<PAGE>
Filed Pursuant to Rule 424(b)(5)
Registration File No.: 333-64351
PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED AUGUST 28, 2000
$1,490,624,000
ASSET BACKED SECURITIES CORPORATION
LONG BEACH HOME EQUITY LOAN TRUST 2000-LB1
HOME EQUITY LOAN PASS-THROUGH CERTIFICATES, SERIES 2000-LB1
ASSET BACKED SECURITIES CORPORATION
DEPOSITOR
[LONG BEACH MORTGAGE COMPANY LOGO]
SELLER AND MASTER SERVICER
(A SUBSIDIARY OF WASHINGTON MUTUAL, INC.)
The following classes of certificates are being offered pursuant to this
prospectus supplement and the accompanying prospectus:
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-13 IN THIS PROSPECTUS
SUPPLEMENT AND ON PAGE 17 IN THE PROSPECTUS. The certificates represent
obligations of the trust only and do not represent an interest in or
obligation of Long Beach Mortgage Company, Washington Mutual, Inc., Asset
Backed Securities Corporation or any of their affiliates. This prospectus
supplement may be used to offer and sell the offered certificates only if
accompanied by the prospectus.
<TABLE>
<CAPTION>
INITIAL
CERTIFICATE
PRINCIPAL PASS-THROUGH UNDERWRITING PROCEEDS TO
CLASS BALANCE (1) RATE PRICE TO PUBLIC DISCOUNT DEPOSITOR (5)
------- ------------- -------------- --------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
AF1 104,800,000 7.701% 100.000% 0.100% 99.900
------- ------------- -------------- --------------- -------------- -------------
AF2 73,500,000 7.570% 99.999% 0.140% 99.859
------- ------------- -------------- --------------- -------------- -------------
AF3 34,700,000 7.610% 100.000% 0.170% 99.830
------- ------------- -------------- --------------- -------------- -------------
AF4 42,200,000 7.825% 99.993% 0.270% 99.723
------- ------------- -------------- --------------- -------------- -------------
AF5 22,300,000 8.050%(2)(3) 100.000% 0.345% 99.655
------- ------------- -------------- --------------- -------------- -------------
AF6 37,500,000 7.615%(2) 99.992% 0.275% 99.717
------- ------------- -------------- --------------- -------------- -------------
M1F 25,313,000 8.240%(2) 99.992% 0.375% 99.617
------- ------------- -------------- --------------- -------------- -------------
M2F 19,687,000 8.700%(2) 99.985% 0.500% 99.492
------- ------------- -------------- --------------- -------------- -------------
BF 14,062,000 9.290%(2) 99.994% 0.650% 99.335
------- ------------- -------------- --------------- -------------- -------------
AV 911,250,000 (2)(4) 100.000% 0.165% 99.835
------- ------------- -------------- --------------- -------------- -------------
M1V 84,375,000 (2)(4) 100.000% 0.375% 99.625
------- ------------- -------------- --------------- -------------- -------------
M2V 64,687,000 (2)(4) 100.000% 0.500% 99.500
------- ------------- -------------- --------------- -------------- -------------
BV 56,250,000 (2)(4) 100.000% 0.650% 99.350
------- ------------- -------------- --------------- -------------- -------------
</TABLE>
(1) Subject to a permitted variance in the aggregate of 5%.
(2) As described under "Description of the Certificates-Pass Through
Rates" in this prospectus supplement, the pass-through rates of these
classes of certificates are subject to a rate cap.
(3) The per annum rate on the Class AF5 certificates will increase to
8.55% after the clean-up call date.
(4) The pass-through rate on the Class AV, Class M1V, Class M2V and Class
BV certificates will vary as described under "Description of the
Certificates-Pass Through Rates " in this prospectus supplement.
(5) Before deducting expenses.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THE OFFERED CERTIFICATES OR DETERMINED
THAT THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IS TRUTHFUL OR COMPLETE.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE ATTORNEY
GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE MERITS OF
THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
The underwriters listed below will purchase the offered certificates from
the depositor. We refer you to "Method of Distribution" in this prospectus
supplement
CREDIT SUISSE FIRST BOSTON
LEHMAN BROTHERS
MORGAN STANLEY DEAN WITTER
PRUDENTIAL SECURITIES
SALOMON SMITH BARNEY
August 28, 2000
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS SUPPLEMENT
AND THE ACCOMPANYING PROSPECTUS
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION. YOU SHOULD NOT
ASSUME THAT THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IS
ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT OF THIS DOCUMENT.
We provide information to you about the offered certificates in two separate
documents that progressively provide more detail:
o the accompanying prospectus, which provides general information, some of
which may not apply to this series of certificates; and
o this prospectus supplement, which describes the specific terms of this
series of certificates.
IF THERE IS A CONFLICT BETWEEN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS, YOU SHOULD RELY ON THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT.
This prospectus supplement and the accompanying prospectus include
cross-references to captions in these materials where you can find further
related discussions. The following table of contents provides pages on which
these captions are located.
We have filed preliminary information regarding the trust's assets and the
certificates with the Securities and Exchange Commission. The information
contained in this document supersedes all of that preliminary information, which
was prepared by the underwriters for prospective investors.
Until November 26, 2000 all dealers that effect transactions in the offered
certificates, whether or not participating in this offering, may be required to
deliver a prospectus and prospectus supplement. This requirement is in addition
to the dealer's obligation to deliver a prospectus and prospectus supplement
when acting as underwriters with respect to their unsold allotments or
subscriptions.
We are not offering the certificates in any state where the offer is not
permitted.
We do not claim the accuracy of the information in this prospectus supplement
and the accompanying prospectus as of any date other than the dates stated on
their respective covers.
<PAGE>
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
Summary of Prospectus Supplement...................... S-1
Risk Factors.......................................... S-13
Use of Proceeds....................................... S-24
The Home Equity Loan Pool............................. S-23
Yield on the Certificates............................. S-54
Description of the Certificates....................... S-72
Pooling and Servicing Agreement....................... S-101
Federal Income Tax Consequences....................... S-111
Certain State Tax Considerations...................... S-113
Method of Distribution................................ S-114
Secondary Market...................................... S-115
Legal Opinions........................................ S-115
Ratings............................................... S-115
Legal Investment...................................... S-116
ERISA Considerations.................................. S-116
Annex I............................................... S-124
PAGE
PROSPECTUS
Prospectus Supplement................................ 2
Additional Information............................... 2
Incorporation of Certain Information by Reference....
2
Summary.............................................. 4
Risk Factors......................................... 17
The Depositor........................................ 31
Use of Proceeds...................................... 31
Maturity, Prepayment and Yield Considerations........
31
Description of the Securities........................ 35
Credit Support....................................... 67
Description of Insurance............................. 73
Certain Legal Aspects of the Mortgage Loans and
Contracts............................................ 81
Federal Income Tax Consequences...................... 93
ERISA Considerations................................. 133
Legal Investment..................................... 139
Plan of Distribution................................. 140
Legal Matters........................................ 141
Index of Terms....................................... 142
<PAGE>
SUMMARY OF PROSPECTUS SUPPLEMENT
o This summary highlights selected information from this prospectus
supplement and does not contain all of the information that you need to
consider in making your investment decision. To understand all of the terms
of the offering of the certificates, you should carefully read this entire
prospectus supplement and the accompanying prospectus.
o This summary provides an overview of information to aid your understanding
and is qualified by the full description of this other information in this
prospectus supplement and the accompanying prospectus.
o You can find a listing of the pages where capitalized terms used in this
prospectus supplement are defined under the caption "Index of Principal
Terms" beginning on page S-119 in this prospectus supplement.
Title of Series...................... Asset Backed Securities Corporation,
Long Beach Home Equity Loan Trust
2000-LB1, Home Equity Loan
Pass-Through Certificates, Series
2000-LB1.
Cut-off Date......................... For all home equity loans included in
the trust on the closing date, August
1, 2000, and for all other home equity
loans the first day of the month in
which such home equity loans are
purchased by the trust.
Statistical Calculation Date......... Close of business on July 31, 2000.
All statistical information relating
to the home equity loans presented in
this prospectus supplement is given as
of the statistical calculation date.
Closing Date......................... On or about August 31, 2000.
Depositor............................ Asset Backed Securities Corporation, a
special purpose Delaware corporation.
Asset Backed Securities Corporation is
an indirect, wholly owned subsidiary
of Credit Suisse First Boston, Inc.
Asset Backed Securities Corporation
will sell the home equity loans to the
issuing trust.
Seller and Master Servicer........... Long Beach Mortgage Company, a
Delaware corporation. We refer you to
"The Home Equity Loan
Pool--Underwriting Standards;
Representations" and "Pooling and
Servicing Agreement--The Master
Servicer" in this prospectus
supplement.
S-1
<PAGE>
Trustee.............................. Bankers Trust Company of California,
N.A., a national banking association,
will be the trustee of the trust. We
refer you to "Pooling and Servicing
Agreement--The Trustee" in this
prospectus supplement.
Distribution Dates................... Distributions on the offered
certificates will be made on the 21st
day of each month, or, if such day is
not a business day, on the next
succeeding business day. The first
distribution date will be in September
2000.
Record Date.......................... With respect to any distribution date,
and the fixed rate certificates, the
last business day of the month
immediately preceding the calendar
month in which such distribution date
occurs. With respect to any
distribution date and the adjustable
rate certificates, the business day
prior to such distribution date.
Due Period........................... With respect to any distribution date,
the period from the second day of the
preceding month to the first day of
such calendar month. Scheduled
payments of interest and principal
received or advanced that were due
during this period will be passed
through to holders of certificates on
such distribution date.
Offered Certificates................. The classes of offered certificates,
their pass-through rates and initial
certificate principal balances are as
shown on the cover page of this
prospectus supplement.
Non-Offered Certificates............. The Class X-F, Class X-V, Class P-F,
Class P-V, Class B-IOF, Class B-IOV
and Class R Certificates.
The non-offered certificates are not
being offered to the public pursuant
to this prospectus supplement and
prospectus. Any information relating
to the non-offered certificates is
provided only to permit a better
understanding of the offered
certificates.
The trustee will distribute to the
Class X-F, Class X-V and Class R
certificates excess cashflow as
described herein. The trustee will
distribute to the Class P-F and Class
P-V certificates all prepayment
penalties received on the related loan
group. The trustee will distribute to
the Class B-IOF and Class B-IOV
certificates interest for the first
thirty distribution dates at the
following pass-through rates and on
notional amounts equal to the lesser
of the amounts shown
S-2
<PAGE>
below and the outstanding principal
balance of the related loan group:
Certificate Rate Notional Amount
---------------- ---------------
Class B-IOF 4.125% $31,000,000(1)
Class B-IOV 4.125% $90,000,000(1)
(1) This class will not receive any
principal payments but will accrue
interest on its notional amount, which
is the lesser of (a) in the case of
the Class B-IOF certificates,
$31,000,000 and in the case of the
Class B-IOV certificates, $90,000,000
and (b) the outstanding principal
balance of the related loan group plus
the related pre-funding amount. The
notional amounts will be $0 on and
after the thirtieth distribution date.
Loan Group 1......................... All home equity loans with fixed
interest rates and certain adjustable
rate home equity loans that have a
fixed rate of interest for five years
following the date of origination and
thereafter have adjustable interest
rates.
Loan Group 2......................... All home equity loans with adjustable
interest rates other than those
allocated to loan group 1.
Group 1 Certificates................. Group 1 Class A Certificates, Class
M1F, Class M2F, Class BF, Class P-F,
Class B-IOF and Class X-F
Certificates.
Group 2 Certificates................. Class AV, Class M1V, Class M2V, Class
BV, Class P-V, Class B-IOV and Class
X-V Certificates.
Certificate Group.................... Either the Group 1 Certificates or
the Group 2 Certificates.
Regular Certificates................. All classes of certificates other
than the Residual Certificates.
Residual Certificates................ One or more Class R Certificates.
Group 1 Class A Certificates......... Class AF1, Class AF2, Class AF3, Class
AF4, Class AF5 and Class AF6
Certificates.
Group 1 Mezzanine
Certificates......................... Class M1F and Class M2F Certificates.
S-3
<PAGE>
Subordinated Certificates............ Group 1 Mezzanine Certificates, Group
2 Mezzanine Certificates, Class BV,
Class BF, Class B-IOV and Class B-IOF
Certificates.
Group 2 Class A Certificates......... Class AV Certificates.
Group 2 Mezzanine
Certificates......................... Class M1V and Class M2V Certificates.
Fixed Rate Certificates.............. Group 1 Certificates and the Class
B-IOV Certificates.
Adjustable Rate Certificates......... Group 2 Certificates other than the
Class B-IOV Certificates.
Subordinated Offered
Certificates......................... Group 1 Mezzanine Certificates, Group
2 Mezzanine Certificates, Class BF
Certificates and Class BV
Certificates.
General Designations................. References to "Class A," Class M-1,"
Class M-2," "Class B," "Class B-IO,"
"Class X," "Class P," "Mezzanine
Certificates" and "Subordinated
Certificates " are references to
certificates of either or both
certificate groups of similar
designations as the context requires.
Book-Entry Registration.............. We will issue the offered certificates
in book-entry form. You will hold your
interests through a depository. While
the offered certificates are
book-entry they will be registered in
the name of the applicable depository,
or in the name of the nominee of the
depository. Transfers within any
depository system will be in
accordance with the usual rules and
operating procedures of that system.
S-4
<PAGE>
INTEREST PAYMENTS
The interest rate for each class of fixed rate certificates is specified on the
cover page of this prospectus supplement, subject in the case of the Class AF5,
AF6, Class M1F, Class M2F and Class BF Certificates, to a rate cap. The
pass-through rate for the Class AF5 Certificates will increase by 0.50% after
the clean up call date. Interest will accrue on the fixed rate certificates on
the basis of a 360-day year divided into twelve 30-day months.
The interest rate for each class of adjustable rate certificates will be equal
to the sum of LIBOR plus a fixed margin, subject to a rate cap.
The fixed margin for each class of adjustable rate certificates is as follows:
------------------- ---------------------------
Class Margin
------------------- ---------------------------
AV 0.26% (or 0.52% after the
clean up call date)
------------------- ---------------------------
M1V 0.60% (or 0.90% after the
clean up call date)
------------------- ---------------------------
M2V 1.10% (or 1.65% after the
clean up call date)
------------------- ---------------------------
BV 2.10% (or 3.15% after the
clean up call date)
------------------- ---------------------------
Interest will accrue on the adjustable rate certificates on the basis of a
360-day year and the actual number of days elapsed in the applicable interest
accrual period. The interest accrual period for the fixed rate certificates for
any distribution date will be the calendar month preceding the month of that
distribution date. The interest accrual period for the adjustable rate
certificates for any distribution date will be the period from and including the
preceding distribution date (or, in the case of the first distribution date, the
closing date) to and including the day prior to the current distribution date.
PRINCIPAL PAYMENTS
Principal will be paid on the certificates on each distribution date as
described under "Description of the Certificates--Principal Distributions on
Offered Certificates" in this prospectus supplement.
THE TRUST
The depositor will establish a trust relating to the Series 2000-LB1
Certificates, pursuant to a pooling and servicing agreement dated as of August
1, 2000 among the depositor, the master servicer and the trustee. The
certificates represent the beneficial interests in the trust. We refer you to
"Description of the Certificates" in this prospectus supplement.
The certificates represent in the aggregate the entire beneficial ownership
interest in the trust. Distributions of interest and/or principal on the offered
certificates will be made only from payments received in connection with the
home equity loans of the related loan group as described below.
THE HOME EQUITY LOANS
On the closing date the trust will acquire a pool of initial home equity loans
that will be divided into two loan groups, loan group 1 and loan group 2.
Loan group 1 will consist of fixed rate home equity loans and certain adjustable
rate home equity loans that have a fixed rate of interest
S-5
<PAGE>
for five years following the date of origination and thereafter have adjustable
interest rates that are secured by first liens on mortgaged properties, that are
transferred to the trust on the closing date and any additional fixed rate home
equity loans and certain adjustable rate home equity loans that initially have a
fixed rate of interest for five years following the date of origination, and
thereafter have an adjustable rate of interest for the remaining life of the
home equity loans, that are purchased by the trust during the pre-funding period
using the amounts on deposit in the related pre-funding account.
Loan group 2 will consist of adjustable rate home equity loans secured by first
liens on mortgaged properties that are transferred to the trust on the closing
date and any additional adjustable rate home equity loans that are purchased by
the trust during the pre-funding period using the amounts on deposit in the
related pre-funding account.
STATISTICAL CALCULATION INFORMATION
The statistical calculation information presented in this prospectus supplement
concerning the initial home equity loans does not reflect all of the home equity
loans that will be included in the trust as of the closing date. The statistical
calculation information presented in this prospectus supplement concerning the
initial home equity loans relates to a statistical calculation pool that
comprises approximately 59.40% and 78.03% of the initial home equity loans that
will be included in loan group 1 and loan group 2, respectively, as of the
closing date. The pool of initial home equity loans for which information is
presented in this prospectus supplement is referred to in this prospectus
supplement as the statistical calculation home equity loan pool and the initial
home equity loans included in such pool are referred to herein as statistical
calculation initial home equity loans. The depositor believes that the
information in this prospectus supplement with respect to the statistical
calculation home equity loan pool is representative of the characteristics of
the home equity loan pool as it will be constituted at the closing date,
although approximately 40.60% and 21.97% of the initial home equity loans that
will be included in loan group 1 and loan group 2, respectively, as of the
closing date are not included in the statistical calculation home equity loan
pool.
The initial home equity loans will be transferred to the trust on the closing
date. Additional home equity loans to be included in loan group 1 and loan group
2 will be transferred to the trust during the pre-funding period, which begins
on the closing date and ends no later than November 30, 2000. Accordingly, the
statistical profile of the final pool of home equity loans in each loan group
following the pre-funding period will vary somewhat from the statistical profile
of the statistical calculation initial home equity loans presented in this
prospectus supplement.
The statistical calculation initial home equity loans in loan group 1 consist of
2,639 fixed rate home equity loans with an aggregate outstanding principal
balance of approximately $222,732,892 as of the statistical calculation date.
The statistical calculation initial home equity loans in loan group 2 consist of
7,104 adjustable rate home equity loans with an aggregate outstanding principal
balance of approximately $877,790,996 as of the statistical calculation date.
S-6
<PAGE>
As described in this prospectus supplement under "The Home Equity Loan Pool,"
the interest rates for the adjustable rate home equity loans will generally
adjust semi-annually, subject to certain caps and floors, as described in this
prospectus supplement.
Approximately 99.39% of the statistical calculation initial loan group 2 home
equity loans are home equity loans that initially have a fixed rate of interest
for two, three or five years following their origination, and thereafter have an
adjustable rate of interest for the remaining life of the home equity loan, as
described under "The Home Equity Loan Pool" in this prospectus supplement.
We refer you to "The Home Equity Loan Pool" in this prospectus supplement.
LOAN GROUP 1
The statistical calculation initial home equity loans in loan group 1 will have
the following characteristics as of the statistical calculation date:
o number of home equity loans: 2,639
o aggregate principal
balance: $222,732,891.68
o average principal balance: $84,400.49
o maximum principal
balance: $527,801.21
o minimum principal balance: $9,981.63
o latest maturity date: September 2030
o interest rates range: 7.50% to 14.99%
o weighted average interest
rate: 10.75% (approximate)
o weighted average remaining
term: 339 months (approximate)
o remaining term
range: 112 months to 360 months
o weighted average
original loan- to-loan
value ratio: 74.47%(approximate)
o maximum original loan-to-value
ratio: 90.00%
o % of balloon
loans: 0.93% (approximate)
LOAN GROUP 2
The statistical calculation initial home equity loans in loan group 2 will have
the following characteristics as of the statistical calculation date:
o number of home equity loans: 7,104
o aggregate principal
balance: $877,790,996.11
o average principal balance: $123,562.92
o maximum principal
balance: $661,045.98
o minimum principal
balance: $12,500.00
o latest maturity date: August 2030
o weighted average current interest
rate: 10.67% (approximate)
o current interest rates
range: 7.99% to 15.10%
o weighted average gross
margin 6.34% (approximate)
o gross margin range: 4.00% to 7.75%
o weighted average maximum
interest rate: 16.68% (approximate)
o maximum interest rate
range: 13.99% to 21.10%
o weighted average minimum
interest rate: 10.67% (approximate)
o minimum interest rate
range: 7.99% to 15.10%
o weighted average remaining
term: 359 months (approximate)
o remaining term
range: 178 months to 360 months
o weighted average original loan-
to-value ratio: 78.16% (approximate)
o maximum original loan-to-
value ratio: 90.00%
S-7
<PAGE>
o % of Six-Month Adjustable Rate
Loans (by principal balance): 0.61%
o % of 2/28 Adjustable Rate Loans
(by principal balance): 90.13%
o % of 3/27 Adjustable Rate Loans
(by principal balance): 1.99%
o % of 5/25 Adjustable Rate Loans
(by principal balance): 7.26%
o weighted average initial interest
rate adjustment cap: 1.22%
o weighted average periodic interest
rate adjustment cap: 1.00%
o weighted average lifetime interest
rate adjustment cap: 6.01%
PRE-FUNDING ACCOUNTS AND CAPITALIZED INTEREST ACCOUNTS
At closing, the depositor will deposit up to $391,250,000 into two separate
pre-funding accounts, to be used to acquire additional home equity loans from
the seller during the pre-funding period.
Of this amount, the trust will apply up to approximately $110,000,000 to
purchase additional fixed rate home equity loans and certain adjustable rate
home equity loans that initially have a fixed rate of interest for five years
following the date of origination, and thereafter have an adjustable rate of
interest for the remaining life of the home equity loan for inclusion in loan
group 1 and up to approximately $281,250,000 to purchase additional adjustable
rate home equity loans for inclusion in loan group 2.
The purchase of additional home equity loans will occur only during the
pre-funding period, which generally terminates upon the earlier of:
o the date on which the remaining pre-funding amount for both loan groups is
less than $100,000, and
o the close of business on November 30, 2000.
At the closing, the depositor also will deposit funds into two separate
capitalized interest accounts, for use as necessary during the pre-funding
period to partially offset shortfalls in interest amounts attributable to the
pre-funding mechanism.
Any amounts in the pre-funding accounts not used during the pre-funding period
to purchase subsequent home equity loans will be distributed as a prepayment of
principal of the related Class A Certificates then entitled to receive
principal, as applicable, on the earliest to occur of:
o the first distribution date following the end of the pre-funding period; or
o November 30, 2000 if the aggregate amount remaining on deposit in both
pre-funding accounts on such date exceeds 0.95% of the assets of the
REMICs.
CREDIT ENHANCEMENT
Credit enhancements provide limited protection to certain holders of
certificates against shortfalls in payments received on the related home equity
loans. The certificates of a certificate group must rely solely on the credit
enhancement for the related certificate group because there is no
cross-collateralization feature in this transaction. This transaction employs
the following forms of credit enhancement.
SUBORDINATION. On each distribution date, classes of a certificate group that
are lower in order of payment priority than the other classes of that
certificate group will not
S-8
<PAGE>
receive payments until the classes that are higher in order of payment priority
have been paid. If there is not enough money from the home equity loans in a
loan group on a distribution date to pay all classes of the related certificate
group, the subordinate classes of that certificate group are the first to forego
payment.
APPLICATION OF REALIZED LOSSES. If on any distribution date, after the balances
of the certificates of a certificate group have been reduced by all amounts paid
in respect of principal on that date, the total principal balance of those
certificates is greater than the total principal balance of the home equity
loans in the related loan group plus any amount remaining in the related
pre-funding account, the principal balance of the outstanding certificates in
that group that are lowest in order of payment priority will be reduced by the
amount of that excess.
The pooling and servicing agreement does not permit the allocation of realized
losses on the home equity loans to the Class A Certificates or Class P
Certificates. However, investors in the Class A Certificates should realize that
under certain loss scenarios there will not be enough principal and interest on
the home equity loans to pay the Class A Certificates all interest and principal
amounts to which such certificates are then entitled. We refer you to
"Description of the Certificates--Allocation of Losses; Subordination" in this
prospectus supplement.
OVERCOLLATERALIZATION. Although the sum of the total principal balance of the
home equity loans in loan group 1 and the amount on deposit in the related
pre-funding account is approximately $375,000,000, the trust is issuing only
$374,062,000 total principal amount of certificates related to loan group 1.
Similarly, although the sum of the total principal balance of the home equity
loans in loan group 2 and the amount on deposit in the related pre-funding
account is approximately $1,125,000,000, the trust is issuing only
$1,116,562,000 total principal amount of the certificates related to loan group
2. The certificates are therefore initially "overcollateralized," and on any
distribution date, the amount of any overcollateralization will be available to
absorb losses from liquidated home equity loans in the related loan group. On
the closing date, the initial level of overcollateralization for each loan group
will be less than the required level of overcollateralization. On each
distribution date, to the extent available, the excess interest from the related
loan group described in the next paragraph will be paid to the related
certificates as principal to achieve or maintain the required level of
overcollateralization. This will have the effect of reducing the principal
balance of the related certificates faster than the principal balance of the
home equity loans in the related loan group so that the required level of
overcollateralization is reached.
The home equity loans in each loan group are expected to generate more interest
than is needed to pay interest on the related certificates because the weighted
average expense adjusted mortgage rate of the home equity loans in each loan
group is expected to be higher than the weighted average pass-through rate on
the related certificates. Some of the excess interest with respect to a loan
group will be used to partially offset shortfalls in interest amounts
attributable to the pre-funding mechanism, some will be
S-9
<PAGE>
used to pay principal as provided in the above paragraph, some will be used to
pay interest on the related certificates that was previously earned but not
paid, some will be used to reimburse the related subordinated offered
certificates for losses that they experienced previously, some will be used to
reimburse certificateholders for net prepayment interest shortfalls and some
will be used to reimburse holders of the adjustable rate certificates for
certain basis risk shortfalls.
We refer you to "Description of the Certificates--Overcollateralization
Provisions" in this prospectus supplement.
GROUP 2 RESERVE FUND. For the first 24 distribution dates, the group 2
certificates will have the benefit of additional credit enhancement provided by
amounts, if any, on deposit in the group 2 reserve fund. The group 2 reserve
fund will not be funded on the closing date. The group 2 reserve fund will be
funded solely from payments, if any, made pursuant to an interest rate cap
agreement with Westdeutsche Landesbank Girozentrale, New York Branch, as
counterparty. The interest rate cap agreement requires the counterparty to make
a cap payment to the extent LIBOR for any interest accrual period exceeds 6.94%
on a scheduled notional amount based on the expected amortization of the 2/28
adjustable rate loans, 3/27 adjustable rate loans and 5/25 adjustable rate loans
in loan group 2. Amounts on deposit in the group 2 reserve fund will be applied
on each distribution date after all other distributions have been made on such
date to the payment of shortfalls in the payment of interest on the group 2
certificates, principal on the group 2 certificates to the extent of any
realized losses incurred on the home equity loans in loan group 2 and unpaid
realized loss amounts on the group 2 subordinated offered certificates.
Amounts on deposit in the group 2 reserve fund will not be available to pay any
shortfalls in interest on the group 2 certificates to the extent such shortfall
results from the application of the available funds cap. On each distribution
date, to the extent after giving effect to all payments and distributions on
such date, the amount on deposit in the group 2 reserve fund exceeds the
specified reserve fund requirement, such amount will be released to the holder
of the Class X-V Certificates.
P&I ADVANCES; COMPENSATING INTEREST
The master servicer is required to advance delinquent payments of principal and
interest on the home equity loans, subject to the limitations described in this
prospectus supplement. The master servicer is entitled to be reimbursed for such
advances, and therefore such advances are not a form of credit enhancement. We
refer you to "Description of the Certificates--P&I Advances" in this prospectus
supplement.
The master servicer will provide to the trust any shortfall in the anticipated
collection of interest on a home equity loan (net of the related servicing fee)
that is caused by a full or partial prepayment of a home equity loan up to the
amount of the servicing fee.
OPTIONAL TERMINATION
At its option, the master servicer may purchase all of the home equity loans,
together with any properties in respect thereof acquired on behalf of the trust,
and thereby effect termination and early retirement of the certificates, after
the aggregate principal balance of the home equity loans (and properties
acquired in respect thereof) remaining in the trust has been reduced to less
than 10% of the
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aggregate principal balance of the home equity loans as of their respective
cut-off dates. We refer you to "Pooling and Servicing Agreement-- Termination"
in this prospectus supplement.
OPTIONAL PURCHASE OF DEFAULTED HOME EQUITY LOANS
The master servicer has the option, but is not obligated, to purchase from the
trust any home equity loan that becomes 90 days or more delinquent.
FEDERAL TAX CONSEQUENCES
Stroock & Stroock & Lavan LLP has acted as counsel to the depositor and is of
the opinion that:
o The trust will include three real estate mortgage investment conduits or
"REMICs" for federal income tax purposes.
o The offered certificates will constitute "regular interests" in a REMIC and
will be treated as debt instruments of such REMIC for federal income tax
purposes with payment terms equivalent to the terms of such certificates.
ERISA CONSIDERATIONS
The acquisition of a Class A certificate by a pension or other employee benefit
plan subject to the Employee Retirement Income Security Act of 1974, as amended,
or ERISA could, in some instances, result in a "prohibited transaction" or other
violation of the fiduciary responsibility provisions of ERISA and the Internal
Revenue Code. Certain exemptions from the prohibited transaction rules could be
applicable to the acquisition of the Class A certificates. The subordinated
offered certificates are not eligible for purchase by plans other than insurance
company general accounts pursuant to Prohibited Transaction Class Exemption
95-60 (although they may be permitted to be purchased on the secondary market
pursuant to a pending published prohibited class exemption).
Any plan fiduciary considering whether to purchase any Class A certificate on
behalf of a plan should consult with its counsel regarding the applicability of
the provisions of ERISA and the Internal Revenue Code. Subject to the
considerations and conditions described under herein and in the prospectus, it
is expected that the Class A certificates may be purchased by a plan.
RATINGS
The classes of certificates listed below will not be offered unless they are
assigned by the following ratings by Moody's Investors Service Inc. and by
Fitch, Inc.
Moody's Fitch
Class Rating Rating
----- ------ ------
A Aaa AAA
M-1 Aa2 AA
M-2 A2 A
B Baa3 BBB
A security rating does not address the frequency of prepayments on the home
equity loans or the corresponding effect on yield to investors. We refer you to
"Yield on the Certificates" and "Ratings" in this prospectus supplement.
LEGAL INVESTMENT
Upon termination of the pre-funding period, the Class A Certificates and the
Class M1F and Class M1V Certificates will be
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"mortgage related securities" for purposes of the Secondary Mortgage Market
Enhancement Act of 1984 so long as they are rated in one of the two highest
rating categories by at least one rating agency. All other certificates will not
be "mortgage related securities" for purposes of SMMEA.
We refer you to "Legal Investment" in the prospectus.
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RISK FACTORS
In addition to the matters described elsewhere in this prospectus
supplement and the prospectus, prospective investors should carefully consider
the following factors before deciding to invest in the offered certificates.
THE UNDERWRITING STANDARDS OF THE HOME EQUITY LOANS ARE NOT AS STRINGENT AS
THOSE UNDERWRITTEN IN A MORE TRADITIONAL MANNER, OR UNDERWRITTEN TO THE
STANDARDS OF FANNIE MAE AND FREDDIE MAC, WHICH MAY RESULT IN LOSSES ALLOCATED TO
THE OFFERED CERTIFICATES
Long Beach Mortgage Company's underwriting standards are primarily
intended to assess the value of the mortgaged property and to evaluate the
adequacy of such property as collateral for the home equity loan and the
applicant's credit standing and ability to repay. Long Beach Mortgage Company
provides loans primarily to borrowers who do not qualify for loans conforming to
Fannie Mae and Freddie Mac guidelines but who generally have equity in their
property. While Long Beach Mortgage Company's primary consideration in
underwriting a home equity loan is the value and adequacy of the mortgaged
property as collateral, Long Beach Mortgage Company also considers, among other
things, a mortgagor's credit history, repayment ability and debt
service-to-income ratio, as well as the type and use of the mortgaged property.
Long Beach Mortgage Company's underwriting standards do not prohibit a mortgagor
from obtaining secondary financing at the time of origination of Long Beach
Mortgage Company's first lien, which secondary financing would reduce the equity
the mortgagor would otherwise have in the related mortgaged property as
indicated in Long Beach Mortgage Company's loan-to-value ratio determination.
As a result of such underwriting standards, the home equity loans in
the home equity loan pool are likely to experience rates of delinquency,
foreclosure and bankruptcy that are higher, and that may be substantially
higher, than those experienced by home equity loans underwritten in a more
traditional manner.
Furthermore, changes in the values of mortgaged properties may have a
greater effect on the delinquency, foreclosure, bankruptcy and loss experience
of the home equity loans in the home equity loan pool than on home equity loans
originated in a more traditional manner. No assurance can be given that the
values of the related mortgaged properties have remained or will remain at the
levels in effect on the dates of origination of the related home equity loans.
We refer you to "The Home Equity Loan Pool--Underwriting Standards;
Representations" in this prospectus supplement.
LIMITED SERVICING HISTORY AND PERFORMANCE DATA WITH RESPECT TO THE MASTER
SERVICER
The master servicer began directly servicing home equity loans in
November 1998. As a result, the master servicer has limited experience servicing
home equity loans similar to the home equity loans in the home equity loan pool.
The master servicer's limited experience in servicing home equity loans may
result in greater defaults and losses on the home equity loans in the home
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equity loan pool and result in accelerated prepayments and losses on the offered
certificates. You will bear any reinvestment risk resulting from such
accelerated prepayments.
Because the master servicer commenced its direct servicing operations
in November 1998, the master servicer does not have historical delinquency,
bankruptcy, foreclosure or default experience that may be referred to for
purposes of examining the master servicer's performance in servicing home equity
loans similar to the home equity loans in the home equity loan pool, other than
to the limited extent as described under "Pooling and Servicing Agreement--The
Master Servicer--Collection Procedures; Delinquency and Loss Experience" in this
prospectus supplement. There can be no assurance that such experience is or will
be representative.
CERTAIN HOME EQUITY LOANS HAVE HIGH LOAN-TO-VALUE RATIOS WHICH MAY PRESENT A
GREATER RISK OF LOSS RELATING TO SUCH HOME EQUITY LOANS
Approximately 27.99% and 38.33% of the statistical calculation initial
home equity loans in loan group 1 and loan group 2, respectively, by aggregate
principal balance as of the statistical calculation date, had a loan-to-value
ratio at origination in excess of 80%. No home equity loan in the home equity
loan pool, including those with a loan-to-value ratio at origination in excess
of 80%, will be covered by a primary mortgage insurance policy. No home equity
loan will have a loan-to-value ratio exceeding 90% at origination. Home equity
loans with higher loan-to-value ratios may present a greater risk of loss. In
addition, an overall decline in the residential real estate market, a rise in
interest rates over a period of time and the general condition of a mortgaged
property, as well as other factors, may have the effect of reducing the value of
such mortgaged property from the appraised value at the time the home equity
loan was originated. If there is a reduction in value of the mortgaged property,
the loan-to-value ratio may increase over what it was at the time the home
equity loan was originated. Such an increase may reduce the likelihood of
liquidation or other proceeds being sufficient to satisfy the home equity loan.
There can be no assurance that the loan-to-value ratio of any home equity loan
determined at any time after origination will be less than or equal to its
original loan-to-value ratio. We refer you to "The Home Equity Loan
Pool--General" in this prospectus supplement.
CERTAIN HOME EQUITY LOANS MAY BE DELINQUENT AS OF THE RELATED CUT-OFF DATE,
WHICH MAY PRESENT A GREATER RISK OF LOSS RELATING TO SUCH HOME EQUITY LOANS
None of the statistical calculation initial home equity loans were more
than 30 days delinquent in their monthly payments as of July 31, 2000. Investors
should note, however, that approximately 58.66% and 85.70% of the statistical
calculation initial home equity loans in loan group 1 and loan group 2,
respectively, by aggregate principal balance as of the statistical calculation
date, have a first payment date occurring on or after the July 1, 2000 and,
therefore, these home equity loans could not have been more than 30 days
delinquent as of July 31, 2000.
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THE HOME EQUITY LOANS ARE CONCENTRATED IN CERTAIN STATES (AS DESCRIBED BELOW),
WHICH MAY PRESENT A GREATER RISK OF LOSS RELATING TO SUCH HOME EQUITY LOANS
As of the statistical calculation date, by aggregate principal balance,
approximately 17.09% 10.46%, 11.51% and 6.19% of the statistical calculation
initial home equity loans in loan group 1 are secured by mortgaged properties
located in California, New York, Texas and Florida, respectively, and
approximately 31.08%, 10.86% and 5.02% of the statistical calculation initial
home equity loans in loan group 2 are secured by mortgaged properties, located
in California, Colorado and Texas, respectively. The aggregate principal balance
of statistical calculation initial home equity loans in the California zip code
with the largest amount of such statistical calculation initial home equity
loans, by aggregate principal balance as of the statistical calculation date,
was approximately $38,069,410 and $272,777,937 for loan group 1 and loan group
2, respectively. If the residential real estate market in these states should
experience an overall decline in property values after the dates of origination
of the home equity loans, the rates of delinquencies, foreclosures, bankruptcies
and losses on the home equity loans may increase over historical levels of
comparable type loans, and may increase substantially. In addition, properties
located in California may be more susceptible than homes located in other parts
of the country to certain types of uninsured hazards, such as earthquakes, as
well as floods, mudslides and other natural disasters.
CERTAIN OF THE HOME EQUITY LOANS ARE BALLOON LOANS, WHICH MAY PRESENT A GREATER
RISK OF LOSS WITH RESPECT TO SUCH HOME EQUITY LOANS
Approximately 0.93% and 0.00% of the statistical calculation initial
home equity loans in loan group 1 and loan group 2, respectively, by aggregate
principal balance as of the statistical calculation date, are home equity loans
with balloon payments. Because borrowers of home equity loans with balloon
payments are required to make substantial higher final payments upon maturity,
it is possible that the default risk associated with such home equity loans is
greater than that associated with fully- amortizing home equity loans.
THE SUBORDINATED OFFERED CERTIFICATES WILL BE MORE SENSITIVE TO LOSSES ON THE
HOME EQUITY LOANS THAN THE CLASS A CERTIFICATES AND SUBORDINATION MAY NOT BE
SUFFICIENT TO PROTECT MORE SENIOR CERTIFICATES FROM LOSSES
The weighted average lives of, and the yields to maturity on, the
Subordinated Offered Certificates will be sensitive to the rate and timing of
mortgagor defaults and the severity of ensuing losses on the home equity loans
of the related loan group. Because payments on the Class B Certificates will be
subordinate to the Class M-1 and Class M-2 Certificates and the Class M-2
Certificates will be subordinate to the Class M-1 Certificates, the Class B
Certificates will be the most sensitive to the rate and timing of losses on the
related home equity loans, followed by the Class M-2 and then Class M-1
Certificates. If the actual rate and severity of losses on the related home
equity loans is higher than those assumed by you, the actual yield to maturity
of such certificate may be lower than you anticipated based on such assumption.
The timing of losses on the related home equity loans will also affect your
actual yield to maturity, even if the rate of defaults and severity of losses
over the life of the home equity loan pool are
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consistent with your expectations. In general, the earlier a loss occurs, the
greater the effect on your yield to maturity. Realized losses on the home equity
loans, to the extent they exceed the amount of excess interest and
overcollateralization of the related loan group following distributions in
respect of principal on the related distribution date, will reduce the
certificate principal balance, first, of the related Class B Certificates until
reduced to zero, second, of the Class M-2 Certificates until reduced to zero and
then to the Class M-1 Certificates until reduced to zero. As a result of any
such reductions, in addition to a loss of principal, less interest will accrue
on such class of Subordinated Offered Certificates than would otherwise be the
case.
You should consider the risk that the subordination of the related
subordinated classes may not be sufficient to protect your certificates from
loss.
THE SUBORDINATED OFFERED CERTIFICATES WILL GENERALLY NOT BE ENTITLED TO RECEIVE
PRINCIPAL PAYMENTS UNTIL SEPTEMBER 2003 WHICH MAY RESULT IN A GREATER RISK OF
LOSS RELATING TO SUCH CERTIFICATES
Unless the certificate principal balance of the related Class A
Certificates has been reduced to zero, the related Subordinated Offered
Certificates will not be entitled to any principal distributions until at least
September 2003 or a later date as provided in this prospectus supplement or
during any period in which delinquencies on the home equity loans exceed certain
levels described under "Description of the Certificates--Principal Distributions
on the Offered Certificates" in this prospectus supplement. As a result, the
weighted average lives of such certificates will be longer than would be the
case if distributions of principal were allocated among all of the certificates
of the related certificate group at the same time. As a result of the longer
weighted average lives of such certificates, the holders of such certificates
have a greater risk of suffering a loss on their investments. Further, because
such certificates might not receive any principal if certain delinquency levels
relating to the home equity loans in the related loan group described under
"Description of the Certificates--Principal Distributions on the Offered
Certificates" in this prospectus supplement are exceeded, it is possible for
such certificates to receive no principal distributions on a particular
distribution date even if no losses have occurred on the home equity loans in
the related loan group.
EXCESS INTEREST FROM THE HOME EQUITY LOANS MAY NOT PROVIDE ADEQUATE CREDIT
ENHANCEMENT
Each loan group is expected to generate more interest than is needed to
pay interest on the related classes of certificates because the weighted average
expense adjusted interest rate on those home equity loans is expected to be
higher than the weighted average pass-through rate on the related classes of
certificates. If the amount of interest generated by a group of home equity
loans is more than the amount that is needed to pay interest on the related
certificates, some of such "excess interest" will be used to partially offset
shortfalls in interest amounts attributable to the pre-funding mechanism, some
will be used to make additional principal payments on the related certificates,
some will be used to pay interest on the related certificates that was
previously earned but not paid, some will be used to reimburse the related
subordinated offered certificates for losses that they experienced previously
and, in the case of the group 2 certificates,
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some will be used to pay certain basis risk shortfalls. The use of excess
interest of a loan group to make additional principal payments on the related
certificates will reduce the total principal balance of those certificates below
the aggregate principal balance of the related home equity loans, thereby
creating "overcollateralization." Overcollateralization is intended to provide
limited protection to certificateholders by absorbing the related certificates'
share of losses from liquidated home equity loans in the applicable loan group.
However, we cannot assure you that enough excess interest will be generated on
the home equity loans of either loan group to establish or maintain the required
levels of overcollateralization for the related certificate group.
The excess interest available on any distribution date will be affected by the
actual amount of interest received, collected or advanced in respect of the home
equity loans of the related loan group during the preceding month. Such amount
will be influenced by changes in the pass-through rates on the group 2
certificates and changes to the weighted average of the mortgage rates resulting
from prepayments and liquidations of the related home equity loans and
adjustments of the mortgage rates on adjustable rate home equity loans. Because
the index used to determine the mortgage rates on the adjustable rate home
equity loans is different from the index used to determine the pass-through
rates on the group 2 certificates, it is possible that the pass-through rates on
these certificates may be higher than the interest rates on the related home
equity loans. In that event, it may be necessary to apply all or a portion of
the available excess interest to make required payments of interest on the
related classes of certificates. As a result, excess interest may be unavailable
for any other purpose.
Investors in the offered certificates, and particularly the Class B
Certificates, should consider the risk that the overcollateralization may not be
sufficient to protect your certificates from loss. Excess interest and
overcollateralization are the only forms of credit enhancement for the Class B
Certificates.
THE CERTIFICATES ARE OBLIGATIONS OF THE TRUST ONLY
The certificates will not represent an ownership interest in or
obligation of the depositor, the master servicer, the seller, the trustee or any
of their respective affiliates. Neither the certificates nor the underlying home
equity loans will be guaranteed or insured by any governmental agency or
instrumentality, or by the depositor, the master servicer, the seller, the
trustee or any of their respective affiliates. Proceeds of the assets included
in the trust will be the sole source of payments on the offered certificates,
and there will be no recourse to the depositor, the master servicer, the seller,
the trustee or any other entity in the event that such proceeds are insufficient
or otherwise unavailable to make all payments provided for under the offered
certificates.
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A DEFAULT OR DOWNGRADE OF THE COUNTERPARTY UNDER THE CAP AGREEMENT MAY RESULT IN
THE DOWNGRADE OF THE GROUP 2 CERTIFICATES
The only asset available to fund the group 2 reserve fund is the
payment made by the counterparty under the cap agreement. In the event that the
counterparty were to default under the cap agreement or if the cap agreement
were to terminate for any reason, the ratings on the group 2 certificates may be
downgraded. Any such downgrade may affect the value and marketability of the
group 2 certificates.
EARLY TERMINATION OF CAP AGREEMENT MAY REDUCE AMOUNTS PAYABLE ON GROUP 2
CERTIFICATES
Under certain circumstances, the cap agreement may be terminated early
and a termination payment may be payable from funds otherwise payable to the
group 2 certificates prior to the payment of interest on the group 2
certificates. Any such termination payment may be substantial.
THE DIFFERENCE BETWEEN THE INTEREST RATES ON THE GROUP 2 CERTIFICATES (OTHER
THAN THE CLASS B-IOV CERTIFICATES AND THE CLASS X-V CERTIFICATES) AND THE
INTEREST RATES ON THE HOME EQUITY LOANS IN LOAN GROUP 2 MAY RESULT IN BASIS RISK
SHORTFALLS
Approximately 0.61% of the statistical calculation initial home equity
loans in loan group 2 as of the statistical calculation date are six-month
adjustable rate loans. Such home equity loans adjust semi-annually based upon
the London interbank offered rate for six-month United States dollar deposits.
The remaining statistical calculation initial home equity loans in loan group 2
are either 2/28 adjustable rate loans, 3/27 adjustable rate loans or 5/25
adjustable rate loans. These home equity loans provide for a fixed interest rate
for a period of approximately two years, three years or five years, as
applicable, following origination and thereafter provide for interest rate and
payment adjustments in a manner similar to the six-month adjustable rate loans.
The interest rate for the group 2 certificates (other than the Class B-IOV
Certificates and the Class X-V Certificates) is determined in accordance with
and adjusts monthly based upon one-month LIBOR, and is subject to interest rate
caps. One-month LIBOR and six-month LIBOR may respond to different economic and
market factors, and there is not necessarily a correlation between them. Thus,
it is possible, for example, that one-month LIBOR may rise during periods in
which six-month LIBOR is stable or is falling or that, even if both one-month
LIBOR and six-month LIBOR rise during the same period, one-month LIBOR may rise
more rapidly than six-month LIBOR. Furthermore, even if one-month LIBOR and
six-month LIBOR were at the same level, various factors may cause an interest
rate cap to limit the amount of interest that would otherwise be distributable
on the group 2 certificates (other than the Class B-IOV Certificates and the
Class X-V Certificates). The operation of an interest rate cap may cause the
pass-through rate of any such certificates to be reduced for extended periods in
a rising interest rate environment and could result in the temporary or
permanent decline in the market value of such certificates.
In addition, the interest rates on the home equity loans in loan group
2 are subject to periodic interest rate adjustment caps and maximum rate caps,
the weighted average margin of
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the home equity loans in loan group 2 is subject to change based upon prepayment
experience and the weighted average coupon rate of the home equity loans in loan
group 2 is subject to change based upon prepayment experience, which also may
result in an interest rate cap limiting increases in the certificate rate for
some of the certificates. Finally, the home equity loans in loan group 2 accrue
interest on the basis of a 360-day year assumed to consist of twelve 30-day
months, while calculations of interest on the group 2 certificates (other than
the Class B-IOV Certificates) will be made on the basis of the actual number of
days elapsed in the related interest period and a year of 360 days. This may
result in an interest rate cap limiting the certificate rate for such
certificates in interest periods that have more than 30 days. Consequently, the
interest that becomes due on the home equity loans (net of the sum of the fees
payable to each of the master servicer and the trustee) with respect to any
distribution date may be insufficient to pay you interest at your stated
certificate rate. IF FOR ANY DISTRIBUTION DATE THE PASS-THROUGH RATES FOR ANY OF
THE GROUP 2 CERTIFICATES (OTHER THAN THE CLASS B-IOV CERTIFICATES) IS LIMITED TO
THE RATE CAP AS DESCRIBED ABOVE, THE HOLDERS OF SUCH CERTIFICATES WILL BE
ENTITLED TO RECOVER THE RESULTING BASIS RISK SHORTFALL ON ANY FUTURE
DISTRIBUTION DATES, BUT ONLY ON A SUBORDINATED BASIS AFTER ALL OTHER
DISTRIBUTIONS HAVE BEEN MADE ON SUCH DATE. We refer you to "Yield on the
Certificates--Special Yield Considerations" in this prospectus supplement.
EFFECT OF PREPAYMENTS OF LOAN GROUP 1 ON PASS-THROUGH RATES OF CERTAIN GROUP 1
CERTIFICATES; INTEREST RATE RISK
The Class AF5, AF6, M1F, M2F and BF Certificates are subject to an
interest rate cap equal to the weighted average expense adjusted mortgage rate
of home equity loans in loan group 1 adjusted to take account of the Class B-IOF
Certificate payment as of the time that interest on the certificates is due. If
there is a sufficiently high prepayment rate with respect to home equity loans
in loan group 1 bearing a higher coupon than the weighted average coupon of loan
group 1 as a whole, the interest rate payable on the Class AF5, AF6, M1F, M2F
and BF certificates may become subject to the interest rate cap. In addition,
the prepayment rate with respect to home equity loans in loan group 1 will be
affected by the inclusion in such loan group of 5/25 adjustable rate loans which
borrowers may be more likely to refinance as these loans approach their initial
adjustment date.
