgage current until such time as the Company
satisfies such senior mortgage. In the event foreclosure proceedings have been
instituted on any senior mortgage prior to the initiation of the Company's
foreclosure action, the Company may satisfy the senior mortgage at the time of
the foreclosure sale or take other action to protect its interest in the related
Mortgaged Property. The Company will take or refrain from taking any such action
based upon the standards and considerations described in the preceding
paragraph.
Unless otherwise specified in the Prospectus Supplement, if a series of
Certificates includes one or more classes of subordinated Certificates, the
Agreement may permit the Company, at its option, to grant to the holders of
certain classes of subordinated Certificates (the 'Loss Certificates') certain
rights in connection with the foreclosure of defaulted Mortgage Loans in the
related Trust Fund. Such rights may be granted on the date of initial issuance
of such series of Certificates or thereafter and may or may not inure to the
benefit of successive holders of the Loss Certificates. These rights would
include, among other things, the right to receive notice from the Company that
foreclosure of a defaulted Mortgage Loan is imminent and the right to instruct
the Company to delay the commencement of foreclosure proceedings for up to six
months after the Mortgage Loan has become delinquent. The Company may also grant
the holders of the Loss Certificates the option to purchase a defaulted Mortgage
Loan at the conclusion of such six-month period, at a purchase price equal to
its unpaid principal balance plus accrued interest. The proceeds of such
purchase would be deposited in the related Collection Account as liquidation
proceeds. It will be a condition to the exercise of these latter rights that a
reserve fund for the benefit of holders of the other classes of Certificates of
such series and the Company as servicer be established. An amount equal to 125%
of the greater of the Scheduled Principal Balance (as defined in the related
Prospectus Supplement) of the defaulted Mortgage Loan and the then current
appraised value of the underlying Mortgaged Property, together with interest at
the applicable Mortgage Rate for the period that foreclosure is delayed, must be
deposited into such reserve fund. The principal purpose of the reserve fund
would be to protect holders of the other classes of Certificates of such series
from any diminution in value of the underlying Mortgaged Property attributable
to the delay in foreclosure. Amounts on deposit in the reserve fund may be
invested in certain specific investments acceptable to each of the rating
agencies that are rating such Certificates.
The exercise by holders of the Loss Certificates of the right to delay
foreclosure will not alter the obligation of the Company to make any advances of
delinquent Mortgage Loan payments specified in the Prospectus Supplement. Any
such advances made by the Company after the date foreclosure is delayed will be
recoverable by the Company from amounts on deposit in the reserve fund. The
Company will continue to be entitled to reimbursement for Nonrecoverable
Advances out of the assets of the related Trust Fund.
The exercise by the holders of the Loss Certificates of any right to delay
commencement of foreclosure proceedings as described above could affect the
amount recovered upon the liquidation of the related Mortgaged Property and
could also affect the extent of any losses recognized thereon if the amounts
available in the reserve fund are not sufficient to make up the difference
between the net liquidation proceeds and the unpaid principal balance of the
related defaulted Mortgage Loan. There can be no assurance that this situation
would not arise under circumstances in which it could be in the interest of
other classes of Certificates to proceed promptly to pursue remedies against the
mortgagor and Mortgaged Property in order to expedite recovery on a defaulted
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Mortgage Loan. Any right to delay commencement of foreclosure proceedings
granted to the holders of the Loss Certificates would terminate in certain
specified circumstances, including when such Class's Certificate Principal
Balance had been reduced to zero.
With respect to Cooperative Loans, any prospective purchaser will generally
have to obtain the approval of the board of directors of the relevant
Cooperative before purchasing the shares and acquiring rights under the related
proprietary lease or occupancy agreement. See 'Certain Legal Aspects of the
Mortgage Loans and Contracts' herein. This approval is usually based on the
purchaser's income and net worth and numerous other factors. Although the
Cooperative's approval is unlikely to be unreasonably withheld or delayed, the
necessity of acquiring such approval could limit the number of potential
purchasers for those shares and otherwise limit the Trust Fund's ability to sell
and realize the value of those shares.
In general, a 'tenant-stockholder' (as defined in Code Section 216(b)(2))
of a corporation that qualifies as a 'cooperative housing corporation' within
the meaning of Code Section 216(b)(1) is allowed a deduction for amounts paid or
accrued within his taxable year to the corporation representing his
proportionate share of certain interest expenses and certain real estate taxes
allowable as a deduction under Code Section 216(a) to the corporation under Code
Sections 163 and 164. In order for a corporation to qualify under Code Section
216(b)(1) for its taxable year in which such items are allowable as a deduction
to the corporation, such Section requires, among other things, that at least 80%
of the gross income of the corporation be derived from its tenant-stockholders
(as defined in Code Section 216(b)(2)). By virtue of this requirement, the
status of a corporation for purposes of Code Section 216(b)(1) must be
determined on a year-to-year basis. Consequently, there can be no assurance that
Cooperatives relating to the Cooperative Loans will qualify under such Section
for any particular year. In the event that such a Cooperative fails to qualify
for one or more years, the value of the collateral securing any related
Cooperative Loans could be significantly impaired because no deduction would be
allowable to tenant-stockholders under Code Section 216(a) with respect to those
years. In view of the significance of the tax benefits accorded
tenant-stockholders of a corporation that qualifies under Code Section
216(b)(1), the likelihood that such a failure would be permitted to continue
over a period of years appears remote.
If a Mortgaged Property has been or is about to be conveyed by the
mortgagor, the Company, as servicer, will be obligated to accelerate the
maturity of the Mortgage Loan, unless it reasonably believes it is unable to
enforce that Mortgage Loan's 'due-on-sale' clause under applicable law or such
enforcement would adversely affect or jeopardize coverage under any related
primary mortgage insurance policy or pool insurance policy. If it reasonably
believes it may be restricted by law, for any reason, from enforcing such a
'due-on-sale' clause, the Company may enter into an assumption and modification
agreement with the person to whom such property has been or is about to be
conveyed, pursuant to which such person becomes liable under the Mortgage Note.
Any fee collected by the Company for entering into an assumption agreement will
be retained by the Company as additional servicing compensation. For a
description of circumstances in which the Company may be unable to enforce
'due-on-sale' clauses, see 'Certain Legal Aspects of the Mortgage Loans and
Contracts-- Enforceability of Certain Provisions'. In connection with any such
assumption, the Mortgage Rate borne by the related Mortgage Note may not be
decreased.
The Company, as servicer, will maintain with one or more depository
institutions one or more accounts into which it will deposit all payments of
taxes, insurance premiums, assessments or comparable items received for the
account of the mortgagors. Withdrawals from such account or accounts may be made
only to effect payment of taxes, insurance premiums, assessments or comparable
items, to reimburse the Company, or applicable servicer, out of related
collections for any cost incurred in paying taxes, insurance premiums and
assessments or otherwise preserving or protecting the value of the Mortgages, to
refund to mortgagors any amounts determined to be overages and to pay interest
to mortgagors on balances in such account or accounts to the extent required by
law.
So long as it acts as servicer of the Mortgage Loans, the Company, and any
successor to the Company appointed following an Event of Default, will be
required to maintain certain insurance covering errors and omissions in the
performance of its obligations as servicer and certain fidelity bond coverage
ensuring against losses through wrongdoing of its officers, employees and
agents.
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Contracts. Pursuant to the Agreement, the Company, as servicer, will
service and administer the Contracts assigned to the Trustee as more fully set
forth below. The Company, either directly or through servicers subject to
general supervision by the Company, will perform diligently all services and
duties specified in each Agreement, in the same manner as prudent lending
institutions servicing manufactured housing installment sales contracts of the
same type as the Contracts in those jurisdictions where the related Manufactured
Homes are located. The Company, as servicer, will monitor the performance of
each other servicer, if any, and, unless the related Prospectus Supplement
states that a Supervisory Master Servicing Arrangement will be in effect, will
remain liable for the servicing of the Contracts in accordance with the terms of
the Agreement. The duties to be performed by the Company will include collection
and remittance of principal and interest payments, collection of insurance
claims and, if necessary, repossession.
The Agreement will provide that, when any Manufactured Home securing a
Contract is about to be conveyed by the borrower, the Company, as servicer, to
the extent it has knowledge of such prospective conveyance and prior to the time
of the consummation of such conveyance, may exercise its rights to accelerate
the maturity of such Contract under the applicable 'due-on-sale' clause, if any,
unless the Company reasonably believes it is unable to enforce such
'due-on-sale' clause under applicable law. In such case, the Company is
authorized to take or enter into an assumption agreement from or with the person
to whom such Manufactured Home has been or is about to be conveyed, pursuant to
which such person becomes liable under the Contract.
Under the Agreement, the Company, as servicer, will repossess or otherwise
comparably convert the ownership of properties securing such of the related
Contracts as come into and continue in default and as to which no satisfactory
arrangements can be made for collection of delinquent payments. In connection
with such repossession or other conversion, the Company will follow such
practices and procedures as it deems necessary or advisable and as shall be
normal and usual in its general servicing activities. The Company, however, will
not be required to expend its own funds in connection with any repossession or
towards the restoration of any property unless it determines (i) that such
restoration or repossession will increase the proceeds of liquidation of the
related Contract to the Certificateholders after reimbursement to itself for
such expenses and (ii) that such expenses will be recoverable to it either
through liquidation proceeds or through insurance proceeds.
PRIVATE MORTGAGE INSURANCE
Generally, Mortgage Loans that the Company originates or acquires do not
have loan-to-value ratios in excess of 95% of their Original Value (as defined
above). Unless otherwise specified in the Prospectus Supplement, Mortgage Loans
(other than Home Equity Loans) that the Company originates or acquires that have
an original principal amount exceeding 80% of Original Value usually will have
private mortgage insurance. The Company generally requires such coverage to
continue until the outstanding principal amount equals or is less than 80% of
the greater of the Original Value and, if permitted under any pool insurance
policy obtained with respect to a series, the then current value of the property
as evidenced by an appraisal thereof satisfactory to the Company. Private
mortgage insurance policies may be provided by General Electric Mortgage
Insurance Corporation, an affiliate of the Company. Any mortgage insurance
relating to a pool of Contracts will be described in the related Prospectus
Supplement. The Company does not require private mortgage insurance policies on
Home Equity Loans. A private mortgage insurance policy may provide that, as an
alternative to paying a claim thereunder, the mortgage insurer will have the
right to purchase the Mortgage Loan following the receipt of a notice of
default, at a purchase price equal to the sum of the principal balance of the
Mortgage Loan, accrued interest thereon and the amount of certain advances made
by the Company as servicer with respect to the Mortgage Loan. The mortgage
insurer may have such purchase right after the borrower has failed to make three
scheduled monthly payments (or one payment if it is the first payment due on the
Mortgage Loan) or after any foreclosure or other proceeding affecting the
Mortgage Loan or the Mortgaged Property has been commenced. The proceeds of any
such purchase will be distributed to Certificateholders on the applicable
Distribution Date. A mortgage insurer may be more likely to exercise such
purchase option when prevailing interest rates are low relative to the interest
rate borne by the defaulted Mortgage Loan, in order to reduce the aggregate
amount of accrued interest that the insurer would be obligated to pay upon
payment of a claim.
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HAZARD INSURANCE
Mortgage Loans. The Company, as servicer, will cause to be maintained for
each Mortgaged Property a hazard insurance policy. The coverage of such policy
is required to be in an amount not less than the maximum insurable value of the
improvements securing the related Mortgage Loan from time to time or the
principal balance owing on such Mortgage Loan from time to time, whichever is
less. All amounts collected by the Company for the benefit of the related Trust
Fund under any hazard policy (except for amounts to be applied to the
restoration or repair of property subject to the related Mortgage or property
acquired by foreclosure or amounts released to the related mortgagor in
accordance with the Company's normal servicing procedures) will be credited to
the related Loan Payment Record and deposited in the applicable Certificate
Account at the times and in the manner described under 'Loan Payment Record'
below.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements on the property by fire,
lightning, explosion, smoke, windstorm and hail, riot, strike and civil
commotion, subject to the conditions and exclusions particularized in each
policy. Although the policies relating to the Mortgage Loans will be
underwritten by different insurers and, therefore, will not contain identical
terms and conditions, the basic terms thereof are dictated by state law. Such
policies typically do not cover any physical damage resulting from the
following: war, revolution, governmental actions, floods and other water-related
causes, earth movement (including earthquakes, landslides and mud flow), nuclear
reactions, pollution, wet or dry rot, vermin, rodents, insects or domestic
animals, theft and, in certain cases, vandalism. The foregoing list is merely
indicative of certain kinds of uninsured risks and is not intended to be
all-inclusive. If the property securing a Mortgage Loan is located in a
federally designated flood area, the Agreement will require that flood insurance
be maintained in such amounts as would be required by the Federal National
Mortgage Association in connection with its mortgage loan purchase program. The
Company may also purchase special hazard insurance against certain of the
uninsured risks described above. See 'Credit Support--Special Hazard Insurance'.
Most of the properties securing the Mortgage Loans will be covered by
homeowners' insurance policies, which, in addition to the standard form of fire
and extended coverage, provide coverage for certain other risks. These
homeowners' policies typically contain a 'coinsurance' clause which in effect
requires the insured at all times to carry insurance of a specified percentage
(generally 80% to 90%) of the full replacement value of the improvements on the
property in order to recover the full amount of any partial loss. If the
insured's coverage falls below this specified percentage, then the insurer's
liability in the event of partial loss will not exceed the lesser of (i) the
actual cash value (generally defined as replacement cost at the time and place
of loss, less physical depreciation) of the improvements damaged or destroyed,
or (ii) such proportion of the loss as the amount of insurance carried bears to
the specified percentage of the full replacement cost of such improvements.
Since the amount of hazard insurance the Company is required to cause to be
maintained on the improvements securing the Mortgage Loans declines as the
principal balances owing thereon decrease, if the residential properties
securing the Mortgage Loans appreciate in value over time, the effect of
coinsurance in the event of partial loss may be that hazard insurance proceeds
will be insufficient to restore fully the damaged property.
The Company, as servicer, will cause to be maintained on any Mortgaged
Property acquired upon foreclosure, or by deed in lieu of foreclosure, on behalf
of the Trustee hazard insurance with extended coverage in an amount which is at
least equal to the lesser of (i) the maximum insurable value from time to time
of the improvements which are a part of such property or (ii) the unpaid
principal balance of the related Mortgage Loan, plus, in the case of a second
priority Home Equity Loan, the unpaid principal balance of any senior mortgage
loan, at the time of such foreclosure or deed in lieu of foreclosure, plus
accrued interest and the good-faith estimate of the Company of related
liquidation expenses to be incurred in connection therewith.
The Company, as servicer, may maintain, in lieu of causing individual
hazard insurance policies to be maintained with respect to each Mortgage Loan,
one or more blanket insurance policies covering hazard losses on the Mortgage
Loans. The Company will pay the premium for such policy on the basis described
therein and will pay any deductible amount with respect to claims under such
policy relating to the Mortgage Loans.
The Company will not require that a standard hazard or flood insurance
policy be maintained on the cooperative dwelling relating to any Cooperative
Loan. Generally, the Cooperative itself is responsible for
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maintenance of hazard insurance for the property owned by the Cooperative and
the tenant-stockholders of that Cooperative do not maintain individual hazard
insurance policies. To the extent, however, that a Cooperative and the related
borrower on a Cooperative Loan do not maintain such insurance or do not maintain
adequate coverage or any insurance proceeds are not applied to the restoration
of damaged property, any damage to such borrower's cooperative dwelling or such
Cooperative's building could significantly reduce the value of the collateral
securing such Cooperative Loan to the extent not covered by other credit
support.
Contracts. The terms of the Agreement will require the Company to cause to
be maintained with respect to each Contract one or more hazard insurance
policies which provide, at a minimum, the same coverage as a standard form fire
and extended coverage insurance policy that is customary for manufactured
housing, issued by a company authorized to issue such policies in the state in
which the Manufactured Home is located, and in an amount which is not less than
the maximum insurable value of such Manufactured Home or the principal balance
due from the borrower on the related Contract, whichever is less. When a
Manufactured Home's location was, at the time of origination of the related
Contract, within a federally designated special flood hazard area, the Company
also shall cause such flood insurance to be maintained, which coverage shall be
at least equal to the minimum amount specified in the preceding sentence or such
lesser amount as may be available under the federal flood insurance program.
The Company, as servicer, may maintain, in lieu of causing individual
hazard insurance policies to be maintained with respect to each Manufactured
Home, and shall maintain, to the extent that the related Contract does not
require the borrower to maintain a hazard insurance policy with respect to the
related Manufactured Home, one or more blanket insurance policies covering
losses on the borrowers' interests in the Contracts resulting from the absence
or insufficiency of individual hazard insurance policies. The Company will pay
the premium for such policy on the basis described therein and will pay any
deductible amount with respect to claims under such policy relating to the
Contracts.
The Company, to the extent practicable, will cause the borrowers to pay all
taxes and similar governmental charges when and as due. To the extent that
nonpayment of any taxes or charges would result in the creation of a lien upon
any Manufactured Home having a priority equal or senior to the lien of the
related Contract, the Company will pay any such delinquent tax or charge. Any
such payment made by the Company will be reimbursable to the Company as
described under '--Loan Payment Record' below.
If the Company repossesses a Manufactured Home on behalf of the Trustee,
the Company will either (i) maintain at its expense hazard insurance with
respect to such Manufactured Home, or (ii) indemnify the Trustee against any
damage to such Manufactured Home prior to resale or other disposition.
UNANTICIPATED RECOVERIES OF LOSSES ON THE MORTGAGE LOANS
Unless otherwise specified in the Prospectus Supplement, in the event that
in any calendar month the Company recovers an amount (an 'Unanticipated
Recovery') as a result of events such as an unanticipated insurance settlement,
tax refund or mortgagor bankruptcy distribution, in respect of principal of a
Mortgage Loan which had previously been allocated as a loss to any class of
Certificates, on the Distribution Date in the next succeeding calendar month the
Trustee shall distribute to the holders of each outstanding class to which such
loss had previously been allocated its share of such Unanticipated Recovery in
an amount not to exceed the amount of such loss previously allocated to such
class, provided that following the Distribution Date on which the Certificate
Principal Balance of a class of Certificates has been reduced to zero, the
holders of such class shall not be entitled to any share of an Unanticipated
Recovery. Any distributions of Unanticipated Recoveries will not reduce the
Certificate Principal Balances of the class of Certificates receiving such
recoveries.
ADVANCES
Unless otherwise specified in the Prospectus Supplement, in the event that
any borrower fails to make any payment of principal or interest required under
the terms of a Mortgage Loan or Contract, the Company, as servicer, will be
obligated to advance the entire amount of such payment adjusted in the case of
any delinquent interest payment to the applicable Remittance Rate. Unless
otherwise specified in the Prospectus Supplement and except as described above
under 'Credit Support--Purchases of Liquidating Loans', this obligation to
advance will be limited to amounts which the Company reasonably believes will be
recoverable by it out of liquidation
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proceeds or otherwise in respect of such Mortgage Loan or Contract. The Company,
or the applicable servicer, will be entitled to reimbursement for any such
advance from related late payments on the Mortgage Loan or Contract as to which
such advance was made. Furthermore, unless otherwise specified in the Prospectus
Supplement, the Company, or the applicable servicer, will be entitled to
reimbursement for any such advance (i) from liquidation proceeds or insurance
proceeds received if such Manufactured Home is repossessed or such Mortgage Loan
is foreclosed (and is not purchased by the Company, as servicer, pursuant to any
obligation it may have to purchase Liquidating Loans) prior to any payment to
Certificateholders in respect of the repossession or foreclosure and (ii) from
receipts or recoveries on all other Mortgage Loans or Contracts or from any
other assets of the Trust Fund, for all or any portion of such advance which the
Company determines, in good faith, may not be ultimately recoverable from such
liquidation or insurance proceeds (a 'Nonrecoverable Advance'). Any
Nonrecoverable Advance will be reimbursable out of the assets of the Trust Fund.
The amount of any scheduled payment required to be advanced by the Company will
not be affected by any agreement between the Company and a borrower providing
for the postponement or modification of the due date or amount of such scheduled
payment. If specified in the Prospectus Supplement, the Trustee for the related
series will make advances of delinquent payments of principal and interest in
the event of a failure by the Company, as servicer, to perform such obligation.
Unless otherwise specified in the Prospectus Supplement, until any Company
obligation to purchase Liquidating Loans is exhausted, the Company will advance
delinquent installments of principal and interest (adjusted to the applicable
Remittance Rate) on the Mortgage Loans as described above in an aggregate amount
up to the amount of its remaining purchase obligation, irrespective of whether
the Company believes any such advance will be recoverable. The Company's
obligation to advance delinquent installments of principal and interest
(adjusted to the applicable Remittance Rate) on the Mortgage Loans which it
deems recoverable will be unaffected by the exhaustion of any obligation of the
Company to purchase Liquidating Loans. In the event that the Company has an
obligation to purchase Liquidating Loans, any outstanding unreimbursed advances
may be charged against the amount of such obligation, subject to reinstatement
on account of net recoveries on such Mortgage Loan.