If you are a Class AF5, AF6, M1F, M2F or BF certificateholder and the
fixed rate otherwise payable on your certificates is reduced as a result of the
interest rate cap, you may suffer a decline in the market value of your
certificates. IF FOR ANY REASON THE PASS-THROUGH RATES ON THESE CERTIFICATES IS
LIMITED TO THE INTEREST RATE CAP DESCRIBED ABOVE, THE HOLDERS OF SUCH
CERTIFICATES WILL NOT BE ENTITLED TO RECOVER THE RESULTING INTEREST SHORTFALL ON
ANY FUTURE DISTRIBUTION DATE.
THE RATE AND TIMING OF PRINCIPAL DISTRIBUTIONS ON THE OFFERED CERTIFICATES WILL
BE AFFECTED BY PREPAYMENT SPEEDS AND BY THE PRIORITY OF PAYMENT ON SUCH
CERTIFICATES
The rate and timing of distributions allocable to principal on the
offered certificates will depend, in general, on the rate and timing of
principal payments (including prepayments and collections upon defaults,
liquidations and repurchases) on the related home equity loans and the
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allocation thereof to pay principal on the related offered certificates as
described under "Description of the Certificates--Principal Distributions on the
Offered Certificates" in this prospectus supplement. As is the case with
mortgage pass-through certificates generally, the offered certificates are
subject to substantial inherent cash-flow uncertainties because the home equity
loans may be prepaid at any time. However, with respect to approximately 81.82%
and 90.33% of the statistical calculation initial home equity loans in loan
group 1 and loan group 2, respectively, by aggregate principal balance as of the
statistical calculation date, a prepayment may subject the related mortgagor to
a prepayment charge. A prepayment charge may or may not act as a deterrent to
prepayment of the related home equity loan. We refer you to "The Home Equity
Loan Pool" in this prospectus supplement.
Approximately 90.13% of the statistical calculation initial home equity
loans in loan group 2 as of the statistical calculation date are 2/28 adjustable
rate loans, having a two-year fixed rate term followed by a 28 year adjustable
rate term. Approximately 1.99% of the statistical calculation initial home
equity loans in loan group 2 as of the statistical calculation date are 3/27
adjustable rate loans, having a three-year fixed rate term followed by a 27 year
adjustable rate term. Approximately 7.26% of the statistical calculation initial
home equity loans in loan group 2 as of the statistical calculation date are
5/25 adjustable rate loans, having a five-year fixed rate term followed by a 25
year adjustable rate term. In addition, although none of the statistical
calculation initial home equity loans in loan group 1 are 5/25 adjustable rate
loans, it is expected that approximately 7% of the initial home equity loans in
loan group 1 on the closing date will be 5/25 adjustable rate loans, and, after
giving effect to the subsequent loans to be added to loan group 1 during the
pre-funding period, up to approximately 10% of home equity loans as of the
cut-off date may be 5/25 adjustable rate loans. As with all home equity loans,
the rate of prepayments on home equity loans that are 2/28 adjustable rate
loans, 3/27 adjustable rate loans or 5/25 adjustable rate loans and are in the
initial fixed rate period is sensitive to prevailing interest rates. The
prepayment behavior of the 2/28 adjustable rate loans, the 3/27 adjustable rate
loans or the 5/25 adjustable rate loans may differ from that of the other home
equity loans. As a 2/28 adjustable rate loan, a 3/27 adjustable rate loan or a
5/25 adjustable rate loans approaches its initial adjustment date, the borrower
may become more likely to refinance such loan to avoid an increase in the
mortgage rate, even if fixed rate loans are only available at rates that are
slightly lower or higher than the mortgage rate before adjustment. The existence
of the applicable periodic rate cap, lifetime cap and lifetime floor also may
affect the likelihood of prepayments resulting from refinancings.
Generally, when prevailing interest rates are increasing, prepayment
rates on home equity loans tend to decrease; a decrease in the prepayment rates
on the home equity loans will result in a reduced rate of return of principal to
investors in the offered certificates at a time when reinvestment at such higher
prevailing rates would be desirable. Conversely, when prevailing interest rates
are declining, prepayment rates on home equity loans tend to increase; an
increase in the prepayment rates on the home equity loans will result in a
greater rate of return of principal to investors in the offered certificates at
a time when reinvestment at comparable yields may not be possible.
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Distributions of principal will be made to the holders of the
Subordinated Offered Certificates according to the priorities described in this
prospectus supplement. The timing of commencement of principal distributions and
the weighted average life of each such class of certificates will be affected by
the rates of prepayment on the related home equity loans experienced both before
and after the commencement of principal distributions on such class. For further
information regarding the effect of principal prepayments on the weighted
average lives of the offered certificates, we refer you to "Yield on the
Certificates" in this prospectus supplement.
THE MULTIPLE CLASS STRUCTURE OF THE GROUP 1 CLASS A CERTIFICATES MAY CAUSE THE
YIELD OF CERTAIN CLASSES OF GROUP 1 CLASS A CERTIFICATES TO BE PARTICULARLY
SENSITIVE TO CHANGES IN THE RATES OF PREPAYMENT OF THE RELATED HOME EQUITY LOANS
AND OTHER FACTORS.
Because distributions of principal will be made to the classes of the
Group 1 Class A Certificates according to the priorities described herein, the
yield to maturity on the certificates of any such class will be sensitive to the
rates of prepayment on the home equity loans in loan group 1 experienced both
before and after the commencement of principal distributions on such class.
THE YIELD TO MATURITY ON THE OFFERED CERTIFICATES WILL DEPEND ON A VARIETY OF
FACTORS
The yield to maturity on the offered certificates will depend, in
general, on:
o with respect to each class of offered certificates, the applicable
pass-through rate thereon from time to time;
o the applicable purchase price;
o the rate and timing of principal payments (including prepayments and
collections upon defaults, liquidations and repurchases) and the
allocation thereof to reduce the certificate principal balance of such
certificates; and
o the rate, timing and severity of realized losses on the related home
equity loans; in the case of the group 2 certificates (other than the
Class B-IOV Certificates), adjustments to the mortgage rates on the
home equity loans, and the amount of excess interest generated by the
home equity loans and the allocation to the offered certificates of
some types of interest shortfalls.
The yield to investors on any class of offered certificates will be
adversely affected by any allocation thereto of interest shortfalls on the
related home equity loans.
In general, if the offered certificates are purchased at a premium and
principal distributions thereon occur at a rate faster than anticipated at the
time of purchase, the investor's actual yield to maturity will be lower than
that assumed at the time of purchase. Conversely, if the offered certificates
are purchased at a discount and principal distributions thereon occur at a
S-21
<PAGE>
rate slower than that anticipated at the time of purchase, the investor's actual
yield to maturity will be lower than that originally assumed.
The proceeds to the depositor from the sale of the offered certificates
were determined based on a number of assumptions, including a prepayment
assumption of 120% with respect to the group 1 certificates of the Prepayment
Assumption and 27% with respect to the group 2 certificates of the Constant
Prepayment Rate model, in each case, as described in this prospectus supplement
under "Yield on the Certificates" and weighted average lives corresponding
thereto. No representation is made that the home equity loans will prepay at
such rate or at any other rate. The yield assumptions for the offered
certificates will vary as determined at the time of sale.
THE YIELD TO MATURITY ON THE SUBORDINATED OFFERED CERTIFICATES WILL BE
PARTICULARLY SENSITIVE TO THE RATE OF PREPAYMENTS ON THE HOME EQUITY LOANS
The multiple class structure of the Subordinated Offered Certificates
causes the yield of such classes to be particularly sensitive to changes in the
rates of prepayment of the related home equity loans. Because distributions of
principal will be made to the holders of such certificates according to the
priorities described in this prospectus supplement, the yield to maturity on
such classes of certificates will be sensitive to the rates of prepayment on the
related home equity loans experienced both before and after the commencement of
principal distributions on such classes. The yield to maturity on such classes
of certificates will also be extremely sensitive to losses due to defaults on
the related home equity loans (and the timing thereof), to the extent such
losses are not covered by excess interest otherwise payable to the related Class
X Certificates or a class of Subordinated Certificates with a higher payment
priority. Furthermore, as described in this prospectus supplement, the timing of
receipt of principal and interest by the Subordinated Offered Certificates may
be adversely affected by losses even if such classes of certificates do not
ultimately bear such loss.
POSSIBLE PREPAYMENT DUE TO INABILITY TO ACQUIRE RELATED SUBSEQUENT HOME EQUITY
LOANS
The ability of the trust to acquire subsequent home equity loans for
inclusion in the related loan group depends on the ability of the seller to
originate and acquire home equity loans during the pre-funding period that meet
the eligibility criteria for subsequent home equity loans as described in this
prospectus supplement. The ability of the seller to originate and acquire
subsequent home equity loans will be affected by a number of factors including
prevailing interest rates, employment levels, the rate of inflation and economic
conditions generally.
If the full amounts on deposit in the pre-funding account allocated to
purchase subsequent home equity loans for a loan group cannot be used by the end
of the pre-funding period for that purpose, the amounts remaining on deposit in
that pre-funding account will be distributed to the holders of the related Class
A certificates as a prepayment on November 30, 2000, if the aggregate amount
remaining on deposit in both pre-funding accounts exceeds .95% of the assets of
the REMICs on such date, or otherwise, on the December 2000 distribution date.
Holders of the related Class A Certificates will bear the reinvestment risk from
any such prepayment.
S-22
<PAGE>
VIOLATION OF VARIOUS FEDERAL AND STATE LAWS MAY RESULT IN LOSSES ON THE HOME
EQUITY LOANS
Applicable state laws generally regulate interest rates and other
charges, require certain disclosure, and require licensing of the seller. In
addition, other state laws, public policy and general principles of equity
relating to the protection of consumers, unfair and deceptive practices and debt
collection practices may apply to the origination, servicing and collection of
the home equity loans.
The home equity loans are also subject to federal laws, including:
o the Federal Truth-in-Lending Act and Regulation Z promulgated
thereunder, which require certain disclosures to the borrowers
regarding the terms of the home equity loans;
o the Equal Credit Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age, race,
color, sex, religion, marital status, national origin, receipt of
public assistance or the exercise of any right under the Consumer
Credit Protection Act, in the extension of credit;
o the Fair Credit Reporting Act, which regulates the use and reporting of
information related to the borrower's credit experience;
o the Depository Institutions Deregulation and Monetary Control Act of
1980, which preempts certain state usury laws; and
o the Alternative Mortgage Transaction Parity Act of 1982, which preempts
certain state lending laws which regulate alternative mortgage
transactions.
Depending on the provisions of the applicable law and the specific
facts and circumstances involved, violations of these federal or state laws,
policies and principles may limit the ability of the trust to collect all or
part of the principal of or interest on the home equity loans, may entitle the
borrower to a refund of amounts previously paid and, in addition, could subject
the seller to damages and administrative enforcement.
THE LIQUIDITY OF YOUR CERTIFICATES MAY BE LIMITED
The underwriters have no obligation to make a secondary market in the
classes of offered certificates. There is therefore no assurance that a
secondary market will develop or, if it develops, that it will continue.
Consequently, you may not be able to sell your certificates readily or at prices
that will enable you to realize your desired yield. The market values of the
certificates are likely to fluctuate; these fluctuations may be significant and
could result in significant losses to you.
S-23
<PAGE>
The secondary markets for asset-backed securities have experienced
periods of illiquidity and can be expected to do so in the future. Illiquidity
can have a severely adverse effect on the prices of securities that are
especially sensitive to prepayment, credit or interest rate risk, or that have
been structured to meet the investment requirements of limited categories of
investors.
THE OFFERED CERTIFICATES ARE NOT SUITABLE INVESTMENTS FOR ALL INVESTORS
The offered certificates are not suitable investments for any investor
that requires a regular or predictable schedule of payments or payment on any
specific date. The offered certificates are complex investments that should be
considered only by investors who, either alone or with their financial, tax and
legal advisors, have the expertise to analyze the prepayment, reinvestment,
default and market risk, the tax consequences of an investment, and the
interaction of these factors.
USE OF PROCEEDS
Long Beach Mortgage Company (in such capacity, the "Seller") will sell
the initial home equity loans to Asset Backed Securities Corporation (the
"Depositor") and the Depositor will convey such home equity loans to the trust
fund in exchange for and concurrently with the delivery of the certificates. Net
proceeds from the sale of the Offered Certificates will be applied by the
Depositor to the purchase of such home equity loans from the Seller and to make
the required deposits to the pre-funding accounts and capitalized interest
accounts. Such net proceeds, together with the delivery of the Class B-IO
Certificates, the Class X Certificates, the Class P Certificates and the
Residual Certificates to a subsidiary of the Seller, will represent the purchase
price to be paid by the Depositor to the Seller for the initial home equity
loans. During the pre-funding period, the Seller will sell subsequent home
equity loans, to the extent they are available during the pre-funding period, to
the Depositor who in turn will convey such subsequent home equity loans to the
trust fund in exchange for cash proceeds released from the pre-funding account.
The home equity loans purchased on the closing date are designated "initial home
equity loans" and the home equity loans purchased on or after the closing date
with proceeds on deposit in the related pre-funding account are designated the
"subsequent home equity loans." The Seller will act as the master servicer for
the home equity loans (in such capacity, the "Master Servicer") pursuant to the
Agreement (as defined herein). We refer you to "--Underwriting Standards;
Representations" in this prospectus supplement.
THE HOME EQUITY LOAN POOL
GENERAL
On the closing date, the Depositor will convey the initial home equity
loans to the trust, and the trust will be entitled to all payments on or
collections in respect of the initial home equity loans due after the cut-off
date (and the trust will not be entitled to scheduled monthly payments due on or
before the cut-off date). The statistical calculation information presented in
this prospectus supplement concerning the home equity loan pool does not reflect
all of the home equity loans that will be included in the trust as of the
closing date. The pool of initial home equity loans for which information is
presented in this
S-24
<PAGE>
prospectus supplement is referred to as the statistical calculation home equity
loan pool and the initial home equity loans included in such pool are referred
to as statistical calculation initial home equity loans. The Seller believes
that the information in this prospectus supplement with respect to the
statistical calculation home equity loan pool is representative of the
characteristics of the home equity loan pool as it will be constituted on the
closing date, although certain characteristics of the initial home equity loans
in the home equity loan pool as of the closing date may vary (including the
inclusion in loan group 1 of 5/25 adjustable rate loans on the closing date).
Unless otherwise indicated, information presented in this prospectus supplement
with respect to the statistical calculation initial home equity loans expressed
as a percentage (other than rates of interest) are approximate percentages based
on the aggregate actual principal balance of the statistical calculation initial
home equity loans of the related loan group as of the statistical calculation
date which is the close of business on July 31, 2000.
The statistical calculation home equity loan pool will consist of 9,743
conventional, one- to four-family, fixed rate and adjustable rate home equity
loans secured by first liens on residential real properties and having an
aggregate principal balance as of the statistical calculation date of
approximately $1,100,523,888. The home equity loans will be divided into two
loan groups, loan group 1 and loan group 2. Each loan group will constitute a
separate sub-trust. As of the statistical calculation date, loan group 1 will
consist of 2,639 conventional, one- to four-family fixed rate home equity loans
that have an aggregate principal balance of approximately $222,732,892 as of the
statistical calculation date. As of the statistical calculation date, loan group
2 will consist of 7,104 conventional, one- to four-family adjustable rate home
equity loans that have an aggregate principal balance of approximately
$877,790,996 as of the statistical calculation date. There is no
cross-collateralization between the two loan groups. Consequently, distributions
to holders of group 1 certificates will be based solely on amounts available for
distribution in respect of loan group 1 and distributions to holders of group 2
certificates will be based solely on amounts available for distribution in
respect of loan group 2. The home equity loans have original terms to maturity
of not greater than 30 years.
All of the home equity loans will be secured by first mortgages or
deeds of trust or other similar security instruments creating first liens on
residential properties consisting of attached, detached or semi-detached, one-
to four-family dwelling units, townhouses, individual condominium units,
individual units in planned unit developments and manufactured housing.
The "Mortgage Rate" on each home equity loan is the per annum rate of
interest specified in the related mortgage note. Each adjustable rate home
equity loan provides for semi-annual adjustment to its Mortgage Rate; provided,
however, that the rate adjusts after an initial period of approximately two
years (the "2/28 Adjustable Rate Loans"), with respect to approximately 90.13%
of the statistical calculation initial home equity loans in loan group 2,
approximately three years (the "3/27 Adjustable Rate Loans") with respect to
approximately 1.99% of the statistical calculation initial home equity loans in
loan group 2, or approximately five years (the "5/25 Adjustable Rate Loans")
with respect to approximately 7.26% of the statistical calculation
S-25
<PAGE>
initial home equity loans in loan group 2, respectively, from the date of
origination thereof. The 2/28 Adjustable Rate Loans, 3/27 Adjustable Rate Loans
and 5/25 Adjustable Rate Loans are sometimes referred to in this prospectus
supplement as Delayed First Adjustment Home Equity Loans. In addition, although
none of the statistical calculation initial home equity loans in loan group 1
are 5/25 Adjustable Rate Loans, it is expected that approximately 7% of the
initial home equity loans in loan group 1 on the closing date, by aggregate
principal balance as of the cut-off date, will be 5/25 Adjustable Rate Loans
and, after giving effect to the subsequent loans to be added to loan group 1
during the pre-funding period, up to approximately 10% of the home equity loans
in loan group 1, as of their respective cut-off dates, may be 5/25 Adjustable
Rate Loans.
In connection with each Mortgage Rate adjustment, the home equity loans
provide for corresponding adjustments to their monthly payment amounts, in each
case on each applicable adjustment date (each such date, an "Adjustment Date").
On each Adjustment Date, the Mortgage Rate on each adjustable rate home equity
loan will generally be adjusted to equal the sum, rounded to the nearest
multiple of 0.125%, of the Index (as described below) and a fixed percentage
amount (the "Gross Margin") for that home equity loan specified in the related
mortgage note; provided, however, that with respect to each adjustable rate home
equity loan, including each Delayed First Adjustment Home Equity Loan, the
Mortgage Rate will generally not increase or decrease by more than 1.00% per
annum on any related Adjustment Date (the "Periodic Rate Cap"), as provided in
the related mortgage note, and will not exceed a specified maximum Mortgage Rate
over the life of such home equity loan (the "Maximum Mortgage Rate") or be less
than a specified minimum Mortgage Rate over the life of such home equity loan
(the "Minimum Mortgage Rate"). Effective with the first monthly payment due on
each adjustable rate home equity loan after each related Adjustment Date, the
monthly payment amount will be adjusted to an amount that will amortize fully
the outstanding principal balance of the related adjustable rate home equity
loan over its remaining term, and pay interest at the Mortgage Rate as so
adjusted. Due to the application of the Periodic Rate Caps and the Maximum
Mortgage Rates, the Mortgage Rate on each adjustable rate home equity loan, as
adjusted on any related Adjustment Date, may be less than the sum of the Index,
calculated as described herein, and the related Gross Margin. We refer you to
"--The Index" in this prospectus supplement. None of the adjustable rate home
equity loans permits the related mortgagor to convert the adjustable Mortgage
Rate thereon to a fixed Mortgage Rate.
The home equity loans have scheduled monthly payments due generally on
the first day of the month (with respect to each home equity loan, a "Due
Date"). Each home equity loan will contain a customary "due-on-sale" clause and
each home equity loan may be assumable by a creditworthy purchaser of the
related mortgaged property.
Approximately 81.82% and 90.33% of the statistical calculation initial
home equity loans in loan group 1 and loan group 2, respectively, by aggregate
principal balance as of the statistical calculation date, provide for payment by
the mortgagor of a prepayment charge (a "Prepayment Charge") in limited
circumstances on certain prepayments as provided in the related Mortgage Note.
Generally, each such home equity loan provides for payment of a Prepayment
Charge on certain voluntary prepayments in full made within a specified period
not in excess of five years
S-26
<PAGE>
from the date of origination of such home equity loan, as provided in the
related mortgage note. The amount of the Prepayment Charge is as provided in the
related mortgage note, but in the majority of cases is equal to six month's
interest on any amounts prepaid in excess of 20% of the then outstanding
original principal balance of the related home equity loan in any 12 month
period, as permitted by law. The holders of the related Class P Certificates
will be entitled to all Prepayment Charges received on the home equity loans,
and such amounts will not be available for distribution on the other classes of
certificates. Under certain circumstances, as described under the terms of the
Agreement, the Master Servicer may waive the payment of any otherwise applicable
Prepayment Charge. Investors should conduct their own analysis of the effect, if
any, that the Prepayment Charges, and decisions by the Master Servicer with
respect to the waiver thereof, may have on the prepayment performance of the
home equity loans. The Depositor makes no representation as to the effect that
the Prepayment Charges, and decisions by the Master Servicer with respect to the
waiver thereof, may have on the prepayment performance of the home equity loans.
LOAN GROUP 1
The average outstanding principal balance of the statistical
calculation initial home equity loans in loan group 1 was approximately $84,400
as of the statistical calculation date. As of the statistical calculation date,
the minimum and maximum outstanding principal balance of the statistical
calculation initial home equity loans in loan group 1 were $9,982 and $527,801
respectively. As of the statistical calculation date, the weighted average per
annum mortgage rate of the statistical calculation initial home equity loans in
loan group 1 was approximately 10.75% per annum; the mortgage rates of the
statistical calculation initial home equity loans in loan group 1 ranged from
7.50% to 14.99% per annum; the weighted average original loan-to-value ratio was
approximately 74.47%; the weighted average original term to maturity was
approximately 341 months; the weighted average remaining term to maturity was
approximately 339 months; and the remaining terms to maturity ranged from 112
months to 360 months. Statistical calculation initial home equity loans in loan
group 1 containing "balloon" payments represented approximately 0.93% of the
outstanding principal balance of the statistical calculation initial home equity
loans in loan group 1 as of the statistical calculation date. No statistical
calculation initial home equity loan in loan group 1 will mature later than
September 2030. As of the statistical calculation date, none of the statistical
calculation initial home equity loans in loan group 1 were more than 30 days
past due. However, investors in the offered certificates should be aware that
approximately 58.66% of the outstanding principal balance of the statistical
calculation initial home equity loans in loan group 1 had a first monthly
payment due on or after July 1, 2000 and it was not possible for such home
equity loans to be more than 30 days past due as of the statistical calculation
date.
Set forth below is approximate statistical information as of the
statistical calculation date regarding the statistical calculation initial home
equity loans in loan group 1. Prior to the closing date, certain additional
initial home equity loans will be added to loan group 1 and others may be
removed. Certain characteristics of the initial home equity loans in loan group
1 will vary from the information presented in this prospectus supplement, but
(except for the inclusion of 5/25 Adjustable Rate Loans on the closing date) it
is not expected that any such variance on a
S-27
<PAGE>
weighted average basis will be material. The sum of the percentage columns in
the following tables may not equal 100% due to rounding.
LOAN GROUP 1
PRINCIPAL BALANCES AT ORIGINATION
<TABLE>
<CAPTION>
% of Loan Group 1
Number of Aggregate Original by Aggregate Original
Principal Balance at Origination Home Equity Loans Principal Balance Principal Balance
---------------------------------- ----------------- ------------------ ---------------------
<S> <C> <C> <C>
$ 0.01 - $ 10,000.00 1 $ 10,000 0.00%
$ 10,000.01 - $ 20,000.00 32 612,125 0.27
$ 20,000.01 - $ 30,000.00 205 5,384,162 2.41
$ 30,000.01 - $ 40,000.00 318 11,324,952 5.08
$ 40,000.01 - $ 50,000.00 334 15,163,174 6.80
$ 50,000.01 - $ 60,000.00 339 18,853,116 8.45
$ 60,000.01 - $ 70,000.00 288 18,712,625 8.39
$ 70,000.01 - $ 80,000.00 198 14,811,167 6.64
$ 80,000.01 - $ 90,000.00 145 12,321,338 5.52
$ 90,000.01 - $100,000.00 117 11,209,333 5.02
$100,000.01 - $110,000.00 99 10,452,895 4.68
$110,000.01 - $120,000.00 80 9,201,071 4.12
$120,000.01 - $130,000.00 64 8,027,958 3.60
$130,000.01 - $140,000.00 61 8,233,930 3.69
$140,000.01 - $150,000.00 56 8,150,925 3.65
$150,000.01- $160,000.00 38 5,914,905 2.65
$160,000.01 - $170,000.00 43 7,112,915 3.19
$170,000.01 - $180,000.00 27 4,723,975 2.12
$180,000.01 - $190,000.00 23 4,283,610 1.92
$190,000.01 - $200,000.00 19 3,719,650 1.67
$200,000.01 - $210,000.00 14 2,877,300 1.29
$210,000.01 - $220,000.00 17 3,668,400 1.64
$220,000.01 - $230,000.00 16 3,611,610 1.62
$230,000.01 - $240,000.00 8 1,878,597 0.84
$240,000.01 - $250,000.00 6 1,479,150 0.66
$250,000.01 - $350,000.00 54 15,460,790 6.93
$350,000.01 - $450,000.00 22 8,567,300 3.84
$450,000.01 + 15 7,359,770 3.30
-- --------- ----
Total 2,639 $223,126,742 100.00%
===== ============ =======
</TABLE>
S-28
<PAGE>
LOAN GROUP 1
REMAINING PRINCIPAL BALANCES AS OF STATISTICAL CALCULATION DATE
<TABLE>
<CAPTION>
% of Loan Group 1
Remaining Number of Aggregate Remaining by Aggregate Remaining
Principal Balance Home Equity Loans Principal Balance Principal Balance
------------------ ----------------- ------------------- ----------------------
<S> <C> <C> <C>
$ 00.01 - $ 10,000.00 1 $9,982 0.00%
$ 10,000.01 - $ 20,000.00 32 606,463 0.27
$ 20,000.01 - $ 30,000.00 205 5,357,969 2.41
$ 30,000.01 - $ 40,000.00 318 11,305,218 5.08
$ 40,000.01 - $ 50,000.00 336 15,221,720 6.83
$ 50,000.01 - $ 60,000.00 337 18,728,526 8.41
$ 60,000.01 - $ 70,000.00 289 18,751,342 8.42
$ 70,000.01 - $ 80,000.00 199 14,878,242 6.68
$ 80,000.01 - $ 90,000.00 143 12,138,672 5.45
$ 90,000.01 - $100,000.00 118 11,294,316 5.07
$100,000.01 - $110,000.00 99 10,449,612 4.69
$110,000.01 - $120,000.00 81 9,313,506 4.18
$120,000.01 - $130,000.00 64 8,028,564 3.60
$130,000.01 - $140,000.00 59 7,963,999 3.58
$140,000.01 - $150,000.00 57 8,287,410 3.72
$150,000.01 - $160,000.00 37 5,757,634 2.58
$160,000.01 - $170,000.00 43 7,104,927 3.19
$170,000.01 - $180,000.00 27 4,715,262 2.12
$180,000.01 - $190,000.00 24 4,470,317 2.01
$190,000.01 - $200,000.00 18 3,522,070 1.58
$200,000.01 - $210,000.00 14 2,875,392 1.29
$210,000.01 - $220,000.00 17 3,665,544 1.65
$220,000.01 - $230,000.00 16 3,605,599 1.62
$230,000.01 - $240,000.00 8 1,877,836 0.84
$240,000.01 - $250,000.00 6 1,476,416 0.66
$250,000.01 - $350,000.00 54 15,413,184 6.92
$350,000.01 - $450,000.00 22 8,557,589 3.84
$450,000.01 + 15 7,355,580 3.30
----- --------- ----
Total 2,639 $222,732,892 100.00%
===== ============ =======
</TABLE>
S-29
<PAGE>
LOAN GROUP 1
GEOGRAPHIC DISTRIBUTION BY MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
% of Loan Group 1
Number of Aggregate Remaining by Aggregate Remaining
State Home Equity Loans Principal Balance Principal Balance
------------------ ----------------- ------------------- ----------------------
<S> <C> <C> <C>
Alabama 78 $4,839,018 2.17%
Alaska 2 189,795 0.09
Arizona 55 4,270,980 1.92
Arkansas 26 1,198,864 0.54
California 309 38,069,410 17.09
Colorado 69 7,126,819 3.20
Connecticut 10 1,488,278 0.67.
Delaware 1 22,294 0.01
Florida 208 13,795,220 6.19
Georgia 56 4,044,237 1.82
Hawaii 48 9,502,711 4.27
Idaho 7 562,688 0.25
Illinois 49 4,203,490 1.89
Indiana 35 1,885,010 0.85
Iowa 24 1,394,831 0.63
Kentucky 16 929,073 0.42
Louisiana 73 3,955,566 1.78
Maine 3 153,531 0.07
Maryland 19 2,031,790 0.91
Massachusetts 54 7,433,008 3.34
Michigan 118 8,047,193 3.61
Minnesota 28 2,159,927 0.97
Mississippi 46 2,634,880 1.18
Missouri 40 2,706,581 1.22
Montana 8 527,558 0.24
Nebraska 29 1,889,644 0.85
Nevada 11 1,193,377 0.54
New Hampshire 8 828,012 0.37
New Jersey 16 2,528,155 1.14
New Mexico 16 1,558,789 0.70
New York 195 23,299,425 10.46
North Carolina 89 6,317,709 2.84
Ohio 143 9,905,286 4.45
Oklahoma 68 3,238,360 1.45
Oregon 45 4,131,085 1.85
Pennsylvania 52 2,669,935 1.20
Rhode Island 13 955,133 0.43
South Carolina 43 2,841,428 1.28
South Dakota 5 260,421 0.12
Tennessee 51 2,837,279 1.27
Texas 361 25,641,663 11.51
Utah 7 950,264 0.43
Virginia 36 2,863,368 1.29
Washington 24 2,586,599 1.16
Washington D C 12 989,758 0.44
West Virginia 23 1,311,992 0.59
Wisconsin 8 593,973 0.27
Wyoming 2 168,483 0.08
- ------- ----
Total 2,639 $222,732,892 100.00%
===== ============ =======
</TABLE>
S-30
<PAGE>
LOAN GROUP 1
CURRENT MORTGAGE RATES
<TABLE>
<CAPTION>
% of Loan Group 1
Number of Aggregate Remaining by Aggregate Remaining
Coupon Rate Home Equity Loans Principal Balance Principal Balance
------------------ ----------------- ------------------- ----------------------
<S> <C> <C> <C>
.500% to 7.999% 1 $57,196 0.03%
8.000% to 8.499% 35 4,168,132 1.87
8.500% to 8.999% 135 18,242,031 8.19
9.000% to 9.499% 105 11,348,645 5.10
9.500% to 9.999% 426 48,052,703 21.57
10.000% to 10.499% 183 17,063,734 7.66
10.500% to 10.999% 483 43,907,447 19.71
11.000% to 11.499% 204 14,229,595 6.39
11.500% to 11.999% 409 27,346,030 12.28
12.000% to 12.499% 163 9,767,085 4.39
12.500% to 12.999% 264 16,546,351 7.43
13.000% to 13.499% 76 4,229,252 1.90
13.500% to 13.999% 100 5,274,027 2.37
14.000% to 14.499% 35 1,704,104 0.77
14.500% to 14.999% 20 796,562 0.36
-- ------- ----
Total 2,639 $222,732,892 100.00%
===== ============ =======
</TABLE>
LOAN GROUP 1
REMAINING MONTHS TO MATURITY
<TABLE>
<CAPTION>
% of Loan Group 1
Number of Aggregate Remaining by Aggregate Remaining
Months Remaining Home Equity Loans Principal Balance Principal Balance
------------------ ----------------- ------------------- ----------------------
<S> <C> <C> <C>
61 to 120 23 $950,062 0.43%
121 to 180 300 19,201,541 8.62
181 to 300 72 4,628,710 2.08
301 to 360 2,244 197,952,579 88.87
----- ----------- -----
Total 2,639 $222,732,892 100.00%
===== ============ =======
</TABLE>
S-31
<PAGE>
LOAN GROUP 1
ORIGINAL LOAN-TO-VALUE RATIO
<TABLE>
<CAPTION>
% of Loan Group 1
Number of Aggregate Remaining by Aggregate Remaining
Original Loan-to-Value Ratio Home Equity Loans Principal Balance Principal Balance
------------------ ----------------- ------------------- ----------------------
<S> <C> <C> <C>
50.00% or less 203 $11,872,407 5.33%
50.01% to 55.00% 75 5,880,286 2.64
55.01% to 60.00% 131 9,995,418 4.49
60.01% to 65.00% 230 17,791,477 7.99
65.01% to 70.00% 246 20,470,616 9.19
70.01% to 75.00% 397 31,787,414 14.27
75.01% to 80.00% 739 62,596,357 28.10
80.01% to 85.00% 527 51,450,476 23.10
85.01% to 90.00% 91 10,888,441 4.89
-- ---------- ----
Total 2,639 $222,732,892 100.00%
===== ============ =======
</TABLE>
LOAN GROUP 1
LOAN PROGRAM
<TABLE>
<CAPTION>
% of Loan Group 1
Number of Aggregate Remaining by Aggregate Remaining
Program Home Equity Loans Principal Balance Principal Balance
------------------ ----------------- ------------------- ----------------------
<S> <C> <C> <C>
Limited Doc 62 $5,935,689 2.66%
Full Documentation 2,220 187,611,362 84.23
Stated Income 357 29,185,841 13.10
--- ---------- -----
Total 2,639 $222,732,892 100.00%
===== ============ =======
</TABLE>
LOAN GROUP 1
PURPOSE
<TABLE>
<CAPTION>
% of Loan Group 1
Number of Aggregate Remaining by Aggregate Remaining
Purpose Home Equity Loans Principal Balance Principal Balance
------------------ ----------------- ------------------- ----------------------
<S> <C> <C> <C>
Purchase 767 $57,071,940 25.62%
Refinance Equity Take Out 1,343 112,318,620 50.43
Refinance No Cash Out 529 53,342,332 23.95
--- ---------- -----
Total 2,639 $222,732,892 100.00%
===== ============ =======
</TABLE>
S-32
<PAGE>
LOAN GROUP 1
RISK CATEGORY
<TABLE>
<CAPTION>
% of Loan Group 1
Number of Aggregate Remaining by Aggregate Remaining
Risk Category(1) Home Equity Loans Principal Balance Principal Balance
------------------ ----------------- ------------------- ----------------------
<S> <C> <C> <C>
A- 1,260 $122,976,669 55.21%
B 426 37,085,476 16.65
B- 358 27,568,217 12.38
C 488 28,175,653 12.65
D 107 6,926,877 3.11
--- --------- ----
Total 2,639 $222,732,892 100.00%
===== ============ =======
</TABLE>
(1) The Risk Category "A-" includes "A-1," "A-2," "A-3," "A-4" and "A-5"
credit grades. The Risk Category "B" includes "B1," "B2," "B3" and "B4"
credit grades. The Risk Category "B-" includes "B-1," "B-2," "B-3,"
"B-4" and "B-5."
LOAN GROUP 1
MORTGAGED PROPERTY TYPES
<TABLE>
<CAPTION>
% of Loan Group 1
Number of Aggregate Remaining by Aggregate Remaining
Mortgaged Property Type Home Equity Loans Principal Balance Principal Balance
------------------------- ----------------- ------------------- ----------------------
<S> <C> <C> <C>
2 to 4 units 93 $9,302,417 4.18%
Condominium 101 7,983,522 3.58
Manufactured Home 186 12,075,140 5.42
Planned Unit Development 99 11,359,589 5.10
Single Family 2,156 181,842,209 81.64
Townhouse 4 170,014 0.08
------ ------------ -------
Total 2,639 $222,732,892 100.00%
===== ============ =======
</TABLE>
S-33
<PAGE>
LOAN GROUP 1
OCCUPANCY STATUS
<TABLE>
<CAPTION>
% of Loan Group 1
Number of Aggregate Remaining by Aggregate Remaining
Occupancy Status Home Equity Loans Principal Balance Principal Balance
--------------------------------- ----------------- ------------------- ----------------------
<S> <C> <C> <C>
Non-Owner Occupied 267 $17,007,549 7.64%
Owner Occupied 2,354 204,233,313 91.69
Second Home 18 1,492,029 0.67
-- --------- ----
Total 2,639 $222,732,892 100.00%
===== ============ =======
</TABLE>
S-34
<PAGE>
LOAN GROUP 2
The average outstanding principal balance of the statistical
calculation initial home equity loans in loan group 2 as of the statistical
calculation date was $123,562.92. As of the statistical calculation date, the
minimum and maximum outstanding principal balance of the statistical calculation
initial home equity loans in loan group 2 as of the statistical calculation date
were $12,500 and $661,046, respectively. As of the statistical calculation date,
the weighted average original loan-to-value ratio of the statistical calculation
initial home equity loans in loan group 2 was approximately 78.16%; the weighted
average original term to maturity was approximately 360 months; the weighted
average remaining term to maturity was approximately 359 months; and the
remaining terms to maturity ranged from 178 months to 360 months. No statistical
calculation initial home equity loans in loan group 2 will mature later than
August 1, 2030. As of the statistical calculation date, none of statistical
calculation initial home equity loans in loan group 2 were more than 30 days
past due. However, investors in the Offered Certificates should be aware that
approximately 85.70% of the outstanding principal balance of the statistical
calculation initial home equity loans in loan group 2 as of the statistical
calculation date had a first monthly payment due on or after July 1, 2000 and it
was not possible for such home equity loans to be more than 30 days past due as
of the statistical calculation date.
As of the statistical calculation date, approximately 0.61% of the
statistical calculation initial home equity loans in loan group 2 have a first
Adjustment Date six months after the date of origination of the related home
equity loan ("Six-Month Adjustable Rate Loans"). As of the statistical
calculation date, approximately 90.13%, 1.99% and 7.26%, respectively, of the
statistical calculation initial home equity loans were 2/28 Adjustable Rate
Loans, 3/27 Adjustable Rate Loans and 5/25 Adjustable Rate Loans. As of the
statistical calculation date, the weighted average remaining period to the next
Adjustment Date for the Six-Month Adjustable Rate Loans was approximately 6
months; the weighted average remaining period to the next Adjustment Date for
the 2/28 Adjustable Rate Loans was approximately 23 months; the weighted average
remaining period to the next Adjustment Date for the 3/27 Adjustable Rate Loans
was approximately 36 months; the weighted average remaining period to the next
Adjustment Date for the 5/25 Adjustable Rate Loans was approximately 59 months;
each Six-Month Adjustable Rate Loan will have an initial payment adjustment
effective with the seventh monthly payment on such loan, a weighted average
initial interest rate adjustment cap of 1.00%, a semi-annual interest rate
adjustment cap of 1.00%, in each case, above the then current interest rate for
such Six-Month Adjustable Rate Loan and a weighted average Lifetime Cap of 6.00%
above the initial rate of such loan; each 2/28 Adjustable Rate Loan will have an
initial payment adjustment effective with the 25th monthly payment on such loan,
a weighted average initial interest rate adjustment cap of 1.04%, a semi-annual
interest rate adjustment cap of 1.00%, in each case, above the then current
interest rate for such 2/28 Adjustable Rate Loan and a weighted average Lifetime
Cap of 6.00% above the initial rate of such loan; each 3/27 Adjustable Rate Loan
will have an initial Adjustment Date effective with the 37th monthly payment on
such loan, a weighted average initial interest rate adjustment cap of 3.00%, a
semi-annual interest rate adjustment cap of 1.00%, in each case, above the then
current interest rate for such 3/27 Adjustable Rate Loan and a weighted average
Lifetime Cap of 6.09% above the initial rate of
S-35
<PAGE>
such loan, and each 5/25 Adjustable Rate Loan will have an initial Adjustment
Date effective with the 61st monthly payment on such loan, a weighted average
initial interest rate adjustment cap of 2.97%, a semi-annual interest rate
adjustment cap of 1.00%, in each case, above the then current interest rate for
such 5/25 Adjustable Rate Loan and a weighted average Lifetime Cap of 6.00%
above the initial rate of such loan. As of the statistical calculation date, the
weighted average mortgage rate of the statistical calculation initial home
equity loans in loan group 2 was approximately 10.67% per annum. The mortgage
rates borne by the statistical calculation initial home equity loans in loan
group 2 as of the statistical calculation date ranged from 7.99% to 15.10% per
annum. The statistical calculation initial home equity loans in loan group 2 had
a weighted average gross margin as of the statistical calculation date of
approximately 6.34%. As of the statistical calculation date, the gross margins
for the statistical calculation initial home equity loans in loan group 2 ranged
from 4.00% to 7.75%. As of the statistical calculation date, the maximum rates
at which interest may accrue on the statistical calculation initial home equity
loans in loan group 2 (the "Maximum Rates") ranged from 13.99% to 21.10% per
annum. The statistical calculation initial home equity loans in loan group 2 had
a weighted average Maximum Rate as of the statistical calculation date of
approximately 16.68% per annum. As of the statistical calculation date, the
minimum rates at which interest may accrue on the statistical calculation
initial home equity loans in loan group 2 (the "Minimum Rates") ranged from
7.99% to 15.10% per annum. As of the statistical calculation date, the weighted
average Minimum Rate on the statistical calculation initial home equity loans in
loan group 2 was approximately 10.67% per annum.
Set forth below is approximate statistical information as of the
statistical calculation date regarding the statistical calculation initial home
equity loans in loan group 2. Prior to the closing date, certain additional home
equity loans will be added to loan group 2 and others may be removed. Certain
characteristics of the initial home equity loans in loan group 2 will vary from
the information presented in this prospectus supplement but it is not expected
that any such variance on a weighted average basis will be material. The sum of
the percentage columns in the following tables may not equal 100% due to
rounding.
S-36
<PAGE>
LOAN GROUP 2
PRINCIPAL BALANCE AT ORIGINATION
<TABLE>
<CAPTION>
% of Loan Group 2
Number of Aggregate Original by Aggregate Original
Principal Balance at Origination Home Equity Loans Principal Balance Principal Balance
--------------------------------- ----------------- ------------------- ----------------------
<S> <C> <C> <C>
$ 10,000.01 - $ 20,000.00 16 $307,250 0.03%
$ 20,000.01 - $ 30,000.00 172 4,530,508 0.52
$ 30,000.01 - $ 40,000.00 336 11,964,254 1.36
$ 40,000.01 - $ 50,000.00 479 21,774,149 2.48
$ 50,000.01 - $ 60,000.00 590 32,757,190 3.73
$ 60,000.01 - $ 70,000.00 573 37,494,446 4.27
$ 70,000.01 - $ 80,000.00 542 40,772,247 4.64
$ 80,000.01 - $ 90,000.00 525 44,729,233 5.09
$ 90,000.01 - $100,000.00 475 45,348,968 5.16
$100,000.01 - $110,000.00 400 42,028,398 4.79
$110,000.01 - $120,000.00 387 44,624,558 5.08
$120,000.01 - $130,000.00 307 38,397,336 4.37
$130,000.01 - $140,000.00 293 39,579,516 4.51
$140,000.01 - $150,000.00 232 33,718,613 3.84
$150,000.01 - $160,000.00 191 29,711,007 3.38
$160,000.01 - $170,000.00 176 29,204,234 3.33
$170,000.01 - $180,000.00 157 27,587,863 3.14
$180,000.01 - $190,000.00 114 21,162,924 2.41
$190,000.01 - $200,000.00 125 24,500,598 2.79
$200,000.01 - $210,000.00 96 19,692,397 2.24
$210,000.01 - $220,000.00 74 15,929,702 1.81
$220,000.01 - $230,000.00 65 14,634,064 1.67
$230,000.01 - $240,000.00 64 15,097,509 1.72
$240,000.01 - $250,000.00 62 15,230,038 1.73
$250,000.01 - $350,000.00 391 114,110,911 12.99
$350,000.01 - $450,000.00 166 65,327,879 7.44
$450,000.01 + 96 48,008,252 5.47
-- ---------- ----
Total 7,104 $878,224,044 100.00%
===== ============ =======
</TABLE>
S-37
<PAGE>
LOAN GROUP 2
REMAINING PRINCIPAL BALANCE
<TABLE>
<CAPTION>
% of Loan Group 2
Remaining Number of Aggregate Remaining by Aggregate Remaining
Principal Balance Home Equity Loans Principal Balance Principal Balance
--------------------------------- ----------------- ------------------- ----------------------
<S> <C> <C> <C>
$ 10,000.01 - $ 20,000.00 16 $303,866 0.03%
$ 20,000.01 - $ 30,000.00 173 4,555,238 0.52
$ 30,000.01 - $ 40,000.00 335 11,926,574 1.36
$ 40,000.01 - $ 50,000.00 479 21,761,410 2.48
$ 50,000.01 - $ 60,000.00 591 32,801,118 3.74
$ 60,000.01 - $ 70,000.00 572 37,415,326 4.26
$ 70,000.01 - $ 80,000.00 544 40,913,721 4.66
$ 80,000.01 - $ 90,000.00 524 44,628,388 5.08
$ 90,000.01 - $100,000.00 475 45,335,251 5.16
$100,000.01 - $110,000.00 400 42,019,705 4.79
$110,000.01 - $120,000.00 387 44,612,794 5.08
$120,000.01 - $130,000.00 309 38,651,579 4.40
$130,000.01 - $140,000.00 290 39,173,362 4.46
$140,000.01 - $150,000.00 232 33,706,885 3.84
$150,000.01 - $160,000.00 192 29,855,632 3.40
$160,000.01 - $170,000.00 176 29,201,883 3.33
$170,000.01 - $180,000.00 157 27,585,958 3.14
$180,000.01 - $190,000.00 113 20,974,889 2.39
$190,000.01 - $200,000.00 125 24,488,679 2.79
$200,000.01 - $210,000.00 96 19,684,403 2.24
$210,000.01 - $220,000.00 75 16,141,235 1.84
$220,000.01 - $230,000.00 65 14,637,996 1.67
$230,000.01 - $240,000.00 63 14,859,839 1.69
$240,000.01 - $250,000.00 62 15,223,429 1.73
$250,000.01 - $350,000.00 391 114,061,310 12.99
$350,000.01 - $450,000.00 167 65,736,768 7.49
$450,000.01 + 95 47,533,757 5.42
-- ---------- ----
Total 7,104 $877,790,996 100.00%
===== ============ =======
</TABLE>
S-38
<PAGE>
LOAN GROUP 2
GEOGRAPHIC DISTRIBUTION BY MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
% of Loan Group 2
Number of Aggregate Remaining Principal by Aggregate Remaining
State Home Equity Loans Balance Principal Balance
--------------------------------- ----------------- ----------------------------- ----------------------
<S> <C> <C> <C>
Alabama 65 $5,004,141 0.57%
Alaska 16 2,033,462 0.23
Arizona 162 17,076,692 1.95
Arkansas 27 1,818,874 0.21
California 1,397 272,777,937 31.08
Colorado 681 95,295,798 10.86
Connecticut 28 3,123,091 0.36
Delaware 3 190,597 0.02
Florida 270 25,664,617 2.92
Georgia 76 7,905,232 0.90
Hawaii 24 5,518,438 0.63
Idaho 52 4,300,813 0.49
Illinois 293 34,088,385 3.88
Indiana 92 6,101,598 0.70
Iowa 127 8,128,238 0.93
Kansas 41 2,661,018 0.30
Kentucky 19 1,230,592 0.14
Louisiana 3 481,950 0.05
Maine 30 2,852,522 0.32
Maryland 32 4,064,877 0.46
Massachusetts 185 31,385,717 3.58
Michigan 405 34,547,309 3.94
Minnesota 186 20,013,870 2.28
Mississippi 44 2,840,715 0.32
Missouri 135 8,984,891 1.02
Montana 35 3,293,429 0.38
Nebraska 120 8,323,955 0.95
Nevada 151 17,651,466 2.01
New Hampshire 22 2,105,675 0.24
New Jersey 62 9,491,824 1.08
New Mexico 44 4,545,747 0.52
New York 129 20,780,178 2.37
North Carolina 195 17,651,220 2.01
North Dakota 6 467,414 0.05
Ohio 277 21,651,144 2.47
Oklahoma 90 5,411,555 0.62
Oregon 241 29,528,035 3.36
Pennsylvania 50 3,592,010 0.41
Rhode Island 30 3,137,336 0.36
South Carolina 131 10,334,592 1.18
South Dakota 19 1,519,610 0.17
Tennessee 74 6,119,045 0.70
Texas 468 44,032,444 5.02
Utah 192 24,011,962 2.74
Vermont 4 260,850 0.03
Virginia 48 4,876,353 0.56
Washington 260 35,291,824 4.02
Washington DC 11 1,464,056 0.17
West Virginia 7 478,079 0.05
Wisconsin 32 2,201,731 0.25
Wyoming 13 1,478,091 0.17
-- --------- ----
Total 7,104 $877,790,996 100.00%
===== ============ =======
</TABLE>
S-39
<PAGE>
LOAN GROUP 2
CURRENT COUPON RATES
<TABLE>
<CAPTION>
% of Loan Group 2
Number of Aggregate Remaining by Aggregate Remaining
Coupon Rates Home Equity Loans Principal Balance Principal Balance
--------------------------------- ----------------- ------------------- ----------------------
<S> <C> <C> <C>
7.500% to 7.999% 1 $249,663 0.03%
8.000% to 8.499% 27 5,383,440 0.61
8.500% to 8.999% 215 36,658,449 4.18
9.000% to 9.499% 286 50,200,686 5.72
9.500% to 9.999% 1,218 195,980,538 22.33
10.000% to 10.499% 781 107,517,441 12.25
10.500% to 10.999% 1,709 216,291,863 24.64
11.000% to 11.499% 768 80,415,986 9.16
11.500% to 11.999% 1,012 97,008,180 11.05
12.000% to 12.499% 417 35,404,939 4.03
12.500% to 12.999% 422 36,126,310 4.12
13.000% to 13.499% 147 10,255,441 1.17
13.500% to 13.999% 78 5,058,409 0.58
14.000% to 14.499% 15 947,471 0.11
14.500% to 14.999% 7 262,980 0.03
15.000% to 15.499% 1 29,200 0.00
- ------ ----
Total 7,104 $877,790,996 100.00%
===== ============ =======
</TABLE>
LOAN GROUP 2
REMAINING MONTHS TO MATURITY
<TABLE>
<CAPTION>
% of Loan Group 2
Number of Aggregate Remaining by Aggregate Remaining
Months Remaining Home Equity Loans Principal Balance Principal Balance
--------------------------------- ----------------- ------------------- ----------------------
<S> <C> <C> <C>
121 to 180 1 $44,855 0.01%
181 to 300 1 41,946 0.00
301 to 360 7,102 877,704,195 99.99
----- ----------- -----
Total 7,104 $877,790,996 100.00%
===== ============ =======
</TABLE>
S-40
<PAGE>
LOAN GROUP 2
PRODUCT TYPE
<TABLE>
<CAPTION>
% of Loan Group 2
Number of Aggregate Remaining by Aggregate Remaining
Product Type Home Equity Loans Principal Balance Principal Balance
--------------------------------- ----------------- ------------------- ----------------------
<S> <C> <C> <C>
2/28 LIBOR 6,335 791,148,915 90.13%
3/27 LIBOR 143 17,475,986 1.99
5/25 LIBOR 592 63,769,046 7.26
6mo adj/LIBOR 34 5,397,049 0.61
-- --------- ----
Total 7,104 877,790,996 100.00%
===== =========== =======
</TABLE>
LOAN GROUP 2
ORIGINAL LOAN-TO-VALUE RATIO
<TABLE>
<CAPTION>
% of Loan Group 2
Number of Aggregate Remaining by Aggregate Remaining
Original Loan-to-Value Ratio Home Equity Loans Principal Balance Principal Balance
--------------------------------- ----------------- ------------------- ----------------------
<S> <C> <C> <C>
50.00% or less 198 $18,934,241 2.16%
50.01% to 55.00% 103 9,924,068 1.13
55.01% to 60.00% 186 20,569,721 2.34
60.01% to 65.00% 449 48,252,652 5.50
65.01% to 70.00% 490 56,599,105 6.45
70.01% to 75.00% 1,000 107,331,182 12.23
75.01% to 80.00% 2,292 279,684,281 31.86
80.01% to 85.00% 2,009 271,142,316 30.89
85.01% to 90.00% 377 65,353,430 7.45
--- ---------- ----
Total 7,104 $877,790,996 100.00%
===== ============ =======
</TABLE>
LOAN GROUP 2
LOAN PROGRAM
<TABLE>
<CAPTION>
% of Loan Group 2
Number of Aggregate Remaining by Aggregate Remaining
Program Home Equity Loans Principal Balance Principal Balance
--------------------------------- ----------------- ------------------- ----------------------
<S> <C> <C> <C>
Limited Doc 243 $41,696,808 4.75%
Full Documentation 5,884 705,680,313 80.39
Stated Income 977 130,418,876 14.86
--- ----------- -----
Total 7,104 $877,790,996 100.00%
===== ============ =======
</TABLE>
S-41
<PAGE>
LOAN GROUP 2
PURPOSE
<TABLE>
<CAPTION>
% of Loan Group 2
Number of Aggregate Remaining by Aggregate Remaining
Purpose Home Equity Loans Principal Balance Principal Balance
--------------------------------- ----------------- ------------------- ----------------------
<S> <C> <C> <C>
Purchase 3,478 $408,482,969 46.54%
Refinance - No Cash Out 2,332 297,072,010 33.84
Refinance Equity Take-Out 1,294 172,236,017 19.62
----- ----------- -----
Total 7,104 $877,790,996 100.00%
===== ============ =======
</TABLE>
LOAN GROUP 2
RISK CATEGORY
<TABLE>
<CAPTION>
% of Loan Group 2
Number of Aggregate Remaining by Aggregate Remaining
Risk Category(1) Home Equity Loans Principal Balance Principal Balance
--------------------------------- ----------------- ------------------- ----------------------
<S> <C> <C> <C>
A- 2,869 $435,312,486 49.59%
B 1,045 130,618,878 14.88
B- 1,259 138,975,498 15.83
C 1,574 138,329,903 15.76
D 357 34,554,231 3.94
--- ---------- ----
Total 7,104 $877,790,996 100.00%
===== ============ =======
</TABLE>
(1) The Risk Category "A-" includes "A-1," "A-2," "A-3," "A-4" and "A-5"
credit grades. The Risk Category "B" includes "B1," "B2," "B3" and "B4"
credit grades. The Risk Category "B-" includes "B-1," "B-2," "B-3,"
"B-4" and "B-5."