Any such obligation to make advances may be limited to amounts due holders
of senior Certificates of the related series or may be limited to specified
periods or otherwise as specified in the Prospectus Supplement.
The Company, or the applicable servicer, will make such advances in order
to maintain a regular flow of scheduled interest and principal payments to
holders of the relevant classes of Certificates. Such advances do not represent
an obligation of the Company or the applicable servicer to guarantee or insure
against losses.
LOAN PAYMENT RECORD
The Agreement will require that the Company, as servicer, establish and
maintain a Loan Payment Record to which will be credited the following payments
received by the Company with respect to the Mortgage Loans or Contracts included
in the related Trust Fund:
(i) All payments on account of principal, including Principal
Prepayments (other than principal payments due and payable on or before,
and Principal Prepayments received before, the Cut-off Date), received from
borrowers (excluding any amounts specified in the Prospectus Supplement);
(ii) All payments (other than those due and payable on or before the
Cut-off Date) on account of interest received from borrowers (adjusted to
the applicable Remittance Rate) and excluding any other amounts specified
in the Prospectus Supplement;
(iii) All amounts received by the Company, or the applicable servicer,
in connection with the liquidation of any Mortgaged Property or
Manufactured Home, and the purchase price including applicable interest
thereon, of any Mortgage Loan or Contract purchased by the Company pursuant
to the applicable Agreement or any amount paid in connection with the
substitution of a Mortgage Loan;
(iv) All proceeds received by the Company, or the applicable servicer,
under any private mortgage insurance or any title, hazard, special hazard,
pool or other insurance policy covering any Mortgage Loan or Contract,
other than proceeds to be applied to the restoration or repair of the
property subject to the related
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Mortgage or Contract or released to the borrower in accordance with the
normal servicing procedures of the Company;
(v) All proceeds received in respect of any Mortgaged Property
acquired on behalf of the Trustee; and
(vi) Unanticipated Recoveries.
The Company will not be required to credit to the Loan Payment Record payments
on any Mortgage Loan or Contract that has been previously released from the
Trust Fund, amounts representing fees or late charge penalties payable by
borrowers or amounts received by the Company for the account of borrowers for
application towards the payment of taxes, insurance premiums, assessments and
similar items.
Unless otherwise specified in the Prospectus Supplement, the Company, as
servicer, may, from time to time, make debits to the Loan Payment Record for the
following purposes:
(i) To reimburse the Company, or the applicable servicer, for expenses
incurred by it in connection with the liquidation of any Mortgage Loan
(including amounts advanced on any senior mortgage loans) or Manufactured
Home and prior unreimbursed advances of delinquent installments of
principal and interest, delinquent taxes, assessments, insurance premiums
and comparable items and property protection expenses with respect thereto,
in an amount not to exceed the amount of the proceeds from any such
liquidation (including insurance proceeds) credited to the Loan Payment
Record, and, if specified in the Prospectus Supplement, to the extent such
proceeds, net of such expenses, exceed the Principal Balance of such
Mortgage Loan or Contract plus one month's interest thereon at the
applicable Remittance Rate, to pay to the Company such excess as additional
servicing compensation;
(ii) To reimburse the Company, or the applicable servicer, for
expenses reimbursable under any insurance policy covering a Mortgage Loan
and amounts expended by the Company in good faith in connection with the
restoration of a Mortgaged Property damaged by an uninsured cause, in an
amount not to exceed the proceeds from any insurance covering such Mortgage
Loan and any liquidation thereof credited to the Loan Payment Record;
(iii) To reimburse the Company for certain expenses relating to the
Agreement as to which the Company is entitled to indemnification or
reimbursement pursuant to the Agreement;
(iv) To pay to the Company amounts received in respect of any Mortgage
Loan or Contract purchased by the Company as required by the Agreement to
the extent that the distribution of any such amounts on the Distribution
Date upon which the proceeds of such purchase are distributed would make
the total amount distributed in respect thereof greater than the Principal
Balance thereof plus, unless otherwise specified in the Prospectus
Supplement, one month's interest thereon at the applicable Remittance Rate,
net of any unreimbursed advances of delinquent installments of principal
and interest made by the Company;
(v) To reimburse the Company (or, if applicable, the Guarantor or any
other entity) for any previous advance of delinquent installments of
principal and interest (adjusted to the applicable Remittance Rate) in
respect of any Mortgage Loan or Contract to the extent of recoveries,
including late payments and liquidation proceeds, on such Mortgage Loan or
Contract;
(vi) To reimburse the Company from any borrower payment of interest or
other recovery with respect to a particular Mortgage Loan, to the extent
not previously retained by the Company, for unpaid servicing fees with
respect to such Mortgage Loan, subject to certain limitations;
(vii) To reimburse the Company (or, if applicable, the Trustee, the
Guarantor or any other entity) for any Nonrecoverable Advance;
(viii) To transfer funds to the Certificate Account; and
(ix) To deduct any amount credited to the Loan Payment Record in
error.
In addition, if specified in the Prospectus Supplement relating to a Trust
Fund which includes second-priority Home Equity Loans, the Company will be
entitled to be reimbursed, out of payments received on a second-priority Home
Equity Loan, for funds advanced to keep the related senior mortgages current.
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On the date or dates specified in the Prospectus Supplement (each, a
'Deposit Date') prior to each Distribution Date, unless otherwise specified in
the Prospectus Supplement, the Company will transfer to the Certificate Account
the payments in respect of the Mortgage Loans or Contracts described above, net
of any debits made thereto as described above, which were received by it after
the Cut-off Date and before the fifth business day next preceding such
Distribution Date (the 'Determination Date'), together with any required
advances of delinquent principal and interest payments to be made by it, except
(i) Principal Prepayments received during the month of such deposit (other than
as described in the next sentence) and all related payments of interest
representing interest for the month of deposit or any portion thereof and (ii)
payments which represent early receipt of scheduled payments of principal and
interest due on a date or dates subsequent to the first day of the month of
deposit. In addition, unless otherwise specified in the Prospectus Supplement,
the Company will transfer to the Certificate Account (i) the amount of any
voluntary prepayment in full (net of any interest thereon) received by the
Company (or, in the case of a Mortgage Loan master-serviced by the Company, of
which the Company receives notice) during the period from the first day through
the fifteenth day of the month of such Distribution Date and any payment made by
the Company in connection with the repurchase of a Mortgage Loan that has been
modified in lieu of refinancing during such period and (ii) the amount of any
Compensating Interest Payment for such Distribution Date, as described in the
Prospectus Supplement. The net amounts described in the two preceding sentences
are the 'Available Funds' for a series of Certificates with respect to any
Distribution Date, provided that such Available Funds shall not include
Unanticipated Recoveries. Unless otherwise specified in the Prospectus
Supplement, all transfers by the Company to the Certificate Account will be made
by transfer of next-day funds. Although such next-day funds may have been
credited to the Certificate Account, until such funds become available to the
Trustee under applicable law and procedures relating to such transfers, such
funds will not be available to Certificateholders. Unless otherwise specified in
the Prospectus Supplement, prior to transferring such funds, the Company may
commingle payments received in respect of the Mortgage Loans or Contracts and
may invest such payments for its own account. Income realized on the investment
of such payments pending deposit into the Certificate Account will be retained
by the Company as additional servicing compensation.
As a result of the Company's access to payments received in respect of the
Mortgage Loans prior to the time such payments become available to the Trustee
in the Certificate Account, creditors or a trustee-in-bankruptcy for the Company
may be able to assert rights in such payments superior to those of the Trustee.
If specified in the Prospectus Supplement, the Company may establish, or
provide for the establishment of, an account (the 'Collection Account') in lieu
of the Loan Payment Record described above. If so specified, all amounts to be
credited or debited to the Loan Payment Record will instead be deposited in or
withdrawn from the Collection Account.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
Unless otherwise specified in the Prospectus Supplement, the Company's
primary compensation for its servicing activities will come from the payment to
it, with respect to each interest payment on a Mortgage Loan or Contract, of all
or a portion of the difference between the Mortgage Rate for such Mortgage Loan
or Contract and the related Remittance Rate. In addition to the primary
compensation, the Company will retain all assumption fees, late payment charges
and other miscellaneous charges, including prepayment penalties, all to the
extent collected from borrowers and, unless otherwise specified in the
Prospectus Supplement, the investment income described in the second preceding
paragraph. In the event the Company or another institution is acting as master
servicer under an Agreement, the master servicer will receive compensation with
respect to the performance of its activities as master servicer.
Unless otherwise specified in the Prospectus Supplement, the Company will
be responsible for paying all expenses incurred in connection with the servicing
of the Mortgage Loans or Contracts (subject to limited reimbursement as
described in 'Loan Payment Record' above), including, without limitation,
payment of any premium for any Advance Guarantee, Liquidating Loan Guarantee,
Deposit Guarantee, pool insurance policy, special hazard policy, bankruptcy
bond, repurchase bond or other guarantee or surety, payment of the fees and the
disbursements of the Trustee, the Administrator (if any) and the independent
accountants, payment of the compensation of any direct servicers of the Mortgage
Loans, payment of all fees and expenses in connection with the realization upon
defaulted Mortgage Loans or Contracts and payment of expenses incurred in
connection with
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distributions and reports to Certificateholders. Unless otherwise specified in
the Prospectus Supplement, the Company may assign any of its primary servicing
compensation in excess of that amount customarily retained as servicing
compensation for similar assets.
RESIGNATION, SUCCESSION AND INDEMNIFICATION OF THE COMPANY
The Agreement will provide that, except as described in the second and
third succeeding paragraphs, the Company may not resign from its obligations and
duties as servicer or master servicer thereunder, except upon determination that
the Company's performance of such duties is no longer permissible under
applicable law or as provided in the last paragraph under this heading. No such
resignation will become effective until the Trustee or a successor has assumed
the Company's servicing obligations and duties under such Agreement. The
Guarantor's obligations under any Advance Guarantee, Liquidating Loan Guarantee
or Deposit Guarantee will, upon issuance thereof, be irrevocable, subject to
certain limited rights of assignment as described in the Prospectus Supplement
if applicable.
The Agreement will provide that neither the Company nor, if applicable, the
Guarantor, nor any of their respective directors, officers, employees or agents,
shall be under any liability to the Trust Fund or the Certificateholders of the
related series for taking any action or for refraining from taking any action
pursuant to such Agreement, or for errors in judgment; provided, however, that
neither the Company nor, if applicable, the Guarantor, nor any such person, will
be protected against any liability which would otherwise be imposed by reason of
willful misfeasance, bad faith or gross negligence in the performance of duties
or by reason of reckless disregard of obligations and duties thereunder. The
Agreement will also provide that the Company and, if applicable, the Guarantor
and their respective directors, officers, employees and agents are entitled to
indemnification by the related Trust Fund and will be held harmless against any
loss, liability or expense incurred in connection with any legal action relating
to the Agreement or the Certificates, other than any loss, liability or expense
related to any specific Mortgage Loan or Contract (except as otherwise
reimbursable under the Agreement) or incurred by reason of willful misfeasance,
bad faith or gross negligence in the performance of duties thereunder or by
reason of reckless disregard of obligations and duties thereunder. In addition,
each Agreement will provide that neither the Company nor, if applicable, the
Guarantor is under any obligation to appear in, prosecute or defend any legal
action which is not incidental to the Company's servicing responsibilities under
such Agreement or the Guarantor's payment obligations under any Limited
Guarantee, respectively, and which in its respective opinion may involve it in
any expense or liability. Each of the Company and, if applicable, the Guarantor
may, however, in its respective discretion undertake any such action which it
may deem necessary or desirable in respect of such Agreement and the rights and
duties of the parties thereto and the interests of the Certificateholders
thereunder. In such event, the legal expenses and costs of such action and any
liability resulting therefrom will be expenses, costs and liabilities of the
Trust Fund, and the Company and, if applicable, the Guarantor, will be entitled
to be reimbursed therefor from amounts credited to the Loan Payment Record.
Any corporation into which the Company may be merged or consolidated or any
corporation resulting from any merger, conversion or consolidation to which the
Company is a party, or any corporation succeeding to the business of the
Company, or any corporation more than 50% of the voting stock of which is owned,
directly or indirectly, by General Electric Company, or any limited partnership,
the sole general partner of which is either the Company or a corporation more
than 50% of the voting stock of which is owned, directly or indirectly, by
General Electric Company, which assumes the obligations of the Company, will be
the successor of the Company under each Agreement.
The Company also has the right to assign its rights, and delegate its
duties and obligations, as servicer under the Agreement for each series of
Certificates; provided that (i) the purchaser or transferee accepting such
assignment or delegation is qualified to service mortgage loans for FNMA or
FHLMC, is reasonably satisfactory to the Trustee for such series of Certificates
and executes and delivers to the Trustee an agreement, in form and substance
reasonably satisfactory to the Trustee, which contains an assumption by such
purchaser or transferee of the due and punctual performance and observance of
each covenant and condition to be performed or observed by the servicer under
the Agreement from and after the date of such agreement and (ii) each applicable
Rating Agency's rating of any Certificates of such series in effect immediately
prior to such assignment or delegation would not be qualified, downgraded or
withdrawn as a result thereof. In the case of any such assignment or delegation,
the Company will be released from its obligations as servicer under the
Agreement except for liabilities and obligations incurred prior to such
assignment or delegation.
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THE POOLING AND SERVICING AGREEMENT
The following summaries describe certain provisions of the Pooling and
Servicing Agreements. The summaries do not purport to be complete and are
subject to, and qualified in their entirety by reference to, the provisions of
the Pooling and Servicing Agreements. Where particular provisions or terms used
in the Pooling and Servicing Agreements are referred to, such provisions or
terms are as specified in the Pooling and Servicing Agreements. Each of the
Pooling and Servicing Agreements may establish one or more Trust Funds.
ASSIGNMENT OF ASSETS
Assignment of the Mortgage Loans. At the time of issuance of a series of
Certificates, the Company, as seller, will assign the related Mortgage Loans to
the Trustee, together with all principal and interest, subject to exclusions
specified in the Prospectus Supplement, received by the Company on or with
respect to such Mortgage Loans on or after the Cut-off Date other than principal
and interest due and payable on or before, and Principal Prepayments received
before, the Cut-off Date. The Trustee will, concurrently with such assignment,
execute, countersign and deliver the Certificates to the Company in exchange for
the Mortgage Loans. Each Mortgage Loan will be identified in a schedule
appearing as an exhibit to the Agreement. Such schedule will include information
as to the Principal Balance of each Mortgage Loan as of the Cut-off Date, as
well as information respecting the Mortgage Rate, the scheduled monthly payment
of principal and interest as of the Cut-off Date and the maturity date of each
Mortgage Note.
In addition, as to each Mortgage Loan, the Company, as seller, will deliver
to the Trustee, unless otherwise specified in the Prospectus Supplement or as
described below, the Mortgage Note and Mortgage, any assumption and modification
agreement and an assignment of the Mortgage to the Trustee in recordable form
(other than in respect of unavailable recording information). In addition,
unless otherwise specified in the Prospectus Supplement, the Company will also
deliver to the Trustee originals of the recorded Mortgages, any intervening
assignments of the Mortgages and title insurance policies with respect to the
Mortgage Loans, as promptly as practicable, and in any case within thirty days,
after receiving all such documents from the applicable recording offices and
title insurance companies. Pending such delivery, the Company will retain and
furnish to the Trustee upon request copies of the Mortgages and intervening
assignments of Mortgage delivered for recording and the evidence of title
insurance issued at origination of the Mortgage Loans. The Company will retain
and furnish to the Trustee upon request any applicable evidence of primary
mortgage insurance so long as such insurance remains in force.
The Company may deliver to the Trustee, in lieu of the original Mortgage
Note, a new promissory note signed by the borrower confirming its obligation
under the original Mortgage Note (a 'Confirmatory Mortgage Note'). Furthermore,
a Trust Fund may include Mortgage Loans where the original Mortgage Note or a
Confirmatory Mortgage Note is not delivered to the Trustee if the Company
instead delivers to the Trustee an affidavit certifying that the Company was the
sole owner of the indebtedness evidenced by such note and the original thereof
has been lost or destroyed and the Company indemnifies the Trust Fund against
any loss, liability, damage, claim or expense resulting from the Company's
failure to have delivered the original Mortgage Note or Confirmatory Mortgage
Note. Such indemnification will be terminated if the Company subsequently
delivers to the Trustee the original Mortgage Note or a Confirmatory Mortgage
Note. Unless otherwise specified in the applicable Prospectus Supplement, no
more than 1% of the Mortgage Loans in any Mortgage Pool, measured by Principal
Balance as of the related Cut-Off Date, may consist of Mortgage Loans as to
which the Company has failed to deliver the original Mortgage Note or
Confirmatory Mortgage Note.
Unless otherwise specified in the Prospectus Supplement, the Company may
refrain from recording the assignments of the Mortgage Loans prior to the
occurrence of certain events set forth in the related Agreement. Although such
recordation is not necessary to make the assignment of the Mortgage Loans to the
Trustee effective, if the Company were to make a sale, assignment, satisfaction
or discharge of any Mortgage Loan prior to recording or filing the assignments
to the Trustee, the other parties to such sale, assignment, satisfaction or
discharge might have rights superior to those of the Trustee. If the Company
were to do so without authority under the Agreement, it would be liable to the
related Certificateholders. Moreover, if insolvency proceedings relating to the
Company were commenced prior to such recording or filing, creditors of the
Company may be able to assert rights in the affected Mortgage Loans superior to
those of the Trustee.
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With respect to any Mortgage Loans which are Cooperative Loans, the
Company, as seller, will cause to be delivered to the Trustee the related
original cooperative note endorsed to the order of the Trustee (or the lost-note
affidavit and indemnification described in the second preceding paragraph), the
original security agreement, the proprietary lease or occupancy agreement, the
recognition agreement, an executed financing agreement and the relevant stock
certificate and related blank stock powers. The Company will file in the
appropriate office an assignment and a financing statement evidencing the
Trustee's security interest in each Cooperative Loan.
Unless otherwise specified in the related Prospectus Supplement, in the
Agreement the Company, as seller, generally will represent and warrant to the
Trustee, among other things, that (i) the information set forth in the schedule
of Mortgage Loans attached thereto is correct in all material respects at the
date or dates respecting which such information is furnished; (ii) a lender's
title insurance policy or binder, or other assurance of title insurance
customary in the relevant jurisdiction therefor, for each Mortgage Loan subject
to the Agreement was issued on the date of origination thereof and each such
policy or binder assurance is valid and remains in full force and effect; (iii)
at the date of initial issuance of the Certificates, the Company has good title
to the Mortgage Loans and the Mortgage Loans are free of offsets, defenses or
counterclaims; (iv) at the date of initial issuance of the Certificates, each
Mortgage is a valid first or, in the case of a second priority Home Equity Loan,
second lien on the property securing the Mortgage Note (subject only to (a) the
lien of current real property taxes and assessments, (b) covenants, conditions,
and restrictions, rights of way, easements and other matters of public record as
of the date of the recording of such Mortgage, such exceptions appearing of
record being acceptable to mortgage lending institutions generally in the area
wherein the property subject to the Mortgage is located or specifically
reflected in the appraisal obtained by the Company, (c) in the case of a
second-priority Home Equity Loan, the lien of the related first mortgage, and
(d) other matters to which like properties are commonly subject which do not
materially interfere with the benefits of the security intended to be provided
by such Mortgage) and such property is free of material damage and is in good
repair; (v) at the date of initial issuance of the Certificates, no Mortgage
Loan is 30 or more days delinquent and there are no delinquent tax or assessment
liens against the property covered by the related Mortgage; (vi) at the date of
initial issuance of the Certificates, the portion of each Mortgage Loan, if any,
which in the circumstances set forth above under 'Servicing of the Mortgage
Loans--Private Mortgage Insurance' should be insured with a private mortgage
insurer is so insured; and (vii) each Mortgage Loan at the time it was made
complied in all material respects with applicable state and federal laws,
including, without limitation, usury, equal credit opportunity and disclosure
laws.
In the event that the Company has acquired the Mortgage Loans for a series,
if so specified in the related Prospectus Supplement, the Company may, in lieu
of making the representations described in the preceding paragraph, cause the
entity from which the Company acquired such Mortgage Loans to make such
representations (other than those regarding the Company's title to the Mortgage
Loans, which will in all events be made by the Company), in the sales agreement
pursuant to which such Mortgage Loans are acquired, or if such entity is acting
as a servicer, in its servicing agreement. In such event such representations,
and the Company's rights against such entity in the event of a breach thereof,
will be assigned to the Trustee for the benefit of the holders of the
Certificates of such series.
Assignment of Agency Securities. The Company, as seller, will cause the
Agency Securities to be registered in the name of the Trustee or its nominee,
and the Trustee concurrently will execute, countersign and deliver the
Certificates. Each Agency Security will be identified in a schedule appearing as
an exhibit to the Agreement, which will specify as to each Agency Security the
original principal amount and outstanding principal balance as of the Cut-off
Date, the annual pass-through rate (if any) and the maturity date. The Company
will represent and warrant to the Trustee, among other things, that the
information contained in the Agency Securities schedule is true and correct and
that immediately prior to the transfer of the Agency Securities to the Trustee,
the Company had good title to, and was the sole owner of, each Agency Security.