LOAN GROUP 2
MORTGAGED PROPERTY TYPES
<TABLE>
<CAPTION>
% of Loan Group 2
Number of Aggregate Remaining by Aggregate Remaining
Mortgaged Property Type Home Equity Loans Principal Balance Principal Balance
--------------------------------- ----------------- ------------------- ----------------------
<S> <C> <C> <C>
2 to 4 units 208 $30,430,425 3.47%
Condominium 406 48,593,197 5.54
Manufactured Homes 589 48,491,554 5.52
Planned Unit Development 458 80,754,661 9.20
Single Family 5,433 668,585,622 76.17
Townhouse 10 935,537 0.11
-- ------- ----
Total 7,104 $877,790,996 100.00%
===== ============ =======
</TABLE>
S-42
<PAGE>
LOAN GROUP 2
OCCUPANCY STATUS
<TABLE>
<CAPTION>
% of Loan Group 2
Number of Aggregate Remaining by Aggregate Remaining
Occupancy Status Home Equity Loans Principal Balance Principal Balance
--------------------------------- ----------------- ------------------- ----------------------
<S> <C> <C> <C>
Non-Owner Occupied 375 $34,936,929 3.98%
Owner Occupied 6,692 837,590,744 95.42
Second Home 37 5,263,323 0.60
-- --------- ----
Total 7,104 $877,790,996 100.00%
===== ============ =======
</TABLE>
S-43
<PAGE>
LOAN GROUP 2
MONTH AND YEAR OF NEXT RATE ADJUSTMENT
<TABLE>
<CAPTION>
% of Loan Group 2
Month and Year of Number of Aggregate Remaining by Aggregate Remaining
Next Rate Adjustment Home Equity Loans Principal Balance Principal Balance
--------------------------------- ----------------- ------------------- ----------------------
<S> <C> <C> <C>
October 2000 1 $229,752 0.03%
December 2000 16 2,571,452 0.29
January 2001 15 1,929,846 0.22
February 2001 2 666,000 0.08
August 2001 1 169,682 0.02
September 2001 28 3,821,218 0.44
October 2001 44 3,977,569 0.45
November 2001 14 1,271,362 0.14
December 2001 41 4,804,493 0.55
January 2002 73 8,696,769 0.99
February 2002 39 5,051,672 0.58
March 2002 132 19,248,207 2.19
April 2002 168 20,587,246 2.35
May 2002 241 31,393,727 3.58
June 2002 1,752 223,069,035 25.41
July 2002 2,235 274,933,425 31.32
August 2002 1,568 194,168,694 22.12
September 2002 6 357,820 0.04
October 2002 3 201,134 0.02
November 2002 3 273,061 0.03
December 2002 3 413,074 0.05
February 2003 3 306,275 0.03
March 2003 1 91,635 0.01
April 2003 4 545,705 0.06
May 2003 8 1,061,070 0.12
June 2003 13 2,305,411 0.26
July 2003 8 1,617,268 0.18
August 2003 90 10,259,350 1.17
December 2004 2 457,805 0.05
January 2005 6 647,133 0.07
February 2005 9 798,042 0.09
March 2005 13 1,691,055 0.19
April 2005 26 3,376,460 0.38
May 2005 153 16,014,225 1.82
June 2005 160 17,620,291 2.01
July 2005 157 16,048,355 1.83
August 2005 66 7,115,680 0.81
-- --------- ----
Total 7,104 $877,790,996 100.00%
===== ============ =======
</TABLE>
S-44
<PAGE>
LOAN GROUP 2
GROSS MARGINS
<TABLE>
<CAPTION>
% of Loan Group 2
Number of Aggregate Remaining by Aggregate Remaining
Gross Margin Home Equity Loans Principal Balance Principal Balance
--------------------------------- ----------------- ------------------- ----------------------
<S> <C> <C> <C>
4.000% to 4.499% 3 $648,565 0.07%
4.500% to 4.999% 4 653,945 0.07
5.000% to 5.499% 147 20,524,768 2.34
5.500% to 5.999% 1,804 245,318,547 27.95
6.000% to 6.499% 1,573 176,637,515 20.12
6.500% to 6.999% 3,545 431,468,826 49.15
7.000% to 7.499% 18 1,606,394 0.18
7.500% to 7.999% 10 932,436 0.11
-- ------- ----
Total 7,104 $877,790,996 100.00%
===== ============ =======
</TABLE>
LOAN GROUP 2
MAXIMUM LOAN RATES
<TABLE>
<CAPTION>
% of Loan Group 2
Number of Aggregate Remaining by Aggregate Remaining
Maximum Rate Home Equity Loans Principal Balance Principal Balance
--------------------------------- ----------------- ------------------- ----------------------
<S> <C> <C> <C>
13.500% to 13.999% 1 $249,663 0.03%
14.000% to 14.499% 27 5,383,440 0.61
14.500% to 14.999% 214 36,574,543 4.17
15.000% to 15.499% 286 50,200,686 5.72
15.500% to 15.999% 1,206 194,081,667 22.11
16.000% to 16.499% 777 106,712,237 12.16
16.500% to 16.999% 1,714 217,568,629 24.79
17.000% to 17.499% 766 80,350,622 9.15
17.500% to 17.999% 1,017 97,483,082 11.11
18.000% to 18.499% 421 36,158,194 4.12
18.500% to 18.999% 425 36,223,553 4.13
19.000% to 19.499% 148 10,305,776 1.17
19.500% to 19.999% 79 5,259,254 0.60
20.000% to 20.499% 15 947,471 0.11
20.500% to 20.999% 7 262,980 0.03
21.000% to 21.499% 1 29,200 0.00
- ------ ----
Total 7,104 $877,790,996 100.00%
===== ============ =======
</TABLE>
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<PAGE>
LOAN GROUP 2
MINIMUM LOAN RATES
<TABLE>
<CAPTION>
% of Loan Group 2
Number of Aggregate Remaining by Aggregate Remaining
Minimum Rate Home Equity Loans Principal Balance Principal Balance
--------------------------------- ----------------- ------------------- ----------------------
<S> <C> <C> <C>
7.500% to 7.999% 1 $249,663 0.03%
8.000% to 8.499% 27 5,383,440 0.61
8.500% to 8.999% 215 36,658,449 4.18
9.000% to 9.499% 286 50,200,686 5.72
9.500% to 9.999% 1,218 195,980,538 22.33
10.000% to 10.499% 781 107,517,441 12.25
10.500% to 10.999% 1,710 216,358,841 24.65
11.000% to 11.499% 767 80,349,009 9.15
11.500% to 11.999% 1,013 97,086,930 11.06
12.000% to 12.499% 417 35,404,939 4.03
12.500% to 12.999% 421 36,047,560 4.11
13.000% to 13.499% 147 10,255,441 1.17
13.500% to 13.999% 78 5,058,409 0.58
14.000% to 14.499% 15 947,471 0.11
14.500% to 14.999% 7 262,980 0.03
15.000% + 1 29,200 0.00
- ------ ----
Total 7,104 $877,790,996 100.00%
===== ============ =======
</TABLE>
THE INDEX
As of any Adjustment Date, the Index applicable to the determination of
the Mortgage Rate on each adjustable rate home equity loan will generally be the
average of the interbank offered rates for six-month United States dollar
deposits in the London market as published in The Wall Street Journal and as
most recently available either (i) as of the first business day 45 days prior to
such Adjustment Date or (ii) as of the first business day of the month preceding
the month of such Adjustment Date, as specified in the related mortgage note. In
the event that the Index becomes unavailable or otherwise unpublished, the
Master Servicer will select a comparable alternative index over which it has no
direct control and which is readily verifiable.
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<PAGE>
The table below sets forth historical average rates of six-month LIBOR
for the months indicated as made available from Fannie Mae, which rates may
differ from the rates of the Index, which is six-month LIBOR as published in The
Wall Street Journal as described above. The table does not purport to be
representative of the subsequent rates of the Index which will be used to
determine the Mortgage Rate on each adjustable rate home equity loan.
Year
Month 2000 1999 1998 1997 1996 1995 1994
----- ---- ---- ---- ---- ---- ---- ----
January 6.24% 5.04% 5.75% 5.71% 5.34% 6.69% 3.39%
February 6.33 5.17 5.78 5.68 5.29 6.44 4.00
March 6.53 5.08 5.80 5.96 5.52 6.44 4.25
April 6.61 5.08 5.87 6.08 5.42 6.31 4.63
May 7.06 5.19 5.81 6.01 5.64 6.06 5.00
June 7.01 5.63 5.87 5.94 5.84 5.88 5.25
July 6.89 5.68 5.82 5.83 5.92 5.88 5.33
August -- 5.91 5.69 5.86 5.74 5.94 5.33
September -- 5.97 5.36 5.85 5.75 5.99 5.69
October -- 6.14 5.13 5.80 5.58 5.95 6.00
November -- 6.06 5.28 6.04 5.55 5.74 6.44
December -- 6.14 5.17 6.01 5.62 5.56 7.00
UNDERWRITING STANDARDS; REPRESENTATIONS
The home equity loans have been acquired by the depositor or its affiliates from
Long Beach. All of the home equity loans were originated or acquired by Long
Beach generally in accordance with the underwriting criteria described below.
The information regarding Long Beach's underwriting standards has been provided
by Long Beach. None of the depositor, the indenture trustee, the owner trustee,
the underwriters or any of their affiliates has made any independent
investigation of such information or has made or will make any representation as
to the accuracy or completeness of such information.
The home equity loans were originated generally in accordance with guidelines
established by Long Beach under its Full Documentation, Limited Doc or Stated
Income residential loan programs. Long Beach's underwriting guidelines are
primarily intended to evaluate the value and adequacy of the mortgaged property
as collateral and are also intended to consider the mortgagor's credit standing
and repayment ability. On a case-by-case basis and only with the approval of two
or more senior lending officers, Long Beach may determine that, based upon
compensating factors, a prospective mortgagor not strictly qualifying under the
underwriting risk category guidelines described below warrants an underwriting
exception. Compensating factors may include, but are not limited to, low
loan-to-value ratio, low debt-to-income ratio, good credit history, stable
employment and time in residence at the applicant's current address. It is
expected that a substantial number of the home equity loans to be included in
the home equity loan pool will represent exceptions to the underwriting
guidelines.
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<PAGE>
Under Long Beach's programs, during the underwriting process, Long Beach reviews
and verifies the loan applicant's sources of income (except under the Stated
Income and Limited Doc loan programs), calculates the amount of income from all
such sources indicated on the loan application, reviews the credit history of
the applicant and calculates the debt-to-income ratio to determine the
applicant's ability to repay the loan, and reviews the mortgaged property for
compliance with Long Beach's underwriting guidelines. Long Beach applies its
underwriting guidelines in accordance with a procedure which complies with
applicable federal and state laws and regulations and requires (1) an appraisal
of the mortgaged property which generally conforms to Freddie Mac and Fannie Mae
standards and (2) a review of that appraisal. The appraisal review may be
conducted by a representative of Long Beach or a staff appraiser and, depending
upon the original principal balance and loan-to-value ratio of the mortgaged
property, may include a desk review of the original appraisal or a drive-by
review appraisal of the mortgaged property.
Long Beach's underwriting guidelines permit loans with loan-to-value ratios at
origination of up to 90%. The maximum allowable loan-to-value ratio varies based
upon the income documentation, property type, creditworthiness, debt
service-to-income ratio of the mortgagor and the overall risks associated with
the loan decision. Under the residential loan programs, the maximum combined
loan-to-value ratio, including any second deeds of trust subordinate to Long
Beach's first lien, is generally 100% for owner occupied mortgaged properties
and 90% for non-owner occupied mortgaged properties.
All of the home equity loans originated under Long Beach's underwriting programs
are based on loan application packages submitted through mortgage brokerage
companies or Long Beach's retail division, or are purchased from approved
originators. Loan application packages submitted through mortgage brokerage
companies, containing relevant credit, property and underwriting information on
the loan request, are compiled by the mortgage brokerage company and submitted
to Long Beach for approval and funding. The mortgage brokerage companies receive
a portion of the loan origination fee charged to the mortgagor at the time the
loan is made. No single mortgage brokerage company accounts for more than 5%,
measured by outstanding principal balance, of the single-family home equity
loans originated by Long Beach.
Each prospective mortgagor completes an application which includes information
with respect to the applicant's liabilities, income, credit history and
employment history, as well as certain other personal information. Long Beach
obtains a credit report on each applicant from a credit reporting company. The
applicant must generally provide to Long Beach or the correspondent originator a
letter explaining all late payments on mortgage debt and, generally,
non-mortgage consumer debt. The report typically contains information relating
to such matters as credit history with local and national merchants and lenders,
installment debt payments and any record of defaults, bankruptcy, repossession,
suits or judgments. Under the Full Documentation residential loan program,
self-employed individuals are generally required to submit their most recent
federal income tax return. As part of its quality control system, Long Beach
reverifies information with respect to the foregoing matters that has been
provided by the mortgage brokerage company prior to funding a loan and
periodically audits files based on a random sample of closed loans. In the
course of its pre-funding audit, Long Beach reverifies the income
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<PAGE>
of each mortgagor or, for a self-employed individual, reviews the income
documentation obtained (except under the Stated Income residential loan
program). Long Beach generally verifies the source of funds for the down
payment.
The mortgaged properties are appraised by qualified independent appraisers who
are approved by Long Beach's internal valuation managers. In most cases,
below-average properties, including properties requiring major deferred
maintenance, are not acceptable under the Long Beach underwriting programs. Each
appraisal includes a market data analysis based on recent sales of comparable
homes in the area and, where deemed appropriate, replacement cost analysis based
on the current cost of constructing a similar home. Every independent appraisal
is reviewed by a representative of Long Beach or by a staff appraiser before the
loan is funded.
Long Beach's underwriting guidelines are less stringent than the standards
generally acceptable to Fannie Mae and Freddie Mac with regard to the
mortgagor's credit standing and repayment ability. Mortgagors who qualify under
the Long Beach's underwriting programs generally have payment histories and debt
ratios which would not satisfy Fannie Mae and Freddie Mac underwriting
guidelines and may have a record of major derogatory credit items such as
outstanding judgments or prior bankruptcies. Long Beach's underwriting
guidelines establish the maximum permitted loan-to-value ratio for each loan
type based upon these and other risk factors.
Under the Limited Doc and Stated Income residential loan programs, the
mortgagor's employment and income sources must be stated on the mortgagor's
application. The mortgagor's income as stated must be reasonable for the related
occupation and such determination as to reasonableness is subject to the loan
underwriter's discretion. However, the mortgagor's income as stated on the
application is not independently verified. Verification of employment is
required for salaried mortgagors only. Maximum loan-to-value ratios are
generally lower under the Limited Doc and Stated Income residential loan
programs than those permitted under the Full Documentation residential loan
program. Except as otherwise stated above, the same mortgage credit, consumer
credit and collateral property underwriting guidelines that apply to the Full
Documentation residential loan program apply to the Limited Doc and Stated
Income residential loan programs.
Long Beach requires that all home equity loans in its underwriting programs have
title insurance and be secured by liens on real property. Long Beach also
requires that fire and extended coverage casualty insurance be maintained on the
secured property in an amount at least equal to the principal balance of the
home equity loan or the replacement cost of the property, whichever is less.
Long Beach does not require that the home equity loans originated under its
underwriting programs be covered by a primary mortgage insurance policy.
Risk Categories
Under Long Beach's underwriting programs, various risk categories are used to
grade the likelihood that the mortgagor will satisfy the repayment conditions of
the home equity loan. These risk categories establish the maximum permitted
loan-to-value ratio and loan amount, given the occupancy status of the mortgaged
property and the mortgagor's credit history and debt
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<PAGE>
ratio. In general, higher credit risk home equity loans are graded in categories
which permit higher debt ratios and more (or more recent) major derogatory
credit items such as outstanding judgments or prior bankruptcies; however, Long
Beach's underwriting programs establish lower maximum loan-to-value ratios and
maximum loan amounts for loans graded in such categories.
Long Beach's underwriting guidelines have the following categories and criteria
for grading the potential likelihood that an applicant will satisfy the
repayment obligations of a home equity loan:
CREDIT GRADE: "A-." Under the "A-" risk categories, the applicant generally must
have repaid installment or revolving debt according to its terms and have
demonstrated steady employment over the last two years. Some non-consumer
credit, collections or judgments may be disregarded on a case-by-case basis. Any
and all delinquent payments made within the past 12 months may not represent
more than 35% of the credit reported during that period. Minor derogatory items
are permitted on a case-by-case basis as to non-mortgage credit when the
majority of the consumer credit is good. No bankruptcy filings may have occurred
during the preceding one year and no discharge or notice of default filings may
have occurred during the preceding three years. The mortgaged property must be
in at least average condition. A maximum loan-to-value ratio of 90% is permitted
for owner occupied purchase money and/or refinance home equity loans on single
family, two unit and condominium properties, and a maximum loan-to-value ratio
of 85% is permitted on an owner occupied mortgaged property consisting of three-
to four-units or second homes. A maximum loan-to-value ratio of 80% is permitted
for non-owner occupied purchase money and/or refinance home equity loans on
single family, two unit and condominium properties, and a maximum loan-to-value
ratio of 75% is permitted on a non-owner occupied mortgaged property consisting
of three-to-four units. Generally, the debt service-to-income ratio maximum may
be 55% based on the mortgagor's net disposable income and if the loan-to-value
ratio is less than or equal to 85%.
CREDIT GRADE: "A-1." Under the "A1" risk sub-category, in addition to
the characteristics described under the "A" risk category above, no
late payments are permitted during the previous twelve months on an
existing home equity loan, either on the property which is being made
subject to Long Beach's lien or any mortgage on any other property for
which the applicant is listed as borrower. In addition, the applicant
must have a credit score of 620 or higher and a debt service-to-income
ratio of 45% or less.
CREDIT GRADE "A-2." Under the "A2" risk sub-category, in addition to
the characteristics described under the "A" risk category above, no
late payments are permitted during the previous twelve months on an
existing home equity loan, either on the property which is being made
subject to Long Beach's lien or any mortgage on any other property for
which the applicant is listed as borrower.
CREDIT GRADE "A-3." Under the "A3" risk sub-category, in addition to
the characteristics described under the "A" risk category above, no
late payments are permitted during the previous twelve months on an
existing home equity loan on the property which is being made subject
to Long Beach's lien.
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<PAGE>
CREDIT GRADE "A-4." Under the "A4" risk sub-category, in addition to
the characteristics described under the "A" risk category above, a
maximum of one 30-day late payment and no 60-day late payments during
the previous twelve months are permitted on an existing home equity
loan, on the property which is being made subject to Long Beach's lien
or any mortgage on any other property for which the applicant is listed
as mortgagor.
CREDIT GRADE "A-5." Under the "A5" risk sub-category, in addition to
the characteristics described under the "A" risk category above, a
maximum of two 30-day late payments and no 60-day late payments during
the previous twelve months are permitted on an existing home equity
loan, on the property which is being made subject to Long Beach's lien
or any mortgage on any other property for which the applicant is listed
as mortgagor.
CREDIT GRADE: "B." Under the "B" risk category, the applicant must have
generally repaid installment or revolving debt according to its terms and have
demonstrated steady employment over the last two years. Certain non-consumer
credit, collections or judgments may be disregarded on a case-by-case basis. Any
and all delinquent payments within the past 12 months may not represent more
than 50% of the credit reported during that period. No bankruptcy filings may
have occurred during the preceding one year and no discharge or notice of
default filings may have occurred during the preceding three years. The
mortgaged property must be in at least average condition. A maximum
loan-to-value ratio of 85% is permitted for owner occupied purchase money and/or
refinance home equity loans on single family and condominium properties, and a
maximum loan-to-value ratio of 80% is permitted for non-owner occupied purchase
money and/or refinance home equity loans on single family and condominium
properties, and a maximum loan-to-value ratio of 70% is permitted on a non-owner
occupied mortgaged property consisting of three- to four-units or second homes.
Generally, the debt service-to-income ratio must be 55% or less based on the
mortgagor's net disposable income and/or loan-to-value ratio.
CREDIT GRADE "B1." Under the "B1" risk sub-category, in addition to the
characteristics described under the "B" risk category described above,
no late payments are permitted during the previous twelve months on an
existing home equity loan, on the property which is being made subject
to Long Beach's lien or any mortgage on any other property for which
the applicant is listed as mortgagor.
CREDIT GRADE "B2." Under the "B2" risk sub-category, in addition to the
characteristics described under the "B" risk category described above,
a maximum of one 30-day late payment and no 60-day late payments are
permitted during the previous twelve months on an existing home equity
loan, on the property which is being made subject to Long Beach's lien
or any mortgage on any other property for which the applicant is listed
as mortgagor.
CREDIT GRADE "B3." Under the "B3" risk sub-category, in addition to the
characteristics described under the "B" risk category described above,
a maximum of two 30-day late payments and no 60-day late payments are
permitted during the previous twelve months
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<PAGE>
on an existing home equity loan, on the property which is being made
subject to Long Beach's lien or any mortgage on any other property for
which the applicant is listed as mortgagor.
CREDIT GRADE "B4." Under the "B4" risk sub-category, in addition to the
characteristics described under the "B" risk category described above,
a maximum of three 30-day late payments and generally no 60-day late
payments during the previous twelve months are permitted on an existing
home equity loan, on the property which is being made subject to Long
Beach's lien or any mortgage on any other property for which the
applicant is listed as mortgagor.
CREDIT GRADE: "B-." Under the "B-" risk category, the applicant must have
generally repaid installment or revolving debt according to its terms and have
demonstrated steady employment over the last two years. No payment delinquent
more than 30 days at the time of application is permitted on an existing home
equity loan. Certain non-consumer credit, collections or judgments may be
disregarded on a case-by-case basis. No bankruptcy filings may have occurred
during the preceding twelve months and no discharge or notice of default filings
may have occurred during the preceding two years. The mortgaged property must be
in at least average condition. A maximum loan-to-value ratio of 85% is permitted
for owner occupied purchase money and/or refinance home equity loans on single
family, two unit and condominium properties, and a maximum loan-to-value ratio
of 75% is permitted on an owner occupied mortgaged property consisting of
two-to-four units or second homes. A maximum loan-to-value ratio of 75% is
permitted for non-owner occupied purchase money and/or refinance home equity
loans on single family, two unit and condominium properties, and a maximum
loan-to-value ratio of 70% is permitted on a non-owner occupied mortgaged
property consisting of three-to-four units or second homes. Generally, the debt
service-to-income ratio must not exceed 55%.
CREDIT GRADE "B-1." Under the "B-1" risk sub-category, in addition to
the characteristics described under the "B-" risk category described
above, no late payments are permitted during the previous twelve months
on an existing home equity loan, on the property which is being made
subject to Long Beach's lien or any mortgage on any other property for
which the applicant is listed as mortgagor.
CREDIT GRADE "B-2." Under the "B-2" risk sub-category, in addition to
the characteristics described under the "B-" risk category described
above, a maximum of one 30-day late payment and .no 60-day late
payments are permitted during the previous twelve months on an existing
home equity loan, on the property which is being made subject to Long
Beach's lien or any mortgage on any other property for which the
applicant is listed as mortgagor.
CREDIT GRADE "B-3." Under the "B-3" risk sub-category, in addition to
the characteristics described under the "B-" risk category described
above, a maximum of two 30-day late payments and no 60-day late
payments are permitted during the previous twelve months on an existing
home equity loan, on the property which is being made subject to Long
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Beach's lien or any mortgage on any other property for which the
applicant is listed as mortgagor.
CREDIT GRADE "B-4." Under the "B-4" risk sub-category, in addition to
the characteristics described under the "B-" risk category described
above, a maximum of three 30-day late payments and generally no 60-day
late payments during the previous twelve months are permitted on an
existing home equity loan, on the property which is being made subject
to Long Beach's lien or any mortgage on any other property for which
the applicant is listed as mortgagor.
CREDIT GRADE "B-5." Under the "B-5" risk sub-category, in addition to
the characteristics described under the "B-" risk category described
above, a maximum of one 60-day late payment during the previous twelve
months are permitted on an existing home equity loan, on the property
which is being made subject to Long Beach's lien or any mortgage on any
other property for which the applicant is listed as mortgagor.
CREDIT GRADE: "C." Under the "C" risk category, the applicant may have
experienced significant credit problems in the past. A maximum of four 60-day
late payments and no 90-day late payments, or three 60-day late payments and one
90-day late payment within the last 12 months is permitted on an existing home
equity loan. An existing home equity loan is not required to be current at the
time the application is submitted. Consumer credit derogatory items will be
considered on a case-by-case basis. No bankruptcy, discharge or notice of
default filings may have occurred during the preceding twelve months. The
mortgaged property must be in at least average condition. A maximum
loan-to-value ratio of 75% (80% with no cash out to the borrower) is permitted
for owner occupied purchase money and/or refinance home equity loans on single
family, two unit and condominium properties, and a maximum loan-to-value ratio
of 70% is permitted on an owner occupied mortgaged property consisting of
three-to-four units or second homes. A maximum loan-to-value ratio of 70% is
permitted for non-owner occupied purchase money and/or refinance home equity
loans on single family, two unit and condominium properties, and a maximum
loan-to-value ratio of 65% is permitted on a non-owner occupied mortgaged
property consisting of three-to-four units or second homes. Generally, the debt
service-to-income ratio must not exceed 55%; however, a debt service-to-income
ratio of 55% to 60% will be considered on a case-by-case basis.
CREDIT GRADE: "D." Under the "D" risk category, the applicant may have
experienced significant credit problems in the past. The applicant may be in
bankruptcy or have a notice of default or foreclosure, and in any such case must
provide a reasonable explanation including why the problem no longer exists. The
mortgaged property must be in at least average condition. A maximum
loan-to-value ratio of 65% is permitted for owner occupied purchase money and/or
refinance home equity loans on single family, two unit and condominium
properties, and a maximum loan-to-value ratio of 60% is permitted on an owner
occupied mortgaged property consisting of three-to-four units or second homes. A
maximum loan-to-value ratio of 60% is permitted for non-owner occupied purchase
money and/or refinance home equity loans on single family and condominium
properties, and a maximum loan-to-value ratio of 50% is permitted on a non-owner
occupied mortgaged property consisting of three-to-four units or second homes.
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Generally, the debt service-to-income ratio must not exceed 55%; however, a debt
service-to-income ratio of 55% to 60% will be considered on a case-by-case
basis.
The Seller will make representations and warranties as of the closing
date with respect to the home equity loans, and will be obligated to replace,
cure or repurchase any such Home Equity Loan in respect of which a material
breach of the representations and warranties it has made has occurred (other
than those breaches which have been cured).
YIELD ON THE CERTIFICATES
DELAY IN DISTRIBUTIONS ON THE FIXED RATE CERTIFICATES
The effective yield to holders of the fixed rate certificates will be
less than the yields otherwise produced by their respective pass-through rates
and purchase prices because (i) on the first Distribution Date one month's
interest is payable thereon even though 20 days will have elapsed from the date
on which interest begins to accrue thereon, (ii) on each succeeding Distribution
Date the interest payable thereon is the interest accrued during the month
preceding the month of such Distribution Date, which ends 20 or more days prior
to such Distribution Date and (iii) during each interest accrual period (other
than the first interest accrual period), interest accrues on a certificate
principal balance that may be less than the certificate principal balance of
such class actually outstanding for the first 20 or more days of such interest
accrual period.
CERTAIN SHORTFALLS IN COLLECTIONS OF INTEREST
When a principal prepayment in full is made on a home equity loan, the
mortgagor is charged interest only for the period from the Due Date of the
preceding monthly payment up to the date of such prepayment, instead of for a
full month. When a partial principal prepayment is made on a home equity loan,
the mortgagor is not charged interest on the amount of such prepayment for the
month in which such prepayment is made. In addition, the application of the
Soldiers' and Sailors' Civil Relief Act of 1940, as amended (the "Relief Act"),
to any home equity loan will adversely affect, for an indeterminate period of
time, the ability of the Master Servicer to collect full amounts of interest on
such home equity loan. We refer you to "Certain Legal Aspects of the Mortgage
Loans and Contracts--Anti-Deficiency Legislation and Other Limitations on
Lenders" in the prospectus. The Master Servicer is obligated to pay from its own
funds only those interest shortfalls attributable to full and partial
prepayments by the mortgagors on the home equity loans, but only to the extent
of its aggregate Servicing Fee (as defined herein) for the related Due Period
(as defined herein). We refer you to "Pooling and Servicing Agreement--Servicing
and Other Compensation and Payment of Expenses" herein. Accordingly, the effect
of (i) any principal prepayments on the home equity loans, to the extent that
any resulting shortfall (a "Prepayment Interest Shortfall") exceeds any payments
made by the Master Servicer from its own funds ("Compensating Interest") or (ii)
any shortfalls resulting from the application of the Relief Act, will be to
reduce the aggregate amount of interest collected that is available for
distribution to certificateholders. Any such shortfalls will be allocated among
the
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certificates as provided under "Description of the Certificates--Interest
Distributions on the Offered Certificates" and "--Overcollateralization
Provisions" in this prospectus supplement.
GENERAL PREPAYMENT CONSIDERATIONS
The rate of principal payments on the Offered Certificates, the
aggregate amount of distributions on the Offered Certificates and the yield to
maturity of the Offered Certificates will be related to the rate and timing of
payments of principal on the home equity loans. The rate of principal payments
on the adjustable rate home equity loans will in turn be affected by the
amortization schedules of such home equity loans as they change from time to
time to accommodate changes in the Mortgage Rates and by the rate of principal
prepayments on the home equity loans (including for this purpose, payments
resulting from refinancings, liquidations of the home equity loans due to
defaults, casualties, condemnations and repurchases, whether optional or
required, by the Depositor, the Seller, or the Master Servicer, as the case may
be). The home equity loans generally may be prepaid by the mortgagors at any
time; however, as described under "The Home Equity Loan Pool" herein, with
respect to approximately 81.82% and 90.33% of the statistical calculation
initial home equity loans in loan group 1 and loan group 2, respectively, by
aggregate principal balance as of the statistical calculation date, a prepayment
may subject the related mortgagor to a Prepayment Charge.
Prepayments, liquidations and repurchases of the home equity loans of a
loan group will result in distributions in respect of principal to the holders
of the class or classes of the related Offered Certificates then entitled to
receive such distributions that otherwise would be distributed over the
remaining terms of such home equity loans. Since the rates of payment of
principal on the home equity loans will depend on future events and a variety of
factors (as described more fully herein and in the prospectus under "Yield
Considerations" "Maturity, Prepayment and Yield Considerations"), no assurance
can be given as to such rate or the rate of principal prepayments. The extent to
which the yield to maturity of any class of Offered Certificates may vary from
the anticipated yield will depend upon the degree to which such certificates are
purchased at a discount or premium and the degree to which the timing of
payments thereon is sensitive to prepayments on the home equity loans of the
related loan group. Further, an investor should consider, in the case of any
such certificate purchased at a discount, the risk that a slower than assumed
rate of principal payments on the home equity loans of the related loan group
could result in an actual yield to such investor that is lower than the
anticipated yield and, in the case of any such certificate purchased at a
premium, the risk that a faster than assumed rate of principal payments could
result in an actual yield to such investor that is lower than the anticipated
yield.
It is highly unlikely that the home equity loans will prepay at any
constant rate until maturity or that all of the home equity loans will prepay at
the same rate. Moreover, the timing of prepayments on the home equity loans of a
loan group may significantly affect the actual yield to maturity on the Offered
Certificates of the related certificate group, even if the average rate of
principal payments experienced over time is consistent with an investor's
expectation. In general, the earlier a prepayment of principal is made on the
home equity loans of a loan group, the greater the effect on the yield to
maturity of the Offered Certificates of the related certificate group. As a
result, the effect on an investor's yield of principal payments occurring at a
rate
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<PAGE>
higher (or lower) than the rate anticipated by the investor during the period
immediately following the issuance of such certificates would not be fully
offset by a subsequent like reduction (or increase) in the rate of principal
payments.
The rate of payments (including prepayments) on pools of home equity
loans is influenced by a variety of economic, geographic, social and other
factors. If prevailing mortgage rates fall significantly below the Mortgage
Rates on the home equity loans, the rate of prepayment (and refinancing) would
be expected to increase. Conversely, if prevailing mortgage rates rise
significantly above the Mortgage Rates on the home equity loans, the rate of
prepayment on the home equity loans would be expected to decrease. Other factors
affecting prepayment of home equity loans include changes in mortgagors' housing
needs, job transfers, unemployment, mortgagors' net equity in the mortgaged
properties and servicing decisions. The prepayment experience of the Delayed
First Adjustment Home Equity Loans may differ from that of the other home equity
loans. The Delayed First Adjustment Home Equity Loans may be subject to greater
rates of prepayments as they approach their initial Adjustment Dates even if
market interest rates are only slightly higher or lower than the Mortgage Rates
on the Delayed First Adjustment Home Equity Loans as borrowers seek to avoid
changes in their monthly payments. In addition, the existence of the applicable
Periodic Rate Cap, Maximum Mortgage Rate and Minimum Mortgage Rate with respect
to the adjustable rate home equity loans may affect the likelihood of
prepayments resulting from refinancings. There can be no certainty as to the
rate of prepayments on the home equity loans during any period or over the life
of the certificates.
The pre-funding feature of the trust fund also presents a prepayment
risk. It is anticipated that the Trust Fund will use substantially all of the
pre-funded amount as the consideration for the acquisition of additional home
equity loans during the pre-funding period, although there can be no assurance
that all of such cash will be so used. If the amounts on deposit in the
pre-funding accounts have not been used by the trust fund to pay for subsequent
home equity loans on or before the end of the funding period, then such
remaining amounts in the pre-funding accounts will be released by the trust fund
as a prepayment of principal of the related Class A Certificates then entitled
to receive principal distributions.
Because principal distributions are paid to certain classes of Offered
Certificates of a certificate group before other such classes, holders of
classes of Offered Certificates of a certificate group having a later priority
of payment bear a greater risk of losses (because such certificates will
represent an increasing percentage interest in the trust fund during the period
prior to the commencement of distributions of principal thereon) than holders of
classes having earlier priorities for distribution of principal. As described
under "Description of the Certificates--Principal Distributions on the Offered
Certificates" in this prospectus supplement, prior to the step down date for a
certificate group, all principal payments on the home equity loans will be
allocated to the related Class A Certificates. Thereafter, as further described
herein, during certain periods, subject to certain delinquency triggers
described herein, all principal payments on the home equity loans of a loan
group will be allocated to the Offered Certificates of the related certificate
group in the priorities described under "Description of the
Certificates--Principal Distributions on the Offered Certificates" in this
prospectus supplement.
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<PAGE>
In general, defaults on home equity loans are expected to occur with
greater frequency in their early years. In addition, default rates may be higher
for home equity loans used to refinance an existing home equity loan. In the
event of a mortgagor's default on a home equity loan, there can be no assurance
that recourse will be available beyond the specific mortgaged property pledged
as security for repayment. We refer you to "The Home Equity Loan
Pool--Underwriting Standards; Representations" in this prospectus supplement.
SPECIAL YIELD CONSIDERATIONS
The Mortgage Rates on the adjustable rate home equity loans adjust
semi-annually based upon the Index (after an initial period of two, three or
five years with respect to the Delayed First Adjustment Home Equity Loans). The
pass-through rate on the group 2 certificates (other than the Class B-IOV
Certificates and the Class X-V Certificates) adjusts monthly based upon
One-Month LIBOR as described under "Description of the Certificates--Calculation
of One-Month LIBOR" in this prospectus supplement, subject to the interest rate
cap, with the result that increases in the pass-through rates on the group 2
certificates (other than the B-IOV Certificates and the Class X-V Certificates)
may be limited for extended periods in a rising interest rate environment.
Investors should note that approximately 99.39% of the statistical calculation
initial home equity loans in loan group 2, by aggregate principal balance as of
the statistical calculation date, are Delayed First Adjustment Home Equity
Loans. The interest due on the home equity loans in loan group 2 during any Due
Period may not equal the amount of interest that would accrue at One-Month LIBOR
plus the applicable spread on the group 2 certificates (other than the B-IOV
Certificates and the Class X-V Certificates) during the related interest accrual
period. In addition, the Index and One-Month LIBOR may respond differently to
economic and market factors. Thus, it is possible, for example, that if both
One-Month LIBOR and the Index rise during the same period, One-Month LIBOR may
rise more rapidly than the Index or may rise higher than the Index, potentially
resulting in the application of the interest rate cap on the group 2
certificates (other than the Class B-IOV Certificates and the Class X-V
Certificates), which would adversely affect the yield to maturity on such
Certificates. In addition, the interest rate cap will be reduced by the
prepayment of home equity loans with high Mortgage Rates. THE HOLDERS OF THE
GROUP 2 CERTIFICATES (OTHER THAN THE CLASS B-IOV CERTIFICATES AND THE CLASS X-V
CERTIFICATES) WILL ONLY BE ENTITLED TO INTEREST IN EXCESS OF THE INTEREST RATE
CAP ON FUTURE DISTRIBUTION DATES ON A SUBORDINATED BASIS AND ONLY AFTER ALL
OTHER DISTRIBUTIONS HAVE BEEN MADE ON SUCH DATE.
As described under "Description of the Certificates--Allocation of
Losses; Subordination," amounts otherwise distributable to holders of the
Subordinated Certificates may be made available to protect the holders of the
related Class A Certificates against interruptions in distributions due to
certain mortgagor delinquencies, to the extent not covered by P&I Advances. Such
delinquencies may affect the yield to investors on such classes of Subordinated
Certificates and, even if subsequently cured, will affect the timing of the
receipt of distributions by the holders of such classes of Subordinated
Certificates. In addition, a larger than expected rate of delinquencies or
losses will affect the rate of principal payments on each class of
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Subordinated Certificates. We refer you to "Description of the
Certificates--Principal Distributions on the Offered Certificates" in this
prospectus supplement.
BALLOON PAYMENTS
The home equity loans with Balloon Payments will not be
fully-amortizing over their terms to maturity, and will require substantial
principal payments at their stated maturity. Home equity loans of this type
involve a greater degree of risk than self-amortizing loans because the ability
of a borrower to make a Balloon Payment typically will depend upon the
borrower's ability either to fully refinance the loan or to sell the related
mortgaged property at a price sufficient to permit the borrower to make the
Balloon Payment. The ability of a borrower to accomplish either of these goals
will be affected by a number of factors, including the value of the related
mortgaged property, the level of available mortgage rates at the time of sale or
refinancing, the borrower's equity in the related mortgaged property, tax laws,
prevailing general economic conditions and the availability of credit for loans
secured by residential property. Because the ability of a borrower to make a
Balloon Payment typically will depend upon the borrower's ability to either
refinance the loan or to sell the related mortgaged property, there is a risk
that the Balloon Loans may default at maturity. Any defaulted Balloon Payment
that extends the maturity of a home equity loan may delay distributions of
principal on the Offered Certificates and thereby extend the weighted average
life of such certificates and, if such certificates were purchased at a
discount, reduce the yield thereon.
YIELD SENSITIVITY OF THE MEZZANINE AND SUBORDINATED CERTIFICATES
If the certificate principal balances of the related Class X
Certificates, the Class B Certificates and the Class M-2 Certificates have been
reduced to zero, the yield to maturity on the Class M-1 Certificates will become
extremely sensitive to losses on the home equity loans (and the timing thereof)
that are covered by subordination, because the entire amount of any Realized
Losses (to the extent not covered by Net Monthly Excess Cashflow (as defined
herein)) on the home equity loans of the related loan group, will be allocated
to the related Class M-1 Certificates. If the certificate principal balances of
the Class X Certificates and the Class B Certificates have been reduced to zero,
the yield to maturity on the Class M-2 Certificates will become extremely
sensitive to losses on the home equity loans (and the timing thereof) that are
covered by subordination, because the entire amount of any Realized Losses (to
the extent not covered by Net Monthly Excess Cashflow) will be allocated to the
related Class M-2 Certificates. If the certificate principal balance of the
Class X-F Certificates has been reduced to zero, the yield to maturity on the
Class BF Certificates will become extremely sensitive to losses on the home
equity loans of the related loan group (and the timing thereof) that are covered
by subordination, because the entire amount of any Realized Losses (to the
extent not covered by Net Monthly Excess Cashflow) will be allocated to the
related Class B Certificates. The initial undivided interests in the home equity
loans of loan group 1 evidenced by the Class M1F Certificates, the Class M2F
Certificates, the Class BF Certificates and the Class X-F Certificates are
approximately 6.75%, approximately 5.25%, approximately 3.75% and approximately
0.25%, respectively. The initial undivided interests in the home equity loans of
loan group 2 evidenced by the Class M1V, Class M2V, Class BV and Class X-V
Certificates are approximately 7.50%,
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5.75%, 5.00% and 0.75%, respectively. Investors in the Subordinated Offered
Certificates should fully consider the risk that Realized Losses on the home
equity loans of the related loan group could result in the failure of such
investors to fully recover their investments. IN ADDITION, ONCE REALIZED LOSSES
HAVE BEEN ALLOCATED TO A SUBORDINATED CERTIFICATE, SUCH AMOUNTS WITH RESPECT TO
SUCH CERTIFICATE WILL NO LONGER ACCRUE INTEREST.
Unless the certificate principal balance of the related Class A
Certificates has been reduced to zero, the Subordinated Offered Certificates
will not be entitled to any principal distributions until the Stepdown Date or
during any period in which a Trigger Event is in effect. As a result, the
weighted average lives of the Subordinated Offered Certificates will be longer
than would otherwise be the case if distributions of principal were allocated on
a pro rata basis among the related Class A Certificates and Subordinated Offered
Certificates. As a result of the longer weighted average lives of the
Subordinated Offered Certificates, the holders of such certificates have a
greater risk of suffering a loss on their investments. Further, because a
Trigger Event is based on delinquencies and not losses, it is possible for the
Subordinated Offered Certificates to receive no principal distributions (unless
the certificate principal balance of the related Class A Certificates has been
reduced to zero) on and after the Stepdown Date even if no losses have occurred
on the home equity loans of the related loan group.
PRINCIPAL PAYMENT FEATURES OF THE CLASS AF6 CERTIFICATES
Investors in the Class AF6 Certificates should be aware that the Class
AF6 Certificates do not receive any portion of principal payments prior to the
Distribution Date occurring in October 2002, thereafter, they will receive an
increasing percentage of their pro rata share of principal payable to the Group
1 Class A Certificates based on a schedule. This percentage will, beginning
October 2006, exceed the Class AF6 Certificates' pro rata share of principal. As
a result, the weighted average life of the Class AF6 Certificates may be longer
or shorter than would otherwise be the case, and the effect on the market value
of the Class AF6 Certificates of changes in market interest rates or market
yields for similar securities may be greater or lesser than for other classes of
the Group 1 Class A Certificates.
ADDITIONAL INFORMATION
The Depositor filed certain yield tables and other computational
materials with respect to certain classes of the Offered Certificates with the
Commission in a report on Form 8-K. Such tables and materials were prepared by
the underwriters at the request of certain prospective investors, based on
assumptions provided by, and satisfying the special requirements of, those
prospective investors. Such tables and assumptions may be based on assumptions
that differ from the structuring assumptions. Accordingly, those tables and
other materials may not be relevant to or appropriate for investors other than
those specifically requesting them.
WEIGHTED AVERAGE LIVES
Weighted average life refers to the amount of time that will elapse
from the date of issuance of a security until each dollar of principal of such
security will be repaid to the investor.
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The weighted average life of each class of Offered Certificates will be
influenced by the rate at which principal on the home equity loans of the
related loan group is paid, which may be in the form of scheduled payments or
prepayments (including repurchases by the Seller, the Depositor, or the Master
Servicer and prepayments of principal by the borrower as well as amounts
received by virtue of condemnation, insurance or foreclosure with respect to the
home equity loans), and the timing thereof.
Prepayments of home equity loans are commonly measured relative to a
prepayment standard or model. The model used with respect to Loan Group 1 (the
"Prepayment Assumption") assumes a constant prepayment rate ("CPR") of 4.0% per
annum of the then unpaid principal balance of such home equity loan in the first
month of the life of such home equity loans and an additional 1.455% per annum
in each month thereafter until the 12th month. Beginning in the 12th month and
in each month thereafter during the life of such home equity loans, 100%
Prepayment Assumption assumes a CPR of 20%. The model used with respect to Loan
Group 2 is 27% CPR, which is a prepayment assumption that represents a constant
assumed rate of prepayment each month relative to the then outstanding principal
balance of a pool of home equity loans for the life of such home equity loans.
Neither model purports to be either a historical description of the prepayment
experience of any pool of home equity loans or a prediction of the anticipated
rate of prepayment of any home equity loans, including the home equity loans to
be included in the Trust.