Assignment of Contracts. The Company, as seller, will cause the Contracts
to be assigned to the Trustee, together with principal and interest due on or
with respect to the Contracts after the Cut-off Date specified in the related
Prospectus Supplement. Each Contract will be identified in a loan schedule
appearing as an exhibit to the related Agreement. Such loan schedule will
specify, with respect to each Contract, among other things: the original
principal balance and the outstanding principal balance as of the close of
business on the Cut-off Date; the interest rate; the current scheduled payment
of principal and interest; and the maturity date.
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In addition, with respect to each Contract, the Company will deliver or
cause to be delivered to the Trustee, the original Contract and copies of
documents and instruments related to each Contract and the security interest in
the Manufactured Home securing each Contract. To give notice of the right, title
and interest of the Certificateholders to the Contracts, the Company will cause
a UCC-1 financing statement to be filed identifying the Trustee as the secured
party and identifying all Contracts as collateral. Unless otherwise specified in
the related Prospectus Supplement, the Contracts will not be stamped or
otherwise marked to reflect their assignment from the Company to the Trustee.
Therefore, if a subsequent purchaser were able to take physical possession of
the Contracts without notice of such assignment, the interest of the
Certificateholders in the Contracts could be defeated. See 'Certain Legal
Aspects of the Mortgage Loans and Contracts'.
The Company, as seller, will provide limited representations and warranties
to the Trustee concerning the Contracts. Such representations and warranties
will include: (i) that the information contained in the loan schedule provides
an accurate listing of the Contracts and that the information respecting such
Contracts set forth in such loan schedule is true and correct in all material
respects at the date or dates respecting which such information is furnished;
(ii) that, immediately prior to the conveyance of the Contracts, the Company had
good title to, and was sole owner of, each such Contract; and (iii) that there
has been no other sale by it of such Contract and that the Contract is not
subject to any lien, charge, security interest or other encumbrance.
REPURCHASE OR SUBSTITUTION
The Trustee will review the documents delivered to it with respect to the
assets of the related Trust Fund. Unless otherwise specified in the Prospectus
Supplement, if any document is not delivered or is found to be defective in any
material respect and the Company cannot deliver such document or cure such
defect within 60 days after notice thereof (which the Trustee will undertake to
give within 45 days of the delivery of such documents), the Company will, not
later than the first Distribution Date which is more than ten days after such
60-day period, (a) remove the affected Mortgage Loan or Contract from the Trust
Fund and substitute one or more other mortgage loans or contracts therefor or
(b) repurchase the Mortgage Loan or Contract from the Trustee for a price equal
to 100% of its Principal Balance plus interest thereon at the applicable
Remittance Rate from the date on which interest was last paid to the first day
of the month in which such purchase price is to be distributed, net of any
unreimbursed advances of principal and interest thereon made by the Company as
servicer. Such purchase price will be deposited in the Certificate Account on
the business day preceding such Distribution Date. Unless otherwise provided in
the Agreement, this repurchase and substitution obligation will constitute the
sole remedy available to Certificateholders or the Trustee on behalf of
Certificateholders against the Company for a material defect in a document
relating to a Mortgage Loan or Contract.
Unless otherwise specified in the Prospectus Supplement, the Company will
agree to either (a) cure in all material respects any breach of any
representation or warranty set forth in the related Agreement that materially
and adversely affects the interests of the Certificateholders in a Mortgage Loan
(a 'Defective Mortgage Loan') or Contract within 60 days of its discovery by the
Company or its receipt of notice thereof from the Trustee, (b) repurchase such
Defective Mortgage Loan or Contract not later than the first Distribution Date
which is more than ten days after such 60-day period for a price equal to 100%
of its Principal Balance plus interest thereon at the applicable Remittance Rate
from the date on which interest was last paid to the first day of the month in
which such purchase price is to be distributed, net of any unreimbursed advances
of principal and interest thereon made by the Company as servicer, or (c) remove
the affected Mortgage Loan or Contract from the Trust Fund and substitute one or
more other mortgage loans or contracts therefor. Such purchase price will be
deposited in the Certificate Account on the business day preceding such
Distribution Date. Unless otherwise provided in the Agreement, this repurchase
or substitution obligation will constitute the sole remedy available to
Certificateholders or the Trustee on behalf of Certificateholders for any such
breach.
If so specified in the Prospectus Supplement for a series where the Company
has acquired the related Mortgage Loans, in lieu of agreeing to repurchase or
substitute Mortgage Loans as described above, the Company may obtain such an
agreement from the entity which sold such mortgage loans, which agreement will
be assigned to the Trustee for the benefit of the holders of the Certificates of
such series. In such event, unless otherwise specified in the related Prospectus
Supplement, the Company will have no obligation to repurchase or substitute
mortgage loans if such entity defaults in its obligation to do so.
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If a mortgage loan or contract is substituted for another Mortgage Loan or
Contract as described above, the new mortgage loan or contract will, unless
otherwise specified in the Prospectus Supplement, (i) have a Principal Balance
(together with any other new mortgage loan or contract so substituted), as of
the first Distribution Date following the month of substitution, after deduction
of all payments due in the month of substitution, not in excess of the Principal
Balance of the removed Mortgage Loan or Contract as of such Distribution Date
(the amount of any shortfall, plus one month's interest thereon at the
applicable Remittance Rate, to be deposited in the Certificate Account on the
business day prior to the applicable Distribution Date), (ii) have a Mortgage
Rate not less than, and not more than one percentage point greater than, that of
the removed Mortgage Loan or Contract, (iii) have a Remittance Rate equal to
that of the removed Mortgage Loan or Contract, (iv) have a remaining term to
stated maturity not later than, and not more than one year less than, the
remaining term to stated maturity of the removed Mortgage Loan or Contract, (v)
have a current loan to Original Value not greater than that of the removed
Mortgage Loan or Contract, and (vi) in the reasonable determination of the
Company, be of the same type, quality and character as the removed Mortgage Loan
or Contract (as if the defect or breach giving rise to the substitution had not
occurred) and be, as of the substitution date, in compliance with the
representations and warranties contained in the Agreement.
If a REMIC election is to be made with respect to all or a portion of a
Trust Fund, any such substitution will occur within two years after the initial
issuance of the related Certificates. If no REMIC election is made, any
substitution will be made within 90 days after the initial issuance of the
related Certificates.
CERTAIN REFINANCINGS
The Agreement will provide that if the Company in its individual capacity
agrees to refinance any Mortgage Loan upon the request of the related Mortgagor,
such Mortgage Loan will be assigned to the Company by the Trustee upon
certification that the Principal Balance of such Mortgage Loan and accrued and
unpaid interest thereon at the Remittance Rate has been credited to the related
Loan Payment Record.
EVIDENCE AS TO COMPLIANCE
The Agreement will provide that a firm of independent public accountants
will furnish to the Trustee on or before March 31 of each year, beginning with
March 31 in the year which begins not less than three months after the date of
the initial issue of Certificates, a report as to compliance by the Company with
the minimum servicing standards set forth in the Uniform Single Attestation
Program for Mortgage Bankers ('USAP') with respect to the mortgage loans (or, if
the Agreement relates to Home Equity Loans, with respect to the home equity
loans) in the Company's servicing portfolio. In connection with the preparation
of such report, the Company will provide to such firm of independent public
accountants a statement signed by an officer of the Company to the effect that
the Company has complied in all material respects with the minimum servicing
standards set forth in the USAP with respect to the mortgage loans (or, if the
Agreement relates to Home Equity Loans, with respect to the home equity loans)
in the Company's servicing portfolio or, if there has been material
noncompliance with such servicing standards, describing such noncompliance.
The Agreement will also provide for delivery to the Trustee on or before
March 31 of each year, beginning with March 31 in the year which begins not less
than three months after the date of the initial issue of the Certificates, a
statement signed by an officer of the Company, as servicer, to the effect that
the Company, as servicer, has fulfilled its material obligations under the
Agreement throughout the preceding year or, if there has been a default in the
fulfillment of any such obligations, describing each such default.
LIST OF CERTIFICATEHOLDERS
Upon written request of the Trustee, or, if the Guarantor has issued any
Limited Guarantee with respect to such Certificates, the Guarantor, the
Certificate Registrar will provide to the Trustee, or, if applicable, the
Guarantor, within fifteen days after receipt of such request, a list of the
names and addresses of all Certificateholders of record of a particular series
as of the most recent Record Date for payment of distributions to
Certificateholders of that series. Upon written request of three or more
Certificateholders of record of a series of Certificates for purposes of
communicating with other Certificateholders with respect to their rights under
the Agreement for such series, the Trustee will afford, within five business
days after the receipt of such request,
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such Certificateholders access during business hours to the most recent list of
Certificateholders of that series held by the Trustee. If such list is as of a
date more than 90 days prior to the date of receipt of a request from such
Certificateholders, the Trustee shall promptly request from the Certificate
Registrar a current list and will afford such requesting Certificateholders
access to such list promptly upon receipt.
The Agreement will not provide for the holding of any annual or other
meetings of Certificateholders.
THE TRUSTEE
Any commercial bank or trust company serving as Trustee may have normal
banking relationships with the Company. In addition, the Company and the Trustee
acting jointly will have the power and the responsibility for appointing
co-trustees or separate trustees of all or any part of the Trust Fund relating
to a particular series of Certificates. In the event of such appointment, all
rights, powers, duties and obligations conferred or imposed upon the Trustee by
the Agreement shall be conferred or imposed upon the Trustee and such separate
trustee or co-trustee jointly, or, in any jurisdiction in which the Trustee
shall be incompetent or unqualified to perform certain acts, singly upon such
separate trustee or co-trustee who shall exercise and perform such rights,
powers, duties and obligations solely at the direction of the Trustee.
The Trustee will make no representations as to the validity or sufficiency
of the Agreement, the Certificates (other than the signature and
countersignature of the Trustee on the Certificates) or of any Mortgage Loan,
Agency Security, Contract or related document, and will not be accountable for
the use or application by the Company of any funds paid to the Company in
respect of the Certificates or the related assets, or amounts credited to the
Loan Payment Record or deposited into the Certificate Account. If no Event of
Default has occurred, the Trustee will be required to perform only those duties
specifically required of it under the Agreement. However, upon receipt of the
various certificates, reports or other instruments required to be furnished to
it, the Trustee will be required to examine them to determine whether they
conform to the requirements of the Agreement.
The Trustee may resign at any time, and the Company may remove the Trustee
if the Trustee ceases to be eligible to continue as such under the Agreement, if
the Trustee becomes insolvent or in such other instances, if any, as are set
forth in the Agreement. Following any resignation or removal of the Trustee, the
Company will be obligated to appoint a successor Trustee, any such successor to
be approved by the Guarantor if so specified in the Prospectus Supplement in the
event that the Guarantor has issued any Limited Guarantee with respect to the
Certificates. Any resignation or removal of the Trustee and appointment of a
successor Trustee does not become effective until acceptance of the appointment
by the successor Trustee.
ADMINISTRATION OF THE CERTIFICATE ACCOUNT
The Agreement will require that the Certificate Account be either (i)
maintained with a depository institution the debt obligations of which are, at
the time of any deposit therein, rated at least 'AA' (or the equivalent) by each
nationally recognized statistical rating organization that rated the
Certificates, (ii) an account or accounts the deposits in which are fully
insured by either the Bank Insurance Fund (the 'BIF') of the Federal Deposit
Insurance Corporation (the 'FDIC') or the Savings Association Insurance Fund (as
successor to the Federal Savings and Loan Insurance Corporation) ('SAIF') of the
FDIC, (iii) an account or accounts with a depository institution, which accounts
are insured by the BIF or SAIF (to the limits established by the FDIC), and
which uninsured deposits are invested in United States government securities or
other high quality investments, or are otherwise secured to the extent required
by each rating agency that rates the Certificates such that, as evidenced by an
opinion of counsel, the holders of the Certificates have a claim with respect to
the funds in the account or a perfected first security interest against any
collateral securing such funds that is superior to claims of any other
depositors or creditors of the depository institution with which the account is
maintained, (iv) a trust account maintained with the corporate trust department
of a federal or state chartered depository institution or trust company with
trust powers and acting in its fiduciary capacity for the benefit of the Trustee
or (v) an account as will not cause any of the rating agencies that rates the
Certificates to downgrade or withdraw its then-current rating assigned to the
Certificates.
Not later than the second business day prior to each Distribution Date, the
Company, as servicer, will furnish a separate statement to the Trustee for the
Certificates setting forth, among other things, the amount to be
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distributed with respect to the Certificates on the next succeeding Distribution
Date to Certificateholders, with amounts allocable to principal and to interest
stated separately and, if applicable, information relating to the amount
available for the purchase of Liquidating Loans.
REPORTS TO CERTIFICATEHOLDERS
At least two Business Days before each Distribution Date, unless otherwise
specified in the Prospectus Supplement, the Company, as servicer, will furnish
to the Trustee for mailing to Certificateholders on such Distribution Date, a
statement generally setting forth, to the extent applicable to any series, among
other things:
(i) The aggregate amount of such distribution allocable to principal,
separately identifying the amount allocable to each class and the amount of
Principal Prepayments (and Mortgage Loans repurchased by the Company)
included therein;
(ii) The amount of such distribution allocable to interest, separately
identifying the amount allocable to each class;
(iii) The amount of servicing compensation received by the Company in
respect of the Mortgage Loans during the month preceding the month of the
Distribution Date, and such other customary information as the Company
deems necessary or desirable to enable Certificateholders to prepare their
tax returns;
(iv) The aggregate Certificate Principal Balance (or Notional
Principal Balance) of each class of Certificates after giving effect to
distributions and allocations, if any, of losses on the Mortgage Loans on
such Distribution Date;
(v) The aggregate Certificate Principal Balance of any class of
Accrual Certificates after giving effect to any increase in such
Certificate Principal Balance that results from the accrual of interest
that is not yet distributable thereon;
(vi) If applicable, the amount of the Company's remaining obligations
with respect to the purchase of Liquidating Loans, after giving effect to
any charges or adjustments thereto in respect of the Distribution Date,
expressed as a percentage of the amount reported pursuant to clause (iv)
and, if applicable, (v) above;
(vii) The aggregate Principal Balance and number of the Mortgage Loans
included in the related Trust Fund after giving effect to distributions of
principal made on such Distribution Date; and
(viii) The aggregate Principal Balance of Mortgage Loans which were
delinquent as to a total of one, two or three or more installments of
principal and interest or were in foreclosure as of the end of the
preceding calendar month.
The Company will also furnish annually customary information deemed
necessary for Certificateholders to prepare their tax returns.
The Company, as servicer, will provide Certificateholders which are
federally insured savings and loan associations with certain reports and with
access to information and documentation regarding the Mortgage Loans included in
the Trust Fund sufficient to permit such associations to comply with applicable
regulations of the Office of Thrift Supervision.
EVENTS OF DEFAULT
Events of Default under the Agreement will consist of: (i) any failure by
the Company, as servicer, to distribute to Certificateholders any required
payment, which failure continues unremedied for three business days after the
giving of written notice of such failure to the Company by the Trustee, or to
the Company and the Trustee by the holders of Certificates evidencing interests
aggregating not less than 25% of each affected class; (ii) any failure by the
Company, as servicer, duly to observe or perform in any material respect any
other of its covenants or agreements in such Agreement materially affecting the
rights of Certificateholders which continues unremedied for 60 days after the
giving of written notice of such failure to the Company by the Trustee, or to
the Company and the Trustee by the holders of Certificates evidencing interests
aggregating not less than 25% of each affected class; (iii) any failure by the
Company, as servicer, to effect timely payment of the premium for a pool
insurance policy or a special hazard insurance policy or Limited Guarantee, if
any, which continues
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unremedied for 10 Business Days after the giving of written notice of such
failure by the Trustee, or to the Company and the Trustee by the holders of
Certificates evidencing interests aggregating not less than 25% of each affected
class; and (iv) certain events of insolvency, readjustment of debt, marshaling
of assets and liabilities or similar proceedings and certain actions by the
Company indicating its insolvency, reorganization or inability to pay its
obligations.
RIGHTS UPON EVENT OF DEFAULT
As long as an Event of Default under the Agreement remains unremedied by
the Company, as servicer (or, if applicable, by the Guarantor pursuant to any
Limited Guarantee), the Trustee, or holders of Certificates evidencing interests
aggregating not less than 51% of each affected class, may terminate all of the
rights and obligations of the Company as servicer under the Agreement, whereupon
the Trustee will succeed to all the responsibilities, duties and liabilities of
the Company as servicer under the Agreement and will be entitled to similar
compensation arrangements, provided that if the Trustee had no obligation under
the Agreement to make advances of delinquent principal and interest on the
Mortgage Loans upon the failure of the Company, as servicer, to do so, or if the
Trustee had such obligation but is prohibited by law or regulation from making
such advances, the Trustee will not be required to assume such obligation of the
Company. The Company, as servicer, shall be entitled to payment of certain
amounts payable to it under the Agreement, notwithstanding the termination of
its activities as servicer. No such termination will affect in any manner the
Guarantor's obligations under any Limited Guarantee, except that the obligation
of the Company, as servicer, to make advances of delinquent payments of
principal and interest (adjusted to the applicable Remittance Rate) and, if
applicable, to purchase any Liquidating Loan will become the direct obligations
of the Guarantor under the Advance Guarantee and the Liquidating Loan Guarantee,
respectively, if applicable, until a new servicer is appointed. In the event
that the Trustee is unwilling or unable so to act, it may appoint, or petition a
court of competent jurisdiction for the appointment of, a housing and home
finance institution with a net worth of at least $10,000,000 and, if the
Guarantor has issued any Limited Guarantee with respect to the Certificates,
approved by the Guarantor, to act as successor to the Company, as servicer,
under such Agreement. In addition, if the Guarantor has issued any Limited
Guarantee with respect to the related series of Certificates, the Guarantor will
have the right to replace any successor servicer to the Company with an
institution meeting the requirements described in the preceding sentence. The
Trustee and such successor may agree upon the servicing compensation to be paid,
which in no event may be greater than the compensation to the Company under such
Agreement.
No holder of Certificates will have any right under the Agreement to
institute any proceeding with respect to the Agreement, unless such holder
previously has given to the Trustee written notice of default and unless the
holders of Certificates of each affected class evidencing, in the aggregate, 25%
or more of the interests in such class have made written request to the Trustee
to institute such proceeding in its own name as Trustee thereunder and have
offered to the Trustee reasonable indemnity and the Trustee for 60 days after
receipt of such notice, request and offer of indemnity has neglected or refused
to institute any such proceedings. However, the Trustee is under no obligation
to exercise any of the trusts or powers vested in it by the Agreement or to make
any investigation of matters arising thereunder or to institute, conduct or
defend any litigation thereunder or in relation thereto at the request, order or
direction of any of the Certificateholders, unless such Certificateholders have
offered to the Trustee reasonable security or indemnity against the costs,
expenses and liabilities which may be incurred therein or thereby.
AMENDMENT
The Agreement may be amended by the Company, as seller, the Company, as
servicer, and the Trustee, and if the Guarantor has issued any Limited Guarantee
with respect to the Certificates, with the consent of the Guarantor, but without
Certificateholder consent, to cure any ambiguity, to correct or supplement any
provision therein which may be inconsistent with any other provision therein, to
take any action necessary to maintain REMIC status of any Trust Fund as to which
a REMIC election has been made, to avoid or minimize the risk of the imposition
of any tax on the Trust Fund pursuant to the Code or to make any other
provisions with respect to matters or questions arising under the Agreement
which are not materially inconsistent with the provisions of the Agreement;
provided that such action will not, as evidenced by an opinion of counsel
satisfactory to the Trustee, adversely affect in any material respect the
interests of any Certificateholders of that series. Unless otherwise
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specified in the Prospectus Supplement, the Agreement may also be amended by the
Company, as seller, the Company, as servicer, and the Trustee with the consent
of holders of Certificates evidencing interests aggregating either not less than
66% of all interests in the related Trust Fund or not less than 66% of all
interests of each Class affected by such amendment, for the purpose of adding
any provisions to or changing in any manner or eliminating any of the provisions
of such Agreement or of modifying in any manner the rights of Certificateholders
of that series; provided, however, that no such amendment may (i) reduce in any
manner the amount of, or delay the timing of, payments received on Mortgage
Loans which are required to be distributed in respect of any Certificate without
the consent of the holder of such Certificate, (ii) adversely affect in any
material respect the interests of the holders of any class of Certificates in
any manner other than as described in (i), without the consent of the holders of
Certificates of such class evidencing at least 66% of the interests of such
class or (iii) reduce the aforesaid percentage of Certificates, the holders of
which are required to consent to any such amendment, without the consent of the
holders of all Certificates of such affected class then outstanding.