The information in the decrement tables has been prepared on the basis
of the following assumed characteristics of the home equity loans and the
following additional assumptions (collectively, the "Structuring Assumptions"):
(i) the home equity loans consist of pools of loans with the level-pay
characteristics set forth below, (ii) the closing date for the Offered
Certificates is August 31, 2000 and interest on the Group 2 Certificates (other
than the Class B-IOV Certificates) begins to accrue on such date, (iii)
distributions on the Offered Certificates are made on the 21st day of each
month, commencing in September, 2000 and are made in accordance with the
priorities described herein, (iv) scheduled monthly payments of principal and
interest will be timely delivered on the first day of each month commencing in
September 2000 (October 2000 for the subsequent home equity loans) (with no
defaults, delinquencies, modifications, waivers or amendments), (v) the home
equity loans prepay at the specified percentages of the Prepayment Assumption in
the case of the home equity loans in loan group 1, or at the indicated
percentage of CPR, in the case of the home equity loans in loan group 2, as
indicated in the prepayment scenarios below, (vi) all prepayments are
prepayments in full received on the last day of each month commencing in August
2000 (September 2000 for the subsequent home equity loans) and include 30 days'
interest thereon, (vii) no optional termination is exercised (except as set
forth below with respect to weighted average life to call), (viii) the Offered
Certificates of each Class have the respective Pass-Through Rates and initial
certificate principal balances or notional amount as set forth herein, (ix) the
required overcollateralization levels are set initially as specified herein, and
thereafter decrease in accordance with the provisions of the Agreement, (x) the
Mortgage Rate for each home equity loan in loan group 2 is adjusted on its next
adjustment date and on subsequent adjustment dates (if necessary) to equal the
sum of the applicable gross margin and the London interbank offered rate for
six-month United States dollar deposits ("Six-Month LIBOR") (such sum being
subject to the applicable periodic rate
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adjustment caps and floors and lifetime rate caps and floors), (xi) Six-Month
LIBOR remains constant at 6.8406% per annum and One-Month LIBOR remains constant
at 6.62% per annum; (xii) the cap premium is assumed to be $211,900 for each
Distribution Date, through and including the August 2002 Distribution Date; and
(xiii) the servicing fee rate is 0.50% per annum on the loan balance of each
home equity loan.
GROUP 1
STATISTICAL
CALCULATION LOANS
<TABLE>
<CAPTION>
Original
Current Term Original Remaining
Coupon to Amortization Term to
Loan Rate Maturity Term Maturity Seasoning Next Due
Group Loan Balance $ (%) (months) (months) (months) (months) Date
<S> <C> <C> <C> <C> <C> <C> <C>
1 23,701,385.80 10.695 341 341 340 1 09/01/00
2 7,169,498.61 10.660 300 300 297 3 09/01/00
3 33,589,644.77 10.597 343 343 342 1 09/01/00
4 88,331,192.69 10.674 344 344 343 1 09/01/00
5 33,050,751.06 11.391 336 336 335 1 09/01/00
</TABLE>
ADDITIONAL LOANS BEFORE CLOSING
<TABLE>
<CAPTION>
Original
Current Term Original Remaining
Coupon to Amortization Term to
Loan Rate Maturity Term Maturity Seasoning Next Due
Group Loan Balance $ (%) (months) (months) (months) (months) Date
<S> <C> <C> <C> <C> <C> <C> <C>
6 11,056,954.32 10.994 321 321 321 0 09/01/00
7 1,908,065.01 11.083 356 356 356 0 09/01/00
8 17,027,943.91 10.873 338 338 338 0 09/01/00
9 42,898,831.62 10.927 347 347 347 0 09/01/00
10 22,515,732.23 11.334 334 334 334 0 09/01/00
</TABLE>
SUBSEQUENT HOME EQUITY LOANS
<TABLE>
<CAPTION>
Original
Current Term Original Remaining
Coupon to Amortization Term to
Loan Rate Maturity Term Maturity Seasoning Next Due
Group Loan Balance $ (%) (months) (months) (months) (months) Date
<S> <C> <C> <C> <C> <C> <C> <C>
11 10,864,860.45 11.094 321 321 321 0 10/01/00
12 1,874,915.95 11.183 356 356 356 0 10/01/00
13 16,732,115.28 10.973 338 338 338 0 10/01/00
14 42,153,544.77 11.027 347 347 347 0 10/01/00
15 22,124,563.55 11.434 334 334 334 0 10/01/00
</TABLE>
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<PAGE>
GROUP 2
STATISTICAL CALCULATION LOANS
Original
Term
Current Gross Months to to
Loan Coupon Margin Lifetime Next Rate Maturity
Group Loan Balance ($) Rate (%) (%) Cap (%) Adjustment (months)
1 26,984,970.94 10.578 6.628 16.584 23 360
2 391,288,784.86 10.506 6.464 16.517 23 360
3 105,548,415.66 10.726 6.484 16.720 23 360
4 79,497,539.40 11.052 6.417 17.054 23 360
5 63,301,787.02 11.113 6.541 17.104 23 360
6 8,556,216.36 10.345 6.403 16.538 34 360
7 144,343.47 10.497 7.000 16.497 28 360
8 5,304,521.23 10.601 6.516 16.595 59 360
9 18,691,607.91 10.372 6.545 16.373 59 359
10 31,879,403.90 10.539 6.350 16.539 59 360
11 2,503,771.21 11.375 6.412 17.375 59 360
12 8,859,552.80 9.916 6.426 15.889 5 360
13 2,032,967.85 10.775 6.000 16.775 6 360
STATISTICAL CALCULATION LOANS
Original Remaining
Amortization Term to Periodic
Loan Term Maturity Seasoning Rate Cap
Group (months) (months) (months) (%) Next Due Date
1 360 359 1 1.000 09/01/00
2 360 359 1 0.998 09/01/00
3 360 359 1 1.000 09/01/00
4 360 359 1 1.000 09/01/00
5 360 359 1 0.999 09/01/00
6 360 358 2 1.000 09/01/00
7 360 352 8 1.000 09/01/00
8 360 359 1 1.000 09/01/00
9 359 358 1 1.000 09/01/00
10 360 359 1 1.000 09/01/00
11 360 359 1 1.000 09/01/00
12 360 359 1 1.000 09/01/00
13 360 360 0 1.000 09/01/00
ADDITIONAL LOANS BEFORE CLOSING
Original
Term
Current Gross Lifetime Months to to
Loan Coupon Margin Cap Next Rate Maturity
Group Loan Balance ($) Rate (%) (%) Adjustment (months)
14 3,802,851.16 10.729 6.722 16.729 24 360
15 55,174,911.69 10.587 6.449 16.591 24 360
16 13,314,838.77 10.892 6.454 16.892 24 360
17 11,541,672.90 11.190 6.374 17.190 24 360
18 9,412,278.15 11.171 6.495 17.189 24 360
19 551,704.98 10.715 6.438 16.715 36 360
20 432,281.36 10.726 6.781 16.726 60 360
21 1,169,971.82 11.203 6.477 17.203 60 360
22 2,620,608.08 10.667 6.322 16.667 60 360
23 261,405.43 11.695 6.245 17.695 60 360
24 430,871.80 9.843 6.211 15.843 6 360
25 442,721.25 11.284 6.000 17.284 6 360
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<PAGE>
ADDITIONAL LOANS BEFORE CLOSING
Original Remaining
Amortization Term to Periodic
Loan Term Maturity Seasoning Rate Cap
Group (months) (months) (months) (%) Next Due Date
14 360 360 0 1.000 09/01/00
15 360 360 0 1.000 09/01/00
16 360 360 0 1.000 09/01/00
17 360 360 0 1.000 09/01/00
18 360 360 0 1.000 09/01/00
19 360 360 0 1.000 09/01/00
20 360 360 0 1.000 09/01/00
21 360 360 0 1.000 09/01/00
22 360 360 0 1.000 09/01/00
23 360 360 0 1.000 09/01/00
24 360 360 0 1.000 09/01/00
25 360 360 0 1.000 09/01/00
SUBSEQUENT HOME EQUITY LOANS
Original Term
Current Gross Months to to
Loan Coupon Margin Lifetime Next Rate Maturity
Group Loan Balance ($) Rate (%) Cap (%) Adjustment (months)
26 10,786,544.66 10.829 6.722 16.729 24 360
27 156,500,116.40 10.687 6.449 16.591 24 360
28 37,766,690.57 10.992 6.454 16.892 24 360
29 32,737,218.72 11.290 6.374 17.190 24 360
30 26,697,326.39 11.271 6.495 17.189 24 360
31 1,564,875.97 10.815 6.438 16.815 36 360
32 1,226,138.49 10.826 6.781 16.726 60 360
33 3,318,550.40 11.303 6.477 17.203 60 360
34 7,433,187.61 10.767 6.322 16.667 60 360
35 741,459.82 11.795 6.245 17.695 60 360
36 1,222,140.38 9.943 6.211 15.843 6 360
37 1,255,750.59 11.384 6.000 17.284 6 360
SUBSEQUENT HOME EQUITY LOANS
Original Remaining
Amortization Term to Periodic
Loan Term Maturity Seasoning Rate Cap
Group (months) (months) (months) (%) Next Due Date
26 360 360 0 1.000 10/01/00
27 360 360 0 1.000 10/01/00
28 360 360 0 1.000 10/01/00
29 360 360 0 1.000 10/01/00
30 360 360 0 1.000 10/01/00
31 360 360 0 1.000 10/01/00
32 360 360 0 1.000 10/01/00
33 360 360 0 1.000 10/01/00
34 360 360 0 1.000 10/01/00
35 360 360 0 1.000 10/01/00
36 360 360 0 1.000 10/01/00
37 360 360 0 1.000 10/01/00
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<PAGE>
PREPAYMENT SCENARIOS
I II III IV V
Group 1(1) 0% 50% 120% 150% 200%
Group 2(2) 0% 15% 27% 35% 45%
------------------
(1) Percentage of the Prepayment Assumption.
(2) Percentage of CPR.
DECREMENT TABLES
The following tables indicate, based on the Structuring Assumptions,
the percentages of the initial certificate principal balance of the Offered
Certificates that would be outstanding after each of the dates shown at the
indicated prepayment scenario, and the corresponding weighted average lives of
such classes. It is not likely that (i) all of the home equity loans will have
the characteristics assumed, (ii) the home equity loans will prepay at the
specified percentages of Prepayment Assumption or CPR or at any other constant
percentage or (iii) the level of One-Month LIBOR or Six-Month LIBOR will remain
constant at the level assumed or at any other level. Moreover, the diverse
remaining terms to maturity of the home equity loans could produce slower or
faster principal distributions than indicated in the tables at the specified
percentages of the Prepayment Assumption or CPR even if the weighted average
remaining term to maturity of the home equity loans is consistent with the
remaining terms to maturity of the home equity loans specified in the
Structuring Assumptions.
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<PAGE>
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
<TABLE>
<CAPTION>
Class AF1 Class AF2
Prepayment Scenario Prepayment Scenario
Distribution Date I II III IV V I II III IV V
----------------- - -- --- -- - - -- --- -- -
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage 100 100 100 100 100 100 100 100 100 100
August 21, 2001 90 69 38 24 1 100 100 100 100 100
August 21, 2002 88 33 0 0 0 100 100 47 8 0
August 21, 2003 85 2 0 0 0 100 100 0 0 0
August 21, 2004 83 0 0 0 0 100 64 0 0 0
August 21, 2005 80 0 0 0 0 100 32 0 0 0
August 21, 2006 77 0 0 0 0 100 6 0 0 0
August 21, 2007 74 0 0 0 0 100 0 0 0 0
August 21, 2008 72 0 0 0 0 100 0 0 0 0
August 21, 2009 69 0 0 0 0 100 0 0 0 0
August 21, 2010 65 0 0 0 0 100 0 0 0 0
August 21, 2011 61 0 0 0 0 100 0 0 0 0
August 21, 2012 57 0 0 0 0 100 0 0 0 0
August 21, 2013 51 0 0 0 0 100 0 0 0 0
August 21, 2014 45 0 0 0 0 100 0 0 0 0
August 21, 2015 39 0 0 0 0 100 0 0 0 0
August 21, 2016 31 0 0 0 0 100 0 0 0 0
August 21, 2017 22 0 0 0 0 100 0 0 0 0
August 21, 2018 12 0 0 0 0 100 0 0 0 0
August 21, 2019 0 0 0 0 0 100 0 0 0 0
August 21, 2020 0 0 0 0 0 80 0 0 0 0
August 21, 2021 0 0 0 0 0 58 0 0 0 0
August 21, 2022 0 0 0 0 0 32 0 0 0 0
August 21, 2023 0 0 0 0 0 11 0 0 0 0
August 21, 2024 0 0 0 0 0 0 0 0 0 0
August 21, 2025 0 0 0 0 0 0 0 0 0 0
August 21, 2026 0 0 0 0 0 0 0 0 0 0
August 21, 2027 0 0 0 0 0 0 0 0 0 0
August 21, 2028 0 0 0 0 0 0 0 0 0 0
August 21, 2029 0 0 0 0 0 0 0 0 0 0
August 21, 2030 0 0 0 0 0 0 0 0 0 0
August 21, 2031 0 0 0 0 0 0 0 0 0 0
Weighted Average Life (Years) (1)(2) 11.5 1.6 0.9 0.7 0.6 21.3 4.5 2.0 1.6 1.3
Weighted Average Life (Years) (1)(3) 11.5 1.6 0.9 0.7 0.6 21.3 4.5 2.0 1.6 1.3
</TABLE>
(1) The weighted average life of an offered certificate is determined by (i)
multiplying the amount of each distribution in reduction of the related
certificate principal balance by the number of years from the date of
issuance of such offered certificate to the related Distribution Date,
(ii) adding the results, and (iii) dividing the sum by the original
certificate principal balance of such offered certificate.
(2) To maturity.
(3) To call.
S-65
<PAGE>
<TABLE>
<CAPTION>
Class AF3 Class AF4
Prepayment Scenario Prepayment Scenario
Distribution Date I II III IV V I II III IV V
----------------- - -- --- -- - - -- --- -- -
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage 100 100 100 100 100 100 100 100 100 100
August 21, 2001 100 100 100 100 100 100 100 100 100 100
August 21, 2002 100 100 100 100 0 100 100 100 100 90
August 21, 2003 100 100 38 0 0 100 100 100 52 0
August 21, 2004 100 100 0 0 0 100 100 74 23 0
August 21, 2005 100 100 0 0 0 100 100 38 0 0
August 21, 2006 100 100 0 0 0 100 100 16 0 0
August 21, 2007 100 87 0 0 0 100 100 13 0 0
August 21, 2008 100 66 0 0 0 100 100 4 0 0
August 21, 2009 100 45 0 0 0 100 100 0 0 0
August 21, 2010 100 23 0 0 0 100 100 0 0 0
August 21, 2011 100 2 0 0 0 100 100 0 0 0
August 21, 2012 100 0 0 0 0 100 85 0 0 0
August 21, 2013 100 0 0 0 0 100 70 0 0 0
August 21, 2014 100 0 0 0 0 100 55 0 0 0
August 21, 2015 100 0 0 0 0 100 42 0 0 0
August 21, 2016 100 0 0 0 0 100 30 0 0 0
August 21, 2017 100 0 0 0 0 100 19 0 0 0
August 21, 2018 100 0 0 0 0 100 9 0 0 0
August 21, 2019 100 0 0 0 0 100 0 0 0 0
August 21, 2020 100 0 0 0 0 100 0 0 0 0
August 21, 2021 100 0 0 0 0 100 0 0 0 0
August 21, 2022 100 0 0 0 0 100 0 0 0 0
August 21, 2023 100 0 0 0 0 100 0 0 0 0
August 21, 2024 78 0 0 0 0 100 0 0 0 0
August 21, 2025 28 0 0 0 0 100 0 0 0 0
August 21, 2026 0 0 0 0 0 77 0 0 0 0
August 21, 2027 0 0 0 0 0 27 0 0 0 0
August 21, 2028 0 0 0 0 0 0 0 0 0 0
August 21, 2029 0 0 0 0 0 0 0 0 0 0
August 21, 2030 0 0 0 0 0 0 0 0 0 0
August 21, 2031 0 0 0 0 0 0 0 0 0 0
Weighted Average Life (Years)(1)(2) 24.6 8.8 3.0 2.4 1.8 26.6 14.6 5.0 3.5 2.2
Weighted Average Life (Years)(1)(3) 24.6 8.8 3.0 2.4 1.8 26.6 13.9 5.0 3.5 2.2
</TABLE>
(1) The weighted average life of an offered certificate is determined by (i)
multiplying the amount of each distribution in reduction of the related
certificate principal balance by the number of years from the date of
issuance of such offered certificate to the related Distribution Date,
(ii) adding the results, and (iii) dividing the sum by the original
certificate principal balance of such offered certificate.
(2) To maturity.
(3) To call.
S-66
<PAGE>
<TABLE>
<CAPTION>
Class AF5 Class AF6
Prepayment Scenario Prepayment Scenario
Distribution Date I II III IV V I II III IV V
----------------- - -- --- -- - - -- --- -- -
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage 100 100 100 100 100 100 100 100 100 100
August 21, 2001 100 100 100 100 100 100 100 100 100 100
August 21, 2002 100 100 100 100 100 100 100 100 100 100
August 21, 2003 100 100 100 100 1 100 97 93 90 81
August 21, 2004 100 100 100 100 1 100 94 88 86 81
August 21, 2005 100 100 100 90 0 99 84 71 66 59
August 21, 2006 100 100 100 62 0 98 71 54 46 35
August 21, 2007 100 100 100 60 0 94 46 25 21 21
August 21, 2008 100 100 100 55 0 90 33 10 7 12
August 21, 2009 100 100 86 42 0 85 23 4 2 7
August 21, 2010 100 100 67 31 0 80 16 2 1 2
August 21, 2011 100 100 51 21 0 74 11 1 0 0
August 21, 2012 100 100 38 15 0 69 7 0 0 0
August 21, 2013 100 100 28 8 0 63 5 0 0 0
August 21, 2014 100 100 21 3 0 57 3 0 0 0
August 21, 2015 100 100 16 0 0 50 2 0 0 0
August 21, 2016 100 100 10 0 0 43 1 0 0 0
August 21, 2017 100 100 5 0 0 37 1 0 0 0
August 21, 2018 100 100 1 0 0 30 1 0 0 0
August 21, 2019 100 100 0 0 0 24 0 0 0 0
August 21, 2020 100 84 0 0 0 18 0 0 0 0
August 21, 2021 100 70 0 0 0 12 0 0 0 0
August 21, 2022 100 57 0 0 0 8 0 0 0 0
August 21, 2023 100 45 0 0 0 5 0 0 0 0
August 21, 2024 100 35 0 0 0 3 0 0 0 0
August 21, 2025 100 25 0 0 0 2 0 0 0 0
August 21, 2026 100 17 0 0 0 1 0 0 0 0
August 21, 2027 100 6 0 0 0 0 0 0 0 0
August 21, 2028 53 0 0 0 0 0 0 0 0 0
August 21, 2029 0 0 0 0 0 0 0 0 0 0
August 21, 2030 0 0 0 0 0 0 0 0 0 0
August 21, 2031 0 0 0 0 0 0 0 0 0 0
Weighted Average Life (Years)(1)(2) 28.1 22.9 11.7 8.4 2.8 14.9 7.5 6.0 5.7 5.5
Weighted Average Life (Years)(1)(3) 28.1 15.1 7.6 5.6 2.8 14.9 7.4 5.8 5.0 3.8
</TABLE>
(1) The weighted average life of an offered certificate is determined by (i)
multiplying the amount of each distribution in reduction of the related
certificate principal balance by the number of years from the date of
issuance of such offered certificate to the related Distribution Date,
(ii) adding the results, and (iii) dividing the sum by the original
certificate principal balance of such offered certificate.
(2) To maturity.
(3) To call.
S-67
<PAGE>
<TABLE>
<CAPTION>
Class M1F Class M2F
Prepayment Scenario Prepayment Scenario
Distribution Date I II III IV V I II III IV V
----------------- - -- --- -- - - -- --- -- -
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage 100 100 100 100 100 100 100 100 100 100
August 21, 2001 100 100 100 100 100 100 100 100 100 100
August 21, 2002 100 100 100 100 100 100 100 100 100 100
August 21, 2003 100 100 100 100 100 100 100 100 100 100
August 21, 2004 100 100 73 54 58 100 100 73 54 31
August 21, 2005 100 100 55 38 19 100 100 55 38 19
August 21, 2006 100 100 41 26 11 100 100 41 26 11
August 21, 2007 100 94 31 18 7 100 94 31 18 5
August 21, 2008 100 84 23 12 3 100 84 23 12 0
August 21, 2009 100 74 17 9 0 100 74 17 9 0
August 21, 2010 100 66 13 6 0 100 66 13 3 0
August 21, 2011 100 58 10 4 0 100 58 10 0 0
August 21, 2012 100 51 7 0 0 100 51 6 0 0
August 21, 2013 100 45 5 0 0 100 45 2 0 0
August 21, 2014 100 39 3 0 0 100 39 0 0 0
August 21, 2015 100 34 0 0 0 100 34 0 0 0
August 21, 2016 100 30 0 0 0 100 30 0 0 0
August 21, 2017 100 26 0 0 0 100 26 0 0 0
August 21, 2018 100 22 0 0 0 100 22 0 0 0
August 21, 2019 100 19 0 0 0 100 19 0 0 0
August 21, 2020 100 16 0 0 0 100 16 0 0 0
August 21, 2021 100 13 0 0 0 100 13 0 0 0
August 21, 2022 100 11 0 0 0 100 11 0 0 0
August 21, 2023 91 8 0 0 0 91 8 0 0 0
August 21, 2024 78 6 0 0 0 78 5 0 0 0
August 21, 2025 63 5 0 0 0 63 1 0 0 0
August 21, 2026 46 1 0 0 0 46 0 0 0 0
August 21, 2027 28 0 0 0 0 28 0 0 0 0
August 21, 2028 10 0 0 0 0 10 0 0 0 0
August 21, 2029 0 0 0 0 0 0 0 0 0 0
August 21, 2030 0 0 0 0 0 0 0 0 0 0
August 21, 2031 0 0 0 0 0 0 0 0 0 0
Weighted Average Life (Years)(1)(2) 25.7 13.5 6.3 5.1 4.5 25.7 13.5 6.2 5.0 4.1
Weighted Average Life (Years)(1)(3) 25.7 11.8 5.5 4.5 4.0 25.7 11.8 5.5 4.4 3.7
</TABLE>
(1) The weighted average life of an offered certificate is determined by (i)
multiplying the amount of each distribution in reduction of the related
certificate principal balance by the number of years from the date of
issuance of such offered certificate to the related Distribution Date,
(ii) adding the results, and (iii) dividing the sum by the original
certificate principal balance of such offered certificate.
(2) To maturity.
(3) To call.
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<PAGE>
<TABLE>
<CAPTION>
Class BF Class AV
Prepayment Scenario Prepayment Scenario
Distribution Date I II III IV V I II III IV V
----------------- - -- --- -- - - -- --- -- -
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage 100 100 100 100 100 100 100 100 100 100
August 21, 2001 100 100 100 100 100 98 80 65 56 43
August 21, 2002 100 100 100 100 100 97 64 41 27 12
August 21, 2003 100 100 100 100 100 97 50 23 9 0
August 21, 2004 100 100 73 54 31 96 38 21 9 0
August 21, 2005 100 100 55 38 18 96 32 15 8 0
August 21, 2006 100 100 41 26 5 95 27 11 5 0
August 21, 2007 100 94 31 17 0 94 23 8 4 0
August 21, 2008 100 84 23 7 0 93 19 6 2 0
August 21, 2009 100 74 16 1 0 92 16 4 1 0
August 21, 2010 100 66 8 0 0 91 14 3 1 0
August 21, 2011 100 58 3 0 0 90 11 2 0 0
August 21, 2012 100 51 0 0 0 89 10 2 0 0
August 21, 2013 100 45 0 0 0 87 8 1 0 0
August 21, 2014 100 39 0 0 0 85 7 1 0 0
August 21, 2015 100 34 0 0 0 83 6 0 0 0
August 21, 2016 100 30 0 0 0 80 5 0 0 0
August 21, 2017 100 26 0 0 0 78 4 0 0 0
August 21, 2018 100 22 0 0 0 74 3 0 0 0
August 21, 2019 100 18 0 0 0 71 3 0 0 0
August 21, 2020 100 13 0 0 0 67 2 0 0 0
August 21, 2021 100 8 0 0 0 62 2 0 0 0
August 21, 2022 100 4 0 0 0 57 1 0 0 0
August 21, 2023 91 1 0 0 0 50 1 0 0 0
August 21, 2024 78 0 0 0 0 43 1 0 0 0
August 21, 2025 63 0 0 0 0 36 0 0 0 0
August 21, 2026 46 0 0 0 0 30 0 0 0 0
August 21, 2027 28 0 0 0 0 24 0 0 0 0
August 21, 2028 3 0 0 0 0 17 0 0 0 0
August 21, 2029 0 0 0 0 0 9 0 0 0 0
August 21, 2030 0 0 0 0 0 0 0 0 0 0
August 21, 2031 0 0 0 0 0 0 0 0 0 0
Weighted Average Life (Years)(1)(2) 25.6 13.2 6.0 4.8 3.9 21.3 4.8 2.5 1.7 1.0
Weighted Average Life (Years)(1)(3) 25.6 11.8 5.5 4.4 3.6 21.3 4.5 2.3 1.6 1.0
</TABLE>
(1) The weighted average life of an offered certificate is determined by (i)
multiplying the amount of each distribution in reduction of the related
certificate principal balance by the number of years from the date of
issuance of such offered certificate to the related Distribution Date,
(ii) adding the results, and (iii) dividing the sum by the original
certificate principal balance of such offered certificate.
(2) To maturity.
(3) To call.
S-69
<PAGE>
<TABLE>
<CAPTION>
Class M1V Class M2V
Prepayment Scenario Prepayment Scenario
Distribution Date I II III IV V I II III IV V
----------------- - -- --- -- - - -- --- -- -
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage 100 100 100 100 100 100 100 100 100 100
August 21, 2001 100 100 100 100 100 100 100 100 100 100
August 21, 2002 100 100 100 100 100 100 100 100 100 100
August 21, 2003 100 100 100 100 51 100 100 100 100 100
August 21, 2004 100 100 56 81 51 100 100 56 35 69
August 21, 2005 100 87 41 23 49 100 87 41 23 10
August 21, 2006 100 73 30 15 27 100 74 30 15 3
August 21, 2007 100 62 21 10 13 100 62 21 10 0
August 21, 2008 100 52 16 6 4 100 52 16 5 0
August 21, 2009 100 44 11 4 0 100 44 11 0 0
August 21, 2010 100 37 8 0 0 100 37 8 0 0
August 21, 2011 100 31 6 0 0 100 31 4 0 0
August 21, 2012 100 26 4 0 0 100 26 1 0 0
August 21, 2013 100 22 2 0 0 100 22 0 0 0
August 21, 2014 100 18 0 0 0 100 18 0 0 0
August 21, 2015 100 15 0 0 0 100 15 0 0 0
August 21, 2016 100 13 0 0 0 100 13 0 0 0
August 21, 2017 100 11 0 0 0 100 11 0 0 0
August 21, 2018 100 9 0 0 0 100 9 0 0 0
August 21, 2019 100 7 0 0 0 100 7 0 0 0
August 21, 2020 100 6 0 0 0 100 4 0 0 0
August 21, 2021 100 5 0 0 0 100 2 0 0 0
August 21, 2022 100 3 0 0 0 100 0 0 0 0
August 21, 2023 100 1 0 0 0 100 0 0 0 0
August 21, 2024 100 0 0 0 0 100 0 0 0 0
August 21, 2025 98 0 0 0 0 98 0 0 0 0
August 21, 2026 83 0 0 0 0 83 0 0 0 0
August 21, 2027 66 0 0 0 0 66 0 0 0 0
August 21, 2028 46 0 0 0 0 46 0 0 0 0
August 21, 2029 24 0 0 0 0 24 0 0 0 0
August 21, 2030 0 0 0 0 0 0 0 0 0 0
August 21, 2031 0 0 0 0 0 0 0 0 0 0
Weighted Average Life (Years)(1)(2) 27.7 9.7 5.5 4.9 4.6 27.7 9.7 5.3 4.4 4.4
Weighted Average Life (Years)(1)(3) 27.5 9.1 5.0 4.6 3.5 27.5 9.1 4.9 4.2 4.0
</TABLE>
(1) The weighted average life of an offered certificate is determined by (i)
multiplying the amount of each distribution in reduction of the related
certificate principal balance by the number of years from the date of
issuance of such offered certificate to the related Distribution Date,
(ii) adding the results, and (iii) dividing the sum by the original
certificate principal balance of such offered certificate.
(2) To maturity.
(3) To call.
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<PAGE>
<TABLE>
<CAPTION>
Class BV
Prepayment Scenario
Distribution Date I II III IV V
<S> <C> <C> <C> <C> <C>
Initial Percentage 100 100 100 100 100
August 21, 2001 100 100 100 100 100
August 21, 2002 100 100 100 100 100
August 21, 2003 100 100 100 100 100
August 21, 2004 100 100 56 35 15
August 21, 2005 100 87 41 22 4
August 21, 2006 100 73 30 11 0
August 21, 2007 100 62 20 3 0
August 21, 2008 100 52 12 0 0
August 21, 2009 100 44 6 0 0
August 21, 2010 100 37 1 0 0
August 21, 2011 100 31 0 0 0
August 21, 2012 100 26 0 0 0
August 21, 2013 100 21 0 0 0
August 21, 2014 100 16 0 0 0
August 21, 2015 100 11 0 0 0
August 21, 2016 100 8 0 0 0
August 21, 2017 100 5 0 0 0
August 21, 2018 100 2 0 0 0
August 21, 2019 100 0 0 0 0
August 21, 2020 100 0 0 0 0
August 21, 2021 100 0 0 0 0
August 21, 2022 100 0 0 0 0
August 21, 2023 100 0 0 0 0
August 21, 2024 100 0 0 0 0
August 21, 2025 98 0 0 0 0
August 21, 2026 83 0 0 0 0
August 21, 2027 66 0 0 0 0
August 21, 2028 46 0 0 0 0
August 21, 2029 24 0 0 0 0
August 21, 2030 0 0 0 0 0
August 21, 2031 0 0 0 0 0
Weighted Average Life (Years)(1)(2) 27.7 9.3 5.1 4.1 3.6
Weighted Average Life (Years)(1)(3) 27.5 9.1 4.9 4.0 3.5
</TABLE>
(1) The weighted average life of an offered certificate is determined by (i)
multiplying the amount of each distribution in reduction of the related
certificate principal balance by the number of years from the date of
issuance of such offered certificate to the related Distribution Date,
(ii) adding the results, and (iii) dividing the sum by the original
certificate principal balance of such offered certificate.
(2) To maturity.
(3) To call.
These tables have been prepared based on the assumptions described
above (including the assumptions regarding the characteristics and performance
of the home equity loans, which differ from the actual characteristics and
performance thereof) and should be read in conjunction therewith.
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<PAGE>
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Asset Backed Securities Corporation, Long Beach Home Equity Loan
Trust 2000-LB1, Home Equity Loan Pass-Through Certificates, Series 2000-LB1 (the
"Certificates") will consist of 22 classes of certificates, designated as: (i)
the Class AF1 Certificates, Class AF2 Certificates, Class AF3 Certificates,
Class AF4 Certificates, Class AF5 Certificates and Class AF6 Certificates
(collectively, the "Group 1 Class A Certificates"), (ii) Class M1F Certificates
and Class M2F Certificates (collectively, the "Group 1 Mezzanine Certificates"),
(iii) Class BF Certificates and Class B-IOF Certificates (collectively, the
"Group 1 Class B Certificates" and together with the Group 1 Mezzanine
Certificates, the "Group 1 Subordinated Certificates"), (iv) Class P-F
Certificates, (v) Class X-F Certificates (collectively, the certificates
referred to in clauses (i) through (v), the "Group 1 Certificates"), (vi) the
Class AV Certificates, (the "Group 2 Class A Certificates" and together with the
Group 1 Class A Certificates, the "Class A Certificates"), (vii) the Class M1V
Certificates and the Class M2V Certificates (the "Group 2 Mezzanine
Certificates" and together with the Group 1 Mezzanine Certificates, the
"Mezzanine Certificates"), (viii) the Class BV Certificates and the Class B-IOV
Certificates (collectively, the "Group 2 Class B Certificates" and together with
the Group 2 Mezzanine Certificates, the "Group 2 Subordinated Certificates" and
together with the Group 1 Subordinated Certificates, the "Subordinated
Certificates"), (ix) the Class P-V Certificates, (x) the Class X-V Certificates
(collectively, the certificates referred to in clauses (vi) through (x), the
"Group 2 Certificates"), and (xi) the Class R Certificates (the "Residual
Certificates"). Only the Class A Certificates, the Mezzanine Certificates, the
Class BF Certificates and Class BV Certificates (together, the "Offered
Certificates") are offered hereby. The Mezzanine Certificates, the Class BF
Certificates and the Class BV Certificates shall be referred to as the
"Subordinated Offered Certificates." The Class B-IOF Certificates, the Class
B-IOV Certificates, the Class X-F Certificates, the Class X-V Certificates, the
Class P-F Certificates, the Class P-V Certificates and the Residual Certificates
are not being offered hereby (collectively, the "Non-Offered Certificates"). Any
information contained in this prospectus supplement relating to the Non-Offered
Certificates is included solely to provide a better understanding of the Offered
Certificates.
References in this prospectus supplement to "Class A", "Class M-1",
"Class M-2", "Class B", "Class B-IO", "Class X", "Class P", "Mezzanine
Certificates" and "Subordinated Certificates" are references to certificates of
either or both certificate groups of similar designations, as the context
requires.
Distributions on the Offered Certificates will be made on the 21st day
of each month, or, if such day is not a business day, on the next succeeding
business day, beginning in September 2000 (each, a "Distribution Date").
The Certificates represent in the aggregate the entire beneficial
ownership interest in a trust fund (the "Trust Fund") consisting primarily of
the home equity loan pool of conventional, one- to four-family, fixed rate and
adjustable rate, first lien home equity loans having original terms to maturity
of not greater than 30 years. The home equity loans will be divided into two
S-72
<PAGE>
loan groups, loan group 1 and loan group 2. Distributions on the Group 1
Certificates will be made solely from collections on the home equity loans in
loan group 1 and distributions on the Group 2 Certificates will be made solely
from collections on the home equity loans in loan group 2 and, to the extent
provided herein funds on deposit in the Group 2 Reserve Fund. The structure does
not contain any cross-collateralization provisions.
Each class of Offered Certificates will have the approximate initial
certificate principal balance set forth on the cover page of this prospectus
supplement. The Pass-Through Rates on the Offered Certificates are described
under "--Pass-Through Rates" below. The Group 1 Class A Certificates evidence an
initial undivided interest of approximately 84.00% in the home equity loans in
loan group 1, the Class M1F Certificates evidence an initial undivided interest
of approximately 6.75% in the home equity loans in loan group 1, the Class M2F
Certificates evidence an initial undivided interest of approximately 5.25% in
the home equity loans in loan group 1, the Class BF Certificates represent an
initial undivided interest of approximately 3.75% in the home equity loans in
loan group 1 and the Class X-F Certificates evidence an initial undivided
interest of approximately 0.25% in the home equity loans in loan group 1. The
Group 2 Class A Certificates evidence an initial undivided interest of
approximately 81.00% in the home equity loans in loan group 2, the Class M1V
Certificates evidence an initial undivided interest of approximately 7.50% in
the home equity loans in loan group 2, the Class M2V Certificates evidence an
initial undivided interest of approximately 5.75% in the home equity loans in
loan group 2, the Class BV Certificates evidence an initial undivided interest
of approximately 5.00% in the home equity loans in loan group 2 and the Class
X-V Certificates evidence an initial undivided interest of approximately 0.75%
in the home equity loans in loan group 2.
The Offered Certificates will be issued, maintained and transferred on
the book-entry records of the Depository Trust Company ("DTC") and its
Participants (as defined herein) in minimum denominations of $25,000 and
integral multiples of $1,000 in excess thereof.
The Offered Certificates will initially be represented by one or more
global certificates registered in the name of the nominee of DTC (together with
any successor clearing agency selected by the Depositor, the "Clearing Agency"),
except as provided below. The Depositor has been informed by DTC that DTC's
nominee will be Cede & Co. ("Cede"). No person acquiring an interest in any
Offered Certificate (a "Certificate Owner") will be entitled to receive a
certificate representing such person's interest, except as set forth below under
"--Definitive Certificates." Unless and until a certificate is issued in fully
registered certificated form (a "Definitive Certificate") under the limited
circumstances described herein, all references to actions by certificateholders
with respect to the Offered Certificates shall refer to actions taken by DTC
upon instructions from its Participants, and all references herein to
distributions, notices, reports and statements to certificateholders with
respect to the Offered Certificates shall refer to distributions, notices,
reports and statements to DTC or Cede, as the registered holder of the Offered
Certificates, for distribution to Certificate Owners in accordance with DTC
procedures. We refer you to "--Registration of the Offered Certificates" and
"--Definitive Certificates" in this prospectus supplement.
S-73
<PAGE>
Any Definitive Certificates will be transferable and exchangeable at
the offices of the Trustee. In addition, any Plan (as defined herein) purchasing
the Mezzanine Certificates will be deemed to have represented that certain
conditions have been satisfied in connection with such purchase. We refer you to
"--Restrictions on Transfer of the Subordinated Certificates" and "ERISA
Considerations" in this prospectus supplement. No service charge will be imposed
for any registration of transfer or exchange, but the Trustee may require
payment of a sum sufficient to cover any tax or other governmental charge
imposed in connection therewith.
All distributions to holders of the Certificates, other than the final
distribution on any class of Certificates, will be made by the Trustee to the
persons in whose names such Certificates are registered at the close of business
on each Record Date. The "Record Date" for each Distribution Date (i) with
respect to any Adjustable Rate Certificates will be the close of business on the
business day immediately preceding such Distribution Date or (ii) with respect
to any Fixed Rate Certificates, including any Definitive Certificates, will be
the close of business on the last business day of the month immediately
preceding the calendar month in which such Distribution Date occurs. Such
distributions will be made either (a) by check mailed to the address of each
such certificateholder as it appears in the Certificate Register or (b) upon
written request to the Trustee at least five business days prior to the relevant
Record Date by any holder of Certificates having an aggregate initial
certificate principal balance that is in excess of the lesser of (i) $5,000,000
or (ii) two-thirds of the initial aggregate certificate principal balance of
such class of Certificates, by wire transfer in immediately available funds to
the account of such certificateholder specified in the request. The final
distribution on any class of Certificates will be made in like manner, but only
upon presentment and surrender of such Certificates at the corporate trust
office of the Trustee or such other location specified in the notice to
certificateholders of such final distribution.
REGISTRATION OF THE OFFERED CERTIFICATES
DTC is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code, and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Securities Exchange Act of 1934, as amended. DTC was created to hold securities
for its participating organizations ("Participants") and to facilitate the
clearance and settlement of securities transactions between Participants through
electronic book entries, thereby eliminating the need for physical movement of
certificates. Participants include securities brokers and dealers (including all
of the Underwriters listed on the cover of this prospectus supplement), banks,
trust companies and clearing corporations. Indirect access to the DTC system is
also available to others such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a Participant,
either directly or indirectly ("Indirect Participants").
Certificate Owners that are not Participants or Indirect Participants
but desire to purchase, sell or otherwise transfer ownership of, or other
interests in, the Offered Certificates may do so only through Participants and
Indirect Participants. In addition, Certificate Owners will receive all
distributions of principal of and interest on the Offered Certificates from the
Trustee through
S-74
<PAGE>
DTC and DTC Participants. The Trustee will forward payments to DTC in same day
funds and DTC will forward such payments to Participants in next day funds
settled through the New York Clearing House. Each Participant will be
responsible for disbursing such payments to Indirect Participants or to
Certificate Owners. Unless and until Definitive Certificates are issued, it is
anticipated that the only certificateholder of the Offered Certificates will be
Cede, as nominee of DTC. Certificate Owners will not be recognized by the
Trustee as certificateholders, as such term is used in the Agreement, and
Certificate Owners will be permitted to exercise the rights of
certificateholders only indirectly through DTC and its Participants.
Under the rules, regulations and procedures creating and affecting DTC
and its operations (the "Rules"), DTC is required to make book-entry transfers
of Offered Certificates among Participants and to receive and transmit
distributions of principal of, and interest on, the Offered Certificates.
Participants and Indirect Participants with which Certificate Owners have
accounts with respect to the Offered Certificates similarly are required to make
book-entry transfers and receive and transmit such payments on behalf of their
respective Certificate Owners. Accordingly, although Certificate Owners will not
possess Definitive Certificates, the Rules provide a mechanism by which
Certificate Owners through their Participants and Indirect Participants will
receive payments and will be able to transfer their interest.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and on behalf of certain banks, the ability of a
Certificate Owner to pledge Offered Certificates to persons or entities that do
not participate in the DTC system, or to otherwise act with respect to such
Certificates, may be limited due to the absence of physical certificates for the
Offered Certificates. In addition, under a book-entry format, Certificate Owners
may experience delays in their receipt of payments since distribution will be
made by the Trustee to Cede, as nominee for DTC.
Under the Rules, DTC will take action permitted to be taken by a
certificateholder under the Agreement only at the direction of one or more
Participants to whose DTC account the Offered Certificates are credited.
Clearstream Banking, societe anonyme, formerly known as Cedelbank SA
("Clearstream") or the Euroclear Operator (as defined herein), as the case may
be, will take any other action permitted to be taken by a certificateholder
under the Agreement on behalf of a Clearstream Participant (as defined herein)
or Euroclear Participant (as defined herein) only in accordance with its
relevant rules and procedures and subject to the ability of the Relevant
Depositary (as defined herein) to effect such actions on its behalf through DTC.
Additionally, under the Rules, DTC will take such actions with respect to
specified Voting Rights only at the direction of and on behalf of Participants
whose holdings of Offered Certificates evidence such specified Voting Rights.
DTC may take conflicting actions with respect to Voting Rights to the extent
that Participants whose holdings of Offered Certificates evidence such Voting
Rights, authorize divergent action.
However, DTC's ability to perform properly its services is also
dependent upon other parties, including but not limited to, issuers and their
agents, as well as third party vendors from whom DTC licenses software and
hardware, and third party vendors on which DTC relies for
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information or the provision of services, including telecommunication and
electrical utility service providers, among others.
According to DTC, the foregoing information with respect to DTC has
been provided to the Industry for informational purposes only and is not
intended to serve as a representation, warranty or contract modification of any
kind.
The Depositor, the Master Servicer, the Trustee and the Seller will
have no liability for any actions taken by DTC or its nominee or Clearstream or
the Euroclear System ("Euroclear"), including, without limitation, actions for
any aspect of the records relating to or payments made on account of beneficial
ownership interests in the Offered Certificates held by Cede, as nominee for
DTC, or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.
DEFINITIVE CERTIFICATES
Definitive Certificates will be issued to Certificate Owners or their
nominees, rather than to DTC or its nominee, only if (i) the Depositor advises
the Trustee in writing that DTC is no longer willing or able to discharge
properly its responsibilities as Clearing Agency with respect to the Offered
Certificates and the Depositor is unable to locate a qualified successor, (ii)
the Depositor, at its option, advises the Trustee in writing that it elects to
terminate the book-entry system through DTC, or (iii) after the occurrence of an
Event of Default, Certificate Owners representing in the aggregate not less than
51% of the Voting Rights of the Offered Certificates advise the Trustee and DTC
through Participants, in writing, that the continuation of a book-entry system
through DTC (or a successor thereto) is no longer in the Certificate Owners'
best interest.
Upon the occurrence of any event described in the immediately preceding
paragraph, the Trustee is required to notify all Certificate Owners through
Participants of the availability of Definitive Certificates. Upon surrender by
DTC of the Definitive Certificates representing the Offered Certificates and
receipt of instructions for re-registration, the Trustee will reissue the
Offered Certificates as Definitive Certificates issued in the respective
principal amounts owned by individual Certificate Owners, and thereafter the
Trustee will recognize the holders of such Definitive Certificates as
certificateholders under the Agreement. Such Definitive Certificates will be
issued in minimum denominations of $10,000, except that any beneficial ownership
represented by a Offered Certificate in an amount less than $10,000 immediately
prior to the issuance of a Definitive Certificate shall be issued in a minimum
denomination equal to the amount represented by such Offered Certificate.
BOOK-ENTRY FACILITIES
Certificate Owners may elect to hold their interests in the Offered
Certificates through DTC in the United States or through Clearstream or
Euroclear in Europe, if they are participants of such systems, or indirectly
through organizations which are participants in such systems. The Offered
Certificates of each class will be issued in one or more certificates which
equal the
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aggregate certificate principal balance of such class and will initially be
registered in the name of Cede, the nominee of DTC. Clearstream and Euroclear
will hold omnibus positions on behalf of their participants through customers'
securities accounts in Clearstream's and Euroclear's names on the books of their
respective depositaries which in turn will hold such positions in customers'
securities accounts in the depositaries' names on the books of DTC. Citibank
N.A. will act as depositary for Clearstream and The Chase Manhattan Bank will
act as depositary for Euroclear (in such capacities, individually the "Relevant
Depositary" and collectively the "European Depositaries").
Because of time zone differences, credits of securities received in
Clearstream or Euroclear as a result of a transaction with a Participant will be
made during subsequent securities settlement processing and dated the business
day following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear Participants or Clearstream Participants on such business day. Cash
received in Clearstream or Euroclear as a result of sales of securities by or
through a Clearstream Participant or Euroclear Participant to a Participant will
be received with value on the DTC settlement date but will be available in the
relevant Clearstream or Euroclear cash account only as of the business day
following settlement in DTC. For information with respect to tax documentation
procedures relating to the Certificates, we refer you to "Federal Income Tax
Consequences--REMIC Trust Funds--Backup Withholding with Respect to REMIC
Certificates" and"--Foreign Investors in REMIC Certificates" in the prospectus.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between Clearstream Participants and Euroclear Participants will occur
in accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Clearstream
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. Clearstream Participants and Euroclear Participants may not deliver
instructions directly to the European Depositaries.
Clearstream is incorporated under the laws of Luxembourg as a
professional depository. Clearstream holds securities for its participating
organizations ("Clearstream Participants") and facilitates the clearance and
settlement of securities transactions between Clearstream Participants through
electronic book-entry changes in accounts of Clearstream Participants, thereby
eliminating the need for physical movement of certificates. Transactions may be
settled in Clearstream in any of 28 currencies, including United States dollars.
Clearstream provides to
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its Clearstream Participants, among other things, services for safekeeping,
administration, clearance and settlement of internationally traded securities
and securities lending and borrowing. Clearstream interfaces with domestic
markets in several countries. As a professional depository, Clearstream is
subject to regulation by the Luxembourg Monetary Institute. Clearstream
Participants are recognized financial institutions around the world, including
underwriters, securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations. Indirect access to Clearstream is
also available to others, such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a Clearstream
Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for participants of
Euroclear ("Euroclear Participants") and to clear and settle transactions
between Euroclear Participants through simultaneous electronic book-entry
delivery against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may now be settled in any of 32 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Brussels, Belgium office of Morgan
Guaranty Trust Company of New York (the "Euroclear Operator"), under contract
with Euroclear Clearance Systems S.C., a Belgian cooperative corporation (the
"Cooperative"). All operations are conducted by the Euroclear Operator, and all
Euroclear securities clearance accounts and Euroclear cash accounts are accounts
with the Euroclear Operator, not the Cooperative. The Cooperative establishes
policy for Euroclear on behalf of Euroclear Participants. Euroclear Participants
include banks (including central banks), securities brokers and dealers and
other professional financial intermediaries. Indirect access to Euroclear is
also available to other firms that clear through or maintain a custodial
relationship with a Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System and applicable Belgian
law (collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Distributions with respect to Certificates held through Clearstream or
Euroclear will be credited to the cash accounts of Clearstream Participants or
Euroclear Participants in accordance
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with the relevant system's rules and procedures, to the extent received by the
Relevant Depositary. Such distributions will be subject to tax reporting in
accordance with relevant United States tax laws and regulations. We refer you to
"Federal Income Tax Consequences--REMIC Trust Funds--Backup Withholding with
Respect to REMIC Certificates" and "--Foreign Investors in REMIC Certificates"
in the prospectus.
Although DTC, Clearstream and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Certificates among participants
of DTC, Clearstream and Euroclear, they are under no obligation to perform or
continue to perform such procedures and such procedures may be discontinued at
any time. See Annex I hereto.
PASS-THROUGH RATES
The pass-through rate (the "Pass-Through Rate") on the Class AF1, Class AF2,
Class AF3 and Class AF4 Certificates is the rate per annum for such class set
forth on the cover page of this prospectus supplement. The Pass-Through Rate on
the Class AF5 Certificates will be a rate per annum equal to the lesser of (i)
8.050% in the case of each Distribution Date through and including the
Distribution Date on which the aggregate principal balance of the home equity
loans (and properties acquired in respect thereof) remaining in the Trust Fund
is reduced to less than 10% of the aggregate principal balance of the home
equity loans as of the related cut-off date, or 8.55% in the case of any
Distribution Date thereafter and (ii) the Group 1 Net WAC Cap. The Pass-Through
Rate for the Class AF6, Class M1F, Class M2F and Class BF Certificates is the
lesser of the rate per annum specified on the cover page of this prospectus
supplement and the Group 1 Net WAC Cap. The "Group 1 Net WAC Cap" with respect
to any Distribution Date will be a rate per annum equal to (A) the product of
(i) the weighted average of the Expense Adjusted Mortgage Rates on the home
equity loans in loan group 1 as of the beginning of the related Due Period and
(ii) the outstanding principal balance of the home equity loans in loan group 1
as of the beginning of the related Due Period minus the notional amount of the
Class B-IOF Certificates as of such date, plus (B) the product of (i) the
weighted average of the Expense Adjusted Mortgage Rates on the home equity loans
in loan group 1 as of the beginning of the related Due Period minus the
Pass-Through Rate of the Class B-IOF Certificates and (ii) the notional amount
of the Class B-IOF Certificates as of the beginning of the related Due Period,
divided by (C) the outstanding principal balance of the home equity loans in
loan group 1 as of the beginning of the related Due Period. The Pass-Through
Rate on the Class B-IOF Certificates is 4.125% per annum. The Class B-IOF
Certificates are interest-only certificates, will not receive any principal
payments, and will accrue interest for the first 30 Distribution Dates on its
notional amount equal to the lesser of (a) $31,000,000 and (b) the outstanding
principal balance of the home equity loans in loan group 1 plus the group 1
pre-funding amount.