TERMINATION
The obligations of the Company, as seller, the Company, as servicer, and
the Trustee created by the Agreement will terminate upon the last action
required to be taken by the Trustee on the final Distribution Date pursuant to
the Agreement after the earlier of (i) the maturity or other liquidation of the
last Mortgage Loan, Agency Security or Contract subject thereto or the
disposition of all property acquired upon foreclosure of any such Mortgage Loan
or Contract or (ii) the repurchase by the Company from the Trust Fund of all the
outstanding Certificates or all remaining assets in the Trust Fund. The
Agreement will establish the repurchase price for the assets in the Trust Fund
and the allocation of such purchase price among the classes of Certificates. The
exercise of such right will effect early retirement of the Certificates of that
series, but the Company's right so to repurchase will be subject to the
conditions set forth in the related Prospectus Supplement. If a REMIC election
is to be made with respect to all or a portion of a Trust Fund, there may be
additional conditions to the termination of such Trust Fund which will be
described in the related Prospectus Supplement. In no event, however, will the
trust created by the Agreement continue beyond the expiration of 21 years from
the death of the survivor of certain persons named in the Agreement. The Trustee
will give written notice of termination of the Agreement to each
Certificateholder, and the final distribution will be made only upon surrender
and cancellation of the Certificates at an office or agency of the Trustee
specified in such notice of termination.
If specified in the Prospectus Supplement, the Agreement will permit the
Trustee to sell the Mortgage Loans, Agency Securities or Contracts and the other
assets of the Trust Fund in the event that payments in respect thereto are
insufficient to make payments required in the Agreement. The assets of the Trust
Fund will be sold only under the circumstances and in the manner specified in
the Prospectus Supplement.
GE CAPITAL MORTGAGE SERVICES, INC.
GENERAL
The Company, a New Jersey corporation, is a wholly-owned subsidiary of GE
Capital Mortgage Corporation ('GECMC'). GECMC is a wholly-owned subsidiary of
General Electric Capital Corporation, which, in turn, is a wholly-owned indirect
subsidiary of General Electric Company.
The Company was acquired by GECMC, effective October 1, 1990, and
thereafter changed its name to GE Capital Mortgage Services, Inc. On August 31,
1993, the Company acquired from Shearson Holdings, Inc. all of the outstanding
capital stock of Shearson Lehman Hutton Mortgage Corporation, a California-based
mortgage company. Following such acquisition, the corporate name of Shearson
Lehman Hutton Mortgage Corporation was changed to GE Capital Mortgage Services
of California, Inc. On December 31, 1993, GE Capital Mortgage Services of
California, Inc. and General Electric Mortgage Securities Corporation, an
affiliate of the Company which has functioned primarily as an issuer and master
servicer of privately-placed mortgage-backed securities, were merged with and
into the Company.
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The Company is engaged in the business of refinancing, acquiring and
servicing residential mortgage loans secured by one- to four-family homes. It
obtains servicing through the acquisition and origination of mortgage loans, and
the purchase of servicing rights. The Company is also engaged in the home equity
business through its Home Equity Services unit. The Home Equity Services unit
acquires and services closed-end first and second mortgage loans. From time to
time, the Company may also engage in sales of such mortgage loans and servicing
rights. See 'The Trust Fund--The Mortgage Loans--Loan Production Sources' and
'--Loan Underwriting Policies.'
DELINQUENCY AND FORECLOSURE EXPERIENCE
The Company's delinquency and foreclosure experience on the portfolio of
one- to four-family residential mortgage loans that it services as of a recent
date will be summarized in the Prospectus Supplement. Such summary will include
or consist of data with respect to the Company's Home Equity Loan portfolio if
the related Trust Fund includes a material amount of Home Equity Loans. There
can be no assurance that the Company's experience with respect to the Mortgage
Loans included in any Trust Fund will be similar to that historically
experienced by the Company.
THE GUARANTOR
If specified in the Prospectus Supplement, an entity identified therein as
the Guarantor will, to the limited extent specified, issue a Limited Guarantee
to guarantee certain of the Company's limited obligations under the related
Agreement. If the Guarantor provides any such Limited Guarantee with respect to
a series of Certificates, the Prospectus Supplement will contain additional
information about the Guarantor.
CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS AND CONTRACTS
The following discussion contains summaries of certain legal aspects of
mortgage loans and manufactured housing contracts which are general in nature.
Because such legal aspects are governed primarily by applicable state law (which
laws 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 or Contracts is situated.
The summaries are qualified in their entirety by reference to the applicable
federal and state laws governing the Mortgage Loans or Contracts.
THE MORTGAGE LOANS
GENERAL
Mortgages. The Mortgages will be either deeds of trust or mortgages. A
mortgage creates a lien upon the real property encumbered by the mortgage. It is
not prior to the lien for real estate taxes and assessments. Priority between
mortgages depends on their terms and generally on the order of filing with a
state or county office. There are two parties to a mortgage: the mortgagor, who
is the borrower and homeowner or the land trustee or the trustee of an inter
vivos revocable trust (as described below), and the mortgagee, who is the
lender. Under the mortgage instrument, the mortgagor delivers to the mortgagee a
note or bond and the mortgage. In the case of a land trust, there are three
parties because title to the property is held by a land trustee under a land
trust agreement of which the borrower/homeowner is the beneficiary; at
origination of a mortgage loan, the borrower executes a separate undertaking to
make payments on the mortgage note. In the case of an inter vivos revocable
trust, there are three parties because title to the property is held by the
trustee under the trust instrument of which the home occupant is the primary
beneficiary; at origination of a mortgage loan, the primary beneficiary and the
trustee execute a mortgage note and the trustee executes a mortgage or deed of
trust, with the primary beneficiary agreeing to be bound by its terms. Although
a deed of trust is similar to a mortgage, a deed of trust formally has three
parties, the borrower-homeowner called the trustor (similar to a mortgagor), a
lender (similar to a mortgagee) called the beneficiary, and a third-party
grantee called the trustee. Under a deed of trust, the borrower grants the
property, irrevocably until the debt is paid, in trust and generally with a
power of sale, to the trustee to secure payment of the obligation. The trustee's
authority under a deed of trust and the mortgagee's authority
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under a mortgage are governed by law, the express provisions of the deed of
trust or mortgage and, in some cases, the directions of the beneficiary.
Cooperatives. Certain of the Mortgage Loans may be Cooperative Loans. The
private, non-profit, cooperative apartment corporation owns all the real
property that comprises the project, including the land, separate dwelling units
and all common areas. The cooperative is directly responsible for project
management and, in most cases, payment of real estate taxes and hazard and
liability insurance. If there is a blanket mortgage on the cooperative apartment
building and/or underlying land, as is generally the case, the cooperative, as
project mortgagor, is also responsible for meeting these mortgage obligations. A
blanket mortgage is ordinarily incurred by the cooperative in connection with
the construction or purchase of the cooperative's apartment building. The
interest of the occupant under proprietary leases or occupancy agreements to
which that cooperative is a party are generally subordinate to the interest of
the holder of the blanket mortgage in that building. If the cooperative is
unable to meet the payment obligations arising under its blanket mortgage, the
mortgagee holding the blanket mortgage could foreclose on that mortgage and
terminate all subordinate proprietary leases and occupancy agreements. In
addition, the blanket mortgage on a cooperative may provide financing in the
form of a mortgage that does not fully amortize with a significant portion of
principal being due in one lump sum at final maturity. The inability of the
cooperative to refinance this mortgage and its consequent inability to make such
final payment could lead to foreclosure by the mortgagee providing the
financing. A foreclosure in either event by the holder of the blanket mortgage
could eliminate or significantly diminish the value of any collateral held by
the lender who financed the purchase by an individual tenant-stockholder of
cooperative shares or, in the case of a Trust Fund including Cooperative Loans,
the collateral securing the Cooperative Loans.
The cooperative is owned by tenant-stockholders who, through ownership of
stock shares or membership certificates in the corporation, receive proprietary
leases or occupancy agreements which confer exclusive rights to occupy specific
units. Generally, a tenant-stockholder of a cooperative must make a monthly
payment to the cooperative representing such tenant-stockholder's pro rata share
of the cooperative's payments for its blanket mortgage, real property taxes,
maintenance expenses and other capital or ordinary expenses. An ownership
interest in a cooperative and accompanying occupancy rights is financed through
a cooperative share loan evidenced by a promissory note and secured by a
security interest in the occupancy agreement or proprietary lease and in the
related cooperative shares. The lender takes possession of the share certificate
and a counterpart of the proprietary lease or occupancy agreement and a
financing statement covering the proprietary lease or occupancy agreement and
the cooperative shares is filed in the appropriate state and local offices to
perfect the lender's interest in its collateral. Subject to the limitations
discussed below, upon default of the tenant-stockholder, the lender may sue for
judgment on the promissory note, dispose of the collateral at a public or
private sale or otherwise proceed against the collateral or tenant-stockholder
as an individual as provided in the security agreement covering the assignment
of the proprietary lease or occupancy agreement and the pledge of cooperative
shares.
FORECLOSURE
Mortgages. Foreclosure of a deed of trust is generally accomplished by a
non-judicial trustee's sale under a specific provision in the deed of trust that
authorizes the trustee to sell the property to a third party upon any default by
the borrower under the terms of the note or deed of trust. In some states, the
trustee must record a notice of default and send a copy to the borrower-trustor
and any person who has recorded a request for a copy of a notice of default and
notice of sale. In addition, the trustee must provide notice in some states to
any other individual having an interest in the real property, including any
junior lien holders. The borrower, or any other person having a junior
encumbrance on the real estate, may, during a reinstatement period, cure the
default by paying the entire amount in arrears plus the costs and expenses
incurred in enforcing the obligation. Generally, state law controls the amount
of foreclosure expenses and costs, including attorney's fees, which may be
recovered by a lender. If the deed of trust is not reinstated, a notice of sale
must be posted in a public place and, in most states, published for a specific
period of time in one or more newspapers. In addition, some state laws require
that a copy of the notice of sale be posted on the property and sent to all
parties having an interest in the real property.
Foreclosure of a mortgage is generally accomplished by judicial action. The
action is initiated by the service of legal pleadings upon all parties having an
interest in the real property. Delays in completion of the foreclosure
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may occasionally result from difficulties in locating necessary parties
defendant. Judicial foreclosure proceedings are often not protested by any of
the parties defendant. However, when the mortgagee's right to foreclose is
contested, the legal proceedings necessary to resolve the issue can be time
consuming. After the completion of judicial foreclosure, the court generally
issues a judgment of foreclosure and appoints a referee or other court officer
to conduct the sale of the property.
A sale conducted in accordance with the terms of the power of sale
contained in a mortgage or deed of trust is generally presumed to be conducted
regularly and fairly, and a conveyance of the real property by the referee
confers absolute legal title to the real property to the purchaser, free of all
junior mortgages and free of all other liens and claims subordinate to the
mortgage or deed of trust under which the sale is made (with the exception of
certain governmental liens and any redemption rights that may be granted to
borrowers pursuant to applicable state law). The purchaser's title is, however,
subject to all senior liens, encumbrances and mortgages. Thus, if the mortgage
or deed of trust being foreclosed is a junior mortgage or deed of trust, the
referee or trustee will convey title to the property to the purchaser, subject
to the underlying first mortgage or deed of trust and any other prior liens and
claims. A foreclosure under a junior mortgage or deed of trust generally will
have no effect on any senior mortgage or deed of trust, except that it may
trigger the right of a senior mortgagee or beneficiary to accelerate its
indebtedness under a 'due-on-sale' clause or 'due on further encumbrance' clause
contained in the senior mortgage.
In case of foreclosure under either a mortgage or a deed of trust, the sale
by the referee or other designated officer or by the trustee is a public sale.
However, because of the difficulty a potential buyer at the sale would have in
determining the exact status of title and because the physical condition of the
property may have deteriorated during the foreclosure proceedings, it is
uncommon for a third party to purchase the property at the foreclosure sale.
Rather, it is common for the lender to purchase the property from the trustee or
referee for an amount equal to the principal amount of the mortgage or deed of
trust, accrued and unpaid interest and expenses of foreclosure. Thereafter, the
lender will assume the burdens of ownership, including obtaining casualty
insurance and making such repairs at its own expense as are necessary to render
the property suitable for sale. The lender will commonly obtain the services of
a real estate broker and pay the broker's commission in connection with the sale
of the property. Depending upon market conditions, the ultimate proceeds of the
sale of the property may not equal the lender's investment in the property. Any
loss may be reduced by the receipt of any mortgage insurance proceeds.
Some courts have been faced with the issue of whether or not federal or
state constitutional provisions reflecting due process concerns for adequate
notice require that borrowers under deeds of trust or mortgages receive notices
in addition to the statutorily prescribed minimum. For the most part, these
cases have upheld the notice provisions as being reasonable or have found that
the sale by a trustee under a deed of trust, or under a mortgage having a power
of sale, does not involve sufficient state action to afford constitutional
protections to the borrower.
Cooperative Loans. The cooperative shares owned by the tenant-stockholder
and pledged to the lender are, in almost all cases, subject to restrictions on
transfer as set forth in the cooperative's Certificate of Incorporation and
Bylaws, as well as the proprietary lease or occupancy agreement, and may be
canceled by the cooperative for failure by the tenant-stockholder to pay rent or
other obligations or charges owed by such tenant-stockholder, including
mechanics' liens against the cooperative apartment building incurred by such
tenant-stockholder. The proprietary lease or occupancy agreement generally
permits the cooperative to terminate such lease or agreement in the event an
obligor fails to make payments or defaults in the performance of covenants
required thereunder. Typically, the lender and the cooperative enter into a
recognition agreement which establishes the rights and obligations of both
parties in the event of a default by the tenant-stockholder on its obligations
under the proprietary lease or occupancy agreement. A default by the
tenant-stockholder under the proprietary lease or occupancy agreement will
usually constitute a default under the security agreement between the lender and
the tenant-stockholder.
The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the cooperative will take no action to terminate such lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the cooperative will
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recognize the lender's lien against proceeds from a sale of the cooperative
apartment, subject, however, to the cooperative's right to sums due under such
proprietary lease or occupancy agreement. The total amount owed to the
cooperative by the tenant-stockholder, which the lender generally cannot
restrict and does not monitor, could reduce the value of the collateral below
the outstanding principal balance of the cooperative loan and accrued and unpaid
interest thereon.
Recognition agreements also provide that in the event of a foreclosure on a
cooperative loan, the lender must obtain the approval or consent of the
cooperative as required by the proprietary lease before transferring the
cooperative shares or assigning the proprietary lease. Generally, the lender is
not limited in any rights it may have to dispossess the tenant-stockholders.
However, the requirement that the lender obtain prior approval or consent of the
cooperative before transferring the cooperative shares or assigning the
proprietary lease may result in delays in completion of foreclosure on
cooperative shares and delays in receipt of foreclosure proceeds by the related
Trust Fund. See '--The Mortgage Loans--General--Cooperatives' herein.
In some states, foreclosure on the cooperative shares is accomplished by a
sale in accordance with the provisions of Article 9 of the Uniform Commercial
Code (the 'UCC') and the security agreement relating to those shares. Article 9
of the UCC requires that a sale be conducted in a 'commercially reasonable'
manner. Whether a foreclosure sale has been conducted in a 'commercially
reasonable' manner will depend on the facts in each case. In determining
commercial reasonableness, a court will look to the notice given the debtor and
the method, manner, time, place and terms of the foreclosure. Generally, a sale
conducted according to the usual practice of banks selling similar collateral
will be considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be applied
first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the cooperative corporation to receive sums due under
the proprietary lease or occupancy agreement. If there are proceeds remaining,
the lender must account to the tenant-stockholder for the surplus. Conversely,
if a portion of the indebtedness remains unpaid, the tenant-stockholder is
generally responsible for the deficiency. See 'Anti-Deficiency Legislation and
Other Limitations on Lenders' below.
JUNIOR MORTGAGES; RIGHTS OF SENIOR MORTGAGEES
Some of the Home Equity Loans included in a Trust Fund may be secured by
mortgages or deeds of trust that are junior to other mortgages or deeds of trust
held by the Company, other lenders or institutional investors. The rights of the
Trustee (and therefore the Certificateholders) as mortgagee under a junior
mortgage or beneficiary under a junior deed of trust are subordinate to those of
the mortgagee under the senior mortgage or beneficiary under the senior deed of
trust, including the prior rights of the senior mortgagee to receive hazard
insurance and condemnation proceeds and to cause the property securing the
Mortgage Loan to be sold upon default of the mortgagor or trustor, thereby
extinguishing the junior mortgagee's or junior beneficiary's lien unless the
junior mortgagee or junior beneficiary asserts its subordinate interest in the
property in foreclosure litigation and, possibly, satisfies the defaulted senior
mortgage or deed of trust. As discussed more fully below, a junior mortgagee or
junior beneficiary may satisfy a defaulted senior loan in full and, in some
states, may cure such default and bring the senior loan current, in either event
adding the amounts expended to the balance due on the junior loan. In most
states, no notice of default is required to be given to a junior mortgagee or
junior beneficiary, and junior mortgagees or junior beneficiaries are seldom
given notice of defaults on senior mortgages. In order for a foreclosure action
in some states to be effective against a junior mortgagee or junior beneficiary,
the junior mortgagee or junior beneficiary must be named in any foreclosure
action, thus giving notice to junior lienors. See 'Servicing of the Mortgage
Loans and Contracts--Collection and Other Servicing Procedures'.
The standard form of the mortgage or deed of trust used by most
institutional lenders (including the Company) confers on the mortgagee or
beneficiary the right under some circumstances both to receive all proceeds
collected under any hazard insurance policy and all awards made in connection
with any condemnation proceedings, and to apply such proceeds and awards to any
indebtedness secured by the mortgage or deed of trust in such order as the
mortgagee or beneficiary may determine. Thus, in the event improvements on the
property are damaged or destroyed by fire or other casualty, or in the event the
property is taken by condemnation, the mortgagee or beneficiary under any
underlying senior mortgages may have the prior right to collect any insurance
proceeds payable under a hazard insurance policy and any award of damages in
connection with the
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condemnation and to apply the same to the indebtedness secured by the senior
mortgages or deeds of trust. Proceeds in excess of the amount of senior mortgage
indebtedness, in most cases, will be applied to the indebtedness of a junior
mortgage or trust deed.
A common form of mortgage or deed of trust used by institutional lenders
typically contains a 'future advance' clause which provides, in essence, that
additional amounts advanced to or on behalf of the mortgagor or trustor by the
mortgagee or beneficiary are to be secured by the mortgage or deed of trust.
While such a clause is valid under the laws of most states, the priority of any
advance made under the clause depends, in some states, on whether the advance
was an 'obligatory' or 'optional' advance. If the mortgagee or beneficiary is
obligated to advance the additional amounts, the advance is entitled to receive
the same priority as amounts initially loaned under the mortgage or deed of
trust, notwithstanding that there may be intervening junior mortgages or deeds
of trust and other liens at the time of the advance. Where the mortgagee or
beneficiary is not obligated to advance the additional amounts (and, in some
jurisdictions, has actual knowledge of the intervening junior mortgages or deeds
of trust and other liens), the advance will be subordinate to such intervening
junior mortgages or deeds of trust and other liens. Priority of advances under
the clause rests, in many other states, on state statutes giving priority to all
advances made under the loan agreement to a 'credit limit' amount stated in the
recorded mortgage.
Other provisions sometimes included in the form of the mortgage or deed of
trust used by institutional lenders (and included in some of the forms used by
the Company) obligate the mortgagor or trustor to pay, before delinquency, all
taxes and assessments on the property and, when due, all encumbrances, charges
and liens on the property which appear prior to the mortgage or deed of trust,
to provide and maintain fire insurance on the property, to maintain and repair
the property and not to commit or permit any waste thereof, and to appear in and
defend any action or proceeding purporting to affect the property or the rights
of the mortgagee or beneficiary under the mortgage or deed of trust. Upon a
failure of the mortgagor or trustor to perform any of these obligations, the
mortgagee or beneficiary is given the right under certain mortgages or deeds of
trust to perform the obligation itself, at its election, with the mortgagor or
trustor agreeing to reimburse the mortgagee or beneficiary for any sums expended
by the mortgagee or beneficiary on behalf of the mortgagor or trustor. All sums
so expended by the mortgagee or beneficiary become part of the indebtedness
secured by the mortgage or deed of trust. See 'Servicing of the Mortgage Loans
and Contracts--Collection and Other Servicing Procedures'.
RIGHT OF REDEMPTION
In some states, after sale pursuant to a deed of trust or foreclosure of a
mortgage, the borrower and foreclosed junior lienors are given a statutory
period in which to redeem the property from the foreclosure sale. In some
states, redemption may occur only upon payment of the entire principal balance
of the loan, accrued interest and expenses of foreclosure. In other states,
redemption may be authorized if the former borrower pays only a portion of the
sums due. The effect of a statutory right of redemption is to diminish the
ability of the lender to sell the foreclosed property. The rights of redemption
would defeat the title of any purchaser from the lender subsequent to
foreclosure or sale under a deed of trust. Consequently, the practical effect of
the redemption right is to force the lender to retain the property and pay the
expenses of ownership until the redemption period has run.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states have imposed statutory prohibitions that limit the remedies
of a beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, statutes limit the right of the beneficiary or mortgagee to obtain a
deficiency judgment against the borrower following foreclosure or sale under a
deed of trust. A deficiency judgment would be a personal judgment against the
former borrower equal in most cases to the difference between the net amount
realized upon the public sale of the real property and the amount due to the
lender. Other statutes require the beneficiary or mortgagee to exhaust the
security afforded under a deed of trust or mortgage by foreclosure in an attempt
to satisfy the full debt before bringing a personal action against the borrower.
Finally, other statutory provisions limit any deficiency judgment against the
former borrower following a judicial sale to the excess of the outstanding debt
over the fair market value of the property at the time of the public sale. The
purpose of these statutes is generally to prevent a beneficiary or a mortgagee
from obtaining a large deficiency judgment against the former borrower as a
result of low or no bids at the judicial sale.
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In addition to laws limiting or prohibiting deficiency judgments, numerous
other statutory provisions, including the federal bankruptcy laws and state laws
affording relief to debtors, may interfere with or affect the ability of the
secured mortgage lender to realize upon collateral and/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
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 suggested that such modifications may include reducing the
amount of each monthly payment, changing the rate of interest, altering the
repayment schedule and reducing the lender's security interest to the value of
the residence, thus leaving the lender a general unsecured creditor for the
difference between the value of the residence and the outstanding balance of the
loan.
The Internal Revenue Code of 1986, as amended, provides priority to certain
tax liens over the lien of the mortgage. 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, their related regulations 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.
Generally, Article 9 of the UCC governs foreclosure on cooperative shares
and the related proprietary lease or occupancy agreement. Some courts have
interpreted section 9-504 of the UCC to prohibit a deficiency award unless the
creditor establishes that the sale of the collateral (which, in the case of a
Cooperative Loan, would be the shares of the cooperative and the related
proprietary lease or occupancy agreement) was conducted in a commercially
reasonable manner.
ENFORCEABILITY OF CERTAIN PROVISIONS
Unless the Prospectus Supplement indicates otherwise, all of the Mortgage
Loans will contain due-on-sale clauses. These clauses permit the lender to
accelerate the maturity of a loan if the borrower sells, transfers, or conveys
the property. The enforceability of these clauses was the subject of legislation
or litigation in many states, and in some cases the enforceability of these
clauses was limited or denied. However, the Garn-St Germain Depository
Institutions Act of 1982 (the 'Garn-St Germain Act') preempts state
constitutional, statutory and case law prohibiting the enforcement of
due-on-sale clauses and permits lenders to enforce these clauses in accordance
with their terms, subject to certain limited exceptions. The Garn-St Germain Act
does 'encourage' lenders to permit assumption of loans at the original rate of
interest or at some other rate less than the average of the original rate and
the market rate.
Due-on-sale clauses contained in mortgage loans originated by federal
savings and loan associations or federal savings banks are fully enforceable
pursuant to regulations of the Office of Thrift Supervision (the 'OTS'), as
successor to the Federal Home Loan Bank Board, which preempt state law
restrictions on the enforcement of due-on-sale clauses.
The Garn-St Germain Act also sets forth several specific instances in which
a mortgage lender covered by the Garn-St Germain Act (including federal savings
and loan associations and federal savings banks) may not exercise a due-on-sale
clause, notwithstanding the fact that a transfer of the property may have
occurred. These include intra-family transfers, certain 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 by the
Federal Home Loan Bank Board as succeeded by the OTS also prohibit the
imposition of a prepayment penalty upon the acceleration of a loan pursuant to a
due-on-sale clause. If interest rates were to rise above the interest rates on
the Mortgage Loans, then any inability of the Company to enforce due-on-sale
clauses may result in the Trust Fund
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including a greater number of loans bearing below-market interest rates than
would otherwise be the case, since a transferee of the property underlying a
Mortgage Loan would have a greater incentive in such circumstances to assume the
transferor's Mortgage Loan. Any inability of the Company to enforce due-on-sale
clauses may affect the average life of the Mortgage Loans and the number of
Mortgage Loans that may be outstanding until maturity. See 'Yield, Maturity and
Weighted Average Life Considerations'.
Upon foreclosure, courts have imposed general equitable principles. These
equitable principles are generally designed to relieve the borrower from the
legal effect of his defaults under the loan documents. Examples of judicial
remedies that have been fashioned include requirements that the lender undertake
affirmative and expensive actions to determine the causes for the borrower's
default and the likelihood that the borrower will be able to reinstate the loan.
In some cases, courts have substituted their judgment for the lender's judgment
and have required that lenders reinstate loans or recast payment schedules in
order to accommodate borrowers who are suffering from temporary financial
disability. In other cases, courts have limited the right of the lender to
foreclose if the default under the mortgage instrument is not monetary, such as
the borrower failing to adequately maintain the property or the borrower
executing a second mortgage or deed of trust affecting the property.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March 1980 ('Title V'), provides that state usury
limitations shall not apply to certain types of residential first mortgage loans
originated by certain lenders after March 31, 1980. The OTS, as successor to the
Federal Home Loan Bank Board, is authorized to issue rules and regulations and
to publish interpretations governing implementation of Title V. The statute
authorized any state to reimpose interest rate limits by adopting, before April
1, 1983, a law or constitutional provision which expressly rejects application
of the federal law. In addition, even where 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.
Under the Agreement for each series of Certificates, the Company will
represent and warrant to the Trustee that the Mortgage Loans have been
originated in compliance in all material respects with applicable state laws,
including usury laws.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT
Generally, under the terms of the Soldiers' and Sailors' Civil Relief Act
of 1940, as amended (the 'Relief Act'), a borrower who enters military service
after the origination of such borrower's Mortgage Loan (including a borrower who
is a member of the National Guard or is in reserve status at the time of the
origination of the Mortgage Loan and is later called to active duty) may not be
charged interest above an annual rate of 6% during the period of such borrower's
active duty status, unless a court orders otherwise upon application of the
lender. It is possible that such interest rate limitation could have an effect,
for an indeterminate period of time, on the ability of the Company to collect
full amounts of interest on certain of the Mortgage Loans. In addition, the
Relief Act imposes limitations which would impair the ability of the Company to
foreclose on an affected Mortgage Loan during the borrower's period of active
duty status. Thus, in the event that such a Mortgage Loan goes into default
there may be delays and losses occasioned by the inability to realize upon the
Mortgaged Property in a timely fashion.
Under the applicable Agreement, the Company will not be required to make
deposits to the Certificate Account for a series of Certificates in respect of
any Mortgage Loan as to which the Relief Act has limited the amount of interest
the related borrower is required to pay each month, and Certificateholders will
bear such loss.
ENVIRONMENTAL CONSIDERATIONS
Under the federal Comprehensive Environmental Response Compensation and
Liability Act, as amended, and under state law in certain states, a secured
party which takes a deed in lieu of foreclosure, purchases a mortgaged property
at a foreclosure sale or operates a mortgaged property may become liable in
certain circumstances for the costs of remedial action ('Cleanup Costs') if
hazardous wastes or hazardous substances have been released or disposed of on
the property. Such Cleanup Costs may be substantial. It is possible that such
Cleanup Costs could reduce the amounts otherwise distributable to the
Certificateholders if the related Trust Fund
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were deemed to be liable for such Cleanup Costs and if such Cleanup Costs were
incurred. Moreover, under federal law and the law of certain states, a lien may
be imposed for any Cleanup Costs incurred by federal or state authorities on the
property that is the subject of such Cleanup Costs. All subsequent liens on such
property are subordinated to such lien and, in several states, even prior
recorded liens, including those of existing mortgages, are subordinated to such
liens (a 'Superlien'). In the latter states, the security interest of the
Trustee in a Mortgaged Property that is subject to such a Superlien could be
adversely affected.
Traditionally, residential mortgage lenders have not taken steps to
evaluate whether hazardous wastes or hazardous substances are present with
respect to any mortgaged property prior to the origination of the mortgage loan
or prior to foreclosure or accepting a deed in lieu of foreclosure. The Company
does not make any representation or warranty or assume 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. See 'Servicing of the Mortgage Loans
and Contracts--Collection and Other Servicing Procedures'.
THE CONTRACTS
GENERAL
As a result of the Company's assignment of the Contracts to the Trustee,
the Certificateholders will succeed collectively to all of the rights (including
the right to receive payment on the Contracts) and will assume certain
obligations of the Company. Each Contract evidences both (a) the obligation of
the obligor to repay the loan evidenced thereby, and (b) the grant of a security
interest in the Manufactured Home to secure repayment of such loan. Certain
aspects of both features of the Contracts are described more fully below.
The Contracts generally are 'chattel paper' as defined in the Uniform
Commercial Code (the 'UCC') in effect in the states in which the Manufactured
Homes initially were registered. Pursuant to the UCC, the sale of chattel paper
is treated in a manner similar to perfection of a security interest in chattel
paper. Under the Agreement, the Company will transfer physical possession of the
Contracts to the Trustee or its custodian. In addition, the Company will make an
appropriate filing of a UCC-1 financing statement in the appropriate states to
give notice of the Trustee's ownership of the Contracts. Unless otherwise
specified in the related Prospectus Supplement, the Contracts will not be
stamped or marked otherwise to reflect their assignment from the Company to the
Trustee. Therefore, if a subsequent purchaser were able to take physical
possession of the Contracts without notice of such assignment, the Trustee's
interest in the Contracts could be defeated.
SECURITY INTERESTS IN THE MANUFACTURED HOMES
The Manufactured Homes securing the Contracts may be located in all 50
states. Security interests in manufactured homes may be perfected either by
notation of the secured party's lien on the certificate of title or by delivery
of the required documents and payment of a fee to the state motor vehicle
authority, depending on state law. In some nontitle states, perfection pursuant
to the provisions of the UCC is required. The Company may effect such notation
or delivery of the required documents and fees, and obtain possession of the
certificate of title, as appropriate under the laws of the state in which any
manufactured home securing a manufactured housing conditional sales contract is
registered. In the event the Company fails, due to clerical errors, to effect
such notation or delivery, or files the security interest under the wrong law
(for example, under a motor vehicle title statute rather than under the UCC, in
a few states), the Certificateholders may not have a first priority security
interest in the Manufactured Home securing a contract. As manufactured homes
have become larger and often have been attached to their sites without any
apparent intention to move them, courts in many states have held that
manufactured homes, under certain circumstances, may become subject to real
estate title and recording laws. As a result, a security interest in a
manufactured home could be rendered subordinate to the interests of other
parties claiming an interest in the home under applicable state real estate law.
In order to perfect a security interest in a manufactured home under real estate
laws, the holder of the security interest must file either a 'fixture filing'
under the provisions of the UCC or a real estate mortgage under the real estate
laws of the state where the home is located. These filings must be made in the
real estate records office of the county where the home is located.
Substantially all of the Contracts contain provisions prohibiting the borrower
from permanently
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attaching the Manufactured Home to its site. So long as the borrower does not
violate this agreement, a security interest in the Manufactured Home will be
governed by the certificate of title laws or the UCC, and the notation of the
security interest on the certificate of title or the filing of a UCC financing
statement will be effective to maintain the priority of the security interest in
the Manufactured Home. If, however, a Manufactured Home is permanently attached
to this site, other parties could obtain an interest in the Manufactured Home
which is prior to the security interest transferred to the Trustee. With respect
to a series of Certificates and as described in the related Prospectus
Supplement, the Company may be required to perfect a security interest in the
Manufactured Home under applicable real estate laws. If such real estate filings
are not required and if any of the foregoing events were to occur, the only
recourse of the Certificateholders would be against the Company pursuant to its
repurchase obligation for breach of warranties.
The Company will assign its security interest in the Manufactured Homes to
the Trustee on behalf of the Certificateholders. Unless otherwise specified in
the related Prospectus Supplement, neither the Company nor the Trustee will
amend the certificates of title to identify the Trust Fund as the new secured
party. Accordingly, the Company will continue to be named as the secured party
on the certificates of title relating to the Manufactured Homes. In most states,
such assignment is an effective conveyance of such security interest without
amendment of any lien noted on the related certificate of title and the new
secured party succeeds to the Company's rights as the secured party. However, in
some states there exists a risk that, in the absence of an amendment to the
certificate of title, such assignment of the security interest might not be held
effective against creditors of the Company.
In the absence of fraud, forgery or permanent affixation of the
Manufactured Home to its site by the Manufactured Home owner, or administrative
error by state recording officials, the notation of the lien of the Company on
the certificate of title or delivery of the required documents and fees will be
sufficient to protect the Certificateholders against the rights of subsequent
purchasers of a Manufactured Home or subsequent lenders who take a security
interest in the Manufactured Home. If there are any Manufactured Homes as to
which the security interest assigned to the Company and the Certificateholders
is not perfected, such security interest would be subordinate to, among others,
subsequent purchasers for value of Manufactured Homes and holders of perfected
security interests. There also exists a risk in not identifying the
Certificateholders as the new secured party on the certificate of title that,
through fraud or negligence, the security interest of the Certificateholders
could be released.
In the event that the owner of a Manufactured Home moves it to a state
other than the state in which such Manufactured Home initially is registered
under the laws of most states the perfected security interest in the
Manufactured Home would continue for four months after such relocation and
thereafter only if and after the owner re-registers the Manufactured Home in
such state. If the owner were to relocate a Manufactured Home to another state
and not re-register the Manufactured Home in such state, and if steps are not
taken to re-perfect the Trustee's security interest in such state, the security
interest in the Manufactured Home would cease to be perfected. A majority of
states generally require surrender of a certificate of title to re-register a
Manufactured Home; accordingly, the Trustee must surrender possession if it
holds the certificate of title to such Manufactured Home or, in the case of
Manufactured Homes registered in states which provide for notation of lien, the
Trustee would receive notice of surrender if the security interest in the
Manufactured Home is noted on the certificate of title. Accordingly, the Trustee
would have the opportunity to re-perfect its security interest in the
Manufactured Home in the state of relocation. In states which do not require a
certificate of title for registration of a manufactured home, re-registration
could defeat perfection. In the ordinary course of servicing the manufactured
housing conditional sales contracts, the Company takes steps to effect such
re-perfection upon receipt of notice of re-registration or information from the
obligor as to relocation. Similarly, when an obligor under a manufactured
housing conditional sales contract sells a manufactured home, the Trustee must
surrender possession of the certificate of title or will receive notice as a
result of its lien noted thereon and accordingly will have an opportunity to
require satisfaction of the related manufactured housing conditional sales
contract before release of the lien. Under the Agreement the Company is
obligated to take such steps, at the Company's expense, as are necessary to
maintain perfection of security interests in the Manufactured Homes.
Under the laws of most states, liens for repairs performed on a
Manufactured Home take priority even over a perfected security interest. The
Company will represent in the Agreement that it has no knowledge of any such
liens with respect to any Manufactured Home securing payment on any Contract.
However, such liens could arise
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at any time during the term of a Contract. No notice will be given to the
Trustee or Certificateholders in the event such a lien arises.
ENFORCEMENT OF SECURITY INTERESTS IN MANUFACTURED HOMES
The Company on behalf of the Trustee, to the extent required by the related
Agreement, may take action to enforce the Trustee's security interest with
respect to Contracts in default by repossession and resale of the Manufactured
Homes securing such Contracts in default. So long as the Manufactured Home has
not become subject to the real estate law, a creditor can repossess a
Manufactured Home securing a Contract by voluntary surrender, by 'self-help'
repossession that is 'peaceful' (i.e., without breach of the peace) or, in the
absence of voluntary surrender and the ability to repossess without breach of
the peace, by judicial process. The holder of a Contract must give the debtor a
number of days' notice, which varies from 10 to 30 days depending on the state,
prior to commencement of any repossession. The UCC and consumer protection laws
in most states place restrictions on repossession sales, including requiring
prior notice to the debtor and commercial reasonableness in effecting such a
sale. The law in most states also requires that the debtor be given notice of
any sale prior to resale of the unit so that the debtor may redeem at or before
such resale. In the event of such repossession and resale of a Manufactured
Home, the Trustee would be entitled to be paid out of the sale proceeds before
such proceeds could be applied to the payment of the claims of unsecured
creditors or the holders of subsequently perfected security interests or,
thereafter, to the debtor.
Under the laws applicable in most states, a creditor is entitled to obtain
a deficiency judgment from a debtor for any deficiency on repossession and
resale of the manufactured home securing such debtor's loan. However, some
states impose prohibitions or limitations on deficiency judgments.
Certain other statutory provisions, including federal and state bankruptcy
and insolvency laws and general equitable principles, may limit or delay the
ability of a lender to repossess and resell collateral or enforce a deficiency
judgment.
CONSUMER PROTECTION LAWS
The so-called 'Holder-in-Due-Course' rule of the Federal Trade Commission
is intended to defeat the ability of the transferor of a consumer credit
contract which is the seller of goods which gave rise to the transaction (and
certain related lenders and assignees) to transfer such contract free of notice
of claims by the debtor thereunder. The effect of this rule is to subject the
assignee of such a contract to all claims and defenses which the debtor could
assert against the seller of goods. Liability under this rule is limited to
amounts paid under a Contract; however, the obligor also may be able to assert
the rule to set off remaining amounts due as a defense against a claim brought
by the Trust Fund against such obligor. Numerous other federal and state
consumer protection laws impose requirements applicable to the origination of
and lending pursuant to the Contracts, including the Truth-in-Lending Act, the
Federal Trade Commission Act, the Fair Credit Billing Act, the Fair Credit
Reporting Act, the Equal Credit Opportunity Act, the Fair Debt Collection
Practices Act and the Uniform Consumer Credit Code. In the case of some of these
laws, the failure to comply with their provisions may affect the enforceability
of the related Contract.
TRANSFERS OF MANUFACTURED HOMES; ENFORCEABILITY OF 'DUE-ON-SALE' CLAUSES
The Contracts, in general, prohibit the sale or transfer of the related
Manufactured Homes without the consent of the Company and permit the
acceleration of the maturity of the Contracts by the Company upon any such sale
or transfer that is not consented to. Unless otherwise specified in the related
Prospectus Supplement, the Company expects that it will permit most transfers of
Manufactured Homes and not accelerate the maturity of the related Contracts. In
certain cases, the transfer may be made by a delinquent obligor in order to
avoid a repossession proceeding with respect to a Manufactured Home.
In the case of a transfer of a Manufactured Home after which the Company
desires to accelerate the maturity of the related Contract, the Company's
ability to do so will depend on the enforceability under state law of the
'due-on-sale' clause. The Garn-St Germain Act preempts, subject to certain
exceptions and conditions, state laws prohibiting enforcement of 'due-on-sale'
clauses applicable to the Manufactured Homes. Consequently, in some states the
Company may be prohibited from enforcing a 'due-on-sale' clause in respect of
certain Manufactured Homes.
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APPLICABILITY OF USURY LAWS
Title V provides that, subject to the following conditions, state usury
limitations shall not apply to any loan which is secured by a first lien on
certain kinds of manufactured housing. The Contracts would be covered if they
satisfy certain conditions, among other things, governing the terms of any
prepayments, late charges and deferral fees and requiring a 30-day notice period
prior to instituting any action leading to repossession of or foreclosure with
respect to the related unit.
Title V authorized any state to reimpose limitations on interest rates and
finance charges by adopting before April 1, 1983 a law or constitutional
provision which expressly rejects application of the federal law. Fifteen states
adopted such a law prior to the April 1, 1983 deadline. In addition, even where
Title V was not so rejected, any state is authorized by the law to adopt a
provision limiting discount points or other charges on loans covered by Title V.
In any state in which application of Title V was expressly rejected or a
provision limiting discount points or other charges has been adopted, no
Contract which imposes finance charges or provides for discount points or
charges in excess of permitted levels will be included in a Trust Fund. The
Company will represent that all of the Contracts comply with applicable usury
law.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT
Generally, under the terms of the Relief Act, a borrower who enters
military service after the origination of such borrower's Contract (including a
borrower who is a member of the National Guard or is in reserve status at the
time of the origination of the Contract and is later called to active duty) may
not be charged interest above an annual rate of 6% during the period of such
borrower's active duty status, unless a court orders otherwise upon application
of the lender. It is possible that such interest rate limitation could have an
effect, for an indeterminate period of time, on the ability of the Company to
collect full amounts of interest on certain of the Contracts. In addition, the
Relief Act imposes limitations which would impair the ability of the Company to
enforce the lien with respect to an affected Contract during the borrower's
period of active duty status. Thus, in the event that such a Contract goes into
default, there may be delays and losses occasioned by the inability to enforce
the lien with respect to the Manufactured Home in a timely fashion.
Under the applicable Agreement, the Company will not be required to make
deposits to the Certificate Account for a series of Certificates in respect of
any Contract as to which the Relief Act has limited the amount of interest the
related borrower is required to pay each month, and Certificateholders will bear
such loss.