The Pass-Through Rate on the Class AV Certificates will be a rate per
annum equal to the lesser of (i) One-Month LIBOR plus 0.26% in the case of each
Distribution Date through and including the Distribution Date on which the
aggregate principal balance of the home equity loans (and properties acquired in
respect thereof) remaining in the Trust Fund is reduced to less than 10% of the
aggregate principal balance of the home equity loans as of the related cut-off
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date, or One-Month LIBOR plus 0.52%, in the case of any Distribution Date
thereafter (the "Class AV Formula Rate") and (ii) the Available Funds Cap for
such Distribution Date.
The Pass-Through Rate on the Class M1V Certificates will be a rate per
annum equal to the lesser of (i) One-Month LIBOR plus 0.60% in the case of each
Distribution Date through and including the Distribution Date on which the
aggregate principal balance of the home equity loans (and properties acquired in
respect thereof) remaining in the Trust Fund is reduced to less than 10% of the
aggregate principal balance of the home equity loans as of the related cut-off
date, or One-Month LIBOR plus 0.90%, in the case of any Distribution Date
thereafter (the "Class M1V Formula Rate") and (ii) the Available Funds Cap for
such Distribution Date.
The Pass-Through Rate on the Class M2V Certificates will be a rate per
annum equal to the lesser of (i) One-Month LIBOR plus 1.10% in the case of each
Distribution Date through and including the Distribution Date on which the
aggregate principal balance of the home equity loans (and properties acquired in
respect thereof) remaining in the Trust Fund is reduced to less than 10% of the
aggregate principal balance of the home equity loans as of the related cut-off
date, or One-Month LIBOR plus 1.65%, in the case of any Distribution Date
thereafter (the "Class M2V Formula Rate") and (ii) the Available Funds Cap for
such Distribution Date. We refer you to "--Calculation of One-Month LIBOR" in
this prospectus supplement.
The Pass-Through Rate on the Class BV Certificates will be a rate per
annum equal to the lesser of (i) One-Month LIBOR plus 2.10% in the case of each
Distribution Date through and including the Distribution Date on which the
aggregate principal balance of the home equity loans (and properties acquired in
respect thereof) remaining in the Trust Fund is reduced to less than 10% of the
aggregate principal balance of the home equity loans as of the related cut-off
date, or One-Month LIBOR plus 3.15%, in the case of any Distribution Date
thereafter (the "Class BV Formula Rate") and (ii) the Available Funds Cap for
such Distribution Date.
The Pass-Through Rate on the Class B-IOV Certificates is 4.125% per
annum. The Class B-IOV Certificates are interest-only certificates, will not
receive any principal payments, and will accrue interest for the first 30
Distribution Dates on its notional amount equal to the lesser of (a) $90,000,000
and (b) the outstanding principal balance of the home equity loans in loan group
2 plus the group 2 pre-funding amount.
The "Available Funds Cap" with respect to a Group 2 Certificate (other
than the Class B-IOV Certificates) and any Interest Accrual Period and the
related Distribution Date will be a rate per annum equal to (A) the product of
(i) the weighted average of the Expense Adjusted Mortgage Rates on the home
equity loans in loan group 2 as of the beginning of the related Due Period and
(ii) the outstanding principal balance of the home equity loans in loan group 2
as of the beginning of the related Due Period minus the notional amount of the
Class B-IOV Certificates as of such date plus (B) the product of (i) the
weighted average of the Expense Adjusted Mortgage Rates on the home equity loans
in loan group 2 as of the beginning of the related Due Period minus the
Pass-Through Rate of the Class B-IOV Certificates and (ii) the notional amount
of the Class B-IOV Certificate as of the beginning of the related Due Period,
divided by (C) the outstanding principal balance of the home equity loans in
loan group 2 as of
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the beginning of the related Due Period (adjusted to an effective rate
reflecting accrued interest calculated on the basis of a 360-day year and the
actual number of days elapsed).
The "Due Period" with respect to any Distribution Date commences on the
second day of the month immediately preceding the month in which such
Distribution Date occurs and ends on the first day of the month in which such
Distribution Date occurs.
The "Expense Adjusted Mortgage Rate" on any home equity loan is equal
to the then applicable Mortgage Rate thereon minus (i) the Servicing Fee Rate
and (ii) in the case of the Group 2 Certificates, the Cap Premium expressed as a
per annum rate. For any Distribution Date, the Servicing Fee Rate is equal to
0.50% per annum. We refer you to "Pooling and Servicing Agreement--Servicing and
Other Compensation and Payment of Expenses" in this prospectus supplement.
The "Cap Premium" for any Distribution Date is an amount equal to
$195,000, through and including the August 2002 Distribution Date.
The Pass-Through Rate on the Group 2 Certificates (other than the Class
B-IOV Certificates) for the current related Interest Accrual Period, to the
extent it has been determined, and for the immediately preceding Interest
Accrual Period may be obtained by telephoning the Trustee at 1-800-735-7777. In
addition, the Trustee may make available each month, to any interested party,
the monthly statement to certificateholders via the Trustee's website,
electronic bulletin board and its fax-on-demand service. The Trustee's website
will be located at http://www-apps.gis.deutsche-bank.com/invr.
INTEREST DISTRIBUTIONS ON THE OFFERED CERTIFICATES
Holders of the Offered Certificates will be entitled to receive on each
Distribution Date, interest distributions in an aggregate amount equal to
interest accrued during the related Interest Accrual Period on the certificate
principal balances thereof at the then-applicable Pass-Through Rates thereon, in
the priorities set forth below.
On each Distribution Date, the Interest Remittance Amount for the
related loan group will be distributed in the following order of priority (in
the case of the Group 2 Certificates, after payment of the Cap Premium, any
unpaid Cap Premium from prior Distribution Dates and any termination payment
owing to the counterparty for such Distribution Date):
first, to the holders of the related Class A Certificates, the Senior
Interest Distribution Amount;
second, to the extent of the Interest Remittance Amount for the related
loan group remaining after distribution of the Senior Interest
Distribution Amount to the related Class A Certificates, to the holders
of the Class M-1 Certificates, the Interest Distribution Amount
allocable to such certificates;
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third, to the extent of the Interest Remittance Amount for the related
loan group remaining after distribution of the Senior Interest
Distribution Amount to the related Class A Certificates and the
Interest Distribution Amount allocable to the Class M-1 Certificates of
the related certificate group, to the holders of the Class M-2
Certificates, the Interest Distribution Amount allocable to such
certificates; and
fourth, to the extent of the Interest Remittance Amount for the related
loan group remaining after distribution of the Senior Interest
Distribution Amount to the related Class A Certificates and the
Interest Distribution Amounts allocable to the Class M-1 Certificates
and the Class M-2 Certificates of the related certificate group, pro
rata to the holders of the Class B Certificates and the Class B-IO
Certificates, the related Interest Distribution Amount allocable to
such certificates.
The "Interest Distribution Amount" for the Offered Certificates of any
class on any Distribution Date is equal to interest accrued during the related
Interest Accrual Period on the certificate principal balance of that class
immediately prior to such Distribution Date at the then applicable Pass-Through
Rate for such class, and reduced (to not less than zero), in the case of each
such class, by the allocable share, if any, for such class of Prepayment
Interest Shortfalls to the extent not covered by Compensating Interest paid by
the Master Servicer and shortfalls resulting from the application of the Relief
Act. On any Distribution Date, any shortfalls resulting from application of the
Relief Act and any Prepayment Interest Shortfalls to the extent not covered by
Compensating Interest paid by the Master Servicer will be allocated first, to
the interest distribution amount with respect to the related Class X
Certificates, and thereafter, to the Interest Distribution Amounts with respect
to the Offered Certificates of the related certificate group on a pro rata basis
based on the respective amounts of interest accrued on such Certificates for
such Distribution Date. The Holders of the Offered Certificates will be entitled
to reimbursement for any such interest shortfalls, subject to available funds
for the related loan group, in the priorities described under
"--Overcollateralization Provisions" in this prospectus supplement. The "Senior
Interest Distribution Amount" on any Distribution Date is equal to the Interest
Distribution Amounts for such Distribution Date for the related Class A
Certificates and the Interest Carry Forward Amount with respect to such Class A
Certificates.
The "Interest Remittance Amount" for any Distribution Date and loan
group is that portion of the Available Distribution Amount for such Distribution
Date and loan group that represents interest received or advanced on the home
equity loans of such loan group.
With respect to any Distribution Date, to the extent that the aggregate
Interest Distribution Amount for a certificate group exceeds the Interest
Remittance Amount of the related loan group for the related Due Period, a
shortfall in interest distributions on one or more classes of certificates will
result. The "Interest Carry Forward Amount" with respect to any class of Offered
Certificates and any Distribution Date is equal to the amount, if any, by which
the Interest Distribution Amount for such class of Offered Certificates for the
immediately preceding Distribution Date exceeded the actual amount distributed
on such certificates in respect of interest on such immediately preceding
Distribution Date, together with any Interest Carry Forward Amount with respect
to such certificates remaining unpaid from the previous
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Distribution Date plus interest accrued thereon at the related
Pass-Through Rate on such certificates for the most recently ended
Interest Accrual Period. The Interest Carry Forward Amount with respect
to the Class A Certificates, if any, is distributed as part of the
Senior Interest Distribution Amount on each Distribution Date. The
Interest Carry Forward Amount with respect to the Subordinated
Certificates, if any, may be carried forward to succeeding Distribution
Dates and, subject to available funds, will be distributed in the
manner set forth under "--Overcollateralization Provisions" and, in the
case of the Group 2 Certificates, under "--Group 2 Reserve Fund" in
this prospectus supplement.
The "Interest Accrual Period" for any Distribution Date and the Group 1
Certificates, and the Class B-IOV Certificates, is the one-month period
preceding the month in which such Distribution Date occurs, and all
distributions of interest on the Group 1 Certificates and the Class B-IOV
Certificates will be based on a 360-day year consisting of twelve 30-day months.
The "Interest Accrual Period" for any Distribution Date and the Group 2
Certificates (other than the Class B-IOV Certificates) is the period commencing
on the Distribution Date of the month immediately preceding the month in which
such Distribution Date occurs (or, in the case of the first period, commencing
on the closing date) and ending on the day preceding such Distribution Date, and
all distributions of interest on the certificates will be based on a 360-day
year and the actual number of days in the applicable Interest Accrual Period.
Except as otherwise described herein, on any Distribution Date, distributions of
the Interest Distribution Amount for a class of certificates will be made in
respect of such class of certificates, to the extent provided herein, on a pari
passu basis, based on the certificate principal balance of the certificates of
each class.
The certificate principal balance of a certificate outstanding at any
time represents the then maximum amount that the holder thereof is entitled to
receive as distributions allocable to principal from the cash flow on the home
equity loans and the other assets in the Trust Fund. The "Certificate Principal
Balance" of any class of Offered Certificates as of any date of determination is
equal to the initial certificate principal balance thereof reduced by the
aggregate of (a) all amounts allocable to principal previously distributed with
respect to such certificates and (b) any reductions in the Certificate Principal
Balance thereof deemed to have occurred in connection with allocations of
Realized Losses in the manner described herein. The Certificate Principal
Balance of the related Class X Certificates as of any date of determination is
equal to the excess, if any, of (a) the then aggregate principal balance of the
home equity loans in the related loan group plus the amount on deposit in the
related pre-funding account over (b) the then aggregate Certificate Principal
Balance of all classes of Offered Certificates of the related certificate group.
CALCULATION OF ONE-MONTH LIBOR
With respect to each Interest Accrual Period and each class of Group 2
Certificates, on the second business day preceding such Interest Accrual Period,
(each such date, an "Interest Determination Date"), the Trustee will determine
One-Month LIBOR for such Interest Accrual Period. With respect to the initial
Interest Accrual Period, on the closing date, the Trustee will determine
One-Month LIBOR for such Interest Accrual Period based on information available
on the second business day preceding such closing date (the related "Interest
Determination Date").
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"One Month LIBOR" means, as of any Interest Determination Date, the London
interbank offered rate for one-month U.S. dollar deposits which appears on
Telerate Page 3750 (as defined herein) as of 11:00 a.m. (London time) on such
date. If such rate does not appear on Telerate Page 3750, the rate for that day
will be determined on the basis of the offered rates of the Reference Banks (as
defined herein) for one-month U.S. dollar deposits, as of 11:00 a.m. (London
time) on such Interest Determination Date. The Trustee will request the
principal London office of each of the Reference Banks to provide a quotation of
its rate. If on such Interest Determination Date two or more Reference Banks
provide such offered quotations, One-Month LIBOR for the related Interest
Accrual Period shall be the arithmetic mean of such offered quotations (rounded
upwards if necessary to the nearest whole multiple of 0.0625%). If on such
Interest Determination Date fewer than two Reference Banks provide such offered
quotations, One-Month LIBOR for the related Interest Accrual Period shall be the
higher of (x) One-Month LIBOR as determined on the previous Interest
Determination Date and (y) the Reserve Interest Rate (as defined herein).
As used in this section, "business day" means a day on which banks are
open for dealing in foreign currency and exchange in London and New York City;
"Telerate Page 3750" means the display page currently so designated on the Dow
Jones Telerate Capital Markets Report (or such other page as may replace that
page on that service for the purpose of displaying comparable rates or prices);
"Reference Banks" means leading banks selected by the Trustee and engaged in
transactions in Eurodollar deposits in the international Eurocurrency market (i)
with an established place of business in London, (ii) which have been designated
as such by the Trustee and (iii) not controlling, controlled by, or under common
control with, the Depositor or the Seller; and "Reserve Interest Rate" shall be
the rate per annum that the Trustee determines to be either (i) the arithmetic
mean (rounded upwards if necessary to the nearest whole multiple of 0.0625%) of
the one-month U.S. dollar lending rates which New York City banks selected by
the Trustee are quoting on the relevant Interest Determination Date to the
principal London offices of leading banks in the London interbank market or,
(ii) in the event that the Trustee can determine no such arithmetic mean, the
lowest one-month U.S. dollar lending rate which New York City banks selected by
the Trustee are quoting on such Interest Determination Date to leading European
banks.
The establishment of One-Month LIBOR on each Interest Determination
Date by the Trustee and the Trustee's calculation of the rate of interest
applicable to the Group 2 Certificates for the related Interest Accrual Period
shall (in the absence of manifest error) be final and binding.
PRINCIPAL DISTRIBUTIONS ON THE OFFERED CERTIFICATES
On each Distribution Date, the Principal Distribution Amount for a loan
group will be distributed to the holders of the certificates of the related
certificate group then entitled to such distributions. The "Principal
Distribution Amount" for any Distribution Date and certificate group will be the
lesser of:
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(a) the excess of the Available Distribution Amount for a loan
group over the aggregate of the Senior Interest Distribution Amount
payable to the related Class A Certificates and the Interest
Distribution Amounts payable to the related Subordinated Certificates;
and
(b) the sum of:
(i) the principal portion of all scheduled monthly
payments on the home equity loans of the related loan group
due during the related Due Period, whether or not received on
or prior to the related Determination Date;
(ii) the principal portion of all proceeds received
in respect of the repurchase of a home equity loan of the
related loan group (or, in the case of a substitution, certain
amounts representing a principal adjustment) as required by
the Agreement during the related Prepayment Period;
(iii) the principal portion of all other unscheduled
collections, including insurance proceeds, liquidation
proceeds and all full and partial principal prepayments,
received during the related Prepayment Period, to the extent
applied as recoveries of principal on the home equity loans of
the related loan group;
(iv) the principal portion of any Realized Losses
incurred on any home equity loans of the related loan group
during the related Prepayment Period to the extent covered by
Net Monthly Excess Cashflow of the related loan group for such
Distribution Date; and
(v) the amount of any Overcollateralization Increase
Amount (as defined herein) for the related certificate group
for such Distribution Date;
minus
(vi) the amount of any Overcollateralization
Reduction Amount (as defined herein) for the related
certificate group for such Distribution Date.
In no event will the Principal Distribution Amount with respect to any
Distribution Date be (x) less than zero or (y) greater than the then outstanding
aggregate Certificate Principal Balance of the Offered Certificates of the
related certificate group.
On each Distribution Date (a) prior to the related Stepdown Date or (b)
on which a Trigger Event for the related certificate group is in effect, the
applicable Principal Distribution Amount shall be distributed: (x)(i) in the
case of Group 1 Certificates, (1) first, to the Class AF6 Certificates, in an
amount equal to the Class AF6 Lockout Distribution Amount and (2) second, the
remainder, sequentially, to the Class AF1, Class AF2, Class AF3, Class AF4,
Class AF5 and Class AF6 Certificates, in that order, until their respective
Certificate Principal Balances are reduced to zero, and (ii) in the case of
Group 2 Certificates, to the Class AV Certificates until the
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Certificate Principal Balance thereof has been reduced to zero; and (y) for each
certificate group, sequentially, to the related Class M-1, Class M-2 and the
Class B Certificates, in that order until the respective Certificate Principal
Balances are reduced to zero.
On each Distribution Date (a) on or after the related Stepdown Date and
(b) on which a Trigger Event for the related certificate group is not in effect,
the holders of each class of certificates shall be entitled to receive
distributions in respect of principal to the extent of the applicable Principal
Distribution Amount in the following amounts and order of priority:
first, the lesser of (x) the Principal Distribution Amount for the
related certificate group and (y) the Class A Principal Distribution
Amount for the related certificate group, shall be distributed in the
following order or priority: (1) in the case of Group 1 Certificates,
(i) first, to the Class AF6 Certificates an amount equal to the Class
AF6 Lockout Distribution Amount and (ii) second, the remainder,
sequentially to the Class AF1, Class AF2, Class AF3, Class AF4, Class
AF5 and Class AF6 Certificates, in that order, until the Certificate
Principal Balances are reduced to zero; and (2) in the case of Group 2
Certificates, to the Class AV Certificates until the Certificate
Principal Balance thereof has been reduced to zero;
second, the lesser of (x) the excess of (i) the Principal Distribution
Amount for the related certificate group over (ii) the amount
distributed to the holders of the related Class A Certificates pursuant
to clause first above, and (y) the Class M-1 Principal Distribution
Amount for the related certificate group, shall be distributed to the
holders of the related Class M-1 Certificates, until the Certificate
Principal Balance thereof has been reduced to zero;
third, the lesser of (x) the excess of (i) the Principal Distribution
Amount for the related certificate group over (ii) the sum of the
amounts distributed to the holders of the related Class A Certificates
pursuant to clause first above and to the holders of the related Class
M-1 Certificates pursuant to clause second above, and (y) the Class M-2
Principal Distribution Amount for the related certificate group, shall
be distributed to the holders of the related Class M-2 Certificates,
until the Certificate Principal Balance thereof has been reduced to
zero; and
fourth, the lesser of (x) the excess of (i) the Principal Distribution
Amount for the related certificate group over (ii) the sum of the
amounts distributed to the holders of the related Class A Certificates
pursuant to clause first above, to the holders of the related Class M-1
Certificates pursuant to clause second above and to the holders of the
related Class M-2 Certificates pursuant to clause third above, and (y)
the Class B Principal Distribution Amount for the related certificate
group, shall be distributed to the holders of the Class B Certificates,
until the Certificate Principal Balance thereof has been reduced to
zero.
The allocation of distributions in respect of principal to the Class A
Certificates on each Distribution Date (a) prior to the related Stepdown Date or
(b) on which a Trigger Event for the related certificate group is in effect,
will have the effect of accelerating the amortization of the
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related Class A Certificates while, in the absence of Realized Losses,
increasing the respective percentage interest in the principal balance of the
home equity loans evidenced by the related Subordinated Offered Certificates.
Increasing the respective percentage interest in the Trust Fund of the related
Subordinated Offered Certificates relative to that of the related Class A
Certificates is intended to preserve the availability of the subordination
provided by the related Subordinated Offered Certificates.
The "Available Distribution Amount" with respect to either loan group
and for any Distribution Date is equal to the sum, net of amounts reimbursable
therefrom to the Master Servicer or the Trustee and, in the case of the Group 2
Certificates, net of the Cap Premium for such Distribution Date, of (i) the
aggregate amount of scheduled monthly payments on the home equity loans of that
loan group due on the related Due Date and received on or prior to the related
Determination Date, after deduction of the related Servicing Fee, (ii) certain
unscheduled payments in respect of the home equity loans of that loan group,
including prepayments, insurance proceeds, liquidation proceeds and proceeds
from repurchases of and substitutions for the home equity loans of that loan
group occurring during the preceding calendar month and (iii) all P&I Advances
with respect to the home equity loans of that loan group received for such
Distribution Date. The holders of the related Class P Certificates will be
entitled to all Prepayment Charges received on the home equity loans of that
loan group and such amounts will not be available for distribution on the
Offered Certificates.
The "Class A Principal Distribution Amount" for a loan group is an
amount equal to the excess of (x) the Certificate Principal Balance of the
related Class A Certificates immediately prior to such Distribution Date over
(y) the lesser of (A) the product of (i) 63.50% for loan group 1 and 59.50% for
loan group 2 and (ii) the aggregate principal balance of the home equity loans
in that loan group as of the last day of the related Due Period and (B) the
aggregate principal balance of the home equity loans in that loan group as of
the last day of the related Due Period minus $1,875,000 for loan group 1 and
$5,625,000 for loan group 2.
The "Class AF6 Calculation Percentage" for any Distribution Date will
be the fraction, expressed as a percentage, the numerator of which is the
Certificate Principal Balance of the Class AF6 Certificates and the denominator
of which is the total of the Certificate Principal Balances of all of the Group
1 Class A Certificates, in each case before giving effect to distributions of
principal on that Distribution Date.
The "Class AF6 Lockout Distribution Amount" for any Distribution Date
will be an amount equal to the product of (1) the applicable Class AF6 Lockout
Percentage for the Distribution Date, (2) the Class AF6 Calculation Percentage
and (3) the Class A Principal Distribution Amount with respect to the Group 1
Class A Certificates for the Distribution Date. In no event shall the Class AF6
Lockout Distribution Amount exceed the outstanding Certificate Principal Balance
of the Class AF6 Certificates or the Principal Distribution Amount applicable to
the Group 1 Class A Certificates for the Distribution Date.
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The "Class AF6 Lockout Percentage" for each Distribution Date will be
as follows:
Distribution Date Lockout Percentage
----------------- ------------------
September 2000 through September 2002 0%
October 2002 through September 2004 20%
October 2004 through September 2005 80%
October 2005 through September 2006 100%
October 2006 and thereafter 300%
The "Class M-1 Principal Distribution Amount" for a loan group is an
amount equal to the excess of (x) the sum of (i) the Certificate Principal
Balance of the related Class A Certificates (after taking into account the
payment of the related Class A Principal Distribution Amount on such
Distribution Date) and (ii) the Certificate Principal Balance of the related
Class M-1 Certificates immediately prior to such Distribution Date over (y) the
lesser of (A) the product of (i) 77.0% for loan group 1 and 74.5% for loan group
2 and (ii) the aggregate principal balance of the home equity loans in that loan
group as of the last day of the related Due Period and (B) the aggregate
principal balance of the home equity loans in that loan group as of the last day
of the related Due Period minus $1,875,000 for loan group 1 and $5,625,000 for
loan group 2.
The "Class M-2 Principal Distribution Amount" for a loan group is an
amount equal to the excess of (x) the sum of (i) the Certificate Principal
Balance of the related Class A Certificates (after taking into account the
payment of the related Class A Principal Distribution Amount on such
Distribution Date), (ii) the Certificate Principal Balance of the related Class
M-1 Certificates (after taking into account the payment of the related Class M-1
Principal Distribution Amount on such Distribution Date) and (iii) the
Certificate Principal Balance of the related Class M-2 Certificates immediately
prior to such Distribution Date over (y) the lesser of (A) the product of (i)
87.5% for loan group 1 and 86.0% for loan group 2 and (ii) the aggregate
principal balance of the home equity loans in that loan group as of the last day
of the related Due Period and (B) the aggregate principal balance of the home
equity loans in that loan group as of the last day of the related Due Period
minus $1,875,000 for loan group 1 and $5,625,000 for loan group 2.
The "Class B Principal Distribution Amount" for a loan group is an
amount equal to the excess of (x) the sum of (i) the Certificate Principal
Balance of the related Class A Certificates (after taking into account the
payment of the related Class A Principal Distribution Amount on such
Distribution Date), (ii) the Certificate Principal Balance of the related Class
M-1 Certificates (after taking into account the payment of the related Class M-1
Principal Distribution Amount on such Distribution Date), (iii) the Certificate
Principal Balance of the related Class M-2 Certificates (after taking into
account the payment of the related Class M-2 Principal Distribution Amount on
such date) and (iv) the Certificate Principal Balance of the related Class B
Certificates immediately prior to such Distribution Date over (y) the lesser of
(A) the product of (i) 95.0% for loan group 1 and 96.0% for loan group 2 and
(ii) the aggregate principal balance
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of the home equity loans of that loan group as of the last day of the related
Due Period and (B) the aggregate principal balance of the home equity loans of
that loan group as of the last day of the related Due Period minus $1,875,000
for loan group 1 and $5,625,000 for loan group 2.
The "Credit Enhancement Percentage" with respect to each certificate
group and for any Distribution Date is the percentage obtained by dividing (x)
the sum of (i) the aggregate Certificate Principal Balance of the Subordinated
Offered Certificates of the related certificate group and (ii) the
Overcollateralized Amount by (y) the aggregate principal balance of the home
equity loans in the related loan group, calculated after taking into account
distributions of principal on the home equity loans in the related loan group
and distribution of the related Principal Distribution Amount to the holders of
the related certificates then entitled to distributions of principal on such
Distribution Date.
The "Determination Date" with respect to any Distribution Date is the
15th day of the month in which such Distribution Date occurs or, if such day is
not a business day, the immediately preceding business day.
The "Prepayment Period" with respect to any Distribution Date is the
calendar month immediately preceding the month in which such Distribution Date
occurs.
The "Scheduled Principal Balance" of any home equity loan as of any
date of determination is equal to the principal balance thereof as of the
related cut-off date (after application of all scheduled principal payments due
on or before the related cut-off date, whether or not received), reduced by (x)
the principal portion of all monthly payments due on or before the date of
determination, whether or not received, (y) all amounts allocable to unscheduled
principal that were received prior to the calendar month in which the date of
determination occurs, and (z) any Bankruptcy Loss (as defined herein) occurring
out of a Deficient Valuation (as defined herein) that was incurred prior to the
calendar month in which the date of determination occurs.
The "Stepdown Date" for any Distribution Date is the Distribution Date
occurring in September 2003.
A "Trigger Event" with respect to each certificate group and a
Distribution Date is in effect if the percentage obtained by dividing (x) the
principal amount of home equity loans in the related loan group delinquent 60
days or more by (y) the aggregate principal balance of the home equity loans in
such loan group, in each case, as of the last day of the previous calendar
month, exceeds 50.0% for loan group 1 or 40.0% for loan group 2 of the related
Credit Enhancement Percentage.
CREDIT ENHANCEMENT
The Credit Enhancement provided for the benefit of the holders of the
related Class A Certificates consists of subordination, as described below, and
overcollateralization, as described under"--Overcollateralization Provisions"
below and, in the case of the Group 2 Class A
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Certificates only, the Group 2 Reserve Fund as described under "--Group 2
Reserve Fund" in this prospectus supplement.
The rights of the holders of the related Subordinated Certificates to
receive distributions will be subordinated, to the extent described herein, to
the rights of the holders of the related Class A Certificates. This
subordination is intended to enhance the likelihood of regular receipt by the
holders of the related Class A Certificates of the full amount of their
scheduled monthly payments of interest and principal and to afford such holders
protection against Realized Losses of the related loan group.
The protection afforded to the holders of the related Class A
Certificates by means of the subordination of the related Subordinated
Certificates will be accomplished by (i) the preferential right of the holders
of the related Class A Certificates to receive on any Distribution Date, prior
to distribution on the related Subordinated Certificates, distributions in
respect of interest and, if applicable, principal, subject to available funds
for the related loan group, and (ii) if necessary, the right of the holders of
the related Class A Certificates to receive future distributions of amounts that
would otherwise be payable to the holders of the related Subordinated
Certificates.
In addition, the rights of the holders of Mezzanine Certificates with
lower numerical class designations will be senior to the rights of holders of
Mezzanine Certificates of the related certificate group with higher numerical
class designations, and the rights of the holders of the Mezzanine Certificates
to receive distributions in respect of the home equity loans will be senior to
the rights of the holders of the related Class B and Class X Certificates, in
each case to the extent described herein. This subordination is intended to
enhance the likelihood of regular receipt by the holders of more senior
certificates of the related certificate group of distributions in respect of
interest and principal and to afford such holders protection against Realized
Losses on the home equity loans of the related loan group.
OVERCOLLATERALIZATION PROVISIONS
The weighted average Expense Adjusted Mortgage Rate for the home equity
loans is generally expected to be higher than the weighted average of the
Pass-Through Rates on the Offered Certificates, thus generating excess interest
collections which, in the absence of Realized Losses, will generally not be
necessary to fund interest distributions on the Offered Certificates. The
Agreement requires that, on each Distribution Date, the Net Monthly Excess
Cashflow, if any, for a loan group be applied on such Distribution Date as an
accelerated payment of principal on the class or classes of Offered Certificates
of the related certificate group then entitled to receive distributions in
respect of principal, but only to the limited extent hereafter described. The
"Net Monthly Excess Cashflow" for any Distribution Date and the related loan
group is equal to the sum of (a) any Overcollateralization Reduction Amount and
(b) the excess of (x) the Available Distribution Amount for such loan group for
such Distribution Date over (y) the sum for such Distribution Date of the
aggregate of the Senior Interest Distribution Amount and the Interest
Distribution Amounts payable to the holders of the Subordinated Certificates and
the sum of the amounts described in clauses (b)(i) through (iii) of the
definition of Principal Distribution Amount.
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With respect to any Distribution Date, any Net Monthly Excess Cashflow
(or, in the case of clause first below, the Net Monthly Excess Cashflow for a
loan group exclusive of any Overcollateralization Reduction Amount for the
related certificate group) shall be paid as follows:
first, to the holders of the class or classes of certificates then
entitled to receive distributions in respect of principal, in an amount
equal to the principal portion of any Realized Losses incurred on the
home equity loans of the related loan group during the related
Prepayment Period;
second, to the holders of the class or classes of certificates of the
related certificate group then entitled to receive distributions in
respect of principal, in an amount equal to the Overcollateralization
Increase Amount for the related certificate group;
third, to the holders of the Class M-1 Certificates of the related
certificate group, in an amount equal to the Interest Carry Forward
Amount allocable to such certificates;
fourth, to the holders of the Class M-1 Certificates of the related
certificate group, any Unpaid Realized Loss Amount for that class;
fifth, to the holders of the Class M-2 Certificates of the related
certificate group, in an amount equal to the Interest Carry Forward
Amount allocable to such certificates;
sixth, to the holders of the Class M-2 Certificates of the related
certificate group, any Unpaid Realized Loss Amount for that class;
seventh, pro rata to the holders of the Class B Certificates and Class
B-IO Certificates of the related certificate group, in an amount equal
to the Interest Carry Forward Amount allocable to such certificates;
eighth, to the holders of the Class B Certificates of the related
certificate group, any Unpaid Realized Loss Amount for that class;
ninth, to the holders of the related Class A Certificates, in an amount
equal to such certificates' allocated share of any Prepayment Interest
Shortfalls on the home equity loans of the related loan group to the
extent not covered by Compensating Interest paid by the Master Servicer
and any shortfalls resulting from the application of the Relief Act
with respect to the home equity loans of the related loan group;
tenth, to the holders of the related Class M-1 Certificates, in an
amount equal to such certificates' allocated share of any Prepayment
Interest Shortfalls on the home equity loans of the related loan group
to the extent not covered by Compensating Interest paid by the Master
Servicer and any shortfalls resulting from the application of the
Relief Act with respect to the home equity loans of the related loan
group;
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eleventh, to the holders of the related Class M-2 Certificates, in an
amount equal to such certificates' allocated share of any Prepayment
Interest Shortfalls on the home equity loans of the related loan group
to the extent not covered by Compensating Interest paid by the Master
Servicer and any shortfalls resulting from the application of the
Relief Act with respect to the home equity loans of the related loan
group;
twelfth, pro rata to the holders of the related Class B Certificates
and Class B-IO Certificates , in an amount equal to such certificates'
allocated share of any Prepayment Interest Shortfalls on the home
equity loans of the related loan group to the extent not covered by
Compensating Interest paid by the Master Servicer and any shortfalls
resulting from the application of the Relief Act with respect to the
home equity loans of the related loan group;
thirteenth, to the adjustable rate certificates, an amount equal to any
Certificateholders' Interest Index Carry Forward for the adjustable
rate certificates for such Distribution Date, allocated to the
adjustable rate certificates in the same order of priority as the
Interest Distribution Amount is allocated to such classes of
certificates;
fourteenth, to the counterparty, any termination payments owing to the
counterparty to the extent not required to be paid from the Interest
Remittance Amount;
fifteenth, to the holders of the related Class X Certificates as
provided in the Agreement; and
sixteenth, to the holders of the Residual Certificates, any remaining
amounts; provided that if such Distribution Date is the Distribution
Date immediately following the expiration of the latest Prepayment
Charge term or any Distribution Date thereafter, then any such
remaining amounts will be distributed first, to the holders of the
related Class P Certificates, until the Certificate Principal Balance
thereof has been reduced to zero; and second, to the holders of the
Residual Certificates.
If on any Distribution Date, after giving effect to all distributions
of principal as described above and, in the case of the Group 2 Certificates,
under "--The Group 2 Reserve Fund" below, the aggregate Certificate Principal
Balances of the certificates in a certificate group exceeds the sum of (i) the
aggregate Scheduled Principal Balance of the home equity loans in the related
loan group and (ii) the amounts, if any, on deposit in the related pre-funding
account, the Certificate Principal Balance of the related Subordinated Offered
Certificates (but not the Class A Certificates) of that certificate group will
be reduced, in inverse order of seniority (beginning with the Class B
Certificates) by an amount equal to that excess, until that Class Principal
Balance is reduced to zero. That reduction is referred to as an "Applied
Realized Loss Amount".
The "Certificateholders' Interest Index Carryover" with respect to each
class of Group 2 Certificates and a Distribution Date, is equal to the sum of
(A) the excess of (1) the amount of interest such class of related certificates
would otherwise be entitled to receive on the
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Distribution Date had the rate been calculated at the related formula rate for
such Distribution Date over (2) the amount of interest payable on such class of
certificates at the Available Funds Cap for the Distribution Date and (B) the
Certificateholders' Interest Index Carryover for such class of certificates for
all previous Distribution Dates not previously paid to such certificateholders
(including any interest accrued on that amount at the related formula rate).
"Unpaid Realized Loss Amount", with respect to any class of
Subordinated Offered Certificates and as to any Distribution Date, is the excess
of (i) Applied Realized Loss Amounts with respect to that class over (ii) the
sum of all distributions in reduction of Applied Realized Loss Amounts on all
previous Distribution Dates. Any amounts distributed to a class of Subordinated
Offered Certificates in respect of any Unpaid Realized Loss Amount will not be
applied to reduce the Certificate Principal Balance of that class.
With respect to any Distribution Date, the excess, if any, of (a) the
aggregate principal balance of the home equity loans of the related loan group
immediately following such Distribution Date, over (b) the sum of the aggregate
Certificate Principal Balances of the Offered Certificates of the related
certificate group, after taking into account the payment of the amounts
described in clauses (b)(i) through (iv) of the definition of Principal
Distribution Amount on such Distribution Date, is the "Overcollateralized
Amount" for the Offered Certificates of such certificate group as of such
Distribution Date. As of the closing date, the aggregate principal balance of
the home equity loans as of the related cut-off date will exceed the sum of the
aggregate Certificate Principal Balances of the Offered Certificates of the
related certificate group by an amount equal to approximately $938,000 for loan
group 1 and $8,438,000 for loan group 2, which is equal to the initial
Certificate Principal Balance of the related Class X Certificates. Such amount
represents approximately 0.25% and 0.75% of the aggregate principal balance of
the home equity loans of the related loan group as of the related cut-off date
and is the initial amount of overcollateralization required to be provided by
the home equity loan pool under the Agreement. Under the Agreement, the
Overcollateralized Amount for a certificate group is required to be maintained
at the "Required Overcollateralized Amount" for such certificate group. In the
event that Realized Losses are incurred on the home equity loans of the related
loan group, such Realized Losses may result in an overcollateralization
deficiency for such certificate group since, in the absence of Net Monthly
Excess Cashflow applied pursuant to clause first above, such Realized Losses
will reduce the principal balance of the home equity loans of the related loan
group without a corresponding reduction to the aggregate Certificate Principal
Balances of the Offered Certificates of the related certificate group. In such
event, the Agreement requires the payment from the related Net Monthly Excess
Cashflow, subject to available funds, of an amount equal to such
overcollateralization deficiency, which shall constitute a principal
distribution on the Offered Certificates of the related certificate group in
reduction of the Certificate Principal Balances thereof. This has the effect of
accelerating the amortization of the Offered Certificates of the related
certificate group relative to the amortization of the home equity loans of the
related loan group, and of increasing the Overcollateralized Amount. With
respect to the Offered Certificates of a certificate group and any Distribution
Date, any amount of related Net Monthly Excess Cashflow actually applied as an
accelerated payment of principal to the extent the Required Overcollateralized
Amount for
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such certificate group exceeds the Overcollateralized Amount for such
certificate group as of such Distribution Date is an "Overcollateralization
Increase Amount" for such certificate group.
On and after the related Stepdown Date and provided that a Trigger
Event for such certificate group is not in effect, the related Required
Overcollateralized Amount may be permitted to decrease ("step down") below the
initial $9,375,000 for the Group 1 Certificates and $22,500,000 for the Group 2
Certificates to a level equal to 5.00% for the Group 1 Certificates and 4.00%
for the Group 2 Certificates of the then current aggregate outstanding principal
balance of the related home equity loans (after giving effect to principal
payments to be distributed on such Distribution Date), subject to a floor of
$1,875,000 for the Group 1 Certificates and $5,625,000 for the Group 2
Certificates. In the event that the Required Overcollateralized Amount of a
certificate group is permitted to step down on any Distribution Date, the
Agreement provides that a portion of the principal which would otherwise be
distributed to the holders of the Offered Certificates on such Distribution Date
shall be distributed to the holders of the related Class X Certificates pursuant
to the priorities set forth above. With respect to each such Distribution Date,
the Principal Distribution Amount will be reduced by the amount by which the
Overcollateralized Amount for a certificate group exceeds the Required
Overcollateralized Amount for such certificate group (the "Overcollateralization
Reduction Amount" for a certificate group) after taking into account all other
distributions to be made on such Distribution Date with respect to such
certificate group, which amount shall be distributed as Net Monthly Excess
Cashflow for such certificate group pursuant to the priorities set forth above.
This has the effect of decelerating the amortization of the Offered Certificates
of a certificate group relative to the amortization of the home equity loans of
the related loan group, and of reducing the related Overcollateralized Amount.
However, if on any Distribution Date a Trigger Event is in effect, the related
Required Overcollateralized Amount will not be permitted to step down on such
Distribution Date.
ALLOCATION OF LOSSES; SUBORDINATION
With respect to any defaulted home equity loan that is finally
liquidated through foreclosure sale, disposition of the related mortgaged
property (if acquired on behalf of the certificateholders by deed in lieu of
foreclosure) or otherwise, the amount of loss realized, if any, will equal the
portion of the unpaid principal balance remaining, if any, plus interest thereon
through the last day of the month in which such home equity loan was finally
liquidated, after application of all amounts recovered (net of amounts
reimbursable to the Master Servicer for P&I Advances, servicing advances and
other related expenses, including attorney's fees) towards interest and
principal owing on the home equity loan. Such amount of loss realized and any
Bankruptcy Losses are referred to herein as "Realized Losses." In the event that
amounts recovered in connection with the final liquidation of a defaulted home
equity loan are insufficient to reimburse the Master Servicer for P&I Advances
and servicing advances, such amounts may be reimbursed to the Master Servicer
out of any funds in the certificate account prior to the distribution on the
certificates.
Any Realized Losses on the home equity loans of a loan group will be
allocated on any Distribution Date, first, to Net Monthly Excess Cashflow, and
second, to the related Class X
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Certificates. Thereafter, any Applied Realized Loss Amounts will be applied
first, to the Class B Certificates, second, to the Class M-2 Certificates, and
third, to the Class M-1 Certificates.
The Agreement does not permit the allocation of Realized Losses to the
related Class A Certificates or the Class P Certificates. Investors in the Class
A Certificates should note that although Realized Losses cannot be allocated to
the Class A Certificates, under certain loss scenarios there will not be enough
principal and interest on the home equity loans of the related loan group to pay
the Class A Certificates all interest and principal amounts which they are then
entitled to.
Once Realized Losses have been allocated to a Subordinate Certificate,
such amounts with respect to such Certificate will no longer accrue interest.
Any allocation of a Realized Loss to a certificate will be made by
reducing the Certificate Principal Balance thereof by the amount so allocated as
of the Distribution Date in the month following the calendar month in which such
Realized Loss was incurred. Notwithstanding anything to the contrary described
herein, in no event will the Certificate Principal Balance of any certificate be
reduced more than once in respect of any particular amount both (i) allocable to
such certificate in respect of Realized Losses and (ii) payable as principal to
the holder of such certificate from Net Monthly Excess Cashflow.
A "Bankruptcy Loss" is a Deficient Valuation or a Debt Service
Reduction. With respect to any home equity loan, a "Deficient Valuation" is a
valuation by a court of competent jurisdiction of the mortgaged property in an
amount less than the then outstanding indebtedness under the home equity loan,
which valuation results from a proceeding initiated under the United States
Bankruptcy Code. A "Debt Service Reduction" is any reduction in the amount which
a mortgagor is obligated to pay on a monthly basis with respect to a home equity
loan as a result of any proceeding initiated under the United States Bankruptcy
Code, other than a reduction attributable to a Deficient Valuation.
GROUP 2 RESERVE FUND
The Agreement provides for a reserve fund (the "Group 2 Reserve Fund")
which is held by the Trustee on behalf of the holders of the Group 2
Certificates. The Group 2 Reserve Fund will be an asset of the Trust but not of
any REMIC. The holder of the Class X-V Certificates will be the owner of the
Group 2 Reserve Fund for tax purposes only, and amounts on deposit in the Group
2 Reserve Fund will be invested at the direction of the holder of the of the
Class X-V Certificate as provided in the Agreement.
The only asset of the Group 2 Reserve Fund will be payments, if any,
received under the Cap Agreement deposited into the Group 2 Reserve Fund.
DISTRIBUTIONS FROM GROUP 2 RESERVE FUND. On each Distribution Date, the Trustee
shall withdraw from the Group 2 Reserve Fund an amount equal to the Group 2
Reserve Fund Transfer Amount and apply such amount in the following order or
priority:
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first, to the holders of the Class AV Certificates, the Senior
Interest Distribution Amount to the extent not otherwise paid on such
Distribution Date;
second, to the holders of the Class M1V Certificates, the
Interest Distribution Amount allocable to such certificates to the
extent not otherwise paid on such Distribution Date;
third, to the holders of the Class M2V Certificates, the
Interest Distribution Amount allocable to such certificates to the
extent not otherwise paid on such Distribution Date;
fourth, pro rata to the holders of the Class BV Certificates
and the Class B-IOV Certificates, the related Interest Distribution
Amount allocable to such certificates to the extent not otherwise paid
on such Distribution Date;
fifth, to the holders of the class or classes of Group 2
Certificates then entitled to receive distributions in respect of
principal, in an amount equal to the principal portion of any Realized
Losses incurred on the home equity loans in loan group 2 during the
related Prepayment Period;
sixth, to the holders of the Class M1V Certificates, in an
amount equal to the Interest Carry Forward Amount allocable to such
certificates to the extent not otherwise paid on such Distribution
Date;
seventh, to the holders of the Class M1V Certificates, any
Unpaid Realized Loss Amount for that class;
eighth, to the holders of the Class M2V Certificates, in an
amount equal to the Interest Carry Forward Amount allocable to such
certificates to the extent not otherwise paid on such Distribution
Date;
ninth, to the holders of the Class M2V Certificates, any
Unpaid Realized Loss Amount for that class;
tenth, pro rata to the holders of the Class BV Certificates
and the Class B-IOV Certificates, in an amount equal to the related
Interest Carry Forward Amount allocable to such certificates to the
extent not otherwise paid on such Distribution Date; and
eleventh, to the holders of the Class BV Certificates, any
Unpaid Realized Loss Amount for that class.
"Group 2 Reserve Fund Transfer Amount" means an amount equal to the
lesser of (x) the amount on deposit in the Group 2 Reserve Fund and (y) the sum
of (a) any shortfalls in the payment of the Senior Interest Distribution Amount,
Interest Distribution Amounts and Interest
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Carry Forward Amounts for the Group 2 Certificates for such Distribution Date,
after taking account all other distributions in respect thereof on such
Distribution Date, (b) the principal portion of any Realized Losses incurred on
the home equity loans in loan group 2 during the related Due Period to the
extent not paid from Net Monthly Excess Cashflow on such Distribution Date, and
(c) the amount of any Unpaid Realized Loss Amount for the Class M1V, Class M2V
and Class BV Certificates, after taking account all other distributions in
respect thereof on such Distribution Date.
In accordance with the terms of the Agreement, amounts on deposit in
the Group 2 Reserve Fund will be released (1) after all distributions are made
on each Distribution Date to the extent that the amount on deposit in the Group
2 Reserve Fund exceeds the Specified Group 2 Reserve Fund Requirement and (2)
after all distributions are made on the Distribution Date in October 2002. All
amounts released from the Group 2 Reserve Fund will be paid to the Class X-V
Certificates. The "Specified Group 2 Reserve Fund Requirement" for the Group 2
Reserve Fund and each Distribution Date shall equal greater of the
overcollaterization shortfall for the group 2 certificates and $10,000 through
October 2002, and thereafter the Specified Group 2 Reserve Fund Requirement will
equal zero.
THE CAP AGREEMENT. The Trust will have the benefit of an interest rate
cap agreement documented pursuant to an ISDA Master Agreement
(Multicurrency-Cross Border), together with a Schedule and a Confirmation (the
"Cap Agreement") pursuant to which Westdeutsche Landesbank Girozentrale, New
York Branch (together with any successor, the "Counterparty") will agree to pay
to the Trust a monthly payment in an amount equal to the product of:
(1) the excess, if any, of LIBOR over 6.94%;
(2) the Scheduled Notional Amount; and
(3) a fraction, the numerator of which is the actual number of days
elapsed from the previous Distribution Date to but excluding the current
Distribution Date (or, for the first Distribution Date, the actual number of
days elapsed from the Closing Date to but excluding the first Distribution
Date), and the denominator of which is 360.
The "Scheduled Notional Amounts" are set forth with respect to each
Distribution Date in "Annex II; Scheduled Notional Amounts." The initial
Scheduled Notional Amount will be $1,104,600,458.00. The Scheduled Notional
Amount declines in accordance with the expected amortization of the 2/28
Adjustable Rate Loans, 3/27 Adjustable Rate Loans and the 5/25 Adjustable Rate
Loans. The Cap Agreement will terminate after the Distribution Date in September
2002.
The Cap Agreement will be governed by and construed in accordance with
the law of the State of New York and will be documented on the ISDA Master
Agreement, as supplemented by a schedule and a confirmation. The obligations of
the Counterparty are limited to those specifically set forth in the Cap
Agreement.
S-97
<PAGE>
The Counterparty is a branch of Westdeutsche Landesbank Girozentrale
("WestLB"). WestLB was created by the merger of two central banks, or
Landesbanks (German State Banks), in the State of North Rhine-Westphalia,
Germany on January 1, 1969. As a German universal bank, WestLB provides
commercial and investment banking services regionally, nationally and
internationally to public, corporate and bank customers. WestLB currently has a
long-term unsecured credit rating of "AA+" from Standard & Poor's Ratings
Services, a division of the McGraw-Hill Companies, Inc. "Aa1" from Moody's and
"AAA" from Fitch.
The Counterparty is licensed and subject to supervision and regulation
by the Superintendent of Banks of the State of New York. The Counterparty is
examined by the New York State Banking Department and is subject to banking laws
and regulations applicable to a foreign bank that operates a New York branch.
Upon written request, the Counterparty will provide without charge to
each person to whom this prospectus supplement is delivered a copy of WestLB's
most recent annual report. Written requests for such annual reports should be
directed to Westdeutsche Landesbank Girozentrale, New York Branch, 1211 Avenue
of the Americas, New York, New York 10036, Attention: Branch Management.
The Agreement will contain provisions permitting the Trustee to enter
into any amendment to the Cap Agreement requested by the Counterparty to cure
any ambiguity in, or correct or supplement any provision of, the Cap Agreement,
so long as the Trustee determines that the amendment will not adversely affect
the interests of the Certificateholders. The written consent of the Counterparty
will be required before certain amendments are made to the Agreement.
The respective obligations of the Counterparty and the Trust to pay
specified amounts due under the Cap Agreement will be subject to the following
conditions precedent: (1) no Cap Default (as defined below) or event that with
the giving of notice or lapse of time or both would become a Cap Default shall
have occurred and be continuing with respect to the Cap Agreement and (2) no
Termination Event (as defined below) has occurred or been effectively designated
with respect to the Cap Agreement.
"Events of Default" under the Cap Agreement (each a "Cap Default") are
limited to
o the following other standard events of default under the ISDA
Master Agreement:
o "Failure to Pay"
o "Breach of Agreement,"
o "Misrepresentation,"
o "Merger without Assumption," and
o "Bankruptcy",
as described in Sections 5 (a)(i), 5(a)(ii), 5(a)(iii), 5(a)(iv), and
5(a)(viii) of the ISDA Master Agreement.
S-98
<PAGE>
"Termination Events" under the Cap Agreement consist of the following
standard events under the ISDA Master Agreement: "Illegality" (which generally
relates to changes in law causing it to become unlawful for either party to
perform its obligations under the Cap Agreement), "Tax Event" (which generally
relates to either party to the Cap Agreement receiving a payment under the Cap
Agreement from which an amount has been deducted or withheld for or on account
of taxes), "Tax Event Upon Merger" (which generally relates to either party to
the Cap Agreement receiving a payment under the Cap Agreement from which an
amount has been deducted or withheld for or on account of taxes resulting from a
merger) and "Credit Event Upon Merger" (which generally relates to the Trust or
the Counterparty and an entity providing credit support for it becoming weaker
as a result of a merger) as described in Sections 5(b)(i), 5(b)(ii), 5(b)(iii)
and 5(b)(iv) of the ISDA Master Agreement. In addition, there are additional
Termination Events relating to the Trust if the Trust should terminate or if the
Pooling and Servicing Agreement or other transaction documents are amended in a
manner adverse to the Counterparty without the consent of the Counterparty.
If the Trust fails to pay a Cap Premium on any Distribution Date, the
Counterparty, in addition to the other remedies available to it under the Cap
Agreement, can set-off the amount of such Cap Premium against the Counterparty's
obligations under the Cap Agreement.
Upon the occurrence of any Cap Default under the Cap Agreement, the
non-defaulting party will have the right to designate an Early Termination Date
(as defined in the ISDA Master Agreement) upon the occurrence of the Cap
Default. The Trust may not designate an Early Termination Date without the
consent of the controlling party specified in the Agreement. With respect to
Termination Events, an Early Termination Date may be designated by one of the
parties (as specified in the Cap Agreement) and will occur only upon notice and,
in some circumstances, after any affected party has used reasonable efforts to
transfer it rights and obligations under the Cap Agreement to a related entity
within a limited period after notice has been given of the Termination Event,
all as set forth in the Cap Agreement. The occurrence of an Early Termination
Date under the Cap Agreement will constitute a "Cap Early Termination".
Upon any Cap Early Termination of the Cap Agreement, the Trust or the
Counterparty may be liable to make a termination payment to the other
(regardless, if applicable, of which of the parties has caused the termination).
The amount of the termination payment will be based on the value of the Cap
Agreement computed in accordance with the procedures set forth in the Cap
Agreement less the present value of the unpaid Cap Premiums that would have been
owed by the Trust under the remaining scheduled term of the Cap Agreement. Any
payment could be substantial. In the event that the Trust is required to make a
termination payment, the payment will be payable solely from the available funds
in loan group 2 in the same order of priority as any Cap Premium would otherwise
be payable to the Counterparty (which is payable prior to payment of interest on
the Group 2 Certificates); provided, however, that, in the event that a
termination payment is owed to the Counterparty following a Cap Default
resulting from a default of the Counterparty or a Termination Event, the
termination payment will be subordinate to the right of the Group 2
Certificateholders to receive full payment of principal of and interest on the
Certificates. Accordingly, termination payments, if required to be made by the
Trust, could result in shortfalls to Group 2 Certificateholders.
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<PAGE>
If, following an Early Termination Date, a termination payment is owed
by the Trust to the Counterparty and the Trust receives a payment (an
"Assumption Payment") from a successor counterparty to assume the position of
the Counterparty, the portion of the Assumption Payment that does not exceed the
amount of the termination payment owed by the Trust to the Counterparty will be
paid by the Trust to the Counterparty and will not be available to make
distributions to Certificateholders. Following the payment, the amount of the
termination payment owed by the Trust to the Counterparty will be reduced by the
amount of the payment.
If the rating of the Counterparty (or any successor credit support
provider) is withdrawn or reduced below "A-" by Fitch or "A3" by Moody's or such
other higher rating specified in the Cap Agreement (this withdrawal or
reduction, a "Cap Rating Agency Downgrade"), the Counterparty is required, no
later than the 30th day following the Cap Rating Agency Downgrade, at the
Counterparty's expense, either to (1) obtain a substitute Counterparty that has
a counterparty rating of at least "A-" by Fitch and "A3" by Moody's or such
other higher rating specified in the Cap Agreement or (2) enter into
arrangements reasonably satisfactory to the Trustee, including collateral
arrangements, guarantees or letters of credit, which arrangements will result in
the total negation of the effect or impact of the Cap Rating Agency Downgrade on
the holders of the Group 2 Certificates.
P&I ADVANCES
Subject to the following limitations, the Master Servicer will be
obligated to advance or cause to be advanced on or before each Distribution Date
its own funds, or funds in the certificate account that are not included in the
Available Distribution Amount for either certificate group for such Distribution
Date, in an amount equal to the aggregate of all payments of principal and
interest, net of the Master Servicer's Servicing Fee, that were due during the
related Due Period on the home equity loans of the related loan group and that
were delinquent on the related Determination Date, plus certain amounts
representing assumed payments not covered by any current net income on the
mortgaged properties acquired by foreclosure or deed in lieu of foreclosure (any
such advance, a "P&I Advance"). With respect to a delinquent Balloon Payment,
the Master Servicer is not required to make a P&I Advance of such delinquent
Balloon Payment. The Master Servicer will, however, make monthly P&I Advances
with respect to a Balloon Loan with a delinquent Balloon Payment up to that
amount equal to the assumed monthly principal and interest payment (net of the
related Servicing Fee) that would have been due during the related Due Period,
based on the original principal amortization schedule for such Balloon Loan had
the Balloon Payment not been due.
P&I Advances are required to be made only to the extent they are deemed
by the Master Servicer to be recoverable from related late collections,
insurance proceeds or liquidation proceeds. The purpose of making such P&I
Advances is to maintain a regular cash flow to the related certificateholders,
rather than to guarantee or insure against losses. The Master Servicer will not
be required to make any P&I Advances with respect to reductions in the amount of
the monthly payments on the home equity loans due to bankruptcy proceedings or
the application of the Relief Act.
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All P&I Advances will be reimbursable to the Master Servicer from late
collections, insurance proceeds and liquidation proceeds from the home equity
loan as to which such unreimbursed P&I Advance was made. In addition, any P&I
Advances previously made in respect of any home equity loan that are deemed by
the Master Servicer to be nonrecoverable from related late collections,
insurance proceeds or liquidation proceeds may be reimbursed to the Master
Servicer out of any funds in the certificate account prior to the distributions
on the Certificates. In the event that the Master Servicer fails in its
obligation to make any required advance, the Trustee will be obligated to make
any such advance, to the extent required in the Agreement.
The Agreement provides that the Master Servicer may enter into a
facility with any person which provides that such person (an "Advancing Person")
may fund P&I Advances and/or servicing advances, although no such facility shall
reduce or otherwise affect the Master Servicer's obligation to fund such P&I
Advances and/or servicing advances. Any P&I Advances and/or servicing advances
made by an Advancing Person will be reimbursed to the Advancing Person in the
same manner as reimbursements would be made to the Master Servicer.
RESTRICTIONS ON TRANSFER OF THE SUBORDINATED OFFERED CERTIFICATES
Because the Subordinated Offered Certificates are subordinate to the
Class A Certificates, any Plan purchasing such Subordinated Offered Certificates
will be deemed to have represented that certain conditions have been satisfied
in connection with such purchase. We refer you to "ERISA Considerations" in this
prospectus supplement.
POOLING AND SERVICING AGREEMENT
GENERAL
The Certificates will be issued pursuant to the Pooling and Servicing
Agreement, dated as of August 1, 2000 (the "Agreement"), among the Depositor,
the Master Servicer and the Trustee, a form of which is filed as an exhibit to
the Registration Statement. A Current Report on Form 8-K relating to the
Certificates containing a copy of the Agreement as executed will be filed by the
Depositor with the Securities and Exchange Commission within fifteen days of the
initial issuance of the certificates. The Trust Fund created under the Agreement
will consist of (i) all of the Depositor's right, title and interest in the home
equity loans, the related mortgage notes, mortgages and other related documents,
(ii) all payments on or collections in respect of the home equity loans due
after the related cut-off date, together with any proceeds thereof, (iii) any
mortgaged properties acquired on behalf of certificateholders by foreclosure or
by deed in lieu of foreclosure, and any revenues received thereon, (iv) the
rights of the Trustee under all insurance policies required to be maintained
pursuant to the Agreement, in the amounts deposited in the pre-funding and
capitalized interest accounts, and (v) the amounts deposited in the pre-funding
and capitalized interest accounts, and, in the case of the Group 2 Certificates,
the rights under the Cap Agreement and the Group 2 Reserve Fund, and (vi)
certain of the rights of the Depositor
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under the Mortgage Loan Purchase Agreement pursuant to which the Depositor
acquired the home equity loans from the Seller. Reference is made to the
prospectus for important information in addition to that set forth herein
regarding the Trust Fund, the terms and conditions of the Agreement and the
Offered Certificates. The Offered Certificates will be transferable and
exchangeable at the corporate trust offices of the Trustee, located at 123
Washington Street New York, New York.
ASSIGNMENT OF THE HOME EQUITY LOANS
The Depositor will deliver to the Trustee (or a custodian on the
Trustee's behalf) with respect to each home equity loan (i) the mortgage note
endorsed without recourse to the Trustee to reflect the transfer of the home
equity loan, (ii) the original mortgage with evidence of recording indicated
thereon and (iii) an assignment of the mortgage in recordable form to the
Trustee, reflecting the transfer of the home equity loan. Such assignments of
home equity loans are required to be recorded by or on behalf of the Depositor
in the appropriate offices for real property records; provided, however, that
such assignments of mortgage are not required to be recorded if the Seller
furnishes to the Trustee, on or before the closing date, at the Seller's
expense, an opinion of counsel with respect to the relevant jurisdictions that
such recording is not necessary to perfect the Trustee's interest in the related
home equity loan; provided, further, however, notwithstanding the delivery of
such opinion of counsel, upon the occurrence of certain events set forth in the
Agreement, each such assignment of mortgage shall be recorded by the Trustee as
set forth in the Agreement.
The Trustee will agree, for the benefit of the certificateholders, to
review (or cause a custodian on its behalf to review) each mortgage file on or
before the closing date (or the date of receipt of any documents delivered to
the Trustee after the closing date), to ascertain that all required documents
(or certified copies of documents) have been executed and received).
If in the process of reviewing the mortgage files and making or
preparing, as the case may be, if the Trustee or any Custodian finds any
document or documents constituting a part of a mortgage file to be missing or
defective in any material respect, at the conclusion of its review the Trustee
(or a Custodian on behalf of the Trustee) shall so notify the Depositor and the
Master Servicer. In addition, upon the discovery by the Depositor, the Master
Servicer or the Trustee of a breach of any of the representations and warranties
made by the Seller in the Mortgage Loan Purchase Agreement in respect of any
home equity loan which materially adversely affects such home equity loan or the
interests of the related certificateholders in such home equity loan, the party
discovering such breach shall give prompt written notice to the other parties.
Upon discovery or receipt of notice of any materially defective
document in, or that a document is missing from, the mortgage file or of the
breach by the Seller of any representation, warranty or covenant under the
Mortgage Loan Purchase Agreement in respect of any home equity loan which
materially adversely affects the value of such home equity loan or the interest
therein of the certificateholders, the Trustee (or a Custodian on behalf of the
Trustee) shall promptly notify the Seller and the Master Servicer of such
defect, missing document or breach and request that the Seller deliver such
missing document or cure such defect or breach within 90
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days from the date the Seller was notified of such missing document, defect or
breach, and if the Seller does not deliver such missing document or cure such
defect or breach in all material respects during such period, the Master
Servicer (or the Trustee) shall enforce the obligations of the Seller under the
Mortgage Loan Purchase Agreement to repurchase such home equity loan within 90
days after the date on which the Seller was notified of such missing document,
defect or breach, if and to the extent that the Seller, as the case may be, is
obligated to do so under the Mortgage Loan Purchase Agreement.
The Agreement requires that prior to the first anniversary of the
Agreement, the Trustee shall deliver to the Depositor and the Master Servicer a
final certification or shall cause the custodian to deliver final certification
evidencing the completeness of the mortgage files, with any applicable
exceptions.
CONVEYANCE OF SUBSEQUENT HOME EQUITY LOANS
On the closing date the excess of the aggregate balance of the
certificates over the scheduled principal balance of the initial home equity
loans on August 1, 2000 (which excess is not expected to exceed $375,000,000)
will be deposited in two pre-funding accounts established and maintained by the
Trustee on behalf of the certificateholders. The amount on deposit in one
pre-funding account will be allocated to purchase fixed rate home equity loans
and 5/25 Adjustable Rate Loans for loan group 1 and the amount on deposit in the
second pre-funding account will be allocated to purchase adjustable rate home
equity loans for loan group 2. During the pre-funding period, the Depositor is
expected to purchase conventional home equity loans acquired by the Seller after
August 1, 2000 from the seller and sell those subsequent home equity loans to
the trust fund as described below. The purchase price for each subsequent home
equity loans will equal the Scheduled Principal Balance of such subsequent home
equity loan as of the date of origination of such subsequent home equity loan
(unless such subsequent home equity loan was originated prior to August 1, 2000,
in which case, as of September 1, 2000) and will be paid from the related
pre-funding account. Accordingly, the purchase of subsequent home equity loan
will decrease the amount on deposit in the pre-funding accounts and increase the
Scheduled Principal Balance of the home equity loan pool.
Pursuant to the pooling and servicing agreement and a subsequent
transfer agreement to be executed by the Seller, the Depositor and the Trustee,
the conveyance of subsequent home equity loans may be made on any business day
during the pre-funding period, subject to certain conditions in the pooling and
servicing agreement being satisfied, including that:
o the subsequent home equity loans conveyed on the subsequent
transfer date satisfy the same representations and warranties
in the pooling and servicing agreement applicable to all home
equity loans,
o the subsequent home equity loans conveyed on the subsequent
transfer date were not selected in a manner intended to be
adverse to the interests of the certificateholders,
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o the Trustee receives an opinion of counsel with respect to the
validity of the conveyance of the subsequent home equity loans
conveyed on the subsequent transfer date and the absence of
any adverse effect on the REMIC,
o the conveyance of the subsequent home equity loans on the
subsequent transfer date will not result in a reduction or
withdrawal of any ratings assigned to the Offered
Certificates,
o no subsequent home equity loans conveyed on the subsequent
transfer date is 30 or more days delinquent,
o each subsequent home equity loan conveyed on the subsequent
transfer date is secured by a first lien on the related
mortgaged property, and
o following the conveyance of the subsequent home equity loans
on the subsequent transfer date, the characteristics of each
loan group to which home equity loans were added pursuant to
such conveyance will remain substantially similar to the
characteristics of each loan group as of the initial cut-off
date.
THE MASTER SERVICER
The information set forth in the following paragraphs has been provided
by the Master Servicer. None of the Depositor, the Underwriter, the Trustee or
any of their respective affiliates has made or will make any representation as
to the accuracy or completeness of such information.
The Master Servicer, a Delaware corporation, is a specialty finance
company engaged in the business of originating, purchasing, selling and
servicing sub-prime home equity loans secured by one- to four-family residences.
The Master Servicer began originating sub-prime home equity loans in 1988 as a
division of Long Beach Bank, F.S.B. To gain greater operating flexibility and
improve its ability to compete against other financial services companies, in
October 1994, Long Beach Bank, F.S.B. ceased operations, voluntarily surrendered
its federal thrift charter and transferred its mortgage banking business to a
new Delaware corporation called Long Beach Mortgage Company ("Old Long Beach").
In May 1997, Old Long Beach completed a reorganization (the
"Reorganization") of its business operations by transferring to its wholly-owned
subsidiary, Long Beach Financial Corporation ("LBFC"), the assets and personnel
related to Old Long Beach's broker-sourced mortgage lending and loan sales
operations and approximately $40 million in cash. The assets received from Old
Long Beach by LBFC were then transferred to the Master Servicer, a wholly-owned
subsidiary of LBFC. Immediately following the Reorganization, LBFC became a
publicly traded company in connection with a public offering of its stock. The
Master Servicer continued the activities previously conducted by the
broker-sourced and loan sales divisions of Old Long Beach.
In October 1999, Washington Mutual, Inc. ("WM"), a publicly traded
financial services company headquartered in Seattle, Washington, acquired LBFC
in a transaction in which LBFC
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merged into WM. As a result of this transaction, the Master Servicer became a
wholly-owned subsidiary of WM.
Substantially all of the loans originated by the Master Servicer while
it operated as a division of Old Long Beach were serviced by the servicing
division of Old Long Beach. Following the Reorganization, loans originated by
the Master Servicer were master serviced by the Master Servicer and directly
serviced by another entity. In November 1998, the Master Servicer began directly
servicing loans and will directly service all of the home equity loans in the
home equity loan pool.
The Master Servicer is approved as a seller/servicer for Fannie Mae and
as a non-supervised mortgagee by the U.S. Department of Housing and Urban
Development.
Lending Activities and Loan Sales. The Master Servicer originates real
estate loans through its network of offices and loan origination centers. The
Master Servicer also participates in secondary market activities by originating
and selling home equity loans while continuing to service the majority of the
loans sold. In other cases the Master Servicer's whole loan sale agreements
provide for the transfer of servicing rights.
The Master Servicer's primary lending activity is funding loans to
enable mortgagors to purchase or refinance residential real property, which
loans are secured by first or second liens on the related real property. The
Master Servicer's single-family real estate loans are predominantly
"conventional" home equity loans, meaning that they are not insured by the
Federal Housing Administration or partially guaranteed by the U.S. Department of
Veterans Affairs.
The following table summarizes the Master Servicer's one- to
four-family residential home equity loan origination and sales activity for the
periods shown below. Sales activity may include sales of home equity loans
purchased by the Master Servicer from other loan originators.
<TABLE>
<CAPTION>
--------------- ---------------- --------------- ---------------- ------------------ ------------
1995(1) 1996(1) 1997(1) 1998 1999(4) 2000(2)(4)
(DOLLARS IN THOUSANDS)
--------------- ---------------- --------------- ---------------- ------------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Originations
and $592,542 $1,058,122 $1,685,742 $2,575,965 $3,181,948 $1,797,335
Purchases
Sales(3) $580,366 $1,029,789 $1,679,522 $2,521,606 $2,814,656 $1,287,341
</TABLE>
-----------------
(1) Reflects activity of broker-sourced business of Old Long Beach up to
May 1997.
(2) Through June 30, 2000
(3) Sales are net of loans repurchased in the normal course of business.
(4) 2000 excludes $475,125,156 of loans which were originated and sold to
Washington Mutual, Inc. in 1999 (included in the 1999 balances) and
were subsequently repurchased in 2000 and sold.
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Loan Servicing. The Master Servicer services all of the home equity
loans it originates that are retained in its portfolio and continues to service
at least a majority of the loans that have been sold to investors. Servicing
includes collecting and remitting loan payments, accounting for principal and
interest, contacting delinquent mortgagors, and supervising foreclosure in the
event of unremedied defaults. The Master Servicer's servicing activities are
audited periodically by applicable regulatory authorities. Certain financial
records of the Master Servicer relating to its loan servicing activities are
reviewed annually as part of the audit of the Master Servicer's financial
statements conducted by its independent accountants.
Collection Procedures; Delinquency and Loss Experience.
When a mortgagor fails to make a required payment on a residential home
equity loan, the Master Servicer attempts to cause the deficiency to be cured by
corresponding with the mortgagor. In most cases, deficiencies are cured
promptly. Pursuant to the Master Servicer's customary procedures for residential
home equity loans serviced by it for its own account, the Master Servicer
generally mails a notice of intent to foreclose to the mortgagor after the loan
is delinquent two payments and, within one month thereafter, if the loan remains
delinquent, typically institutes appropriate legal action to foreclose on the
property securing the loan. If foreclosed, the property is sold at public or
private sale and may be purchased by the Master Servicer. In California, real
estate lenders are generally unable as a practical matter to obtain a deficiency
judgment against the mortgagor on a loan secured by single-family real estate.
Loan Servicing Portfolio
The following table sets forth the delinquency and loss experience at
the dates indicated for residential (one- to four-family) first lien loans
serviced directly by the Master Servicer that were originated or purchased by
the Master Servicer:
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999 December 31, 1998
(Dollars in Thousands)
<S> <C> <C> <C>
Total Outstanding Principal Balance $4,455,761 $3,951,592 $546,581
Number of Loans 39,572 35,359 4,865
DELINQUENCY
Period of Delinquency:
31-60 Days
Principal Balance $65,151 $63,403 $312
Number of Loans 650 645 2
Delinquency as a Percentage
of Total Outstanding
Principal Balance 1.46% 1.60% 0.06%
Delinquency as a Percentage
of Number of Loans 1.64% 1.82% 0.04%
61-90 Days
Principal Balance $39,362 $31,376 $0.00
Number of Loans 356 278 0
Delinquency as a Percentage
of Total Outstanding
Principal Balance 0.88% 0.79% 0.00%
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Delinquency as a Percentage of Number
of Loans 0.90% 0.79% 0.00%
91 Days or More
Principal Balance $127,256 $97,653 $7,695
Number of Loans 1,196 939 97
Delinquency as a Percentage of Total
Outstanding Principal Balance
Delinquency as a Percentage of Number 2.86% 2.47% 1.41%
of Loans 3.02% 2.66% 1.99%
Total Delinquencies:
Principal Balance $231,769 $192,433 $8,007
Number of Loans 2,202 1,862 99
Delinquency as a Percentage of Total
Outstanding Principal Balance 5.20% 4.87% 1.46%
Delinquency as a Percentage of
Number of Loans 5.56% 5.27% 2.03%
FORECLOSURES PENDING(1)
Principal Balance $123,675 $97,661 $7,597
Number of Loans 1150 930 96
Foreclosures Pending as a Percentage
of Total Outstanding Principal
Balance 2.78% 2.47% 1.39%
Foreclosures Pending as a Percentage
of Number of Loans 2.91% 2.63% 1.97%
NET LOAN LOSSES $2,771 $0.00
for the Period $3,371
NET LOAN LOSSES as a
Percentage of Total Outstanding
Principal Balance 0.08% 0.07% 0.00%
</TABLE>
-------------------
(1) Includes home equity loans which are in foreclosure but as to which title
to the mortgaged property has not been acquired, at the end of the period
indicated. Foreclosures pending are included in the delinquencies set forth
above.
(2) Net Loan Losses is calculated for all loans as the aggregate of the net
loan loss for all such loans liquidated during the period indicated. The
net loan loss for any such loan is equal to the difference between (a) the
principal balance plus accrued interest through the date of liquidation
plus all liquidation expenses related to such loan and (b) all amounts
received in connection with the liquidation of such loan. The majority of
residential loans serviced by the Master Servicer have been conveyed to
REMIC trust funds.
As of June 30, 2000, 299 one- to four-family residential properties
relating to loans in the Master Servicer's servicing portfolio had been acquired
through foreclosure or deed in lieu of foreclosure and were not liquidated.
There can be no assurance that the delinquency and loss experience of
the home equity loans will correspond to the loss experience of the Master
Servicer's mortgage portfolio set forth
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in the foregoing table. The statistics shown above represent the delinquency and
loss experience for the Master Servicer's total servicing portfolio only for the
periods presented, whereas the aggregate delinquency and loss experience on the
home equity loans will depend on the results obtained over the life of the Trust
Fund. The Master Servicer's portfolio includes home equity loans with payment
and other characteristics which are not representative of the payment and other
characteristics of the home equity loans. A substantial number of the home
equity loans may also have been originated based on Long Beach Underwriting
Guidelines that are less stringent than those generally applicable to the
servicing portfolio reflected in the foregoing table. If the residential real
estate market should experience an overall decline in property values, the
actual rates of delinquencies, foreclosures and losses could be higher than
those previously experienced by the Master Servicer. In addition, adverse
economic conditions (which may or may not affect real property values) may
affect the timely payment by mortgagors of scheduled payments of principal and
interest on the home equity loans and, accordingly, the actual rates of
delinquencies, foreclosures and losses with respect to the home equity loans.
The delinquency and loss experience percentages set forth above in the
immediately preceding table are calculated on the basis of the total home equity
loans serviced as of the end of the periods indicated. However, because the
total outstanding principal balance of residential loans serviced by the Master
Servicer has increased from $546,581 at December 31, 1998 to $4,455,761 at June
30, 2000, the total outstanding principal balance of originated loans serviced
as of the end of any indicated period includes many loans that will not have
been outstanding long enough to give rise to some or all of the indicated
periods of delinquency. In the absence of such substantial and continual
additions of newly originated loans to the total amount of loans serviced, the
percentages indicated above would be higher and could be substantially higher.
The actual delinquency percentages with respect to the home equity loans may be
expected to be substantially higher than the delinquency percentages indicated
above because the composition of the home equity loans will not change.
THE TRUSTEE
Bankers Trust Company of California, N.A., a national banking
association, will act as trustee (the "Trustee") for the certificates pursuant
to the Agreement. The Trustee's offices for notices under the Agreement are
located at 1761 St. Andrew Place, Santa Ana, CA 92705-4934 and its telephone
number is 714-247-6000.
The principal compensation to be paid to the Trustee in respect of its
obligations under the Agreement will be equal to a fee that will have been paid
by or on behalf of the Depositor prior to the closing date plus any interest or
other income earned on funds held in the distribution account as provided in the
Agreement. The Agreement will provide that the Trustee and any director,
officer, employee or agent of the Trustee will be indemnified by the Trust Fund
and will be held harmless against any loss, liability or expense (not including
expenses, disbursements and advances incurred or made by the Trustee, including
the compensation and the expenses and disbursements of its agents and counsel,
in the ordinary course of the Trustee's performance in accordance with the
provisions of the Agreement) incurred by the Trustee in connection with any
pending or threatened claim or legal action arising out of or in connection with
the acceptance or
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administration of its obligations and duties under the Agreement, other than any
loss, liability or expense (i) resulting from a breach of the Master Servicer's
obligations and duties under the Agreement, provided, however, the Master
Servicer will agree to indemnify the Trustee from, and hold it harmless against,
any loss, liability or expense resulting from a breach of the Master Servicer's
obligations and duties under the Agreement, (ii) that constitutes certain
specific liabilities of the Trustee in connection with its REMIC administration
duties under the Agreement or (iii) incurred by reason of willful misfeasance,
bad faith or negligence in the performance of the Trustee's duties under the
Agreement or as a result of a breach, or by reason of reckless disregard, of the
Trustee's obligations and duties under the Agreement. In addition, the Agreement
will provide that the Trustee and any director, officer, employee or agent of
the Trustee will be reimbursed from the Trust Fund for all costs associated with
the transfer of servicing in the event of a Master Servicer Event of Default (as
defined in the Agreement) including, but not limited to, any differential in the
current Servicing Fee or any successor servicing fee.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The principal compensation to be paid to the Master Servicer in respect
of its servicing activities for the certificates will be equal to accrued
interest at the Servicing Fee Rate of 0.50% per annum with respect to each home
equity loan on the Scheduled Principal Balance of each home equity loan (the
"Servicing Fee"). As additional servicing compensation, the Master Servicer is
entitled to retain all assumption fees, late payment charges and other
miscellaneous servicing fees (with the exception of Prepayment Charges, which
will be distributed to the holders of the Class P Certificates) to the extent
collected from mortgagors, together with any interest or other income earned on
funds held in the Certificate Account and any escrow accounts.
The Master Servicer is obligated to offset any Prepayment Interest
Shortfall with respect to the home equity loans on any Distribution Date
(payments made by the Master Servicer in satisfaction of such obligation,
"Compensating Interest") to the extent of its Servicing Fee for such
Distribution Date. The Master Servicer is obligated to pay certain insurance
premiums and certain ongoing expenses associated with the home equity loan pool
with respect to the home equity loans and incurred by the Master Servicer in
connection with its responsibilities under the Agreement and is entitled to
reimbursement therefor as provided in the Agreement. We refer you to
"Description of the Securities--Retained Interest; Servicing Compensation and
Payment of Expenses" in the prospectus for information regarding expenses
payable by the Master Servicer and "Federal Income Tax Consequences" in this
prospectus supplement regarding certain taxes payable by the Master Servicer.
EVENTS OF DEFAULT
In addition to those Events of Default (as defined in the prospectus)
described under "Description of the Securities--Events of Default" in the
prospectus, upon the occurrence of certain loss triggers with respect to the
home equity loans, the Master Servicer may be removed as master servicer of the
home equity loans in accordance with the terms of the Agreement.
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Any successor to the Master Servicer appointed under the Agreement must
be a housing loan servicing institution acceptable to each Rating Agency (as
defined in the prospectus) with a net worth at the time of such appointment of
at least $15,000,000. We refer you to "Description of the Securities--Rights
Upon Event of Default" in the prospectus.
VOTING RIGHTS
At all times, 93% of all voting rights will be allocated among all
holders of the Offered Certificates in proportion to their then outstanding
Certificate Principal Balances, 1% and 1%, respectively, of all voting rights
will be allocated among the holders of the Class X-F Certificates and Class X-V
Certificates, 1% and 1%, respectively, of all voting rights will be allocated
among holders of the Class B-IOF Certificates and B-IOV Certificates, 1% and 1%,
respectively, of all voting rights will be allocated among holders of the Class
P-F Certificates and Class P-V Certificates respectively, and 1% of all voting
rights will be allocated among holders of the Residual Certificates, in each
case in proportion to the percentage interests evidenced by their respective
certificates.
TERMINATION
The circumstances under which the obligations created by the Agreement
will terminate in respect of the certificates are described in "Description of
the Securities--Termination" in the prospectus. The Master Servicer will have
the right to purchase all remaining home equity loans and any properties
acquired in respect thereof and thereby effect early retirement of the
certificates on any Distribution Date following the Due Period during which the
aggregate principal balance of the home equity loans (and properties acquired in
respect thereof) remaining in the Trust Fund at the time of purchase is reduced
to less than 10% of the aggregate principal balance of the home equity loans as
of the related cut-off date. In the event the Master Servicer exercises such
option, the purchase price payable in connection therewith generally will be
equal to the greater of par or the fair market value of the home equity loans
and such properties, plus accrued interest for each home equity loan at the
related Mortgage Rate to but not including the first day of the month in which
such repurchase price is distributed, together with any amounts due to the
Master Servicer for unpaid Servicing Fees and any unreimbursed advances. In the
event the Master Servicer exercises such option, the portion of the purchase
price allocable to the Offered Certificates of each class will be, to the extent
of available funds, (i) 100% of the then outstanding Certificate Principal
Balance thereof, plus (ii) one month's interest on the then outstanding
Certificate Principal Balance thereof at the then applicable Pass-Through Rate
for such class, plus (iii) any previously accrued but unpaid interest thereon to
which the holders of such certificates are entitled, including any unpaid
Certificateholders' Interest Index Carryover. In no event will the trust created
by the Agreement continue beyond the expiration of 21 years from the death of
the survivor of the persons named in the Agreement. We refer you to "Description
of the Securities--Termination" in the prospectus.
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FEDERAL INCOME TAX CONSEQUENCES
The following section in conjunction with the section in the prospectus
captioned "Federal Income Tax Consequences" discusses the material federal
income tax consequences of the purchase, ownership and disposition of the
Offered Certificates. This section must be considered only in connection with
"Federal Income Tax Consequences" in the prospectus. The discussion herein and
in the prospectus is based upon laws, regulations, rulings and decisions now in
effect, all of which are subject to change. The discussion below and in the
prospectus does not purport to deal with all federal tax consequences applicable
to all categories of investors, some of which may be subject to special rules.
Investors should consult their own tax advisors in determining the federal,
state, local and any other tax consequences to them of the purchase, ownership
and disposition of the Offered Certificates. No portion of the "Federal Income
Tax Consequences" section of the prospectus or prospectus supplement constitutes
an opinion of counsel, other than the opinion set forth in the second paragraph
of "--REMIC Elections" below and in clause (ii) of "Federal Income Tax
Consequences--General" in the prospectus.
REMIC ELECTIONS
Elections will be made to treat certain assets of the Trust as "real
estate mortgage investment conduits" ("REMICs") for federal income tax purposes,
creating a three-tiered REMIC structure. The Offered Certificates will be
designated as regular interests in a REMIC (the "Regular Certificates" or the
"REMIC Regular Certificates"), and the Class R Certificates will be designated
as the residual interest in each REMIC (the "REMIC Residual Certificates").
Qualification as a REMIC requires ongoing compliance with certain
conditions. Stroock & Stroock & Lavan LLP, special tax counsel to the Depositor,
is of the opinion that, for federal income tax purposes, assuming (I) the
appropriate REMIC elections are made, and (ii) compliance with all of the
provisions of the Agreement, the REMICs formed pursuant to the Agreement will
each constitute a REMIC, the Offered Certificates will be considered "regular
interests" in a REMIC, and the Class R Certificates will be considered the sole
class of "residual interests" in each REMIC.
Because the REMIC Regular Certificates will be considered REMIC regular
interests, they generally will be taxable as debt obligations under the Internal
Revenue Code of 1986, as amended (the "Code"), and interest paid or accrued on
the Regular Certificates, including original issue discount with respect to any
Regular Certificates issued with original issue discount, will be taxable to
certificateholders in accordance with the accrual method of accounting. Some or
all of the Classes of Regular Certificates may be subject to the original issue
discount provisions. We refer you to "Federal Income Tax Consequences" in the
prospectus for more detail.
In addition, certain Classes of Regular Certificates may be treated as
issued with a premium. We refer you to "Federal Income Tax Consequences" in the
prospectus for more detail.
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The prepayment assumption that will be used in determining the rate of
accrual of original issue discount is 120% Prepayment Assumption with respect to
the home equity loans in Loan Group 1, 27% CPR with respect to the home equity
loans in loan group 2. We refer you to "Prepayment and Yield Considerations" in
this prospectus supplement for a description of the prepayment assumption model.
However, no representation is made as to the rate at which prepayments actually
will occur.
The Offered Certificates will be treated as assets described in Section
7701(a)(19)(c) of the Code for domestic building and loan associations, and
"real estate assets" for real estate investment trusts (REITs), subject to the
limitations described in "Federal Income Tax Consequences" in the prospectus.
Similarly, interest on such Offered Certificates will be considered "interest on
obligations secured by mortgages on real property" for REITs, subject to the
limitations described in "Federal Income Tax Consequences" in the prospectus.
ADJUSTABLE RATE CERTIFICATES
The Agreement provides for a reserve fund (the "Supplemental Interest
Reserve Fund"), which is held by the Trustee on behalf of the holders of the
Group 2 Certificates (other than the Class B-IOV Certificates and the Class X-V
Certificates). To the extent amounts on deposit are sufficient, holders of the
adjustable rate certificates will be entitled to receive payments from the fund
equal to any Current WAC Excess for the related class and any such
Certificateholders' Interest Index Carryover. The "Current WAC Excess" for the
related class is the portion of the related Interest Distribution Amount being
distributed on any particular Distribution Date with respect to the adjustable
rate certificates equal to the amount of interest accrued on such Certificates
at a rate equal to the excess of the related formula rate for the related class
over the Group 2 Net WAC Cap for the related class. The "Group 2 Net WAC Cap"
for the related class with respect to any Distribution Date will be a rate per
annum equal to (A) the product of (i) the weighted average of the Expense
Adjusted Mortgage Rates on the home equity loans in loan group 2 as of the
beginning of the related Due Period and (ii) the outstanding principal balance
of the home equity loans in loan group 2 as of the beginning of the related Due
Period minus the notional amount of the Class B-IOV Certificates as of such date
plus (B) the product of (i) the weighted average of the Expense Adjusted
Mortgage Rates on the home equity loans in loan group 2 as of the beginning of
the related Due Period minus the Pass-Through Rate of the Class B-IOV
Certificates and (ii) the notional amount of the Class B-IOV Certificates as of
the beginning of the related Due Period, divided by (C) the outstanding
principal balance of the home equity loans in loan group 2 as of the beginning
of the related Due Period. The amount required to be deposited in the fund on
any Distribution Date (the "Supplemental Interest Reserve Fund Deposit") will
equal any Current WAC Excess for the related class or such Certificateholders'
Interest Index Carryover for the related Distribution Date, or, if no Current
WAC Excess for the related class or such Certificateholders' Interest Index
Carryover for the related class is payable on that Distribution Date, an amount
that when added to other amounts already on deposit in the fund, the aggregate
amount on deposit in the fund is equal to $10,000. Any investment earnings on
amounts on deposit in the fund will be paid to (and for the benefit of) the
holders of the related Class X-IO certificates and will not be available to pay
any Current WAC Excess for the related class or such Certificateholders' Index
Carryover. The Supplemental
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Interest Reserve Fund will not be included as an asset of any REMIC created
pursuant to the Agreement.
The adjustable rate certificates, except to the extent of any Current
WAC Excess for the related class and any such Certificateholders' Interest Index
Carryover, will be treated as regular interests in a REMIC under section 860G of
the Code (the "Regular Interests"). Accordingly, the portion of the related
certificates representing such Regular Interests will be treated as (I) assets
described in section 7701(a)(19)(c) of the Code, and (ii) "real estate assets"
within the meaning of section 856(c)(4)(A) of the Code, in each case to the
extent described in the prospectus. Interest on the portion of the related
certificates will be treated as interest on obligations secured by mortgages on
real property within the meaning of section 856(c)(3)(B) of the Code to the same
extent that the portion of the related certificates is treated as real estate
assets. We refer you to "Certain Federal Income Tax Consequences" in the
prospectus.
The right to receive any Current WAC Excess for the related class and
any such Certificateholders' Interest Index Carryover will not be (I) a regular
interest in a REMIC under section 860G of the Code, (ii) an asset described in
section 7701(a)(19)(c) of the Code, or (iii) a "real estate asset" within the
meaning of section 856(c)(4)(A) of the Code. Further, neither the Current WAC
Excess for the related class nor such Certificateholders' Interest Index
Carryover will be considered interest on obligations secured by mortgages on
real property within the meaning of section 856(c)(3)(B) of the Code.
Each holder of Group 2 Certificates (other than the Class B-IOV and the
Class X-V Certificates) is deemed to own an undivided beneficial ownership
interest in two assets: (I) the Regular Interests for the related class and (ii)
an interest rate cap contract (a "Rate Cap Agreement") under which the Current
WAC Excess for the related class and such Certificateholders' Interest Index
Carryover is paid. The Rate Cap Agreement with respect to Group 2 Certificates
(other than the Class B-IOV Certificates) is not included in any REMIC. The
treatment of amounts received by holders of the Group 2 Certificates (other than
the Class B-IOV Certificates and the Class X-V Certificates) under such
certificateholder's right to receive the Current WAC Excess for the related
class and such Certificateholders' Interest Index Carryover will depend upon the
portion of such certificateholder's purchase price allocable thereto. Under the
REMIC regulations, each such certificateholder must allocate its purchase price
for the adjustable rate certificates between its undivided interest in the
Regular Interests for the related class and its undivided interest in the Rate
Cap Agreement for the related class in accordance with the relative fair market
values of each property right. No representation is or will be made as to the
relative fair market values. Generally, payments made to the adjustable rate
certificates under the Rate Cap Agreement for the related class will be included
in income based on, and the purchase price allocated to such Cap Agreement for
the related class may be amortized in accordance with, the regulations relating
to notional principal contracts.
CERTAIN STATE TAX CONSIDERATIONS
Because the income tax laws of the states vary, it is impractical to
predict the income tax consequences to the certificateholders in all of the
state taxing jurisdictions in which they are
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subject to tax. Certificateholders are urged to consult their own tax advisors
with respect to state and local income and franchise taxes.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the underwriting
agreement, dated August 28, 2000 (the "Underwriting Agreement"), the Depositor
has agreed to sell, and Credit Suisse First Boston Corporation, Lehman Brothers,
Inc., Morgan Stanley & Co. Incorporated, Prudential Securities Incorporated and
Salomon Smith Barney Inc., (the "Underwriters") has agreed to purchase from the
Depositor the principal amount of the Offered Certificates set forth under their
respective names.
<TABLE>
<CAPTION>
Principal Principal Principal Principal Principal Principal
Amount Amount Amount Amount Amount Amount
Class AF1 Class AF2 Class AF3 Class AF4 Class AF5 Class AF6
Underwriter Certificates Certificates Certificates Certificates Certificates Certificates
----------- ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Credit Suisse First Boston Corporation 20,960,000 14,700,000 6,940,000 8,440,000 4,460,000 7,500,000
Lehman Brothers Inc................... 20,960,000 14,700,000 6,940,000 8,440,000 4,460,000 7,500,000
Morgan Stanley & Co. Incorporated 20,960,000 14,700,000 6,940,000 8,440,000 4,460,000 7,500,000
Prudential Securities Incorporated 20,960,000 14,700,000 6,940,000 8,440,000 4,460,000 7,500,000
Salomon Smith Barney Inc.............. 20,960,000 14,700,000 6,940,000 8,440,000 4,460,000 7,500,000
</TABLE>
<TABLE>
<CAPTION>
Principal Principal Principal Principal Principal Principal Principal
Amount Amount Amount Amount Amount Amount Amount
Class M1F Class M2F Class BF Class AV Class M1V Class M2V Class BV
Underwriter Certificates Certificates Certificates Certificates Certificates Certificates Certificates
----------- ------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Credit Suisse First Boston Corporation 25,313,000 19,687,000 14,062,000 182,250,000 56,375,000 64,687,000 54,250,000
Lehman Brothers Inc................... 0 0 0 182,250,000 7,000,000 0 0
Morgan Stanley & Co. Incorporated 0 0 0 182,250,000 7,000,000 0 0
Prudential Securities Incorporated 0 0 0 182,250,000 7,000,000 0 2,000,000
Salomon Smith Barney Inc.............. 0 0 0 182,250,000 7,000,000 0 0
</TABLE>
The underwriting agreement provides that the underwriters are obligated
to purchase all of the Offered Certificates if any are purchased. The
underwriting agreement provides that if an underwriter defaults the purchase
commitments of non-defaulting underwriters may be increased or the offering of
the Offered Certificates may be terminated.
The underwriters propose to offer the Offered Certificates initially at
the public offering prices on the cover page of this prospectus supplement, and
to selling group members at those prices less a concession of 0.06% per Class
AF1 Certificate, 0.084% per Class AF2 Certificate, 0.102% per Class AF3
Certificate, 0.162% per Class AF4 Certificates, 0.207% per Class AF5
Certificate, 0.165% per Class AF6 Certificates, 0.225% per Class M1F
Certificates, 0.30% per Class M2F Certificates, 0.39% per Class BF Certificates,
0.099% per Class AV Certificates, 0.225% per Class M1V Certificates, 0.30% per
Class M2V Certificates and 0.39% per Class BV Certificates. The underwriters and
the selling group members may allow a discount of 0.05% per Class AF1
Certificates, 0.075% per Class AF2 Certificates, 0.10% per Class AF3
Certificates, 0.125% per Class AF4 Certificates, 0.125% per Class AF5
Certificates, 0.125% per Class AF6 Certificates, 0.125% per Class M1F
Certificates, 0.125% per Class M2F Certificates, 0.125% per
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Class BF Certificates, 0.075% per Class AV Certificates, 0.125% per Class M1V
Certificates, 0.125% per Class M2V Certificates and 0.125% per Class BV
Certificates on sales to specified other broker dealers.
After the initial public offering, the public offering prices, such
concessions and such discounts may be changed.
The Offered Certificates are a new issue of securities with no
established trading market. The Trust has been advised by the Underwriters that
they intend to make a market in the Offered Certificates, but the Underwriters
are not obligated to make such a market and may discontinue market making at any
time without notice. No assurance can be given as to the liquidity of the
trading market for the Offered Certificates.
The Underwriting Agreement provides that the Depositor will indemnify
the Underwriters against certain civil liabilities, including liabilities under
the Securities Act.
The Depositor is an affiliate of Credit Suisse First Boston
Corporation.
SECONDARY MARKET
There is currently no secondary market for the Offered Certificates and
there can be no assurance that a secondary market for the Offered Certificates
will develop or, if it does develop, that it will continue. The Underwriters
intend to establish a market in the Offered Certificates but are not obligated
to do so. The primary source of information available to investors concerning
the Offered Certificates will be the monthly statements discussed in the
prospectus under "Description of the Securities--Reports to Securityholders,"
which will include information as to the outstanding principal balance of the
Offered Certificates and the status of the applicable form of credit
enhancement. There can be no assurance that any additional information regarding
the Offered Certificates will be available through any other source. In
addition, the Depositor is not aware of any source through which price
information about the Offered Certificates will be generally available on an
ongoing basis. The limited nature of such information regarding the Offered
Certificates may adversely affect the liquidity of the Offered Certificates,
even if a secondary market for the Offered Certificates becomes available.
LEGAL OPINIONS
Certain legal matters relating to the Offered Certificates will be
passed upon for the Seller and Master Servicer by Thacher Proffitt & Wood, New
York, New York and for the Depositor and the Underwriters by Stroock & Stroock &
Lavan LLP, New York, New York.
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RATINGS
It is a condition to the issuance of the Offered Certificates that they
receive at least the respective ratings by Moody's Investors Service Inc.
("Moody's") and Fitch, Inc. ("Fitch", and together with Moody's, the "Rating
Agencies") set forth below:
Moody's Fitch
Class Rating Rating
----- ------ ------
A Aaa AAA
M-1 Aa2 AA
M-2 A2 A
B Baa3 BBB
A securities rating addresses the likelihood of the receipt by offered
certificateholders of distributions on the home equity loans. The rating takes
into consideration the characteristics of the home equity loans and the
structural, legal and tax aspects associated with the Offered Certificates,
including in the case of the Group 2 Certificates, the rating of the
Counterparty. The ratings on the Offered Certificates do not, however,
constitute statements regarding the likelihood or frequency of prepayments on
the home equity loans, the likelihood of payment of any Certificateholders'
Interest Index Carryovers or the possibility that offered certificateholders
might realize a lower than anticipated yield.
A securities rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each securities rating should be evaluated
independently of similar ratings on different securities.
LEGAL INVESTMENT
Upon termination of the pre-funding period, the Class A Certificates,
the Class M1F Certificates and the Class M1V Certificates will constitute
"mortgage related securities" for purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA") for so long as they are rated not lower than
the second highest rating category by at least one nationally recognized
statistical rating organization. All other certificates will not be "mortgage
related securities" for purposes of SMMEA.
The Depositor makes no representations as to the proper
characterization of any class of Offered Certificates for legal investment or
other purposes, or as to the ability of particular investors to purchase any
class of Offered Certificates under applicable legal investment restrictions.
These uncertainties may adversely affect the liquidity of any class of Offered
Certificates. Accordingly, all institutions whose investment activities are
subject to legal investment laws and regulations, regulatory capital
requirements or review by regulatory authorities should consult with their legal
advisors in determining whether and to what extent any class of Offered
Certificates constitutes a legal investment or is subject to investment, capital
or other restrictions. We refer you to "Legal Investment" in the prospectus.
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ERISA CONSIDERATIONS
A fiduciary of a pension, profit-sharing, retirement or other employee
benefit plan subject to Title I of the Employee Retirement Income Security Act
of 1974, as amended ("ERISA"), should consider the fiduciary standards under
ERISA in the context of the plan's particular circumstances before authorizing
an investment of a portion of such plan's assets in the Class A Certificates.
Accordingly, pursuant to Section 404 of ERISA, such fiduciary should consider
among other factors: (i) whether the investment is for the exclusive benefit of
plan participants and their beneficiaries; (ii) whether the investment satisfies
the applicable diversification requirements; (iii) whether the investment is in
accordance with the documents and instruments governing the plan; and (iv)
whether the investment is prudent, considering the nature of the investment.
Fiduciaries of plans also should consider ERISA's prohibition on improper
delegation of control over, or responsibility for, plan assets.
In addition, benefit plans subject to ERISA, as well as individual
retirement accounts or certain types of Keogh plans not subject to ERISA but
subject to Section 4975 of the Code and any entity whose source of funds for the
purchase of Class A Certificates includes plan assets by reason of a plan or
account investing in such entity (each, a "Plan"), are prohibited from engaging
in a broad range of transactions involving Plan assets and persons having
certain specified relationships to a Plan ("parties in interest" and
"disqualified persons"). Such transactions are treated as "prohibited
transactions" under Sections 406 and 407 of ERISA and excise taxes are imposed
upon such persons by Section 4975 of the Code.
An investment in Class A Certificates by a Plan might result in the
assets of the Trust Fund being deemed to constitute Plan assets, which in turn
might mean that certain aspects of such investment, including the operation of
the Trust Fund, might be prohibited transactions under ERISA and the Code.
Neither ERISA nor the Code defines the term "plan assets." Under 29 C.F.R.
Section 2510.3-101 of the United States Department of Labor ("DOL") regulations
(the "Regulation"), a Plan's assets may include an interest in the underlying
assets of an entity (such as a trust) for certain purposes, including the
prohibited transaction provisions of ERISA and the Code, if the Plan acquires an
"equity interest" in such entity, unless certain exceptions apply. The Depositor
believes that the Class A Certificates will give certificateholders an equity
interest in the Trust Fund for purposes of the Regulation and can give no
assurance that the Class A Certificates will qualify for any of the exceptions
under the Regulation. As a result, the assets of the Trust may be considered the
assets of any Plan which acquires a Class A Certificate.