LEGAL INVESTMENT MATTERS
Unless otherwise specified in the Prospectus Supplement, all of the classes
of a series of Certificates offered thereby will constitute 'mortgage related
securities' for purposes of the Secondary Mortgage Market Enhancement Act of
1984 ('SMMEA'), so long as they are rated in one of the two highest rating
categories by one or more nationally recognized statistical rating
organizations, and, as such, are legal investments for persons, trusts,
corporations, partnerships, associations, business trusts and business entities
(including, but not limited to, state-chartered savings banks, commercial banks,
savings and loan associations and insurance companies, as well as trustees and
state government employee retirement systems) created pursuant to or existing
under the laws of the United States or of any state (including the District of
Columbia and Puerto Rico) whose authorized investments are subject to state
regulation to the same extent that, under applicable law, obligations issued by
or guaranteed as to principal and interest by the United States or any agency or
instrumentality thereof constitute legal investments for such entities. Pursuant
to SMMEA, a number of states enacted legislation, on or before the October 3,
1991 cut-off for such enactments, limiting to varying extents the ability of
certain entities (in particular, insurance companies) to invest in 'mortgage
related securities,' in most cases by requiring the affected investors to rely
solely upon existing state law and not SMMEA. Accordingly, the investors
affected by such legislation will be authorized to invest in the Certificates
only to the extent provided in such legislation.
SMMEA also amended the legal investment authority of federally chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal with 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
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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 such regulations as the applicable federal regulatory
authority may prescribe. In this connection, federal credit unions should review
National Credit Union Administration (the 'NCUA') Letter to Credit Unions No.
96, as modified by Letter to Credit Unions No. 108, which includes guidelines to
assist federal credit unions in making investment decisions for mortgage related
securities. The NCUA has adopted rules, effective December 2, 1991, which
prohibit federal credit unions from investing in certain mortgage related
securities, possibly including certain series or classes of Certificates, except
under limited circumstances.
If specified in the Prospectus Supplement, one or more classes of a series
of Certificates will not constitute 'mortgage related securities' for purposes
of SMMEA. In such event, persons whose investments are subject to state or
federal regulation may not be legally authorized to invest in such classes of
Certificates.
All depository institutions considering an investment in the Certificates
should review the 'Supervisory Policy Statement on Securities Activities' dated
January 28, 1992 (the 'Policy Statement') of the Federal Financial Institutions
Examination Council. The Policy Statement, which has been adopted by the Board
of Governors of the Federal Reserve System, the FDIC, the Comptroller of the
Currency and the Office of Thrift Supervision, effective February 10, 1992, and
by the NCUA (with certain modifications) effective June 26, 1992, prohibits
depository institutions from investing in certain 'high-risk mortgage
securities' (including securities such as certain series and classes of the
Certificates), except under limited circumstances, and sets forth certain
investment practices deemed to be unsuitable for regulated institutions.
Institutions whose investment activities are subject to regulation by
federal or state authorities should review rules, policies and guidelines
adopted from time to time by such authorities before purchasing Certificates, as
certain series or classes thereof may be deemed unsuitable investments, or may
otherwise be restricted, under such rules, policies or guidelines, in certain
instances irrespective of SMMEA.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to, 'prudent investor' provisions, percentage-of-assets limits, provisions which
may restrict or prohibit investments in securities which are not
'interest-bearing' or 'income-paying,' and, with regard to any Certificates
issued in book-entry form, provisions which may restrict or prohibit investments
in securities which are issued in book-entry form.
Investors should consult their own legal advisors in determining whether
and to what extent the Certificates constitute legal investments for such
investors.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ('ERISA'),
and the Internal Revenue Code of 1986, as amended (the 'Code') impose
requirements on employee benefit plans (and on certain other retirement plans
and arrangements, including individual retirement accounts and annuities, Keogh
plans and collective investment funds and separate accounts in which such plans,
accounts or arrangements are invested) subject to ERISA or Section 4975 of the
Code (collectively, 'Plans') and on persons who are fiduciaries with respect to
such Plans. Among other things, ERISA requires that the assets of a Plan subject
to ERISA be held in trust and that the trustee, or other duly authorized
fiduciary, have exclusive authority and discretion to manage and control the
assets of such Plan. ERISA also imposes certain duties on persons who are
fiduciaries with respect to a Plan. Under ERISA, any person who exercises any
authority or control respecting the management or disposition of the assets of a
Plan generally is considered to be a fiduciary of such Plan. In addition to the
imposition by ERISA of general fiduciary standards of investment prudence and
diversification, ERISA and Section 4975 of the Code prohibit a broad range of
transactions involving Plan assets and persons ('Parties in Interest') having
certain specified relationships to a Plan and impose additional prohibitions
where Parties in Interest are fiduciaries with respect to such Plan.
The United States Department of Labor (the 'DOL') has issued a regulation
concerning the definition of what constitutes the assets of a Plan (DOL Reg.
Section 2510.3-101). Under this regulation, the underlying assets and properties
of corporations, partnerships and certain other entities in which a Plan makes
an 'equity'
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investment could be deemed for purposes of ERISA and Section 4975 of the Code to
be assets of the investing Plan in certain circumstances. In such a case, the
fiduciary making such an investment for the Plan could be deemed to have
delegated his or her asset management responsibility, the underlying assets and
properties could be subject to ERISA's reporting and disclosure requirements,
and transactions involving the underlying assets and properties could be subject
to the fiduciary responsibility requirements of ERISA and the prohibited
transaction provisions of Section 4975 of the Code. Certain exceptions to the
regulation may apply in the case of a Plan's investment in the Certificates, but
the Company cannot predict in advance whether any such exceptions will apply due
to the factual nature of the conditions to be met. Accordingly, because the
Mortgage Loans, Agency Securities or Contracts may be deemed Plan assets of each
Plan that purchases Certificates, an investment in the Certificates by a Plan
might give rise to a prohibited transaction under ERISA Sections 406 or 407 and
be subject to an excise tax under Code Section 4975 unless a statutory or
administrative exemption applies.
DOL Prohibited Transaction Class Exemption 83-1 ('PTE 83-1') exempts from
the prohibited transaction rules of ERISA and Section 4975 of the Code certain
transactions relating to the operation of residential mortgage pool investment
trusts and the purchase, sale and holding of 'mortgage pool pass-through
certificates' in the initial issuance of such certificates. PTE 83-1 permits,
subject to certain conditions, transactions which might otherwise be prohibited
between Plans and Parties in Interest with respect to those Plans involving the
origination, servicing, operation and termination of mortgage pools consisting
of mortgage loans secured by first or second mortgages or deeds of trust on
single-family residential property, and the acquisition and holding of certain
mortgage pool pass-through certificates representing an interest in such
mortgage pools by Plans.
PTE 83-1 sets forth three general conditions which must be satisfied for
any transaction to be eligible for exemption: (i) the maintenance of a system of
insurance or other protection for the pooled mortgage loans and property
securing such loans, and for indemnifying certificateholders against reductions
in pass-through payments due to property damage or defaults in loan payments in
an amount not less than the greater of one percent of the aggregate principal
balance of all covered pooled mortgage loans or the principal balance of the
largest covered pooled mortgage loan; (ii) the existence of a pool trustee who
is not an affiliate of the pool sponsor; and (iii) a limitation on the amount of
the payments retained by the pool sponsor, together with other funds inuring to
its benefit, to not more than adequate consideration for selling the mortgage
loans plus reasonable compensation for services provided by the pool sponsor to
the mortgage pool.
Although the Trustee for any series of Certificates will be unaffiliated
with the Company, there can be no assurance that the system of insurance or
subordination will meet the general or specific conditions referred to above. In
addition, the nature of a Trust Fund's assets or the characteristics of one or
more classes of the related series of Certificates may not be included within
the scope of PTE 83-1 or any other class exemption under ERISA. The Prospectus
Supplement will provide additional information with respect to the application
of ERISA and Section 4975 of the Code to the related Certificates.
Several underwriters of mortgage-backed securities have applied for and
obtained individual ERISA prohibited transaction exemptions which are in some
respects broader than PTE 83-1. Such exemptions only apply to mortgage-backed
securities which, in addition to satisfying other conditions, are sold in an
offering with respect to which such underwriter serves as the sole or a managing
underwriter, or as a selling or placement agent. If such an exemption might be
applicable to a series of Certificates, the related Prospectus Supplement will
refer to such possibility.
Each Plan fiduciary who is responsible for making the investment decisions
whether to purchase or commit to purchase and to hold Certificates must make its
own determination as to whether the general and the specific conditions of PTE
83-1 have been satisfied, or as to the availability of any other prohibited
transaction exemptions. Each Plan fiduciary should also determine whether, under
the general fiduciary standards of investment prudence and diversification, an
investment in the Certificates is appropriate for the Plan, taking into account
the overall investment policy of the Plan and the composition of the Plan's
investment portfolio.
Unless otherwise specified in the Prospectus Supplement, the Agreement will
provide that the Residual Certificates of any series of Certificates with
respect to which a REMIC election has been made may not be acquired by a Plan.
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Any Plan proposing to invest in Certificates should consult with its
counsel to confirm that such investment will not result in a prohibited
transaction and will satisfy the other requirements of ERISA and the Code.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following generally describes the anticipated material federal income
tax consequences of purchasing, owning and disposing of Certificates. It does
not address special rules which may apply to particular types of investors. The
authorities on which this discussion is based are subject to change or differing
interpretations, and any such change or interpretation could apply
retroactively. Investors should consult their own tax advisors regarding the
Certificates.
For purposes of this discussion, unless otherwise specified, the term
'Mortgage Loans' will be used to refer to Mortgage Loans, Agency Securities and
Contracts, and the term 'Owner' will refer to the beneficial owner of a
Certificate.
REMIC ELECTIONS
Under the Internal Revenue Code of 1986 (the 'Code'), an election may be
made to treat each Trust Fund related to a Series of Certificates (or segregated
pools of assets within the Trust Fund) as a 'real estate mortgage investment
conduit' ('REMIC') within the meaning of Section 860D(a) of the Code. If one or
more REMIC elections are made, the Certificates of any Class will be either
'regular interests' in a REMIC within the meaning of Section 860G(a)(1) of the
Code ('Regular Certificates') or 'residual interests' in a REMIC within the
meaning of Section 860G(a)(2) of the Code ('Residual Certificates'). The
Prospectus Supplement for each Series of Certificates will indicate whether an
election will be made to treat each Trust Fund as one or more REMICs, and if so,
which Certificates will be Regular Certificates and which will be Residual
Certificates.
If a REMIC election is made, each Trust Fund, or each portion thereof that
is treated as a separate REMIC, will be referred to as a 'REMIC Pool'. If a
Trust Fund is comprised of two REMIC Pools, one will be an 'Upper-Tier REMIC'
and one a 'Lower-Tier REMIC'. The assets of the Lower-Tier REMIC will consist of
the Mortgage Loans and related Trust Fund assets. The assets of the Upper-Tier
REMIC will consist of all of the regular interests issued by the Lower-Tier
REMIC.
The discussion below under the heading 'REMIC Certificates' considers
Series for which a REMIC election will be made. Series for which no such
election will be made are addressed under 'Non-REMIC Certificates'.
REMIC CERTIFICATES
The discussion in this section applies only to a Series of Certificates for
which a REMIC election is made.
TAX OPINION
Qualification as a REMIC requires ongoing compliance with certain
conditions. Upon the issuance of each Series of Certificates for which a REMIC
election is made, Cleary, Gottlieb, Steen & Hamilton, counsel to the Company,
will deliver its opinion generally to the effect that, with respect to each such
Series of Certificates, under then existing law and assuming compliance by the
Company, the Servicer and the Trustee for such Series with all of the provisions
of the related Agreement (and such other agreements and representations as may
be referred to in such opinion), each REMIC Pool will be a REMIC, and the
Certificates of such Series will be treated as either Regular Certificates or
Residual Certificates.
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STATUS OF CERTIFICATES
The Certificates will be:
o assets described in Code Section 7701(a)(19)(C); and
o 'real estate assets' under Code Section 856(c)(4)(A),
to the extent the assets of the related REMIC Pool are so treated. Interest on
the Regular Certificates will be 'interest on obligations secured by mortgages
on real property or on interests in real property' within the meaning of Code
Section 856(c)(3)(B) in the same proportion that the income of the REMIC Pool is
so treated. If at all times 95% or more of the assets or income of the REMIC
Pool qualifies under the foregoing Code sections, the Certificates (and income
thereon) will so qualify in their entirety. The Regular Certificates will also
qualify as 'permitted assets' under Section 860L(c) of the Code.
In the event the assets of the related REMIC Pool include buy-down Mortgage
Loans, it is unclear whether the related buy-down funds would qualify under the
foregoing Code sections. Also, Contracts may be considered to qualify under the
foregoing sections only if the Manufactured Homes securing such Contracts are
considered to be 'permanently fixed' or 'permanently installed'. Contracts may
limit the ability of a borrower to permanently attach a Manufactured Home to its
site.
The rules described in the two preceding paragraphs will be applied to a
Trust Fund consisting of two REMIC Pools as if the Trust Fund were a single
REMIC holding the assets of the Lower-Tier REMIC.
INCOME FROM REGULAR CERTIFICATES
General. Except as otherwise provided in this tax discussion, Regular
Certificates will be taxed as newly originated debt instruments for federal
income tax purposes. Interest, original issue discount and market discount
accrued on a Regular Certificate will be ordinary income to the Owner. All
Owners must account for interest income under the accrual method of accounting,
which may result in the inclusion of amounts in income that are not currently
distributed in cash.
On January 27, 1994, the Internal Revenue Service adopted regulations
applying the original issue discount rules of the Code (the 'OID Regulations').
Except as otherwise noted, the discussion below is based on the OID Regulations.
Original Issue Discount. Certain Regular Certificates may have 'original
issue discount.' An Owner must include original issue discount in income as it
accrues, without regard to the timing of payments.
The total amount of original issue discount on a Regular Certificate is the
excess of its 'stated redemption price at maturity' over its 'issue price.' The
issue price for any Regular Certificate is the price (including any accrued
interest) at which a substantial portion of the Class of Certificates including
such Regular Certificate are first sold to the public. In general, the stated
redemption price at maturity is the sum of all payments made on the Regular
Certificate, other than payments of interest that (i) are actually payable at
least annually over the entire life of the Certificates and (ii) are based on a
single fixed rate or variable rate (or certain combinations of fixed and
variable rates). The stated redemption price at maturity of a Regular
Certificate always includes its original principal amount, but generally does
not include distributions of stated interest, except in the case of Accrual
Certificates, and, as discussed below, Interest Only Certificates. An 'Interest
Only Certificate' is a Certificate entitled to receive distributions of some or
all of the interest on the Mortgage Loans or other assets in a REMIC Pool and
that has either a notional or nominal principal amount. Special rules for
Regular Certificates that provide for interest based on a variable rate are
discussed below in 'Income from Regular Certificates--Variable Rate Regular
Certificates.'
With respect to an Interest Only Certificate, the stated redemption price
at maturity is likely to be the sum of all payments thereon, determined in
accordance with the Prepayment Assumption (as defined below). In that event,
Interest Only Certificates would always have original issue discount.
Alternatively, in the case of an Interest Only Certificate with some principal
amount, the stated redemption price at maturity might be determined under the
general rules described in the preceding paragraph. If, applying those rules,
the stated redemption price at maturity were considered to equal the principal
amount of such Certificate, then the rules
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described below under 'Premium' would apply. The Prepayment Assumption is the
assumed rate of prepayment of the Mortgage Loans used in pricing the Regular
Certificates. The Prepayment Assumption will be set forth in the related
Supplement.
Under a de minimis rule, original issue discount on a Regular Certificate
will be considered zero if it is less than 0.25% of the Certificate's stated
redemption price at maturity multiplied by the Certificate's weighted average
maturity. The weighted average maturity of a Regular Certificate is computed
based on the number of full years (i.e., rounding down partial years) each
distribution of principal (or other amount included in the stated redemption
price at maturity) is scheduled to be outstanding. The schedule of such
distributions likely should be determined in accordance with the Prepayment
Assumption.
The Owner of a Regular Certificate generally must include in income the
original issue discount that accrues for each day on which the Owner holds such
Certificate, including the date of purchase, but excluding the date of
disposition. The original issue discount accruing in any period equals:
PV End + Dist - PV Beg
Where:
PV End = present value of all remaining distributions to be made as of the
end of the period;
Dist = distributions made during the period includible in the stated
redemption price at maturity; and
PV Beg = present value of all remaining distributions as of the beginning
of the period.
The present value of the remaining distributions is calculated based on (i) the
original yield to maturity of the Regular Certificate, (ii) events (including
actual prepayments) that have occurred prior to the end of the period and (iii)
the Prepayment Assumption. For these purposes, the original yield to maturity of
a Regular Certificate will be calculated based on its issue price, assuming that
the Certificate will be prepaid in all periods in accordance with the Prepayment
Assumption, and with compounding at the end of each accrual period used in the
formula.
Assuming the Regular Certificates have monthly Distribution Dates, discount
would be computed under the formula generally for the one-month periods (or
shorter initial period) ending on each Distribution Date. The original issue
discount accruing during any accrual period is divided by the number of days in
the period to determine the daily portion of original issue discount for each
day.
The daily portions of original issue discount generally will increase if
prepayments on the underlying Mortgage Loans exceed the Prepayment Assumption
and decrease if prepayments are slower than the Prepayment Assumption (changes
in the rate of prepayments having the opposite effect in the case of an Interest
Only Certificate). If the relative principal payment priorities of the Classes
of Regular Certificates of a Series change, any increase or decrease in the
present value of the remaining payments to be made on any such Class will affect
the computation of original issue discount for the period in which the change in
payment priority occurs.
If original issue discount computed as described above is negative for any
period, the Owner generally will not be allowed a current deduction for the
negative amount but instead will be entitled to offset such amount only against
future positive original issue discount from such Certificate. However, while
not free from doubt, such an Owner may be entitled to deduct 'negative original
issue discount' to the extent the Owner's adjusted basis (as defined in 'Sale or
Exchange of Certificates' below) in the Certificate remaining after such
deduction is not less than the principal amount of the Certificate.
Acquisition Premium. If an Owner of a Regular Certificate acquires such
Certificate at a price greater than its 'adjusted issue price,' but less than
its remaining stated redemption price at maturity, the daily portion for any day
(as computed above) is reduced by an amount equal to the product of (i) such
daily portion and (ii) a fraction, the numerator of which is the amount by which
the price exceeds the adjusted issue price and the denominator of which is the
sum of the daily portions for such Regular Certificate for all days on and after
the date of purchase. The adjusted issue price of a Regular Certificate on any
given day is its issue price, increased by
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all original issue discount that has accrued on such Certificate and reduced by
the amount of all previous distributions on such Certificate of amounts included
in its stated redemption price at maturity.
Market Discount. A Regular Certificate may have market discount (as
defined in the Code). Market discount equals the excess of the adjusted issue
price of a Certificate over the Owner's adjusted basis in the Certificate. The
Owner of a Certificate with market discount must report ordinary interest
income, as the Owner receives distributions on the Certificate of principal or
other amounts included in its stated redemption price at maturity, equal to the
lesser of (a) the excess of the amount of those distributions over the amount,
if any, of accrued original issue discount on the Certificate or (b) the portion
of the market discount that has accrued and not previously been included in
income. Also, such Owner must treat gain from the disposition of the Certificate
as ordinary income to the extent of any accrued, but unrecognized, market
discount. Alternatively, an Owner may elect in any taxable year to include
market discount in income currently as it accrues on all market discount
instruments acquired by the Owner in that year or thereafter. An Owner may
revoke such an election only with the consent of the Internal Revenue Service.
In general terms, market discount on a Regular Certificate may be treated,
at the Owner's election, as accruing either (a) on the basis of a constant yield
(similar to the method described above for accruing original issue discount) or
(b) alternatively, either (i) in the case of a Regular Certificate issued
without original issue discount, in the ratio of stated interest distributable
in the relevant period to the total stated interest remaining to be distributed
from the beginning of such period (computed taking into account the Prepayment
Assumption) or (ii) in the case of a Regular Certificate issued with original
issue discount, in the ratio of the amount of original issue discount accruing
in the relevant period to the total remaining original issue discount at the
beginning of such period. An election to accrue market discount on a Regular
Certificate on a constant yield basis is irrevocable with respect to that
Certificate.
An Owner may be required to defer a portion of the deduction for interest
expense on any indebtedness that the Owner incurs or maintains in order to
purchase or carry a Regular Certificate that has market discount. The deferred
amount would not exceed the market discount that has accrued but not been taken
into income. Any such deferred interest expense is, in general, allowed as a
deduction not later than the year in which the related market discount income is
recognized.
Market discount with respect to a Regular Certificate will be considered to
be zero if such market discount is de minimis under a rule similar to that
described above in the fourth paragraph under 'Original Issue Discount.' Owners
should consult their own tax advisors regarding the application of the market
discount rules as well as the advisability of making any election with respect
to market discount.
Discount on a Regular Certificate that is neither original issue discount
nor market discount, as defined above, must be allocated ratably among the
principal payments on the Certificate and included in income (as gain from the
sale or exchange of the Certificate) as the related principal payments are made
(whether as scheduled payments or prepayments).