The DOL has granted to Credit Suisse First Boston Corporation an
administrative exemption (Prohibited Transaction Exemption ("PTE") 89-90; 54
Fed. Reg. 42,597 (Oct. 17, 1989)(as amended by PTE 97-34; 62 Fed. Reg. 39,021
(July 21, 1997) (the "Exemption") from certain of the prohibited transaction
rules of ERISA which may be applicable to the initial purchase, the holding and
the subsequent resale in the secondary market by Plans of pass-through
certificates representing a beneficial undivided ownership interest in the
assets of a trust that consist of certain receivables, loans and other
obligations that meet the conditions and
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requirements of the Exemption which may be applicable to the Class A
Certificates if Credit Suisse First Boston Corporation or any of its affiliates
is either the sole underwriter or manager or co-manager of the underwriting
syndicate, or a selling or placement agent. The conditions which must be
satisfied for the Exemption to apply to the purchase, holding and transfer of
the Class A Certificates are set forth under "ERISA Considerations" in the
prospectus.
The Exemption does not apply to Plans sponsored by the Seller, the
Depositor, the underwriters, the Trustee, the servicer or any mortgagor with
respect to home equity loans included in the Trust Fund constituting more than
5% of the aggregate unamortized principal balance of the assets in the Trust
Fund or any affiliate of such parties (the "Restricted Group"). No exemption is
provided from the restrictions of ERISA for the acquisition or holding of Class
A Certificates on behalf of an "Excluded Plan" by any person who is a fiduciary
with respect to the assets of such Excluded Plan. For purposes of the Class A
Certificates, an Excluded Plan is a Plan sponsored by any member of the
Restricted Group. In addition, no Plan's investment in any class of Class A
Certificates may exceed 25% of all of the certificates of such class outstanding
at the time of the Plan's acquisition and after the Plan's acquisition of such
class of Class A Certificates, no more than 25% of the assets over which the
fiduciary has investment authority may be invested in securities of a trust
containing assets which are sold or serviced by the same entity. Finally, in the
case of initial issuance (but not secondary market transactions), at least 50%
of each class of Class A Certificates, and at least 50% of the aggregate
interest in the Trust Fund, must be acquired by persons independent of the
Restricted Group.
The Depositor believes that the Exemption will apply to the
acquisition, holding and resale of the Class A Certificates by a Plan and that
all conditions of the Exemption other than those within the control of the
investors have been or will be met. We refer you to "ERISA Considerations" in
the prospectus for more detail.
Before purchasing a Class A Certificate, a fiduciary of a Plan should
itself confirm (a) that the Class A Certificates constitute "certificates" for
purposes of the Exemption and (b) that the specific conditions set forth in the
Exemption and the other requirements set forth in the Exemption will be
satisfied.
As the Subordinated Offered Certificates are subordinate, the Exemption
will not be applicable to the sale, purchase or holding of such Subordinated
Offered Certificates, except that the Subordinated Offered Certificates may be
purchased by an "insurance company general account" within the meaning of
Section V(e) of Prohibited Transaction Class Exemption 95-60, 60 Fed. Reg. 35925
(July 12, 1995) but may not otherwise be purchased by or on behalf of other
plans. In addition, on August 23, 2000 the DOL published in the Federal
Register, a proposed prohibited transaction exemption which, after publication
in the Federal Register as a final exemption, will amend PTE 97-34 and among
other things will permit Plans which satisfy the specific conditions set forth
in the Exemption to acquire the Subordinated Offered Certificates in the
secondary market pursuant to the Exemption.
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Any Plan fiduciary considering whether to purchase a Class A
Certificate or Subordinated Certificate on behalf of a Plan should consult with
its counsel regarding the applicability of the fiduciary responsibility and
prohibited transaction provisions of ERISA and the Code to such investment.
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<PAGE>
INDEX OF PRINCIPAL TERMS
2/28 Adjustable Rate Loans.................................................S-25
3/27 Adjustable Rate Loans.................................................S-25
5/25 Adjustable Rate Loans.................................................S-25
Adjustment Date............................................................S-26
Advancing Person..........................................................S-101
Agreement.................................................................S-101
Applied Realized Loss Amount...............................................S-92
Assumption Payment........................................................S-100
Available Distribution Amount..............................................S-87
Available Funds Cap........................................................S-80
Balloon Payments...........................................................S-58
Bankruptcy Loss............................................................S-95
Cap Agreement..............................................................S-97
Cap Early Termination......................................................S-99
Cede.......................................................................S-73
Certificate Owner..........................................................S-73
Certificate Principal Balance..............................................S-83
Certificateholders' Interest Index Carryover...............................S-92
Certificates...............................................................S-72
Class A Certificates.......................................................S-72
Class A Principal Distribution Amount......................................S-87
Class AF6 Calculation Percentage...........................................S-87
Class AF6 Lockout Distribution Amount......................................S-87
Class AF6 Lockout Percentage...............................................S-88
Class AV Formula Rate......................................................S-80
Class B Principal Distribution Amount......................................S-88
Class BV Formula Rate......................................................S-80
Class M-1 Principal Distribution Amount....................................S-88
Class M1V Formula Rate.....................................................S-80
Class M-2 Principal Distribution Amount....................................S-88
Class M2V Formula Rate.....................................................S-80
Clearing Agency............................................................S-73
Clearstream................................................................S-75
Clearstream Participants...................................................S-77
Code......................................................................S-111
Compensating Interest......................................................S-54
Cooperative................................................................S-78
Counterparty...............................................................S-97
CPR........................................................................S-60
Credit Enhancement Percentage..............................................S-89
Current WAC Excess........................................................S-112
Debt Service Reduction.....................................................S-95
Deficient Valuation........................................................S-95
S-120
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Definitive Certificate.....................................................S-73
Delayed First Adjustment Home Equity Loans.................................S-26
Depositor..................................................................S-24
Determination Date.........................................................S-89
disqualified persons......................................................S-117
Distribution Date..........................................................S-72
DOL.......................................................................S-117
DTC........................................................................S-73
Due Date...................................................................S-26
Due Period.................................................................S-81
equity interest...........................................................S-117
ERISA.....................................................................S-117
Euroclear..................................................................S-76
Euroclear Operator.........................................................S-78
Euroclear Participants.....................................................S-78
European Depositaries......................................................S-77
Events of Default..........................................................S-98
Excluded Plan.............................................................S-118
Exemption.................................................................S-117
Expense Adjusted Mortgage Rate.............................................S-81
Global Securities.........................................................S-124
Gross Margin...............................................................S-26
Group 1 Certificates.......................................................S-72
Group 1 Class A Certificates...............................................S-72
Group 1 Class B Certificates...............................................S-72
Group 1 Mezzanine Certificates.............................................S-72
Group 1 Net WAC Cap........................................................S-79
Group 1 Subordinated Certificates..........................................S-72
Group 2 Certificates.......................................................S-72
Group 2 Class A Certificates...............................................S-72
Group 2 Class B Certificates...............................................S-72
Group 2 Mezzanine Certificates.............................................S-72
Group 2 Net WAC Cap.......................................................S-112
Group 2 Reserve Fund.......................................................S-95
Group 2 Subordinated Certificates..........................................S-72
Indirect Participants......................................................S-74
initial home equity loans..................................................S-24
Interest Accrual Period....................................................S-83
Interest Carry Forward Amount..............................................S-82
Interest Determination Date................................................S-83
Interest Distribution Amount...............................................S-82
Interest Remittance Amount.................................................S-82
LBFC......................................................................S-104
Master Servicer............................................................S-24
Maximum Mortgage Rate......................................................S-26
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Maximum Rates..............................................................S-36
Mezzanine Certificates.....................................................S-72
Minimum Mortgage Rate......................................................S-26
Minimum Rates..............................................................S-36
Mortgage Rate..............................................................S-25
Net Monthly Excess Cashflow................................................S-90
Non-Offered Certificates...................................................S-72
Offered Certificates.......................................................S-72
Old Long Beach............................................................S-104
Overcollateralization Reduction Amount.....................................S-94
Overcollateralized Amount..................................................S-93
P&I Advance...............................................................S-100
Participants...............................................................S-74
parties in interest.......................................................S-117
Pass-Through Rate..........................................................S-79
Periodic Rate Cap..........................................................S-26
Plan......................................................................S-117
plan assets...............................................................S-117
Prepayment Assumption......................................................S-60
Prepayment Charge..........................................................S-26
Prepayment Interest Shortfall..............................................S-54
Prepayment Period..........................................................S-89
Principal Distribution Amount..............................................S-84
prohibited transactions...................................................S-117
PTE.......................................................................S-117
Rate Cap Agreement........................................................S-113
Record Date................................................................S-74
Regular Certificates......................................................S-111
Regular Interests.........................................................S-113
Regulation................................................................S-117
Relevant Depositary........................................................S-77
Relief Act.................................................................S-54
REMIC Regular Certificates................................................S-111
REMIC Residual Certificates...............................................S-111
REMICs....................................................................S-111
Reorganization............................................................S-104
Residual Certificates......................................................S-72
Restricted Group..........................................................S-118
Rules......................................................................S-75
Scheduled Notional Amounts.................................................S-97
Scheduled Principal Balance................................................S-89
Seller.....................................................................S-24
Senior Interest Distribution Amount........................................S-82
Servicing Fee.............................................................S-109
Six-Month LIBOR............................................................S-60
S-122
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Specified Group 2 Reserve Fund Requirement.................................S-97
Stepdown Date..............................................................S-89
Structuring Assumptions....................................................S-60
Subordinated Certificates..................................................S-72
Subordinated Offered Certificates..........................................S-72
subsequent home equity loans...............................................S-24
Supplemental Interest Reserve Fund........................................S-112
Supplemental Interest Reserve Fund Deposit................................S-112
Trigger Event..............................................................S-89
Trust Fund.................................................................S-72
Trustee...................................................................S-108
U.S. Person...............................................................S-128
Underwriting Agreement....................................................S-114
Unpaid Realized Loss Amount................................................S-93
WestLB.....................................................................S-98
WM .......................................................................S-104
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<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the Class A Certificates and
the Mezzanine Certificates will be offered globally (the "Global Securities")
and will be available only in book-entry form. Investors in the Global
Securities may hold such Global Securities through any of The Depository Trust
Company ("DTC"), Clearstream or Euroclear. The Global Securities will be
tradable as home market instruments in both the European and U.S. domestic
markets. Initial settlement and all secondary trades will settle in same-day
funds.
Secondary market trading between investors holding Global Securities
through Clearstream and Euroclear will be conducted in the ordinary way in
accordance with their normal rules and operating procedures and in accordance
with conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations.
Secondary cross-market trading between Clearstream or Euroclear and DTC
Participants holding certificates will be effected on a delivery-against-payment
basis through the respective Depositaries of Clearstream and Euroclear (in such
capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be
subject to U.S. withholding taxes unless such holders meet certain requirements
and deliver appropriate U.S. tax documents to the securities clearing
organizations or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the
name of Cede & Co. as nominee of DTC. Investors' interests in the Global
Securities will be represented through financial institutions acting on their
behalf as direct and indirect Participants in DTC. As a result, Clearstream and
Euroclear will hold positions on behalf of their participants through their
respective Depositaries, which in turn will hold such positions in accounts as
DTC Participants.
Investors electing to hold their Global Securities through DTC will
follow the settlement practices applicable to conventional eurobonds, except
that there will be no temporary global security and no "lock-up" or restricted
period. Investor securities custody accounts will be credited with their
holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Clearstream
or Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no 'lock-up' or restricted period. Global Securities
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will be credited to the securities custody accounts on the settlement date
against payment in same-day funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important
to establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior home
equity loan asset-backed certificates issues in same-day funds.
Trading between Clearstream and/or Euroclear Participants. Secondary
market trading between Clearstream Participants or Euroclear Participants will
be settled using the procedures applicable to conventional eurobonds in same-day
funds.
Trading between DTC seller and Clearstream or Euroclear purchaser. When
Global Securities are to be transferred from the account of a DTC Participant to
the account of a Clearstream Participant or a Euroclear Participant, the
purchaser will send instructions to Clearstream or Euroclear through a
Clearstream Participant or Euroclear Participant at least one business day prior
to settlement. Clearstream or Euroclear will instruct the respective Depositary,
as the case may be, to receive the Global Securities against payment. Payment
will include interest accrued on the Global Securities from and including the
last coupon payment date to and excluding the settlement date, on the basis of a
30-day month or the actual number of days in such accrual period, as applicable,
and a year assumed to consist of 360 days. For transactions settling on the 31st
of the month, payment will include interest accrued to and excluding the first
day of the following month. Payment will then be made by the respective
Depositary of the DTC Participant's account against delivery of the Global
Securities. After settlement has been completed, the Global Securities will be
credited to the respective clearing system and by the clearing system, in
accordance with its usual procedures, to the Clearstream Participant's or
Euroclear Participant's account. The securities credit will appear the next day
(European time) and the cash debt will be back-valued to, and the interest on
the Global Securities will accrue from, the value date (which would be the
preceding day when settlement occurred in New York). If settlement is not
completed on the intended value date (i.e., the trade fails), the Clearstream or
Euroclear cash debt will be valued instead as of the actual settlement date.
Clearstream Participants and Euroclear Participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within Clearstream or Euroclear. Under
this approach, they may take on credit exposure to Clearstream or Euroclear
until the Global Securities are credited to their accounts one day later.
S-125
<PAGE>
As an alternative, if Clearstream or Euroclear has extended a line of
credit to them, Clearstream Participants or Euroclear Participants can elect not
to preposition funds and allow that credit line to be drawn upon the finance
settlement. Under this procedure, Clearstream Participants or Euroclear
Participants purchasing Global Securities would incur overdraft charges for one
day, assuming they cleared the overdraft when the Global Securities were
credited to their accounts. However, interest on the Global Securities would
accrue from the value date. Therefore, in many cases the investment income on
the Global Securities earned during that one-day period may substantially reduce
or offset the amount of such overdraft charges, although this result will depend
on each Clearstream Participant's or Euroclear Participant's particular cost of
funds.
Since the settlement is taking place during New York business hours,
DTC Participants can employ their usual procedures for sending Global Securities
to the respective European Depositary for the benefit of Clearstream
Participants or Euroclear Participants. The sale proceeds will be available to
the DTC seller on the settlement date. Thus, to the DTC Participants a
cross-market transaction will settle no differently than a trade between two DTC
Participants.
Trading between Clearstream or Euroclear Seller and DTC Purchaser. Due
to time zone differences in their favor, Clearstream Participants and Euroclear
Participants may employ their customary procedures for transactions in which
Global Securities are to be transferred by the respective clearing system,
through the respective Depositary, to a DTC Participant. The seller will send
instructions to Clearstream or Euroclear through a Clearstream Participant or
Euroclear Participant at least one business day prior to settlement. In these
cases Clearstream or Euroclear will instruct the respective Depositary, as
appropriate, to deliver the Global Securities to the DTC Participant's account
against payment. Payment will include interest accrued on the Global Securities
from and including the last coupon payment to and excluding the settlement date
on the basis of a 30-day month or the actual number of days in such accrual
period, as applicable, and a year assumed to consist of 360 days. For
transactions settling on the 31st of the month, payment will include interest
accrued to and excluding the first day of the following month. The payment will
then be reflected in the account of the Clearstream Participant or Euroclear
Participant the following day, and receipt of the cash proceeds in the
Clearstream Participant's or Euroclear Participant's account would be
back-valued to the value date (which would be the preceding day, when settlement
occurred in New York). Should the Clearstream Participant or Euroclear
Participant have a line of credit with its respective clearing system and elect
to be in debt in anticipation of receipt of the sale proceeds in its account,
the back-valuation will extinguish any overdraft incurred over that one-day
period. If settlement is not completed on the intended value date (i.e., the
trade fails), receipt of the cash proceeds in the Clearstream Participant's or
Euroclear Participant's account would instead be valued as of the actual
settlement date.
Finally, day traders that use Clearstream or Euroclear and that
purchase Global Securities from DTC Participants for delivery to Clearstream
Participants or Euroclear Participants should note that these trades would
automatically fail on the sale side unless affirmative action were taken. At
least three techniques should be readily available to eliminate this potential
problem:
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<PAGE>
(a) borrowing through Clearstream or Euroclear for one day (until the
purchase side of the day trade is reflected in their Clearstream or Euroclear
accounts) in accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC Participant
no later than one day prior to settlement, which would give the Global
Securities sufficient time to be reflected in their Clearstream or Euroclear
account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC Participant is at least one
day prior to the value date for the sale to the Clearstream Participant or
Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through
Clearstream or Euroclear (or through DTC if the holder has an address outside
the U.S.) will be subject to the 30% U.S. withholding tax that generally applies
to payments of interest (including original issue discount) on registered debt
issued by U.S. Persons, unless (i) each clearing system, bank or other financial
institution that holds customers' securities in the ordinary course of its trade
or business in the chain of intermediaries between such beneficial owner and the
U.S. entity required to withhold tax complies with applicable certification
requirements and (ii) such beneficial owner takes one of the following steps to
obtain an exemption or reduced tax rate:
Exemption for non-U.S. Persons (Form W-8 or Form W-8BEN). Beneficial
owners of Global Securities that are non-U.S. Persons can obtain a complete
exemption from the withholding tax by filing a signed Form W-8 (Certificate of
Foreign Status) or Form W-8BEN (Certificate of Foreign Status of Beneficial
Owner for United States Tax Withholding). If the information shown on Form W-8
or Form W-8BEN changes, a new Form W-8 or Form W-8BEN must be filed within 30
days of such change. After December 31, 2000, only Form W-8BEN will be
acceptable.
Exemption for non-U.S. Persons with effectively connected income (Form
4224 or Form W-8ECI). A non-U.S. Person, including a non-U.S. corporation or
bank with a U.S. branch, for which the interest income is effectively connected
with its conduct of a trade or business in the United States, can obtain an
exemption from the withholding tax by filing Form 4224 (Exemption from
Withholding of Tax on Income Effectively Connected with the Conduct of a Trade
or Business in the United States) or Form W-8ECI (Certificate of Foreign
Person's Claim for Exemption from Withholding on Income Effectively Connected
with the Conduct of a Trade or Business in the United States). After December
31, 2000, only Form W-8ECI will be acceptable.
Exemption or reduced rate for non-U.S. Persons resident in treaty
countries (Form 1001 or Form W-8BEN). Non-U.S. Persons that are Certificate
Owners residing in a country that has a tax treaty with the United States can
obtain an exemption or reduced tax rate (depending on the
S-127
<PAGE>
treaty terms) by filing Form 1001 (Ownership, Exemption or Reduced Rate
Certificate) or Form W-8BEN (Certificate of Foreign Status of Beneficial Owner
for United States Tax Withholding). Form 1001 or Form W-8BEN may be filed by the
Certificate Owners or his agent. After December 31, 2000, only Form W-8BEN will
be acceptable.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a
complete exemption from the withholding tax by filing Form W-9 (Payer's Request
for Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Certificate Owner of a
Global Security or, in the case of a Form 1001 or a Form 4224 filer, his agent,
files by submitting the appropriate form to the person through whom it holds
(the clearing agency, in the case of persons holding directly on the books of
the clearing agency). Form W-8, Form 1001 and Form 4224 are effective until
December 31, 2000. Form W-8BEN and Form W-8ECI are effective until the third
succeeding calendar year from the date such form is signed.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation, partnership or other entity treated as a corporation
or partnership for United States federal income tax purposes organized in or
under the laws of the United States or any state thereof or the District of
Columbia (unless, in the case of a partnership, Treasury regulations provide
otherwise) or (iii) an estate the income of which is includible in gross income
for United States tax purposes, regardless of its source, or (iv) a trust if a
court within the United States is able to exercise primary supervision over the
administration of the trust and one or more United States persons have authority
to control all substantial decisions of the trust. Notwithstanding the preceding
sentence, to the extent provided in Treasury regulations, certain trusts in
existence on August 20, 1996, and treated as United States persons prior to such
date, that elect to continue to be treated as United States persons will also be
a U.S. Person. This summary does not deal with all aspects of U.S. Federal
income tax withholding that may be relevant to foreign holders of the Global
Securities. Investors are advised to consult their own tax advisors for specific
tax advice concerning their holding and disposing of the Global Securities.
S-128
<PAGE>
PROSPECTUS
ASSET BACKED SECURITIES CORPORATION
DEPOSITOR
ABS MORTGAGE AND MANUFACTURED HOUSING CONTRACT
ASSET-BACKED CERTIFICATES AND ASSET-BACKED NOTES (ISSUABLE IN SERIES)
------------------------------
Asset Backed Securities Corporation (the "Depositor") may offer from
time to time the ABS Mortgage and Manufactured Housing Contract Asset-Backed
Certificates (the "Certificates") and the ABS Mortgage and Manufactured Housing
Contract Asset-Backed Notes (the "Notes" and, together with the Certificates,
the "Securities") offered hereby and by the related Prospectus Supplements which
may be sold from time to time in one or more series (each, a "Series") in
amounts, at prices and on terms to be determined at the time of sale and to be
set forth in the related Prospectus Supplement. Each Series of Securities may
include one or more separate classes (each, a "Class") of Notes and/or
Certificates, which may be divided into one or more subclasses (each, a
"Subclass"). The Certificates will be issued by a trust (the "Trust") to be
formed by the Depositor with respect to such Series pursuant to either a Trust
Agreement (each, a "Trust Agreement") to be entered into between the Depositor
and the trustee specified in the related Prospectus Supplement (the "Trustee")
or a Pooling and Servicing Agreement (each, a "Pooling and Servicing Agreement")
among the Depositor, the Master Servicer and the Trustee. If a Series of
Securities includes Notes, such Notes will be issued and secured pursuant to an
Indenture (each, an "Indenture") to be entered into between any of (i) the Trust
or (ii) a partnership, corporation, limited liability company or other entity
formed by the Depositor solely for purpose of issuing Notes of a related Series
and matters incidental thereto, as issuer (the "Issuer"), and the indenture
trustee specified in the related Prospectus Supplement (the "Indenture
Trustee"). The related Trust Fund will be serviced by the Master Servicer
pursuant to a Sale and Servicing Agreement (the "Sale and Servicing Agreement")
among the Depositor, the Master Servicer and the Indenture Trustee. The
Certificates represent interests in specified percentages of principal and
interest (a "Percentage Interest") with respect to the related Mortgage Pool or
Contract Pool (each, as defined below), or have been assigned a Stated Principal
Balance and an Interest Rate (as such terms are defined herein), as more fully
set forth herein, and will evidence the undivided interest, beneficial interest
or notional amount specified in the related Prospectus Supplement in one of a
number of Trusts, each to be created by the Depositor from time to time. If a
Series of Securities includes Notes, the Notes will represent indebtedness of
the related Trust Fund. The trust property of each Trust (the "Trust Fund") will
consist of a pool containing one- to four-family residential mortgage loans
(including revolving lines of credit), mortgage loans secured by multifamily
residential rental properties consisting of five or more dwelling units or
apartment buildings owned by cooperative housing corporations, loans made to
finance the purchase of certain rights relating to cooperatively owned
properties secured by a pledge of shares of a cooperative corporation and an
assignment of a proprietary lease or occupancy agreement on a cooperative
dwelling, mortgage participation certificates evidencing participation interests
in such loans that are acceptable to the nationally recognized statistical
rating agency or agencies rating the related Series of Securities (collectively,
the "Rating Agency") for a rating in one of the four highest rating categories
of such Rating Agency (such loans and participation certificates being referred
to collectively hereinafter as the "Mortgage Loans"), or certain conventional
mortgage pass-through certificates, collateralized mortgage bonds or other
indebtedness secured by mortgage loans or manufactured housing contracts (the
"Mortgage Certificates"), in each case together with certain and related
property (the "Mortgage Pool") or a pool of manufactured housing installment or
conditional sales contracts and installment loan agreements (the "Contracts") or
participation certificates representing participation interests in such
Contracts and related property (the "Contract Pool") conveyed to such Trust by
the Depositor. The Mortgage Loans may be conventional mortgage loans,
conventional cooperative loans, mortgage loans insured by the Federal Housing
Administration (the "FHA"), mortgage loans partially guaranteed by the Veterans
Administration (the "VA"), or any combination of the foregoing, bearing fixed or
variable rates of interest. The Contracts may be conventional contracts,
contracts insured by the FHA or partially guaranteed by the VA, or any
combination of the foregoing, bearing fixed or variable rates of interest, as
specified in the related Prospectus Supplement. If so specified in the related
Prospectus Supplement, the rights of the holders of the Securities of one or
more Classes or Subclasses of Notes and/or Certificates of a Series to receive
distributions with respect to the related Mortgage Pool or Contract Pool may be
subordinated to such rights of the holders of the Securities of one or more
Classes or Subclasses of Notes and/or Certificates of such Series to the extent
described herein and in such Prospectus Supplement. As provided in the
applicable Prospectus Supplement, the timing of payments, whether of principal
or of interest, to any one or more of such Classes or Subclasses may be on a
sequential or a pro rata basis. The Prospectus Supplement with respect to each
Series will also set forth specific information relating to the Trust Fund with
respect to the Series in respect of which this Prospectus is being delivered,
together with specific information regarding the Securities of such Series.
The Securities do not represent an obligation of or interest in the
Depositor or any affiliate thereof. Neither the Securities, the Mortgage Loans,
the Contracts nor the Mortgage Certificates are insured or guaranteed by any
governmental agency or instrumentality, except to the extent provided herein.
PROSPECTIVE INVESTORS SHOULD CONSIDER THE LIMITATIONS DISCUSSED UNDER
"ERISA CONSIDERATIONS" HEREIN AND IN THE ACCOMPANYING PROSPECTUS SUPPLEMENT.
SEE "RISK FACTORS" BEGINNING ON PAGE 17 HEREIN FOR A DISCUSSION OF
CERTAIN FACTORS THAT POTENTIAL INVESTORS SHOULD CONSIDER IN DETERMINING WHETHER
TO INVEST IN THE SECURITIES OF A SERIES IN RESPECT OF WHICH THIS PROSPECTUS IS
BEING DELIVERED.
There will have been no public market for the Securities of any Series
prior to the offering thereof. No assurance can be given that such a market will
develop as a result of such offering or, if it does develop, that it will
continue.
The Depositor, as specified in the applicable Prospectus Supplement,
may elect to treat the Trust Fund or certain assets of the Trust Fund with
respect to certain Series of Securities as one or more Real Estate Mortgage
Investment Conduits (each, a "REMIC"). See "Federal Income Tax Consequences."
If so specified in the Prospectus Supplement, one or more Classes of
Notes of a Series may be subject to optional redemption by the Issuer under the
circumstances described in the Prospectus Supplement. If so specified in the
Prospectus Supplement relating to a Series of Securities, the Certificates of
such Series may be subject to early termination and may receive Special
Distributions (as defined herein) in reduction of Stated Principal Balance (as
defined herein) under the circumstances described herein and in such Prospectus
Supplement.
This Prospectus may not be used to consummate sales of the Securities
offered hereby unless accompanied by a Prospectus Supplement.
------------------------------
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.
------------------------------
CREDIT SUISSE FIRST BOSTON
The date of this Prospectus is August 28, 2000.
<PAGE>
PROSPECTUS SUPPLEMENT
The Prospectus Supplement with respect to each Series of Securities
will, among other things, set forth with respect to such Series of Securities:
(i) the identity of each Class or Subclass of Securities within such Series;
(ii) the undivided interest, Percentage Interest, Stated Principal Balance,
principal balance or notional amount of each Class or Subclass of Securities;
(iii) the Interest Rate borne (or manner in which interest is paid, if any) by
each Class or Subclass of Securities within such Series; (iv) certain
information concerning the Mortgage Loans, the Mortgage Certificates, the
Contracts, if any, and the other assets comprising the Trust Fund for such
Series; (v) the final Distribution Date of each Class or Subclass of Securities
within such Series; (vi) the identity of each Class or Subclass of Compound
Interest Securities, if any, within such Series; (vii) the method used to
calculate the amount to be distributed with respect to each Class or Subclass of
Securities within such Series; (viii) the order of application of distributions
to each of the Classes or Subclasses of Securities within such Series, whether
sequential, pro rata or otherwise; (ix) the Distribution Dates with respect to
such Series; (x) information with respect to the terms of the Residual
Certificates or Subordinated Securities offered hereby, if any, are offered;
(xi) information with respect to the method of credit support, if any, with
respect to such Series; and (xii) additional information with respect to the
plan of distribution of such Series of Certificates.
ADDITIONAL INFORMATION
This Prospectus contains, and the Prospectus Supplement for each Series
of Securities will contain, a summary of the material terms of the documents
referred to herein and therein, but neither contains nor will contain all of the
information set forth in the Registration Statement of which this Prospectus and
the related Prospectus Supplement is a part. For further information, reference
is made to such Registration Statement and the exhibits thereto which the
Depositor has filed with the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended. Statements contained
in this Prospectus and any Prospectus Supplement as to the contents of any
contract or other document referred to are summaries and in each instance
reference is made to the copy of the contract or other document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference. Copies of the Registration Statement may be
obtained from the Commission, upon payment of the prescribed charges, or may be
examined free of charge at the Commission's offices. Reports and other
information filed with the Commission can be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Regional Offices of the Commission at
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661,
and Seven World Trade Center, Suite 1300, New York, New York 10048. Copies of
such information can be obtained from the Public Reference Section of the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
at prescribed rates.
The Commission maintains a Web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. The address of such site is
(http://www.sec.gov).
Copies of the Pooling and Servicing Agreement or of the Trust
Agreement, Indenture and Sale and Servicing Agreement pursuant to which a Series
of Securities is issued, as applicable, will be provided to each person to whom
a Prospectus and the related Prospectus Supplement are delivered, upon written
or oral request directed to: Treasurer, Asset Backed Securities Corporation,
Eleven Madison Avenue, New York, New York 10010, (212) 325-2000.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
There are incorporated herein by reference all documents and reports
filed or caused to be filed by the Depositor with respect to a Trust Fund
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act prior to the
termination of the offering of Securities offered hereby. The Depositor will
provide or cause to be provided without charge to each person to whom this
Prospectus is delivered in connection with the offering of one or more Classes
or Subclasses of Securities, upon request, a copy of any or all such documents
or reports incorporated herein by reference, in each case to the extent such
documents or reports relate to one or more of such Classes of such Securities,
other than the exhibits to such documents (unless such exhibits are specifically
incorporated by reference in such documents). Requests to the Depositor should
be directed to: Asset Backed Securities Corporation, Eleven Madison Avenue, New
York, New York 10010, (212) 325-2000.
2
<PAGE>
IF AND TO THE EXTENT REQUIRED BY APPLICABLE LAW OR REGULATIONS, THIS
PROSPECTUS AND THE ATTACHED PROSPECTUS SUPPLEMENT WILL ALSO BE USED BY THE
UNDERWRITER AFTER THE COMPLETION OF THE OFFERING IN CONNECTION WITH OFFERS AND
SALES RELATED TO MARKET-MAKING TRANSACTIONS IN THE OFFERED SECURITIES IN WHICH
THE UNDERWRITER ACTS AS PRINCIPAL. SALES WILL BE MADE AT NEGOTIATED PRICES
DETERMINED AT THE TIME OF SALE.
3
<PAGE>
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 information with respect to each Series of Securities contained in the
related Prospectus Supplement. Certain capitalized terms used and not otherwise
defined herein shall have the meanings given elsewhere in this Prospectus.
Securities Offered..................ABS Mortgage and Manufactured Housing
Contract Asset-Backed Certificates (the
"Certificates") and ABS Mortgage and
Manufactured Housing Contract Asset-Backed
Notes (the "Notes" and, together with the
Certificates, the "Securities") issuable in
series (each, a "Series"). The Securities
may be issued in one or more classes (each,
a "Class") and such Classes may be divided
into one or more subclasses (each, a
"Subclass"). One or more of such Classes or
Subclasses of a Series may be subordinated
to one or more Classes or Subclasses of
such Series, as specified in the related
Prospectus Supplement (any such Class or
Subclass to which one or more other Classes
or Subclasses is subordinated being
hereinafter referred to as a "Senior Class"
or a "Senior Subclass," respectively, and
any such subordinated Class or Subclass
being hereinafter referred to as a
"Subordinated Class" or "Subordinated
Subclass," respectively).
One of such Classes or Subclasses of
Certificates of a Series (the "Residual
Certificates") may evidence a residual
interest in the related Trust Fund (as
defined below). If so specified in the
related Prospectus Supplement, one or more
Classes or Subclasses of Certificates within
a Series (the "Multi-Class Securities") may
be assigned a principal balance (a "Stated
Principal Balance" or a "Certificate
Principal Balance") based on the cash flow
from the Mortgage Loans (as hereinafter
defined), Mortgage Certificates (as
hereinafter defined), the Contracts (as
hereinafter defined) and/or the other assets
in the Trust Fund if specified as such in
the related Prospectus Supplement and a
stated annual interest rate, determined in
the manner set forth in such Prospectus
Supplement, which may be fixed or variable
(an "Interest Rate"). If so specified in the
related Prospectus Supplement, one or more
Classes or Subclasses of Notes and/or
Certificates may receive unequal amounts of
the distributions of principal of and
interest on the Mortgage Loans, the
Contracts and the Mortgage Certificates
included in the related Trust Fund, as
specified in such Prospectus Supplement (any
such Class or Subclass receiving the higher
proportion of principal distributions being
referred to hereinafter as a "Principal
Weighted Class" or "Principal Weighted
Subclass," respectively, and any such Class
or Subclass receiving the higher proportion
of interest distributions being referred to
hereinafter as an "Interest Weighted Class"
or an "Interest Weighted Subclass,"
respectively). If so specified in the
related Prospectus Supplement, the
allocation of the principal and interest
distributions may involve as much as 100% of
each distribution of principal or interest
being allocated to one or more Classes or
Subclasses and 0% to another. If so
specified in the related Prospectus
Supplement, one or more Classes or
Subclasses may receive disproportionate
amounts of certain distributions of
principal,
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<PAGE>
which proportions may change over time
subject to certain conditions. Payments may
be applied to any one or more Classes or
Subclasses on a sequential or pro rata
basis, or otherwise, as specified in the
related Prospectus Supplement. Each
Certificate will represent the undivided
interest, beneficial interest or percentage
interest specified in the related Prospectus
Supplement in one of a number of trusts
(each, a "Trust"), each to be created by the
Depositor from time to time pursuant to
either a Trust Agreement (each, a "Trust
Agreement") to be entered into between the
Depositor and the trustee specified in the
related Prospectus Supplement (the
"Trustee") or a Pooling and Servicing
Agreement (each, a "Pooling and Servicing
Agreement") among the Depositor, the Master
Servicer and the Trustee. If a Series of
Securities includes Notes, such Notes will
be issued and secured pursuant to an
Indenture (each, an "Indenture") to be
entered into between any of (i) the Trust or
(ii) a partnership, corporation, limited
liability company or other entity formed by
the Depositor solely for purpose of issuing
Notes of a related Series and matters
incidental thereto, as issuer (the
"Issuer"), and the indenture trustee
specified in the related Prospectus
Supplement (the "Indenture Trustee"), and
such Notes will represent indebtedness of
the related Trust. The trust property of
each trust (the "Trust Fund") will consist
of (a) one or more mortgage pools (each, a
"Mortgage Pool") containing (i) conventional
one- to four-family residential, mortgage
loans, (ii) closed-end loans (the
"Closed-End Loans") and/or revolving home
equity loans or certain balances thereof
(the "Revolving Credit Line Loans" and,
together with the Closed-End Loans, the
"Home Equity Loans") secured by mortgages or
deeds of trust on residential one- to
four-family properties, including townhouses
and individual units in condominiums and
planned unit developments, (iii) loans (the
"Cooperative Loans") made to finance the
purchase of certain rights relating to
cooperatively owned properties secured by
the pledge of shares issued by a cooperative
corporation (the "Cooperative") and the
assignment of a proprietary lease or
occupancy agreement providing the exclusive
right to occupy a particular dwelling unit
(a "Cooperative Dwelling" and, together with
one- to four-family residential properties,
"Single Family Property"), (iv) mortgage
loans secured by multifamily residential
rental properties consisting of five or more
dwelling units or apartment buildings owned
by cooperative housing corporations
("Multifamily Property"), purchased by the
Depositor either directly or through one or
more affiliates from an affiliate or from
unaffiliated sellers, (v) mortgage
participation certificates evidencing
participation interests in such loans that
are acceptable to the nationally recognized
rating agency or agencies identified in the
related Prospectus Supplement (collectively,
the "Rating Agency") rating the Securities
of such Series for a rating in one of the
four highest rating categories of such
Rating Agency (such loans and mortgage
participation certificates being referred to
collectively hereinafter as the "Mortgage
Loans"), or (vi) certain conventional
mortgage pass- through certificates (the
"Mortgage Certificates") issued by one or
more trusts established by one or more
private entities or (b) one or more contract
pools (each, a "Contract Pool") containing
manufactured housing installment or
conditional sales contracts and installment
loan agreements (the "Contracts") or
participation certificates representing
5
<PAGE>
participation interests in such Contracts
(such Contracts, together with the Mortgage
Loans and the Mortgage Certificates, being
referred to collectively hereinafter as the
"Trust Assets") purchased by the Depositor
either directly or through one or more
affiliates or Unaffiliated Sellers, and
related property conveyed to such trust by
the Depositor. Unless otherwise specified in
the related Prospectus Supplement, each
Series of Securities will be offered in
fully registered form only, in one or more
Classes of Notes and/or Certificates, which
may be divided into one or more Subclasses.
If so specified in the related Prospectus
Supplement, Multi-Class Securities of a
Series may be issued with the Stated
Principal Balances and the Interest Rates
therein specified. At the time of issuance,
each Security offered by means of this
Prospectus and the related Prospectus
Supplements will be rated in one of the four
highest rating categories by at least one
Rating Agency. The minimum undivided
interest, percentage interest or beneficial
interest in a Mortgage Pool or Contract
Pool, the minimum notional amount to be
evidenced by a Certificate of a Class or
Subclass, or the minimum denomination in
which a Certificate of a Class or Subclass
is to be issued will be set forth in the
related Prospectus Supplement.
Depositor...........................Asset Backed Securities Corporation, a
Delaware corporation.
Master Servicer.....................The entity, if any, named as Master
Servicer in the applicable Prospectus
Supplement, which may be an affiliate of
the Depositor. See "Description of the
Securities."
Interest............................Interest will be distributed on the days
specified in the Prospectus Supplement with
respect to each Class or Subclass of
Securities of a Series, or if any such day
is not a business day, the next succeeding
business day (the "Distribution Date"), at
the rate, or pursuant to the method of
determining such rate, specified in the
related Prospectus Supplement for each
Class or Subclass of Securities within such
Series, commencing on the day specified in
such Prospectus Supplement, in the manner
specified in such Prospectus Supplement.
See "Maturity, Prepayment and Yield
Considerations" and "Description of the
Securities -- Payments on Mortgage Loans"
and " -- Payments on Contracts."
Principal (Including
Prepayments)......................Unless otherwise specified in the related
Prospectus Supplement, principal on each
Trust Asset underlying a Series of
Securities will be distributed on each
Distribution Date, commencing on the date
and in the priority and manner specified in
the related Prospectus Supplement. If so
specified in the Prospectus Supplement with
respect to a Series that includes
Multi-Class Securities, distributions on
such Multi-Class Securities may be made in
reduction of the Stated Principal Balance,
in an amount equal to the Stated Principal
Distribution Amount. Unless otherwise
specified in the related Prospectus
Supplement, the Stated Principal
Distribution Amount will equal the amount by
which the Stated Principal Balance of such
Class of Multi-Class Securities (before
taking into account the amount of interest
accrued and added to the Stated Principal
Balance of
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<PAGE>
any Class or of Compound Interest
Securities) exceeds the Asset Value (as
defined herein) of the Trust Assets and
other property in the related Trust Fund as
of the Business Day prior to the related
Distribution Date. See "Maturity,
Prepayment and Yield Considerations" and
"Description of the Securities -- Payments
on Mortgage Loans" and " -- Payments on
Contracts." If so specified in the
Prospectus Supplement relating to a Series,
the Multi-Class Securities of such Series
which have other than monthly Distribution
Dates may receive special distributions in
reduction of Stated Principal Balance
("Special Distributions") in any month,
other than a month in which a Distribution
Date occurs, if, as a result of principal
prepayments on the Trust Assets included in
the related Trust Fund and/or low
reinvestment yields, the Trustee
determines, based on assumptions specified
in the related Agreement (as defined
herein), that the amount of cash
anticipated to be on deposit in the
Certificate Account for such Series on the
next Distribution Date may be less than the
sum of the interest distributions and the
amount of distributions in reduction of
Stated Principal Balance to be made on such
Distribution Date. Unless otherwise
specified in the related Prospectus
Supplement, Special Distributions will be
made on such Certificates in the same
priority and manner as distributions in
reduction of Stated Principal Balance would
be made on the next Distribution Date for
such Certificates. See "Description of the
Securities -- Special Distributions." In
addition, if so specified in the related
Prospectus Supplement, one or more Classes
of Notes may be subject to optional
redemption on the terms and conditions
specified in the related Prospectus
supplement.
The Mortgage Pools..................If so specified in the related Prospectus
Supplement, the Securities of a Series will
represent the interest specified in such
Prospectus Supplement in, or be secured by,
the Mortgage Pool or Pools included in the
Trust Fund for such Series. Unless
otherwise specified in the applicable
Prospectus Supplement, the original
principal amount of each Mortgage Loan in a
Mortgage Pool will not be more than 95%
(such ratio, the "Loan-to-Value Ratio") of
the value of the property securing such
Mortgage Loan (the "Mortgaged Property"),
based upon an appraisal of the Mortgaged
Property considered acceptable to the
originator of such Mortgage Loan or the
sales price, whichever is less (the
"Original Value"). Unless otherwise
specified in the applicable Prospectus
Supplement, Mortgage Loans secured by
Single Family Property having an original
principal amount exceeding 80% of the
Original Value will be covered by a policy
of private mortgage insurance until the
outstanding principal amount is reduced to
the percentage of the Original Value set
forth in the related Prospectus Supplement
as a result of principal payments by the
borrower (the "Mortgagor"). Unless
otherwise specified in the applicable
Prospectus Supplement, the principal
balance at origination of each Mortgage
Loan that is secured by Single Family
Property will not exceed $500,000. Mortgage
Loans in a Mortgage Pool will all have
original maturities of 10 to 40 years,
unless otherwise specified in the
applicable Prospectus Supplement. Mortgage
Loans in a Mortgage Pool may have interest
rates (the "Mortgage Rates") that are
either fixed or variable. Mortgage Pools
may be formed from time to time in varying
sizes.
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<PAGE>
Mortgage Certificates...............If so specified in the related Prospectus
Supplement, the Trust Fund for a Series of
Securities may include Mortgage
Certificates issued by one or more trusts
established by one or more private
entities, with the respective aggregate
principal balances and the characteristics
described in such Prospectus Supplement.
Each Mortgage Certificate included in a
Trust Fund will evidence an interest of the
type specified in the related Prospectus
Supplement in a pool of mortgage loans of
the type described in such Prospectus
Supplement, secured principally by
mortgages on one-to four-family residences,
mortgages on multi-family residential
rental properties or apartment buildings
owned by cooperative housing corporations
or by pledges of shares of cooperative
corporations and assignments of proprietary
leases or occupancy agreements on
cooperative dwellings, unless otherwise
specified in such Prospectus Supplement.
The Contract Pools................. If so specified in the related Prospectus
Supplement, the Securities of a Series will
represent the interest specified in such
Prospectus Supplement in, or be secured by,
the Contract Pool or Pools included in the
Trust Fund for such Series. Unless otherwise
specified in the applicable Prospectus
Supplement, the Contracts will be fixed rate
Contracts. Such Contracts, as specified in
the related Prospectus Supplement, will
consist of manufactured housing installment
or conditional sales contracts and
installment loan agreements and will be
conventional Contracts or Contracts insured
by the FHA or partially guaranteed by the
VA. Each Contract may be secured by a new or
used unit of manufactured housing (a
"Manufactured Home"). The related Prospectus
Supplement will specify the range of terms
to maturity of the Contracts at origination
and, to the extent specified in such
Prospectus Supplement, the maximum
Loan-to-Value Ratio at origination (the
"Contract Loan-to-Value Ratio"). Because
manufactured homes, unlike site-built homes,
generally depreciate in value, the
Loan-to-Value Ratios of some of the
Contracts may be higher at the Cut-off Date
than at origination and may increase over
time. Unless otherwise specified in the
related Prospectus Supplement, Contracts
that are conventional Contracts will not be
covered by primary mortgage insurance
policies or primary credit insurance
policies. Each Manufactured Home which
secures a Contract will be covered by a
standard hazard insurance policy (which may
be a blanket policy) to the extent described
herein or in the related Prospectus
Supplement insuring against hazard losses
due to various causes, including fire,
lightning and windstorm. A Manufactured Home
located in a federally designated flood area
will be required to be covered by flood
insurance. Contract Pools may be formed from
time to time in varying sizes. None of the
Contracts will have been originated by the
Depositor or any of its affiliates.
Yield Considerations............... If so specified in the applicable Prospectus
Supplement, an assumed rate of prepayment
will be used to calculate the expected yield
to maturity on each Class of the Securities
of a Series. The yield on any Class of
Securities, the purchase price of which is
greater than the aggregate
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<PAGE>
amount of the Principal Distributions to be
made to such Class (a "Premium Security"),
is likely to be adversely affected by a
higher than anticipated level of principal
prepayments on the Trust Assets included in
the related Trust Fund. This effect on yield
will intensify with any increase in the
amount by which the purchase price of such
Security exceeds the aggregate amount of
such Principal Distributions. If the
differential is particularly wide and a high
level of prepayments occurs, it is possible
for Holders of Premium Securities not only
to have a lower than anticipated yield but,
in extreme cases, to fail to recoup fully
their initial investment.
Conversely, a lower than anticipated level
of principal prepayments (which can be
anticipated to increase the expected yield
to Holders of Securities that are Premium
Securities) will likely result in a lower
than anticipated yield to Holders of
Securities of a Class the purchase price of
which is less than the aggregate amount of
the Principal Distributions to be made to
such Class (a "Discount Security"). The
Prospectus Supplement for each Series of
Securities that includes an Interest
Weighted or a Principal Weighted Class will
set forth certain yield calculations on each
such Class based upon a range of specified
prepayment assumptions on the Trust Assets
included in the related Trust Fund. The
yield to Securityholders will also be
adversely affected because interest will
accrue on the Mortgage Loans, the Contracts
or the mortgage loans underlying the
Mortgage Certificates included in a Trust
Fund, from the first day of the month
preceding the month in which a Distribution
Date occurs, but the distribution of such
interest will be made no earlier than the
25th day of the succeeding month unless
otherwise provided in the applicable
Prospectus Supplement. The adverse effect on
yield of this delay will intensify with any
increase in the period of time by which the
Distribution Date for a Series of
Certificates succeeds the date on which
distributions on the Mortgage Loans, the
Contracts or the Mortgage Certificates are
received by the Master Servicer or the
Trustee. See "Maturity, Prepayment and Yield
Considerations."
Pre-Funding.........................If so specified in the related Prospectus
Supplement, a portion of the issuance
proceeds of the Securities of a particular
Series (such amount, the "Pre-Funded
Amount") will be deposited in an account
(the "Pre-Funding Account") to be
established with the Trustee, which will be
used to acquire additional Mortgage Loans,
Contracts or Mortgage Certificates from time
to time during the period specified in the
related Prospectus Supplement (the
"Pre-Funding Period"). Prior to the
investment of the Pre-Funded Amount in
additional Mortgage Loans, Contracts or
Mortgage Certificates, such Pre-Funded
Amount may be invested in one or more
Eligible Investments. Any Eligible
Investment must mature no later than the
Business Day prior to the next Distribution
Date. See "Description of the Securities --
Pre-Funding." During any Pre-Funding Period,
the Depositor will be obligated (subject
only to the availability thereof) to
transfer to the related Trust Fund
additional Mortgage Loans, Contracts or
Mortgage Certificates from time to time
during such Pre-Funding Period. Such
additional Mortgage Loans, Contracts or
Mortgage Certificates will be required to
satisfy certain eligibility criteria more
fully set forth in the
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<PAGE>
related Prospectus Supplement, which
eligibility criteria will be consistent with
the eligibility criteria of the Mortgage
Loans, Contracts or Mortgage Certificates
included in the Trust Fund as of the Closing
Date, subject to such exceptions as are
expressly stated in such Prospectus
Supplement. Although the specific parameters
of the Pre-Funding Account with respect to
any issuance of Securities will be specified
in the related Prospectus Supplement, it is
anticipated that: (a) the Pre-Funding Period
will not exceed 120 days from the related
Closing Date, (b) that the additional
Mortgage Loans, Contracts or Mortgage
Certificates to be acquired during the
Pre-Funding Period will be subject to the
same representations and warranties as the
Mortgage Loans, Contracts or Mortgage
Certificates included in the related Trust
Fund on the Closing Date (although
additional criteria may also be required to
be satisfied, as described in the related
Prospectus Supplement) and (c) that the
Pre-Funded Amount will not exceed 25% of the
principal amount of the Securities issued
pursuant to a particular offering.