Premium. A Regular Certificate, other than an Accrual Certificate or, as
discussed above under 'Original Issue Discount', an Interest Only Certificate,
purchased at a cost (net of accrued interest) greater than its principal amount
generally is considered to be purchased at a premium. The Owner may elect under
Code Section 171 to amortize such premium under the constant yield method, using
the Prepayment Assumption. To the extent the amortized premium is allocable to
interest income from the Regular Certificate, it is treated as an offset to such
interest rather than as a separate deduction. An election made by an Owner would
generally apply to all its debt instruments and may not be revoked without the
consent of the Internal Revenue Service.
Special Election to Apply OID Rules. In lieu of the rules described above
with respect to de minimis discount, acquisition premium, market discount and
premium, an Owner of a Regular Certificate may elect to accrue such discount, or
adjust for such premium, by applying the principles of the OID rules described
above. An election made by a taxpayer with respect to one obligation can affect
other obligations it holds. Owners should consult with their tax advisors
regarding the merits of making this election.
Retail Regular Certificates. For purposes of the original issue and market
discount rules, a repayment in full of a Retail Certificate that is subject to
payment in units or other increments, rather than on a pro rata basis with other
Retail Certificates, will be treated in the same manner as any other prepayment.
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Variable Rate Regular Certificates. The Regular Certificates may provide
for interest that varies based on an interest rate index. The OID Regulations
provide special rules for calculating income from certain 'variable rate debt
instruments' or 'VRDIs.' A debt instrument must meet certain technical
requirements to qualify as a VRDI, which are outlined in the next paragraph.
Under the regulations, income on a VRDI is calculated by (1) creating a
hypothetical debt instrument that pays fixed interest at rates equivalent to the
variable interest, (2) applying the original issue discount rules of the Code to
that fixed rate instrument, and (3) adjusting the income accruing in any accrual
period by the difference between the assumed fixed interest amount and the
actual amount for the period. In general, where a variable rate on a debt
instrument is based on an interest rate index (such as LIBOR), a fixed rate
equivalent to a variable rate is determined based on the value of the index as
of the issue date of the debt instrument. In cases where rates are reset at
different intervals over the life of a VRDI, adjustments are made to ensure that
the equivalent fixed rate for each accrual period is based on the same reset
interval.
A debt instrument must meet a number of requirements in order to qualify as
a VRDI. A VRDI cannot be issued at a premium above its principal amount that
exceeds a specified percentage of its principal amount (15%, or if less 1.5%
times its weighted average life). As a result, Interest Only Certificates will
never be VRDIs. Also, a debt instrument that pays interest based on a multiple
of an interest rate index is not a VRDI if the multiple is less than or equal to
0.65 or greater than 1.35, unless, in general, interest is paid based on a
single formula that lasts over the life of the instrument. A debt instrument is
not a VRDI if it is subject to caps and floors, unless they remain the same over
the life of the instrument or are not expected to change significantly the yield
on the instrument. Variable rate Regular Certificates other than Interest Only
Certificates may or may not qualify as VRDIs depending on their terms.
In a case where a variable rate Regular Certificate does not qualify as a
VRDI, it will be treated under the OID Regulations as a contingent payment debt
instrument. The Internal Revenue Service has issued final regulations addressing
contingent payment debt instruments, but such regulations are not applicable by
their terms to REMIC regular interests. Until further guidance is forthcoming,
one method of calculating income on such a Regular Certificate that appears to
be reasonable would be to apply the principles governing VRDIs outlined above.
Subordinated Certificates. Certain Series of Certificates may contain one
or more Classes of subordinated Certificates. In the event there are defaults or
delinquencies on the related Mortgage Loans, amounts that otherwise would be
distributed on a Class of subordinated Certificates may instead be distributed
on other more senior Classes of Certificates. Since Owners of Regular
Certificates are required to report income under an accrual method, Owners of
subordinated Certificates will be required to report income without giving
effect to delays and reductions in distributions on such Certificates
attributable to defaults or delinquencies on the Mortgage Loans, except to the
extent that it can be established that amounts are uncollectible. As a result,
the amount of income reported by an Owner of a subordinated Certificate in any
period could significantly exceed the amount of cash distributed to such Owner
in that period. The Owner will eventually be allowed a loss (or be allowed to
report a lesser amount of income) to the extent that the aggregate amount of
distributions on the subordinated Certificate is reduced as a result of defaults
and delinquencies on the Mortgage Loans. Such a loss could in some circumstances
be a capital loss. Also, the timing and amount of such losses or reductions in
income are uncertain. Owners of subordinated Certificates should consult their
tax advisors on these points.
INCOME FROM RESIDUAL CERTIFICATES
Taxation of REMIC Income. Generally, Owners of Residual Certificates in a
REMIC Pool ('Residual Owners') must report ordinary income or loss equal to
their pro rata shares (based on the portion of all Residual Certificates they
own) of the taxable income or net loss of the REMIC. Such income must be
reported regardless of the timing or amounts of distributions on the Residual
Certificates.
The taxable income of a REMIC Pool is generally determined under the
accrual method of accounting in the same manner as the taxable income of an
individual taxpayer. Taxable income is generally gross income, including
interest and original issue discount income, if any, on the assets of the REMIC
Pool and income from the amortization of any premium on Regular Certificates,
minus deductions. Market discount (as defined in the Code) with respect to
Mortgage Loans held by a REMIC Pool is recognized in the same fashion as if it
were
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original issue discount. Deductions include interest and original issue discount
expense on the Regular Certificates, reasonable servicing fees attributable to
the REMIC Pool, other administrative expenses and amortization of any premium on
assets of the REMIC Pool. As previously discussed, the timing of recognition of
'negative original issue discount,' if any, on a Regular Certificate is
uncertain; as a result, the timing of recognition of the corresponding income to
the REMIC Pool is also uncertain.
If the Trust Fund consists of an Upper-Tier REMIC and a Lower-Tier REMIC,
the OID Regulations provide that the regular interests issued by the Lower-Tier
REMIC to the Upper-Tier REMIC will be treated as a single debt instrument for
purposes of the original issue discount provisions. A determination that these
regular interests are not treated as a single debt instrument would have a
material adverse effect on the Owners of Residual Certificates issued by the
Lower-Tier REMIC.
A Residual Owner may not amortize the cost of its Residual Certificate.
Taxable income of the REMIC Pool, however, will not include cash received by the
REMIC Pool that represents a recovery of the REMIC Pool's initial basis in its
assets, and such basis will include the issue price of the Residual Certificates
(assuming the issue price is positive). Such recovery of basis by the REMIC Pool
will have the effect of amortization of the issue price of the Residual
Certificate over its life. The period of time over which such issue price is
effectively amortized, however, may be longer than the economic life of the
Residual Certificate. The issue price of a Residual Certificate is the price at
which a substantial portion of the Class of Certificates including the Residual
Certificate are first sold to the public (or if the Residual Certificate is not
publicly offered, the price paid by the first buyer).
A subsequent Residual Owner must report the same amounts of taxable income
or net loss attributable to the REMIC Pool as an original Owner. No adjustments
are made to reflect the purchase price.
Losses. A Residual Owner that is allocated a net loss of the REMIC Pool
may not deduct such loss currently to the extent it exceeds the Owner's adjusted
basis (as defined in 'Sale or Exchange of Certificates' below) in its Residual
Certificate. A Residual Owner that is a U.S. person (as defined below in
'Taxation of Certain Foreign Investors'), however, may carry over any disallowed
loss to offset any taxable income generated by the same REMIC Pool.
Excess Inclusions. A portion of the taxable income allocated to a Residual
Certificate is subject to special tax rules. That portion, referred to as an
'excess inclusion,' is calculated for each calendar quarter and equals the
excess of such taxable income for the quarter over the daily accruals for the
quarter. The daily accruals equal the product of (i) 120% of the federal
long-term rate under Code Section 1274(d) for the month which includes the
Closing Date (determined on the basis of quarterly compounding and properly
adjusted for the length of the quarter) and (ii) the adjusted issue price of the
Certificate at the beginning of such quarter. The adjusted issue price of a
Residual Certificate at the beginning of a quarter is the issue price of the
Certificate, plus the amount of daily accruals on the Certificate for all prior
quarters, decreased (but not below zero) by any prior distributions on the
Certificate. If the aggregate value of the Residual Certificates is not
considered to be 'significant,' then to the extent provided in Treasury
regulations, a Residual Owner's entire share of REMIC taxable income will be
treated as an excess inclusion. The regulations that have been adopted under
Code Sections 860A through 860G (the 'REMIC Regulations') do not contain such a
rule.
Excess inclusions generally may not be offset by unrelated losses or loss
carryforwards or carrybacks of a Residual Owner. In addition, for all taxable
years beginning after August 20, 1996, and unless a Residual Owner elects
otherwise for all other taxable years, the alternate minimum taxable income of a
Residual Owner for a taxable year may not be less than the Residual Owner's
excess inclusions for the taxable year and excess inclusions are disregarded
when calculating a Residual Owner's alternate minimum tax net operating loss
deduction.
Excess inclusions are treated as unrelated business taxable income for an
organization subject to the tax on unrelated business income. In addition, under
Treasury regulations yet to be issued, if a real estate investment trust,
regulated investment company or certain other pass-through entities are Residual
Owners, a portion of the distributions made by such entities may be treated as
excess inclusions.
Distributions. Distributions on a Residual Certificate (whether at their
scheduled times or as a result of prepayments) generally will not result in any
taxable income or loss to the Residual Owner. If the amount of any
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distribution exceeds a Residual Owner's adjusted basis in its Residual
Certificate, however, the Residual Owner will recognize gain (treated as gain
from the sale or exchange of its Residual Certificate) to the extent of such
excess. See 'Sale or Exchange of Certificates' below.
Prohibited Transactions; Special Taxes. Net income recognized by a REMIC
Pool from 'prohibited transactions' is subject to a 100% tax and is disregarded
in calculating the REMIC Pool's taxable income. In addition, a REMIC Pool is
subject to federal income tax at the highest corporate rate on 'net income from
foreclosure property' (which has a technical definition). A 100% tax also
applies to certain contributions to a REMIC Pool made after it is formed. It is
not anticipated that any REMIC Pool will (i) engage in prohibited transactions
in which it recognizes a significant amount of net income, (ii) receive
contributions of property that are subject to tax, or (iii) derive a significant
amount of net income from foreclosure property that is subject to tax.
Negative Value Residual Certificates. The federal income tax treatment of
any consideration paid to a transferee on a transfer of a Residual Certificate
is unclear. Such a transferee should consult its tax advisor. The preamble to
the REMIC Regulations indicates that the Internal Revenue Service may issue
future guidance on the tax treatment of such payments.
Mark to Market Rules. A REMIC residual interest that is acquired on or
after January 4, 1995 is not a 'security' for the purposes of Code Section 475,
and thus is not subject to the mark to market rules.
The method of taxation of Residual Certificates described in this section
can produce a significantly less favorable after-tax return for a Residual
Certificate than would be the case if the Certificate were taxable as a debt
instrument. Also, a Residual Owner's return may be adversely affected by the
excess inclusions rules described above. In certain periods, taxable income and
the resulting tax liability for a Residual Owner may exceed any distributions it
receives. In addition, a substantial tax may be imposed on certain transferors
of a Residual Certificate and certain Residual Owners that are 'pass-thru'
entities. See 'Transfers of Residual Certificates' below. Investors should
consult their tax advisors before purchasing a Residual Certificate.
SALE OR EXCHANGE OF CERTIFICATES
An Owner generally will recognize gain or loss upon sale or exchange of a
Regular or Residual Certificate equal to the difference between the amount
realized and the Owner's adjusted basis in the Certificate. The adjusted basis
in a Certificate generally will equal the cost of the Certificate, increased by
income previously recognized, and reduced (but not below zero) by previous
distributions, and by any amortized premium in the case of a Regular
Certificate, or net losses allowed as a deduction in the case of a Residual
Certificate.
Except as described below, any gain or loss on the sale or exchange of a
Certificate held as a capital asset will be capital gain or loss and will be
long-term or short-term depending on whether the Certificate has been held for
more than one year. Such gain or loss will be ordinary income or loss (i) for a
bank or thrift institution, and (ii) in the case of a Regular Certificate, (a)
to the extent of any accrued, but unrecognized, market discount, or (b) to the
extent income recognized by the Owner is less than the income that would have
been recognized if the yield on such Certificate were 110% of the applicable
federal rate under Code Section 1274(d).
A Residual Owner should be allowed a loss upon termination of the REMIC
Pool equal to the amount of the Owner's remaining adjusted basis in its Residual
Certificates. Whether the termination will be treated as a sale or exchange
(resulting in a capital loss) is unclear.
Except as provided in Treasury regulations, the wash sale rules of Code
Section 1091 will apply to dispositions of a Residual Certificate where the
seller of the interest, during the period beginning six months before the sale
or disposition of the interest and ending six months after such sale or
disposition, acquires (or enters into any other transaction that results in the
application of Code Section 1091) any REMIC residual interest, or any interest
in a 'taxable mortgage pool' (such as a non-REMIC owner trust) that is
economically comparable to a residual interest.
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TAXATION OF CERTAIN FOREIGN INVESTORS
Regular Certificates. A Regular Certificate held by an Owner that is a
non-U.S. person (as defined below), and that has no connection with the United
States other than owning the Certificate, will not be subject to U.S.
withholding or income tax with respect to the Certificate provided such Owner
(i) is not a '10-percent shareholder' within the meaning of Code Section
871(h)(3)(B) or a controlled foreign corporation described in Code Section
881(c)(3)(C), and (ii) provides an appropriate statement, signed under penalties
of perjury, identifying the Owner and stating, among other things, that the
Owner is a non-U.S. person. If these conditions are not met, a 30% withholding
tax will apply to interest (including original issue discount) unless an income
tax treaty reduces or eliminates such tax or unless the interest is effectively
connected with the conduct of a trade or business within the United States by
such Owner. In the latter case, such Owner will be subject to United States
federal income tax with respect to all income from the Certificate at regular
rates then applicable to U.S. taxpayers (and in the case of a corporation,
possibly also the branch profits tax).
The term 'non-U.S. person' means any person other than a U.S. person. A
U.S. person is a citizen or resident of the United States, a corporation,
partnership or other entity created or organized in or under the laws of the
United States or any political subdivision thereof, or an estate or trust that
is subject to U.S. federal income tax regardless of the source of its income.
Residual Certificates. A Residual Owner that is a non-U.S. person, and
that has no connection with the United States other than owning a Residual
Certificate, will not be subject to U.S. withholding or income tax with respect
to the Certificate (other than with respect to excess inclusions) provided that
(i) the conditions described in the second preceding paragraph with respect to
Regular Certificates are met and (ii) in the case of a Residual Certificate in a
REMIC Pool holding Mortgage Loans, the Mortgage Loans were originated after July
18, 1984. Excess inclusions are subject to a 30% withholding tax in all events
(notwithstanding any contrary tax treaty provisions) when distributed to the
Residual Owner (or when the Residual Certificate is disposed of). The Code
grants the Treasury Department authority to issue regulations requiring excess
inclusions to be taken into account earlier if necessary to prevent avoidance of
tax. The REMIC Regulations do not contain such a rule. The preamble thereto
states that the Internal Revenue Service is considering issuing regulations
concerning withholding on distributions to foreign holders of residual interests
to satisfy accrued tax liability due to excess inclusions.
With respect to a Residual Certificate that has been held at any time by a
non-U.S. person, the Trustee (or its agent) will be entitled to withhold (and to
pay to the Internal Revenue Service) any portion of any payment on such Residual
Certificate that the Trustee reasonably determines is required to be withheld.
If the Trustee (or its agent) reasonably determines that a more accurate
determination of the amount required to be withheld from a distribution can be
made within a reasonable period after the scheduled date for such distribution,
it may hold such distribution in trust for the Residual Owner until such
determination can be made.
Special tax rules and restrictions that apply to transfers of Residual
Certificates to and from non-U.S. persons are discussed in the next section.
TRANSFERS OF RESIDUAL CERTIFICATES
Special tax rules and restrictions apply to transfers of Residual
Certificates to disqualified organizations or foreign investors, and to
transfers of noneconomic Residual Certificates.
Disqualified Organizations. In order to comply with the REMIC rules of the
Code, the Agreement will provide that no legal or beneficial interest in a
Residual Certificate may be transferred to, or registered in the name of, any
person unless (i) the proposed purchaser provides to the Trustee an 'affidavit'
(within the meaning of the REMIC Regulations) to the effect that, among other
items, such transferee is not a 'disqualified organization' (as defined below),
is not purchasing a Residual Certificate as an agent for a disqualified
organization (i.e., as a broker, nominee, or other middleman) and is not an
entity (a 'Book-Entry Nominee') that holds REMIC residual securities as nominee
to facilitate the clearance and settlement of such securities through electronic
book-entry changes in accounts of participating organizations and (ii) the
transferor states in writing to the Trustee that it has no actual knowledge that
such affidavit is false.
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If despite these restrictions a Residual Certificate is transferred to a
disqualified organization, the transfer may result in a tax equal to the product
of (i) the present value of the total anticipated future excess inclusions with
respect to such Certificate and (ii) the highest corporate marginal federal
income tax rate. Such a tax generally is imposed on the transferor, except that
if the transfer is through an agent for a disqualified organization, the agent
is liable for the tax. A transferor is not liable for such tax if the transferee
furnishes to the transferor an affidavit that the transferee is not a
disqualified organization and, as of the time of the transfer, the transferor
does not have actual knowledge that the affidavit is false.
A disqualified organization may hold an interest in a REMIC Certificate
through a 'pass-thru entity' (as defined below). In that event, the pass-thru
entity is subject to tax (at the highest corporate marginal federal income tax
rate) on excess inclusions allocable to the disqualified organization. However,
such tax will not apply to the extent the pass-thru entity receives affidavits
from record holders of interests in the entity stating that they are not
disqualified organizations and the entity does not have actual knowledge that
the affidavits are false.
For these purposes, (i) 'disqualified organization' means the United
States, any state or political subdivision thereof, any foreign government, any
international organization, any agency or instrumentality of any of the
foregoing, certain organizations that are exempt from taxation under the Code
(including tax on excess inclusions) and certain corporations operating on a
cooperative basis, and (ii) 'pass-thru entity' means any regulated investment
company, real estate investment trust, common trust fund, partnership, trust or
estate and certain corporations operating on a cooperative basis. Except as may
be provided in Treasury regulations, any person holding an interest in a
pass-thru entity as a nominee for another will, with respect to that interest,
be treated as a pass-thru entity. Certain additional rules also apply to
'electing large partnerships.' If an electing large partnership holds a Residual
Certificate, all interests in the electing large partnership are treated as held
by disqualified organizations for the purposes of the tax on pass-through
entities described above. The exception to this tax described above for
pass-through entities that collect affidavits from their record holders is not
available to electing large partnerships.
Foreign Investors. Under the REMIC Regulations, a transfer of a Residual
Certificate to a non-U.S. person that will not hold the Certificate in
connection with a U.S. trade or business will be disregarded for all federal tax
purposes if the Certificate has 'tax avoidance potential.' A Residual
Certificate has tax avoidance potential unless, at the time of transfer, the
transferor reasonably expects that:
(i) for each excess inclusion, the REMIC will distribute to the
transferee residual interest holder an amount that will equal at least 30
percent of the excess inclusion, and
(ii) each such amount will be distributed at or after the time at
which the excess inclusion accrues and not later than the close of the
calendar year following the calendar year of accrual.
A transferor has such reasonable expectation if the above test would be met
assuming that the REMIC's Mortgage Loans will prepay at each rate between 50
percent and 200 percent of the Prepayment Assumption.
The REMIC Regulations also provide that a transfer of a Residual
Certificate from a non-U.S. person to a U.S. person (or to a non-U.S. person
that will hold the Certificate in connection with a U.S. trade or business) is
disregarded if the transfer has 'the effect of allowing the transferor to avoid
tax on accrued excess inclusions.'
In light of these provisions, the Agreement provides that a Residual
Certificate may not be purchased by or transferred to any person that is not a
U.S. person, unless (i) such person holds the Certificate in connection with the
conduct of a trade or business within the United States and furnishes the
transferor and the Trustee with an effective Internal Revenue Service Form 4224,
or (ii) the transferee delivers to both the transferor and the Trustee an
opinion of nationally recognized tax counsel to the effect that such transfer is
in accordance with the requirements of the Code and the regulations promulgated
thereunder and that such transfer will not be disregarded for federal income tax
purposes.
Noneconomic Residual Certificates. Under the REMIC Regulations, a transfer
of a 'noneconomic' Residual Certificate will be disregarded for all federal
income tax purposes if a significant purpose of the transfer is to impede the
assessment or collection of tax. Such a purpose exists if the transferor, at the
time of the transfer,
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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. A
transferor is presumed to lack such knowledge if:
(i) the transferor conducted, at the time of the transfer, a
reasonable investigation of the financial condition of the transferee and
found that the transferee had historically paid its debts as they came due
and found no significant evidence to indicate that the transferee will not
continue to pay its debts as they become due, and
(ii) the transferee represents to the transferor that it understands
that, as the holder of the noneconomic residual interest, it may incur tax
liabilities in excess of any cash flows generated by the interest and that
it intends to pay taxes associated with holding the residual interest as
they become due.
A Residual Certificate (including a Certificate with significant value at
issuance) is noneconomic unless, at the time of the transfer, (i) the present
value of the expected future distributions on the Certificate at least equals
the product of the present value of the anticipated excess inclusions and the
highest corporate income tax rate in effect for the year in which the transfer
occurs, and (ii) the transferor reasonably expects that the transferee will
receive distributions on the Certificate, at or after the time at which taxes
accrue, in an amount sufficient to pay the taxes.
The Agreement will provide that no legal or beneficial interest in a
Residual Certificate may be transferred to, or registered in the name of, any
person unless the transferor represents to the Trustee that it has conducted the
investigation of the transferee, and made the findings, described in the
preceding paragraph, and the proposed transferee provides to the Trustee the
transferee representations described in the preceding paragraph, and agrees that
it will not transfer the Certificate to any person unless that person agrees to
comply with the same restrictions on future transfers.
SERVICING COMPENSATION AND OTHER REMIC POOL EXPENSES
Under Code Section 67, an individual, estate or trust is allowed certain
itemized deductions only to the extent that such deductions, in the aggregate,
exceed 2% of the Owner's adjusted gross income, and such a person is not allowed
such deductions to any extent in computing its alternative minimum tax
liability. Under Treasury regulations, if such a person is an Owner of a REMIC
Certificate, the REMIC Pool is required to allocate to such a person its share
of the servicing fees and administrative expenses paid by a REMIC together with
an equal amount of income. Those fees and expenses are deductible as an offset
to the additional income, but subject to the 2% floor.
In the case of a REMIC Pool that has multiple classes of Regular
Certificates with staggered maturities, fees and expenses of the REMIC Pool
would be allocated entirely to the Owners of Residual Certificates. However, if
the REMIC Pool were a 'single-class REMIC' as defined in applicable Treasury
regulations, such deductions would be allocated proportionately among the
Regular and Residual Certificates.
REPORTING AND ADMINISTRATIVE MATTERS
Annual reports will be made to the Internal Revenue Service, and to Holders
of record of Regular Certificates, and Owners of Regular Certificates holding
through a broker, nominee or other middleman, that are not excepted from the
reporting requirements, of accrued interest, original issue discount,
information necessary to compute accruals of market discount, information
regarding the percentage of the REMIC Pool's assets meeting the qualified assets
tests described above under 'Status of Certificates' and, where relevant,
allocated amounts of servicing fees and other Code Section 67 expenses. Holders
not receiving such reports may obtain such information from the related REMIC by
contacting the person designated in IRS Publication 938. Quarterly reports will
be made to Residual Holders showing their allocable shares of income or loss
from the REMIC Pool, excess inclusions, and Code Section 67 expenses.
The Trustee will sign and file federal income tax returns for each REMIC
Pool. To the extent allowable, the Company will act as the tax matters person
for each REMIC Pool. Each Owner of a Residual Certificate, by the acceptance of
its Residual Certificate, agrees that the Company will act as the Owner's agent
in the performance of any duties required of the Owner in the event that the
Owner is the tax matters person.
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An Owner of a Residual Certificate is required to treat items on its
federal income tax return consistently with the treatment of the items on the
REMIC Pool's return, unless the Owner owns 100% of the Residual Certificate for
the entire calendar year or the Owner either files a statement identifying the
inconsistency or establishes that the inconsistency resulted from incorrect
information received from the REMIC Pool. The Internal Revenue Service may
assess a deficiency resulting from a failure to comply with the consistency
requirement without instituting an administrative proceeding at the REMIC level.
Any person that holds a Residual Certificate as a nominee for another person may
be required to furnish the REMIC Pool, in a manner to be provided in Treasury
regulations, the name and address of such other person and other information.
NON-REMIC CERTIFICATES
The discussion in this Section applies only to a Series of Certificates for
which no REMIC election is made.
TRUST FUND AS GRANTOR TRUST
Upon issuance of each series of Certificates, Cleary, Gottlieb, Steen &
Hamilton, counsel to the Company, will deliver its opinion to the effect that,
under then current law, assuming compliance by the Company, the Servicer and the
Trustee with all the provisions of the Agreement (and such other agreements and
representations as may be referred to in the opinion), the Trust Fund will be
classified for federal income tax purposes as a grantor trust and not as an
association taxable as a corporation.
Under the grantor trust rules of the Code, each Owner of a Certificate will
be treated for federal income tax purposes as the owner of an undivided interest
in the Mortgage Loans (and any related assets) included in the Trust Fund. The
Owner will include in its gross income, gross income from the portion of the
Mortgage Loans allocable to the Certificate, and may deduct its share of the
expenses paid by the Trust Fund that are allocable to the Certificate, at the
same time and to the same extent as if it had directly purchased and held such
interest in the Mortgage Loans and had directly received payments thereon and
paid such expenses. If an Owner is an individual, trust or estate, the Owner
will be allowed deductions for its share of Trust Fund expenses (including
reasonable servicing fees) only to the extent that the sum of those expenses and
the Owner's other miscellaneous itemized deductions exceeds 2% of adjusted gross
income, and will not be allowed to deduct such expenses for purposes of the
alternative minimum tax. Distributions on a Certificate will not be taxable to
the Owner, and the timing or amount of distributions will not affect the timing
or amount of income or deductions relating to a Certificate.
STATUS OF THE CERTIFICATES
The Certificates, other than Interest Only Certificates, will be:
o 'real estate assets' under Code Section 856(c)(4)(A); and
o assets described in Section 7701(a)(19)(C) of the Code,
to the extent the assets of the Trust Fund are so treated. Interest income from
such Certificates will be 'interest on obligations secured by mortgages on real
property' under Code Section 856(c)(3)(B) to the extent the income of the Trust
Fund qualifies under that section. An 'Interest Only Certificate' is a
Certificate which is entitled to receive distributions of some or all of the
interest on the Mortgage Loans or other assets in a REMIC Pool and that has
either a notional or nominal principal amount. Although not certain,
Certificates that are Interest Only Certificates should qualify under the
foregoing Code sections to the same extent as other Certificates.
POSSIBLE APPLICATION OF STRIPPED BOND RULES
The federal income tax treatment of Certificates will depend on whether
they are subject to the 'stripped bond' rules of Code Section 1286. In general,
Certificates will be subject to those rules in the hands of an Owner if (i) the
Company (or anyone else) retains rights to receive more than 100 basis points of
interest on any Mortgage Loans assigned to the Trust Fund (disregarding rights
to reasonable servicing compensation, but including rights to fees in excess of
reasonable compensation), or (ii) Certificates are issued in two or more Classes
representing rights to non-pro rata shares of interest and principal payments on
the Mortgage Loans.
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Notwithstanding the foregoing, a Certificate will not be subject to the
stripped bond rules in the hands of an Owner unless, viewing the Certificate as
a debt instrument issued by the Trust Fund, it would have original issue
discount. In general, a Certificate will not have original issue discount if it
pays interest at a fixed rate, or a single variable rate, monthly over its
entire life, is issued within one month of the first Distribution Date, and is
issued with no more than a de minimis amount of discount below its principal
amount. Discount is de minimis if the Certificate has an issue price (generally
the initial offering price at which a substantial amount of Certificates are
sold) that is not less than its principal amount by more than .25% times the
weighted average life of the Certificate (calculated by rounding down the number
of years to each principal payment to the next lowest number). For a more
detailed discussion of the definition of original issue discount, see 'REMIC
Certificates-- Income from Regular Certificates--Original Issue Discount' above.
TAXATION OF CERTIFICATES IF STRIPPED BOND RULES DO NOT APPLY
If the stripped bond rules do not apply to a Certificate, then the Owner
will be required to include in income its share of the interest payments on the
Mortgage Loans held by the Trust Fund in accordance with its tax accounting
method. The Owner must also account for discount or premium on the Mortgage
Loans if it is considered to have purchased its interest in the Mortgage Loans
at a discount or premium. An Owner will be considered to have purchased an
interest in each Mortgage Loan at a price determined by allocating its purchase
price for the Certificate among the Mortgage Loans in proportion to their fair
market values at the time of purchase. It is likely that discount would be
considered to accrue and premium would be amortized, as described below, based
on an assumption that there will be no future prepayments of the Mortgage Loans,
and not based on a reasonable prepayment assumption.
Discount. The treatment of any discount relating to a Mortgage Loan will
depend on whether the discount is original issue discount or market discount.
Discount at which a Mortgage Loan is purchased will be original issue discount
only if the Mortgage Loan itself has original issue discount; the issuance of
Certificates is not considered a new issuance of a debt instrument that can give
rise to original issue discount. A Mortgage Loan generally will be considered to
have original issue discount if the greater of the amount of points charged to
the borrower, or the amount of any interest foregone during any initial teaser
period, exceeds .167% of the principal amount of the Mortgage Loan times the
number of full years to maturity (i.e., 5% of the principal amount for a 30 year
loan), or if interest is not paid at a fixed rate or a single variable rate
(disregarding any initial teaser rate) over the life of the Mortgage Loan. It is
not anticipated that the amount of original issue discount, if any, accruing on
the Mortgage Loans in each month will be significant relative to the interest
paid currently on the Mortgage Loans, but there can be no assurance that this
will be the case.
In the case of a Mortgage Loan that is considered to have been purchased
with market discount that exceeds a de minimis amount (generally, .167% of the
principal amount times the number of whole years to maturity remaining at the
time of purchase), the Owner will be required to include in income in each month
the amount of such discount that has accrued through such month and not
previously been included in income, but limited to the amount of principal on
the Mortgage Loan that is received by the Trust Fund in that month. Because the
Mortgage Loans will provide for monthly principal payments, such discount may be
required to be included in income at a rate that is not significantly slower
than the rate at which such discount accrues. Any market discount that has not
previously been included in income will be recognized as ordinary income if and
when the Mortgage Loan is prepaid in full. For a more detailed discussion of the
market discount rules of the Code, see 'REMIC Certificates--Income from Regular
Certificates--Market Discount' above.
In the case of market discount that does not exceed a de minimis amount,
the Owner generally will be required to allocate ratably the portion of such
discount that is allocable to a Mortgage Loan among the principal payments on
the Mortgage Loan and to include the discount in ordinary income as the related
principal payments are made (whether as scheduled payments or prepayments).
Premium. In the event that a Mortgage Loan is purchased at a premium, the
Owner may elect under Section 171 of the Code to amortize such premium under a
constant yield method based on the yield of the Mortgage Loan to such Owner,
provided that such Mortgage Loan was originated after September 27, 1985.
Premium allocable to a Mortgage Loan originated on or before that date should be
allocated among the principal
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payments on the Mortgage Loan and allowed as an ordinary deduction as principal
payments are made (whether as scheduled payments or prepayments).
TAXATION OF CERTIFICATES IF STRIPPED BOND RULES APPLY
If the stripped bond rules apply to a Certificate, income on the
Certificate will be treated as original issue discount and will be included in
income as it accrues under a constant yield method. More specifically, for
purposes of applying the original issue discount rules of the Code, the Owner
will likely be taxed as if it had purchased a newly issued, single debt
instrument providing for payments equal to the payments on the interests in the
Mortgage Loans allocable to the Certificate, and having original issue discount
equal to the excess of the sum of such payments over the Owner's purchase price
for the Certificate (which would be treated as the issue price). The amount of
original issue discount income accruing in any taxable year will be computed
generally as described above under 'REMIC Certificates--Income from Regular
Certificates--Original Issue Discount'. It is possible, however, that the
calculation must be made using as the Prepayment Assumption an assumption of
zero prepayments. If the calculation is made assuming no future prepayments,
then the Owner should be allowed to deduct currently any negative amount of
original issue discount produced by the accrual formula.
Different approaches could be applied in calculating income under the
stripped bond rules. For example, a Certificate could be viewed as a collection
of separate debt instruments (one for each payment allocable to the Certificate)
rather than a single debt instrument. Also, in the case of an Interest-Only
Certificate, it could be argued that certain proposed regulations governing
contingent payment debt obligations apply. Owners should consult their own tax
advisors regarding the calculation of income under the stripped bond rules.
SALES OF CERTIFICATES
A Certificateholder that sells a Certificate will recognize gain or loss
equal to the difference between the amount realized in the sale and its adjusted
tax basis in the Certificate. In general, such adjusted basis will equal the
Certificateholder's cost for the Certificate, increased by the amount of any
income previously reported with respect to the Certificate and decreased (but
not below zero) by the amount of any distributions received thereon, the amount
of any losses previously allowable to such Owner with respect to such
Certificate and any premium amortization thereon. Any such gain or loss would be
capital gain or loss if the Certificate was held as a capital asset, subject to
the potential treatment of gain as ordinary income to the extent of any accrued
but unrecognized market discount under the market discount rules of the Code, if
applicable.
FOREIGN INVESTORS
Except as described in the following paragraph, an Owner that is not a U.S.
person (as defined under 'REMIC Certificates--Taxation of Foreign Investors'
above) and that is not subject to federal income tax as a result of any direct
or indirect connection to the United States in addition to its ownership of a
Certificate will not be subject to United States income or withholding tax in
respect of a Certificate (assuming the underlying Mortgage Loans were originated
after July 18, 1984), if the Owner provides an appropriate statement, signed
under penalties of perjury, identifying the Owner and stating, among other
things, that the Owner is not a U.S. person. If these conditions are not met, a
30% withholding tax will apply to interest (including original issue discount)
unless an income tax treaty reduces or eliminates such tax or unless the
interest is effectively connected with the conduct of a trade or business within
the United States by such Owner. Income effectively connected with a U.S. trade
or business will be subject to United States federal income tax at regular rates
then applicable to U.S. taxpayers (and in the case of a corporation, possibly
also the branch profits tax).
In the event the Trust Fund acquires ownership of real property located in
the United States in connection with a default on a Mortgage Loan, then any
rental income from such property allocable to an Owner that is not a U.S. person
generally will be subject to a 30% withholding tax. In addition, any gain from
the disposition of such real property allocable to an Owner that is not a U.S.
person may be treated as income that is effectively connected with a U.S. trade
or business under special rules governing United States real property interests.
The Trust Fund may be required to withhold tax on gain realized upon a
disposition of such real property by the Trust Fund at a 35% rate.
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REPORTING
Tax information will be reported annually to the Internal Revenue Service
and to Holders of Certificates that are not excluded from the reporting
requirements.
BACKUP WITHHOLDING
Distributions made on a Certificate and proceeds from the sale of a
Certificate to or through certain brokers may be subject to a 'backup'
withholding tax of 31% unless, in general, the Owner of the Certificate complies
with certain procedures or is a corporation or other person exempt from such
withholding. Any amounts so withheld from distributions on the Certificates
would be refunded by the Internal Revenue Service or allowed as a credit against
the Owner's federal income tax.
PLAN OF DISTRIBUTION
Certificates are being offered hereby in series or in one or more classes
of a series through one or more of the various methods described below. The
Prospectus Supplement will describe the method of offering being utilized for
the related series or classes of Certificates and will state the public offering
or purchase price of each class of Certificates being offered thereby or the
method by which such price will be determined and the net proceeds to the
Company from the sale of each such class.
The Certificates of each series or class will be offered through the
following methods from time to time, and offerings may be made concurrently
through more than one of these methods and an offering of a particular series or
of one or more classes of Certificates may be made through a combination of two
or more of these methods. Such methods are as follows:
1. By negotiated firm commitment underwriting and public reoffering by
underwriters;
2. By placements by the Company with institutional investors through
dealers or agents; and
3. By direct placements by the Company with institutional investors.
If underwriters are used in a sale of any Certificates, such Certificates
will be acquired by the underwriters for their own account and may be resold
from time to time in one or more transactions including negotiated transactions,
at fixed public offering prices or at varying prices to be determined at the
time of sale or at the time of commitment therefor. The managing underwriter or
underwriters with respect to the offer and sale of a particular series or class
of Certificates will be set forth on the cover of the Prospectus Supplement
relating to such series or class and the members of the underwriting syndicate,
if any, will be named in such Prospectus Supplement.
In connection with the sale of the Certificates, underwriters may receive
compensation from the Company or from purchasers of the Certificates in the form
of discounts, concessions or commissions. Underwriters and dealers participating
in the distribution of the Certificates may be deemed to be underwriters in
connection with such Certificates, and any discounts or commissions received by
them from the Company and any profit on the resale of Certificates by them may
be deemed to be underwriting discounts and commissions under the Securities Act
of 1933, as amended (the 'Securities Act'). The Prospectus Supplement will
describe any such compensation paid by the Company.
It is anticipated that the underwriting agreement pertaining to the sale of
any series or class of Certificates will provide that the obligations of the
underwriters will be subject to certain conditions precedent, that the
underwriters will be obligated to purchase all such Certificates if any are
purchased and that the Company will indemnify the underwriters against certain
civil liabilities, including liabilities under the Securities Act or will
contribute to payments required to be made in respect thereof.
Purchasers of Certificates, including dealers, institutional investors and
sophisticated non-institutional investors, may, depending on the facts and
circumstances of such purchases, be deemed to be underwriters within the meaning
of the Securities Act, in connection with reoffers and sales by them of
Certificates. Holders of Certificates should consult with their legal advisors
in this regard prior to any such reoffer or sale.
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With respect to any series of Certificates offered other than through
underwriters, the Prospectus Supplement will contain information regarding the
nature of such offering and any agreements to be entered into between the
Company and purchasers of such Certificates.
USE OF PROCEEDS
The net proceeds of sales of Certificates will be added to the Company's
general funds. Unless otherwise specified in the Prospectus Supplement, the
Company intends to use such proceeds for general corporate purposes, including
the acquisition of servicing rights, Mortgage Loans, Agency Securities and
Contracts.
LEGAL MATTERS
The legality of the Certificates offered hereby will be passed upon for the
Company by Cleary, Gottlieb, Steen & Hamilton, New York, New York. Certain
federal income tax matters will be passed upon for the Company by Cleary,
Gottlieb, Steen & Hamilton.
FINANCIAL INFORMATION
A Trust Fund will be formed with respect to each series of Certificates. No
Trust Fund will have any assets or obligations prior to the issuance of the
related series of Certificates. No Trust Fund will engage in any activities
other than those described herein or in the Prospectus Supplement. Accordingly,
no financial statement with respect to any Trust Fund is included in this
Prospectus or will be included in the Prospectus Supplement.
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS SUPPLEMENT OR THE
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO
BUY ANY SECURITIES OTHER THAN THE SECURITIES DESCRIBED IN THIS PROSPECTUS
SUPPLEMENT OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS NOR ANY
SALE MADE THEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THE INFORMATION CONTAINED HEREIN OR THEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT
TO THE DATE OF SUCH INFORMATION.
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TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
Page
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Summary of Terms.................................... S-4
Risk Factors........................................ S-15
Description of the Mortgage Pool and the Mortgaged
Properties......................................... S-16
Description of the Certificates..................... S-25
Yield and Weighted Average Life Considerations...... S-36
GE Capital Mortgage Services, Inc................... S-46
The Home Equity Loan Program........................ S-46
Delinquency, Foreclosure and Loan Loss Experience of
the Company's Home Equity Loan Servicing
Portfolio.......................................... S-48
The Pooling and Servicing Agreement................. S-50
Certain Federal Income Tax Consequences............. S-55
ERISA Considerations................................ S-56
Legal Investment Matters............................ S-57
Plan of Distribution................................ S-58
Certificate Ratings................................. S-58
Legal Matters....................................... S-59
Index of Certain Prospectus Supplement
Definitions........................................ S-60
PROSPECTUS
Prospectus Supplement............................... 2
Available Information............................... 2
Incorporation of Certain Documents by Reference..... 3
Reports to Certificateholders....................... 3
Prospectus Summary.................................. 6
Description of the Certificates..................... 14
The Trust Fund...................................... 19
Credit Support...................................... 30
Yield, Maturity and Weighted Average Life
Considerations..................................... 36
Servicing of the Mortgage Loans and Contracts....... 38
The Pooling and Servicing Agreement................. 49
GE Capital Mortgage Services, Inc................... 56
The Guarantor....................................... 57
Certain Legal Aspects of the Mortgage Loans and
Contracts.......................................... 57
Legal Investment Matters............................ 67
ERISA Considerations................................ 68
Certain Federal Income Tax Consequences............. 70
Plan of Distribution................................ 83
Use of Proceeds..................................... 84
Legal Matters....................................... 84
Financial Information............................... 84
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UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE CERTIFICATES OFFERED HEREBY, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS
SUPPLEMENT AND PROSPECTUS TO WHICH IT RELATES. THIS IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
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$189,560,000
(APPROXIMATE)
GE CAPITAL MORTGAGE
SERVICES, INC.
(SELLER AND SERVICER)
HOME EQUITY LOAN
PASS-THROUGH CERTIFICATES,
SERIES 1998-HE2
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PROSPECTUS SUPPLEMENT
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PRUDENTIAL SECURITIES
INCORPORATED
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JUNE 23, 1998
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