Credit Support......................Neither the Securities nor the Trust Assets
will be insured or guaranteed by any
governmental agency, except to the extent of
any FHA insurance or VA guarantee. Credit
support will be provided on the Mortgage
Pools or Contract Pools by one or more
irrevocable letters of credit (the "Letter
of Credit"), a policy of mortgage pool
insurance (the "Pool Insurance Policy"), a
bond or similar form of insurance coverage
against certain losses in the event of the
bankruptcy of a Mortgagor (the "Mortgagor
Bankruptcy Bond") or any combination of the
foregoing as specified in the applicable
Prospectus Supplement. In lieu of or in
addition to the foregoing credit support
arrangements if so specified in the related
Prospectus Supplement, the Securities of a
Series may be issued in one or more Classes
or Subclasses. Payments on the Securities of
one or more Classes or Subclasses (the
"Senior Securities") may be supported by a
prior right to receive distributions
attributable or otherwise payable to one or
more other Classes or Subclasses (the
"Subordinated Securities") to the extent
specified in the related Prospectus
Supplement (the "Subordinated Amount"). In
addition, if so specified in the related
Prospectus Supplement, one or more Classes
or Subclasses of Subordinated Securities may
be subordinated to another Class or Subclass
of Subordinated Securities and may be
entitled to receive disproportionate amounts
of distributions of principal. If so
specified in the related Prospectus
Supplement, if a Series of Securities
includes Notes, all Classes of Certificates
will be subordinated to the Classes of Notes
and one more Classes or Subclasses of Notes
may be subordinated to one or more other
Classes or Subclasses of Notes and may be
entitled to receive disproportionate amounts
of distributions of principal. If so
specified in the related Prospectus
Supplement, a reserve (the "Reserve Fund")
and certain other accounts or funds may be
established to support payments on one or
more Classes of Securities. A Prospectus
Supplement with respect to a Series may also
provide for additional or alternative forms
of credit support, including a guarantee or
surety bond, acceptable to the Rating Agency
("Alternative Credit Support").
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<PAGE>
A. Letter of Credit...............If so specified in the applicable Prospectus
Supplement, the issuer of one or more
Letters of Credit (the "L/C Bank") will
deliver to the Trustee the Letters of Credit
for the Mortgage Pool or Contract Pool.
Unless otherwise specified in the related
Prospectus Supplement, to the extent
described herein, the L/C Bank will honor
the Trustee's demands with respect to such
Letter of Credit, to the extent of the
amount available thereunder, to make
payments to the Certificate Account on each
Distribution Date in an amount equal to the
amount sufficient to repurchase each
Liquidating Loan that has not been purchased
by the related Servicer or the Master
Servicer pursuant to the terms of the
applicable Servicing Agreement, Pooling and
Servicing Agreement or Sale and Servicing
Agreement referred to herein. Unless
otherwise provided in the related Prospectus
Supplement, the term "Liquidating Loan"
means: (a) each Mortgage Loan with respect
to which foreclosure proceedings have been
commenced (and the Mortgagor's right of
reinstatement has expired), (b) each
Mortgage Loan with respect to which the
Servicer or the Master Servicer has agreed
to accept a deed to the property in lieu of
foreclosure, (c) each Cooperative Loan as to
which the shares of the related Cooperative
and the related proprietary lease or
occupancy agreement have been sold or
offered for sale or (d) each Contract with
respect to which repossession proceedings
have been commenced. The liability of the
L/C Bank under the Letter of Credit will be
reduced by the amount of unreimbursed
payments thereunder. In the event that at
any time there remains no amount available
under the Letter of Credit for a specific
Mortgage Pool or Contract Pool, and coverage
under another form of credit support, if
any, is exhausted, any losses will be borne
by the holder of Securities of the Series,
as specified in the related Prospectus
Supplement. Unless otherwise specified in
the related Prospectus Supplement, the
maximum liability of the L/C Bank under the
Letter of Credit for a Mortgage Pool or
Contract Pool will be an amount equal to a
percentage (not greater than 10% of the
initial aggregate principal balance of the
Mortgage Loans in such Mortgage Pool or
Contracts in such Contract Pool) (the "L/C
Percentage"), set forth in the Prospectus
Supplement, relating to such Mortgage Pool
or Contract Pool. The maximum amount
available at any time to be paid under the
Letter of Credit will be determined in
accordance with the provisions of the
applicable Agreement referred to herein. The
duration of coverage and the amount and
frequency of any reduction in coverage
provided by the Letter of Credit with
respect to a Series of Securities will be in
compliance with requirements established by
the Rating Agency rating such Series and
will be set forth in the related Prospectus
Supplement. If so specified in the related
Prospectus Supplement, the Letter of Credit
with respect to a Series of Securities or
one or more Classes of Series of Securities
may, in addition to or in lieu of the
foregoing, provide coverage with respect to
the unpaid principal or notional amount of
the Securities of a Class or Classes within
such Series. See "Credit Support -- Letter
of Credit."
B. Pool Insurance.................If so specified in the applicable Prospectus
Supplement, the Master Servicer will obtain
a Pool Insurance Policy to cover any loss
(subject to the limitations described below)
by reason of default by the Mortgagors on
the related Mortgage Loans to the extent not
covered by any policy of
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primary mortgage insurance (a "Primary
Mortgage Insurance Policy"). The amount of
coverage provided by the Pool Insurance
Policy for a Mortgage Pool will be specified
in the related Prospectus Supplement. A Pool
Insurance Policy for a Mortgage Pool,
however, will not be a blanket policy
against loss, because claims thereunder may
only be made for particular defaulted
Mortgage Loans and only upon satisfaction of
certain conditions precedent. See
"Description of Insurance -- Pool Insurance
Policies." The Master Servicer, if any, or
the Depositor or the applicable Servicer
will be required to use its best reasonable
efforts to maintain the Pool Insurance
Policy for each related Mortgage Pool and to
present claims thereunder to the issuer of
such Pool Insurance Policy (the "Pool
Insurer") on behalf of the Trustee and the
Securityholders. See "Description of the
Securities -- Presentation of Claims."
C. Mortgagor Bankruptcy
Bond.......................If so specified in the related Prospectus
Supplement, the Master Servicer, if any, the
Depositor or the applicable Servicer will
obtain and use its best reasonable efforts
to maintain a Mortgagor Bankruptcy Bond for
one or more Classes of Securities of such
Series covering certain losses resulting
from action that may be taken by a
bankruptcy court in connection with the
bankruptcy of a Mortgagor. The level of
coverage provided by such Mortgagor
Bankruptcy Bond will be specified in the
applicable Prospectus Supplement. See
"Description of Insurance -- Mortgagor
Bankruptcy Bond."
D. Subordinated Securities........If so specified in the related Prospectus
Supplement, the rights of holders of the
Securities of one or more Subordinated
Classes or Subclasses of a Series to receive
distributions with respect to the Mortgage
Loans in the Mortgage Pool or Contracts in
the Contract Pool for such Series, or with
respect to a Subordinated Pool (as defined
herein), will be subordinated to the rights
of the holders of the Securities of one or
more Classes or Subclasses of such Series to
receive such distributions to the extent
described in the related Prospectus
Supplement, and may be limited to the
Subordinated Amount set forth in the related
Prospectus Supplement. This subordination
will be intended to enhance the likelihood
of regular receipt by holders of the Senior
Securities of the full amount of scheduled
payments of principal and interest due them
and to reduce the likelihood that the
holders of such Senior Securities will
experience losses. See "Credit Support --
Subordinated Securities."
E. Shifting Interest..............If so specified in the applicable Prospectus
Supplement, the protection afforded to
holders of Senior Securities of a Series by
the subordination of certain rights of
holders of Subordinated Securities of such
Series to distributions on the related
Mortgage Loans or Contracts may be effected
by the preferential right of the holders of
the Senior Securities to receive, prior to
any distribution being made in respect of
the holders of the related Subordinated
Securities, current distributions on the
related Mortgage Loans or Contracts of
principal and interest due them on each
Distribution Date out of funds available for
distribution on such date in the related
Certificate Account and by the distribution
to the holders of the Senior
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Securities on each Distribution Date of a
greater than pro rata percentage of certain
principal prepayments or other recoveries of
principal specified in the related
Prospectus Supplement on a Mortgage Loan or
Contract that are received in advance of
their scheduled Due Dates and are not
accompanied by an amount as to interest
representing scheduled interest due on any
date or dates in any month or months
subsequent to the month of prepayment (the
"Principal Prepayments"). The allocation of
a greater than pro rata share of such
amounts to the Senior Securities will have
the effect of accelerating the amortization
of the Senior Securities while increasing
the respective interest in the Trust Fund
evidenced by the Subordinated Securities.
Increasing the respective interest of the
Subordinated Securities relative to that of
the Senior Securities is intended to
preserve the availability of the benefits of
the subordination provided by the
Subordinated Securities. See "Description of
the Securities -- Distributions of Principal
and Interest" and " -- Distributions on
Securities" and "Credit Support -- Shifting
Interest."
F. Reserve Fund...................If so specified in the related Prospectus
Supplement, a Reserve Fund may be
established for a Series. Unless otherwise
specified in such Prospectus Supplement,
such Reserve Fund will not be included in
the corpus of the Trust Fund for such
Series. If so specified in the related
Prospectus Supplement, such Reserve Fund may
be created by the deposit, in escrow, by the
Depositor, of a separate pool of mortgage
loans, cooperative loans or Contracts (the
"Subordinated Pool"), with the aggregate
principal balance specified in such
Prospectus Supplement, or by the deposit of
cash in the amount specified in such
Prospectus Supplement (the "Initial
Deposit"). The Reserve Fund will be funded
by the retention of specified distributions
on the Trust Assets of the related Mortgage
Pool or Contract Pool, and/or on the
mortgage loans, cooperative loans or
Contracts in the Subordinated Pool, until
the Reserve Fund (without taking into
account the amount of any Initial Deposit,
except as otherwise provided in the related
Prospectus Supplement), reaches an amount
(the "Required Reserve") set forth in the
related Prospectus Supplement. Thereafter,
specified distributions on the Trust Assets
of the related Mortgage Pool or Contract
Pool, and/or on the mortgage loans,
cooperative loans or Contracts in the
Subordinated Pool, will be retained to the
extent necessary to maintain such Reserve
Fund (without, except as otherwise provided
in the related Prospectus Supplement, taking
into account the amount of any Initial
Deposit) at the related Required Reserve.
Except as otherwise provided in the related
Prospectus Supplement, in no event will the
Required Reserve for any Series ever be
required to exceed the lesser of the
Subordinated Amount for such Series or the
outstanding aggregate principal amount of
Securities of the Subordinated Classes or
Subclasses of such Series specified in the
related Prospectus Supplement. If so
specified in the related Prospectus
Supplement, the Reserve Fund with respect to
a Series may be funded at a lesser amount or
in another manner acceptable to the Rating
Agency rating such Series. See "Credit
Support -- Subordinated Securities" and " --
Reserve Fund."
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G. Other Funds....................Assets consisting of cash, certificates of
deposit or letters of credit or any
combination thereof, in the aggregate amount
specified in the related Prospectus
Supplement, will be deposited by the
Depositor in one or more accounts to be
established with respect to a Series of
Securities by the Depositor with the Trustee
on the related Delivery Date if such assets
are required to make timely distributions in
respect of principal of, and interest on,
the Securities of such Series, are otherwise
required as a condition to the rating of
such Securities in the rating category
specified in the Prospectus Supplement, or
are required in order to provide for certain
contingencies or in order to make certain
distributions regarding Securities which
represent interests in GPM Loans (a "GPM
Fund") or Buy-Down Loans (a "Buy-Down
Fund"). Following each Distribution Date,
amounts may be withdrawn from any such fund
and used and/or distributed in accordance
with the Agreement under the conditions and
to the extent specified in the related
Prospectus Supplement.
H. Swap Agreement.................If so specified in the Prospectus Supplement
relating to a Series of Securities, the
related Issuer will enter into or obtain an
assignment of a swap agreement or similar
agreement pursuant to which such Issuer will
have the right to receive certain payments
of interest (or other payments) as set forth
or determined as described therein. See
"Credit Support -- Swap Agreement."
I. Security Guarantee
Insurance...................If so specified in the related Prospectus
Supplement, credit enhancement for a Series
may be provided by an insurance policy (the
"Security Guarantee Insurance") issued by
one or more insurance companies. Such
Security Guarantee Insurance may guarantee
timely distributions of interest and full
distributions of principal on the basis of a
schedule of principal distributions set
forth in or determined in the manner
specified in the related Prospectus
Supplement.
Hazard Issuance and Special Hazard
Insurance Policies................Unless otherwise specified in the applicable
Prospectus Supplement, all of the Mortgage
Loans (except for the Cooperative Loans) and
the Contracts will be covered by standard
hazard insurance policies insuring against
losses due to various causes, including
fire, lightning and windstorm. In addition,
the Depositor will, if so specified in the
applicable Prospectus Supplement, obtain an
insurance policy (the "Special Hazard
Insurance Policy") covering losses that
result from certain other physical risks
that are not otherwise insured against
(including earthquakes and mudflows). The
Special Hazard Insurance Policy will be
limited in scope and will cover losses in an
amount specified in the applicable
Prospectus Supplement. Any hazard losses not
covered by either standard hazard policies
or the Special Hazard Insurance Policy will
not be insured against and to the extent
that the amount available under any other
method of credit support available for such
Series is exhausted, will be borne by
Securityholders of such Series. The hazard
insurance policies and the Special Hazard
Insurance Policy will be subject to the
limitations described under "Description of
Insurance -- Standard Hazard Insurance
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Policies on Mortgage Loans," "-- Standard
Hazard Insurance Policies on the
Manufactured Homes" and " -- Special Hazard
Insurance Policies."
Substitution of Trust Assets........If so specified in the Prospectus Supplement
relating to a Series of Securities, within
the period following the date of issuance of
such Securities specified in such Prospectus
Supplement, the Depositor or one or more
Servicers will deliver to the Trustee with
respect to such Series Trust Assets in
substitution for any one or more of the
Trust Assets included in the Trust Fund
relating to such Series which do not conform
in one or more material respects to the
representations and warranties in the
related Agreement. See "Description of the
Securities -- Assignment of Mortgage Loans,"
"-- Assignment of Contracts" and " --
Assignment of Mortgage Certificates."
Advances............................Except as otherwise provided in the
Prospectus Supplement with respect to a
Series, the Servicers of the Mortgage Loans
and Contracts (and the Master Servicer, if
any, with respect to each Mortgage Loan and
Contract that it services directly, and
otherwise to the extent the related Servicer
does not do so) will be obligated to advance
delinquent installments of principal of and
interest on the Mortgage Loans and Contracts
(the "Advances") under certain
circumstances. See "Description of the
Securities -- Advances."
Optional Termination................If so specified in the Prospectus Supplement
with respect to a Series, the Depositor or
such other persons as may be specified in
such Prospectus Supplement may purchase the
Trust Assets in the related Trust Fund and
any property acquired in respect thereof at
the time, in the manner and at the price
specified in such Prospectus Supplement. In
the event that the Depositor elects to treat
the related Trust Fund as a Real Estate
Mortgage Investment Conduit (a "REMIC")
under the Internal Revenue Code of 1986, as
amended (the "Code"), any such repurchase
will be effected only in compliance with the
requirements of Section 860F(a)(4) of the
Code, so as to constitute a "qualified
liquidation" thereunder. The exercise of the
right of repurchase will effect early
retirement of the Certificates of the
related Series. See "Maturity, Prepayment
and Yield Considerations" and "Description
of the Securities -- Termination."
ERISA Considerations................A fiduciary of any employee benefit plan or
retirement arrangement subject to the
Employee Retirement Income Security Act of
1974, as amended ("ERISA"), or Section 4975
of the Code should carefully review with its
own legal advisers whether the purchase or
holding of Securities could give rise to a
prohibited transaction under ERISA or
Section 4975 of the Code. See "ERISA
Considerations."
Tax Status..........................See "Federal Income Tax Consequences."
Legal Investment....................If so specified in the related Prospectus
Supplement relating to a Series of
Securities, a Class or Subclass of such
Securities will constitute a "mortgage
related security" under the Secondary
Mortgage Market Enhancement Act of 1984
("SMMEA") if and for so long as it is rated
in
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one of the two highest rating categories by
at least one nationally recognized
statistical rating organization. Such
Classes or Subclasses, if any, 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.
See "Legal Investment."
Use of Proceeds.....................The Depositor will use the net proceeds from
the sale of each Series for one or more of
the following purposes: (i) to purchase the
related Trust Assets, (ii) to repay
indebtedness which has been incurred to
obtain funds to acquire such Trust Assets,
(iii) to establish any reserve funds
described in the related Prospectus
Supplement and (iv) to pay costs of
structuring, guaranteeing and issuing such
Securities. If so specified in the related
Prospectus Supplement, the purchase of the
Trust Assets for a Series may be effected by
an exchange of Securities by the Depositor
with the seller of such Trust Assets. See
"Use of Proceeds."
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<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus and
in the applicable Prospectus Supplement to be prepared and delivered in
connection with the offering of any Series of Securities, prospective investors
should carefully consider the following risk factors before investing in any
Class or Subclass of Securities of any such Series.
LIMITED LIQUIDITY
There can be no assurance that a secondary market for the Securities of
any Series will develop or, if it does develop, that it will provide
Securityholders with liquidity of investment or that it will continue for the
life of the related Securities. The Prospectus Supplement for a Series of
Securities may indicate that an underwriter specified therein intends to
establish a secondary market in such Securities; however, no underwriter will be
obligated to do so. The Securities will not be listed on any securities
exchange.
LIMITED OBLIGATIONS
Except for any related insurance policies or credit support described
in the applicable Prospectus Supplement, the Trust Assets included in the
related Trust Fund will be the sole source of payments on the Securities of a
Series. The Securities of any Series will not represent an interest in or
obligation of the Depositor, the Master Servicer, any Servicer, any Unaffiliated
Seller, the Trustee or any of their respective affiliates, except for the
limited obligations of the Depositor, the Master Servicer or any Unaffiliated
Seller with respect to certain breaches of representations and warranties and
the Master Servicer's obligations as Master Servicer. Neither the Securities of
any Series nor the related Trust Assets will be guaranteed or insured by any
governmental agency or instrumentality (except to the limited extent described
in the related Prospectus Supplement that certain Trust Assets may be insured or
guaranteed, in whole or in part, by the FHA or VA), the Depositor, the Master
Servicer, any Servicer, any Unaffiliated Seller, the Trustee, any of their
respective affiliates or any other person. Consequently, in the event that
payments on the Trust Assets are insufficient or otherwise unavailable to make
all payments required on the Securities, there will be no recourse to the
Depositor, the Master Servicer, any Servicer, any Unaffiliated Seller, the
Trustee or, except as specified in the applicable Prospectus Supplement, any
other entity.
LIMITATIONS, REDUCTION AND SUBSTITUTION OF CREDIT SUPPORT
With respect to each Series of Securities, credit support may be
provided in limited amounts to cover certain types of losses on the underlying
Trust Assets. Credit support may be provided in one or more of the forms
referred to herein, including, but not limited to: a Letter of Credit; a Pool
Insurance Policy; a Mortgagor Bankruptcy Bond; subordination of one or more
Classes or Subclasses of Securities of the same Series; a Reserve Fund; and any
combination thereof. See "Credit Support." Regardless of the form of credit
support, if any, provided, the amount of coverage will be limited in amount and
in most cases will be subject to periodic reduction in accordance with a
schedule or formula. Furthermore, such credit support may provide only very
limited coverage as to certain types of losses, and may provide no coverage as
to certain other types of losses. All or a portion of the credit support, if
any, for any Series of Securities will generally be permitted to be reduced,
terminated or substituted for, if each applicable Rating Agency indicates that
the then-current rating thereof will not be adversely affected. See "Credit
Support."
RISKS OF THE TRUST ASSETS
An investment in securities such as the Securities of any Series which
generally represent interests in, or are secured by, mortgage loans or
manufactured housing installment or conditional sales contracts and
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installment loan agreements, as the case may be, may be affected by, among other
things, a decline in real estate values and changes in the mortgagors' or
obligors' financial condition. No assurance can be given that the values of the
Mortgaged Properties securing the Mortgage Loans, the values of the mortgaged
properties securing the mortgage loans underlying the Mortgage Certificates or
the values of the Manufactured Homes securing the Contracts, as the case may be,
underlying any Series of Securities have remained or will remain at their levels
on the dates of origination of the related Mortgage Loans, mortgage loans,
Mortgage Certificates or Contracts. If the residential real estate market should
experience an overall decline in property values such that the outstanding
balances of the Mortgage Loans and the mortgage loans underlying the Mortgage
Certificates comprising a particular Trust Fund, and any secondary financing on
the related Mortgaged Properties and mortgaged properties, become equal to or
greater than the value of the related Mortgaged Properties or mortgaged
properties, as applicable, the actual rates of delinquencies, foreclosures and
losses could be higher than those now generally experienced in the mortgage
lending industry and those experienced in the related Originator's portfolio. In
addition, adverse economic conditions generally, in particular geographic areas
or industries, or affecting particular segments of the borrowing community (such
as Mortgagors or Obligors relying on commission income and self-employed
Mortgagors or Obligors) and other factors, may affect the timely payment by
Mortgagors, Obligors or mortgagors of scheduled payments of principal of and
interest on the Mortgage Loans, Contracts or Mortgage Certificates, as the case
may be, and, accordingly, the actual rates of delinquencies, foreclosures and
losses with respect to any Trust Fund. See "Maturity, Prepayment and Yield
Considerations." To the extent that such losses are not covered by the
applicable credit support, holders of Securities of the Series evidencing
interests in, or secured by, the related Trust Fund will bear all risk of loss
resulting from default by Mortgagors, Obligors or mortgagors and will have to
look primarily to the value of the Mortgaged Properties, mortgaged properties or
Manufactured Homes for recovery of the outstanding principal of and unpaid
interest on the defaulted Mortgage Loans or Contracts. In addition to the
foregoing, certain geographic regions in the United States from time to time
will experience weaker regional economic conditions and housing markets and,
consequently, will experience higher rates of loss and delinquency on mortgage
loans or contracts generally. The Mortgage Loans, Contracts or mortgage loans
underlying the Mortgage Certificates underlying certain Series of Securities may
be concentrated in these regions, and such concentration may present risk
considerations in addition to those generally present for similar
mortgage-backed or contract-backed securities without such concentration. See
"The Trust Fund -- The Mortgage Pools," "-- Mortgage Loan Program," "--
Underwriting Standards," "-- The Contract Pools" and " -- Underwriting
Policies."
PREPAYMENT AND YIELD CONSIDERATIONS
The rate and timing of principal payments on the Securities of each
Series will depend, among other things, on the rate and timing of principal
payments (including prepayments, defaults and liquidations) on the related
Mortgage Loans, Mortgage Certificates or Contracts. As is the case with
mortgage-backed securities generally, each Series of Securities is subject to
substantial inherent cash-flow uncertainties because the Mortgage Loans and
Contracts may be prepaid at any time. Generally, when prevailing interest rates
increase, prepayment rates on mortgage loans tend to decrease, resulting in a
slower return of principal to investors at a time when reinvestment at such
higher prevailing rates would be desirable. Conversely, when prevailing interest
rates decline, prepayment rates on mortgage loans tend to increase, resulting in
a faster return of principal to investors at a time when reinvestment at
comparable yields may not be possible.
The yield to maturity on each Class of Securities of each Series will
depend, among other things, on the rate and timing of principal payments
(including prepayments, defaults and liquidations) on the Mortgage Loans,
Mortgage Certificates or Contracts, as applicable, and the allocation thereof to
reduce the Certificate Principal Balance of such Class. The yield to maturity on
each Class of Securities will also depend on the Mortgage Rates and the purchase
price for such Securities. The yield to investors on any
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<PAGE>
Class of Securities will be adversely affected by any allocation thereto of
interest shortfalls on the Mortgage Loans or Contracts, as applicable, which are
expected to result from the distribution of interest only to the date of
prepayment (rather than a full month's interest) in connection with prepayments
in full and in part (including for this purpose Insurance Proceeds and
Liquidation Proceeds) to the extent not covered by amounts otherwise payable to
the Master Servicer as servicing compensation.
In general, if a Class of Securities is purchased at a premium and
principal distributions thereon occur at a rate faster than anticipated at the
time of purchase, the investor's actual yield to maturity will be lower than
that assumed at the time of purchase. Conversely, if a Class of Securities is
purchased at a discount and principal distributions thereon occur at a rate
slower than that assumed at the time of purchase, the investor's actual yield to
maturity will be lower than that assumed at the time of purchase.
SUBORDINATION
To the extent specified in the applicable Prospectus Supplement,
distributions of interest on and principal of one or more Classes or Subclasses
of Securities of a Series may be subordinated in priority of payment to interest
and principal due on one or more other Classes or Subclasses of Securities of
such Series.
LIMITATION ON EXERCISE OF RIGHTS DUE TO BOOK-ENTRY REGISTRATION
If so specified in the applicable Prospectus Supplement, one or more
Classes of Securities of a Series initially will be represented by one or more
certificates registered in the name of Cede & Co. ("Cede"), or any other nominee
of The Depository Trust Company ("DTC") set forth in such Prospectus Supplement,
and will not be registered in the names of the holders of the Securities of such
Series or their nominees. Because of this, unless and until Securities in fully
registered, certificated form ("Definitive Securities") for such Series are
issued, holders of such Securities will not be recognized by the applicable
Trustee as "Securityholders" (as such terms are used herein or in the related
Agreement, as applicable). Hence, until Definitive Securities are issued,
holders of such Securities will be able to exercise the rights of
Securityholders only indirectly through DTC and its participating organizations.
THE TRUST FUND
Ownership of the Mortgage or Contract Pool or Pools included in the
Trust Fund for a Series of Securities may be evidenced by one or more Classes of
Certificates, which may consist of one or more Subclasses, as specified in the
Prospectus Supplement for such Series. Each Certificate will evidence the
undivided interest, beneficial interest or notional amount specified in the
related Prospectus Supplement in one or more Mortgage Pools containing one or
more Mortgage Loans or Mortgage Certificates or Contract Pools containing
Contracts, having an aggregate principal balance of not less than approximately
$50,000,000 as of the first day of the month of its creation (the "Cut-off
Date"), unless otherwise specified in the applicable Prospectus Supplement. If
so specified in the related Prospectus Supplement, each Class or Subclass of the
Certificates of a Series will evidence the percentage interest specified in such
Prospectus Supplement in the payments of principal of and interest on the
Mortgage Loans or Mortgage Certificates in the related Mortgage Pool or Pools or
on the Contracts in the related Contract Pool or Pools (a "Percentage
Interest"). To the extent specified in the related Prospectus Supplement, each
Mortgage Pool or Contract Pool with respect to a Series will be covered by a
Letter of Credit, a Pool Insurance Policy, a Special Hazard Insurance Policy, a
Mortgagor Bankruptcy Bond, by the subordination of the rights of the holders of
the Subordinated Securities of a Series to the rights of the holders of the
Senior Securities, which, if so specified in the related Prospectus Supplement,
may include Securities of a Subordinated Class or Subclass and the establishment
of a Reserve Fund, by the right of one or more Classes or Subclasses of
Securities to receive a
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disproportionate amount of certain distributions of principal, by Security
Guarantee Insurance or another form or forms of Alternative Credit Support
acceptable to the Rating Agency rating the Securities of such Series or by any
combination of the foregoing. See "Description of Insurance" and "Credit
Support."
THE MORTGAGE POOLS
If so specified in the Prospectus Supplement with respect to a Series,
the Trust Fund for such Series may include (a) one or more Mortgage Pools
containing (i) conventional one-to four-family residential, first and/or second
mortgage loans, (ii) closed-end loans (the "Closed-End Loans") and/or revolving
home equity loans or certain balances thereof (the "Revolving Credit Line Loans"
and, together with the Closed-End Loans, the "Home Equity Loans") secured by
mortgages or deeds of trust on residential one-to-four family properties,
including townhouses and individual units in condominiums and planned unit
developments, (iii) Cooperative Loans made to finance the purchase of certain
rights relating to cooperatively owned properties secured by the pledge of
shares issued by a Cooperative and the assignment of a proprietary lease or
occupancy agreement providing the exclusive right to occupy a particular
Cooperative Dwelling, (iv) mortgage loans secured by Multifamily Property, (v)
mortgage participation securities evidencing participation interests in such
loans that are acceptable to the nationally recognized Rating Agency rating the
Securities of such Series for a rating in one of the four highest rating
categories of such Rating Agency or (vi) certain conventional Mortgage
Certificates issued by one or more trusts established by one or more private
entities or (b) one or more Contract Pools containing Contracts or participation
Securities representing participation interests in such Contracts purchased by
the Depositor either directly or through one or more affiliates or Unaffiliated
Sellers, and related property conveyed to such trust by the Depositor.
A Mortgage Pool may include Mortgage Loans insured by the FHA ("FHA
Loans") and/or Mortgage Loans partially guaranteed by the Veterans
Administration (the "VA", and such mortgage loans are referred to herein as "VA
Loans"). All Mortgage Loans will be evidenced by promissory notes or other
evidence of indebtedness (the "Mortgage Notes") secured by first mortgages or
first or second deeds of trust or other similar security instruments creating a
first lien or second lien, as applicable, on the Mortgaged Properties (as
defined below). Single Family Property and Multifamily Property will consist of
single family detached homes, attached homes (single family units having a
common wall), individual units located in condominiums, townhouses, planned unit
developments, multifamily residential rental properties, apartment buildings
owned by cooperative housing corporations and such other types of homes or units
as are set forth in the related Prospectus Supplement. Unless otherwise
specified in the applicable Prospectus Supplement, each such detached or
attached home or multifamily property will be constructed on land owned in fee
simple by the Mortgagor or on land leased by the Mortgagor for a term at least
two years greater than the term of the applicable Mortgage Loan. Attached homes
may consist of duplexes, triplexes and fourplexes (multifamily structures where
each Mortgagor owns the land upon which the unit is built with the remaining
adjacent land owned in common). Multifamily Property may include mixed
commercial and residential buildings. The Mortgaged Properties may include
investment properties and vacation and second homes. Mortgage Loans secured by
Multifamily Property may also be secured by an assignment of leases and rents
and operating or other cash flow guarantees relating to the Mortgaged Properties
to the extent specified in the related Prospectus Supplement.
Unless otherwise specified below or in the applicable Prospectus
Supplement, each Mortgage Loan in a Mortgage Pool will (i) have an individual
principal balance at origination of not less than $25,000 nor more than
$500,000, (ii) have monthly payments due on the first day of each month (the
"Due Date"), (iii) be secured by Mortgaged Properties or relate to Cooperative
Loans located in any of the 50 states or the District of Columbia, and (iv)
consist of fully-amortizing Mortgage Loans, each with a 10 to 40 year term at
origination, a fixed or variable rate of interest and level or variable monthly
payments over the term of the Mortgage Loan. Unless otherwise specified in the
related Prospectus Supplement, the Loan-to-Value Ratio
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of such Mortgage Loans at origination will not exceed 95% on any Mortgage Loan
with an original principal balance of $150,000 or less, 90% on any Mortgage Loan
with an original principal balance of $150,001 through $200,000, 85% on any
Mortgage Loan with an original principal balance of $200,001 through $300,000
and 80% on any Mortgage Loan with an original principal balance exceeding
$300,000. If so specified in the related Prospectus Supplement, a Mortgage Pool
may also include fully amortizing, adjustable rate Mortgage Loans ("ARM Loans")
with (unless otherwise specified in such Prospectus Supplement) 30-year terms at
origination and mortgage interest rates adjusted periodically (with
corresponding adjustments in the amount of monthly payments) to equal the sum
(which may be rounded) of a fixed margin and an index described in such
Prospectus Supplement, subject to any applicable restrictions on such
adjustments. The Mortgage Pools may also include other types of Mortgage Loans
to the extent set forth in the applicable Prospectus Supplement.
Unless otherwise specified in the applicable Prospectus Supplement, no
Mortgage Loan will have a Loan-to-Value Ratio at origination in excess of 95%,
regardless of its original principal balance. Except as otherwise provided in
the related Prospectus Supplement, the Loan-to-Value Ratio will be the ratio,
expressed as a percentage, of the principal amount of the Mortgage Loan at the
date of determination to the lesser of (a) the appraised value determined in an
appraisal obtained by the originator and (b) the sales price for such property
(the "Original Value"). Unless otherwise specified in the related Prospectus
Supplement, with respect to a Mortgage Loan secured by a mortgage on a vacation
or second home or an investment property (other than Multifamily Property), no
income derived from the property will be considered for underwriting purposes,
the Loan-to-Value Ratio (taking into account any secondary financing) may not
exceed 80% and the original principal balance may not exceed $250,000.
If so specified in the related Prospectus Supplement, a Mortgage Pool
may contain Mortgage Loans with fluctuating Mortgage Rates. Any such Mortgage
Loan may provide that on the day on which the Mortgage Rate adjusts, the amount
of the monthly payments on the Mortgage Loan will be adjusted to provide for the
payment of the remaining principal amount of the Mortgage Loan with level
monthly payments of principal and interest at the new Mortgage Rate to the
maturity date of the Mortgage Loan. Alternatively, the Mortgage Loan may provide
that the Mortgage Rate adjusts more frequently than the monthly payment. As a
result, a greater or lesser portion of the monthly payment will be applied to
the payment of principal of the Mortgage Loan, thus increasing or decreasing the
rate at which the Mortgage Loan is repaid. See "Maturity, Prepayment and Yield
Considerations." In the event that an adjustment to the Mortgage Rate causes the
amount of interest accrued in any month to exceed the amount of the monthly
payment on such Mortgage Loan, the excess (the "Deferred Interest") will be
added to the principal balance of the Mortgage Loan (unless otherwise paid by
the Mortgagor), and will bear interest at the Mortgage Rate in effect from time
to time. The amount by which the Mortgage Rate or monthly payment may increase
or decrease and the aggregate amount of Deferred Interest on any Mortgage Loan
may be subject to certain limitations, as described in the related Prospectus
Supplement.
If so specified in the Prospectus Supplement for the related Series,
the Mortgage Rate on certain ARM Loans will be convertible from an adjustable
rate to a fixed rate at the option of the Mortgagor under certain circumstances.
Unless otherwise specified in the related Prospectus Supplement, the Agreement
will provide that the Unaffiliated Seller from which such convertible ARM Loans
were acquired will be obligated to repurchase from the Trust Fund any such ARM
Loan as to which the conversion option has been exercised (a "Converted Mortgage
Loan"), at a purchase price set forth in the related Prospectus Supplement. The
amount of such purchase price will be required to be deposited in the
Certificate Account and will be distributed to the Securityholders on the
Distribution Date in the month following the month of the exercise of the
conversion option. The obligation of the Unaffiliated Seller to repurchase
Converted Mortgage Loans may or may not be supported by cash, letters of credit,
third party guarantees or other similar arrangements.
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If provided for in the applicable Prospectus Supplement, a Mortgage
Pool may contain Mortgage Loans pursuant to which the monthly payments made by
the Mortgagor during the early years of the Mortgage Loan will be less than the
scheduled monthly payments on the Mortgage Loan ("Buy-Down Loans"). The
resulting difference in payment shall be compensated for from an amount
contributed by the Depositor, the seller of the related Mortgaged Property, the
Servicer or another source and placed in a custodial account (the "Buy-Down
Fund") by the Servicer, or if so specified in such Prospectus Supplement, with
the Trustee. In lieu of a cash deposit, if so specified in the related
Prospectus Supplement, a letter of credit or guaranteed investment contract may
be delivered to the Trustee to fund the Buy-Down Fund. See "Description of the
Securities -- Payments on Mortgage Loans." Buy-Down Loans included in a Mortgage
Pool will provide for a reduction in monthly interest payments by the Mortgagor
for a period of up to the first four years of the term of such Mortgage Loans.
If provided for in the applicable Prospectus Supplement, a Mortgage
Pool may contain Mortgage Loans pursuant to which the monthly payments by the
Mortgagor during the early years of the related Mortgage Note are less than the
amount of interest that would otherwise be payable thereon, with the interest
not so paid added to the outstanding principal balance of such Mortgage Loan
("GPM Loans"). If so specified in the related Prospectus Supplement, the
resulting difference in payment shall be compensated for from an amount
contributed by the Depositor or another source and delivered to the Trustee (the
"GPM Fund"). In lieu of a cash deposit, the Depositor may deliver to the Trustee
a letter of credit, guaranteed investment contract or another instrument
acceptable to the Rating Agency rating the related Series to fund the GPM Fund.
If provided for in the applicable Prospectus Supplement, a Mortgage
Pool may contain Mortgage Loans which are Home Equity Loans pursuant to which
the full principal amount of such Mortgage Loan is advanced at origination of
the loan and generally is repayable in equal (or substantially equal)
installments of an amount sufficient to fully amortize such loan at its stated
maturity. Interest on each Home Equity Loan may be calculated on the basis of
the outstanding principal balance of such loan multiplied by the Mortgage Rate
thereon and further multiplied by a fraction, the numerator of which is the
number of days in the period elapsed since the preceding payment of interest was
made and the denominator is the number of days in the annual period for which
interest accrues on such loan. Under certain circumstances, under a Home Equity
Loan, a borrower may choose an interest only payment option and is obligated to
pay only the amount of interest which accrues on the loan during the billing
cycle. Generally, an interest only payment option may be available for a
specified period before the borrower must begin paying at least the minimum
monthly payment of a specified percentage of the average outstanding balance of
the loan.
FHA Loans will be insured by the Federal Housing Administration (the
"FHA") as authorized under the National Housing Act, as amended, and the United
States Housing Act of 1937, as amended. Such FHA loans will be insured under
various FHA programs including the standard FHA 203-b programs to finance the
acquisition of one- to four-family housing units, the FHA 245 graduated payment
mortgage program and the FHA 221 and 223 programs to finance certain multifamily
residential rental properties. FHA Loans generally require a minimum down
payment of approximately 5% of the original principal amount of the FHA Loan. No
FHA Loan may have an interest rate or original principal amount exceeding the
applicable FHA limits at the time of origination of such FHA Loan.
VA Loans will be partially guaranteed by the VA under the Servicemen's
Readjustment Act of 1944, as amended (the "Servicemen's Readjustment Act"). The
Servicemen's Readjustment Act permits a veteran (or in certain instances the
spouse of a veteran) to obtain a mortgage loan guarantee by the VA covering
mortgage financing of the purchase of a one- to four-family dwelling unit at
interest rates permitted by the VA. The program has no mortgage loan limits,
requires no down payment from the purchasers and
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permits the guarantee of mortgage loans of up to 30 years' duration. However, no
VA Loan will have an original principal amount greater than five times the
partial VA guarantee for such VA Loan. The maximum guarantee that may be issued
by VA under this program is 50% of the principal amount of the Mortgage Loan if
the principal amount of the Mortgage Loan is $45,000 or less, the lesser of
$36,000 and 40% of the principal amount of the Mortgage Loan if the principal
amount of the Mortgage Loan is greater than $45,000 but less than or equal to
$144,000, and the lesser of $46,000 and 25% of the principal amount of the
Mortgage Loan if the principal amount of the Mortgage Loan is greater than
$144,000.
Unless otherwise specified in the related Prospectus Supplement,
interest on each Revolving Credit Line Loan, excluding introduction rates
offered from time to time during promotional periods, is computed and payable
monthly on the average daily outstanding principal balance of such Loan.
Principal amounts on a Revolving Credit Line Loan may be drawn down (up to a
maximum amount as set forth in the related Prospectus Supplement) or repaid
under each Revolving Credit Line Loan from time to time, but may be subject to a
minimum periodic payment. To the extent and accordingly under the terms provided
in the related Prospectus Supplement, the Trust Fund may include amounts
borrowed under a Revolving Credit Line Loan after the Cut-off Date. The full
amount of a Closed-End Loan is advanced at the inception of the Loan and
generally is repayable in equal (or substantially equal) installments of an
amount to fully amortize such Loan at its stated maturity. Except to the extent
provided in the related Prospectus Supplement, the original terms to stated
maturity of Closed-End Loans will not exceed 360 months. Under certain
circumstances, under either a Revolving Credit Line Loan or a Closed-End Loan, a
borrower may choose an interest only payment option and is obligated to pay only
the amount of interest which accrues on the Loan during the billing cycle. An
interest only payment option may be available for a specified period before the
borrower must begin paying at least the minimum monthly payment of a specified
percentage of the average outstanding balance of the Loan.
The Prospectus Supplement (or, if such information is not available in
advance of the date of such Prospectus Supplement, a Current Report on Form 8-K
to be filed with the Commission) for each Series of Securities the Trust Fund
with respect to which contains Mortgage Loans will contain information as to the
type of Mortgage Loans that will comprise the related Mortgage Pool or Pools and
information as to (i) the aggregate principal balance of the Mortgage Loans as
of the applicable Cut-off Date, (ii) the type of Mortgaged Properties securing
the Mortgage Loans, (iii) the original terms to maturity of the Mortgage Loans,
(iv) the largest in principal balance of the Mortgage Loans, (v) the earliest
origination date and latest maturity date of the Mortgage Loans, (vi) the
aggregate principal balance of Mortgage Loans having Loan-to-Value Ratios at
origination exceeding 80%, (vii) the interest rate or range of interest rates
borne by the Mortgage Loans, (viii) the average outstanding principal balance of
the Mortgage Loans, (ix) the geographical distribution of the Mortgage Loans,
(x) the number and aggregate principal balance of Buy-Down Loans or GPM Loans,
if applicable, (xi) with respect to ARM Loans, the adjustment dates, the
highest, lowest and weighted average margin, and the maximum Mortgage Rate
variation at the time of any periodic adjustment and over the life of such ARM
Loans, and (xii) with respect to Mortgage Loans secured by Multifamily Property
or such other Mortgage Loans as are specified in the Prospectus Supplement,
whether the Mortgage Loan provides for an interest only period and whether the
principal amount of such Mortgage Loan is amortized on the basis of a period of
time that extends beyond the maturity date of the Mortgage Loan.
No assurance can be given that values of the Mortgaged Properties in a
Mortgage Pool have remained or will remain at their levels on the dates of
origination of the related Mortgage Loans. If the real estate market should
experience an overall decline in property values such that the outstanding
balances of the Mortgage Loans and any secondary financing on the Mortgaged
Properties in a particular Mortgage Pool become equal to or greater than the
value of the Mortgaged Properties, the actual rates of delinquencies,
foreclosures and losses could be higher than those now generally experienced in
the mortgage lending
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industry. In addition, the value of property securing Cooperative Loans and the
delinquency rate with respect to Cooperative Loans could be adversely affected
if the current favorable tax treatment of cooperative stockholders were to
become less favorable. See "Certain Legal Aspects of the Mortgage Loans and
Contracts -- The Mortgage Loans." To the extent that such losses are not covered
by the methods of credit support or the insurance policies described herein or
by Alternative Credit Support, they will be borne by holders of the Securities
of the Series evidencing interests in, or secured by, the Mortgage Pool.
Multifamily lending is generally viewed as exposing the lender to a
greater risk of loss than one- to four-family residential lending. Multifamily
lending typically involves larger loans to single borrowers or groups of related
borrowers than residential one- to four-family mortgage loans. Furthermore, the
repayment of loans secured by income producing properties is typically dependent
upon the successful operation of the related real estate project. If the cash
flow from the project is reduced (for example, if leases are not obtained or
renewed), the borrower's ability to repay the loan may be impaired. Multifamily
real estate can be affected significantly by supply and demand in the market for
the type of property securing the loan and, therefore, may be subject to adverse
economic conditions. Market values may vary as a result of economic events or
governmental regulations outside the control of the borrower or lender, such as
rent control laws, which impact the future cash flow of the property.
Corresponding to the greater lending risk is a generally higher interest rate
applicable to multifamily mortgage loans.
The Depositor will cause the Mortgage Loans constituting each Mortgage
Pool to be assigned to the Trustee named in the applicable Prospectus
Supplement, for the benefit of the holders of the Certificates of such Series
(the "Certificateholders") and, if a Series of Securities includes Notes, the
Depositor will cause the Mortgage Loans constituting the Mortgage Pool to be
pledged to the Indenture Trustee, for the benefit of the holders of the Notes of
such Series (the "Noteholders" and, together with the Certificateholders, the
"Securityholders"). The Master Servicer, if any, named in the related Prospectus
Supplement will service the Mortgage Loans, either by itself or through other
mortgage servicing institutions, if any (each, a "Servicer"), pursuant to a
Pooling and Servicing Agreement or a Sale and Servicing Agreement, as described
herein, and will receive a fee for such services. See " -- Mortgage Loan
Program" and "Description of the Securities." As used herein, "Agreement" means,
with respect to a Series that only includes Certificates, the Pooling and
Servicing Agreement, and with respect to a Series that includes Notes, the
Indenture, the Trust Agreement and the Sale and Servicing Agreement, as the
context requires. Unless otherwise specified in the applicable Prospectus
Supplement, with respect to those Mortgage Loans serviced by a Servicer, such
Servicer will be required to service the related Mortgage Loans in accordance
with the Pooling and Servicing Agreement, Sale and Servicing Agreement or
Seller's Warranty and Servicing Agreement between the Servicer and the Depositor
(each, a "Servicing Agreement"), as applicable, and will receive the fee for
such services specified in such Servicing Agreement; however, any Master
Servicer will remain liable for its servicing obligations under the applicable
Agreement as if the Master Servicer alone were servicing such Mortgage Loans.
The Depositor will make certain representations and warranties
regarding the Mortgage Loans, but its assignment of the Mortgage Loans to the
Trustee will be without recourse. See "Description of the Securities --
Assignment of Mortgage Loans." The Master Servicer's obligations with respect to
the Mortgage Loans will consist principally of its contractual servicing
obligations under the Servicing Agreement (including its obligation to enforce
certain purchase and other obligations of Servicers and/or Unaffiliated Sellers,
as more fully described herein under " -- Mortgage Loan Program" and " --
Representations by Unaffiliated Sellers; Repurchases" and "Description of the
Securities -- Assignment of Mortgage Loans" and " -- Servicing by Unaffiliated
Sellers") and its obligations to make Advances in the event of delinquencies in
payments on or with respect to the Mortgage Loans or in connection with
prepayments and liquidations of such Mortgage Loans, in amounts described herein
under "Description of the Securities -- Advances." Unless otherwise specified in
the related Prospectus Supplement, such
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Advances with respect to delinquencies will be limited to amounts that the
Master Servicer believes ultimately would be reimbursable under any applicable
Letter of Credit, Pool Insurance Policy, Special Hazard Insurance Policy,
Mortgagor Bankruptcy Bond or other policy of insurance, from amounts in the
Reserve Fund, under any Alternative Credit Support or out of the proceeds of
liquidation of the Mortgage Loans, cash in the Certificate Account or otherwise.
See "Description of the Securities -- Advances," "Credit Support" and
"Description of Insurance."
MORTGAGE LOAN PROGRAM
The Mortgage Loans will have been purchased by the Depositor either
directly or through affiliates or by the Trust formed by the Depositor, from one
or more affiliates or from sellers unaffiliated with the Depositor
("Unaffiliated Sellers"). Mortgage Loans acquired by the Depositor will have
been originated in accordance with the underwriting criteria specified below
under "Underwriting Standards" or as otherwise described in a related Prospectus
Supplement.
UNDERWRITING STANDARDS
Except in the case of certain Mortgage Loans originated by Unaffiliated
Sellers in accordance with their own underwriting criteria ("Closed Loans") or
such other standards as may be described in the applicable Prospectus
Supplement, all prospective Mortgage Loans will be subject to the underwriting
standards adopted by the Depositor. See " -- Closed Loan Program" below for a
description of underwriting standards applicable to Closed Loans. Unaffiliated
Sellers will represent and warrant that Mortgage Loans originated by them and
purchased by the Depositor have been originated in accordance with the
applicable underwriting standards established by the Depositor or such other
standards as may be described in the applicable Prospectus Supplement. The
following discussion describes the underwriting standards of the Depositor with
respect to any Mortgage Loan that it purchases.
The mortgage credit approval process for one- to four-family
residential loans follows a standard procedure that generally complies with
FHLMC and FNMA regulations and guidelines (except that certain Mortgage Loans
may have higher loan amount and qualifying ratios) and applicable federal and
state laws and regulations. The credit approval process for Cooperative Loans
follows a procedure that generally complies with applicable FNMA regulations and
guidelines (except for the loan amounts and qualifying ratios) and applicable
federal and state laws and regulations. The originator of a Mortgage Loan (the
"Originator") generally will review a detailed credit application by the
prospective mortgagor designed to provide pertinent credit information,
including a current balance sheet describing assets and liabilities and a
statement of income and expenses, as well as an authorization to apply for a
credit report that summarizes the prospective mortgagor's credit history with
local merchants and lenders and any record of bankruptcy. In addition, an
employment verification is obtained from the prospective mortgagor's employer
wherein the employer reports the length of employment with that organization,
the current salary, and gives an indication as to whether it is expected that
the prospective mortgagor will continue such employment in the future. If the
prospective mortgagor is self-employed, he or she is required to submit copies
of signed tax returns. The prospective mortgagor may also be required to
authorize verification of deposits at financial institutions. In certain
circumstances, other credit considerations may cause the Originator or Depositor
not to require some of the above documents, statements or proofs in connection
with the origination or purchase of certain Mortgage Loans.
Unless otherwise specified in the applicable Prospectus Supplement, an
appraisal generally will be required to be made on each residence to be
financed. Such appraisal generally will be made by an appraiser who meets FNMA
requirements as an appraiser of one- to four-family residential properties. The
appraiser is required to inspect the property and verify that it is in good
condition and that, if new, construction has
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been completed. The appraisal generally will be based on the appraiser's
judgment of value, giving appropriate weight to both the market value of
comparable homes and the cost of replacing the residence. These underwriting
standards also require a search of the public records relating to a mortgaged
property for liens and judgments against such mortgaged property.
Based on the data provided, certain verifications and the appraisal, a
determination is made by the Originator as to whether the prospective mortgagor
has sufficient monthly income available to meet the prospective mortgagor's
monthly obligations on the proposed loan and other expenses related to the
residence (such as property taxes, hazard and primary mortgage insurance and, if
applicable, maintenance) and other financial obligations and monthly living
expenses. Each Originator's lending guidelines for conventional mortgage loans
generally will specify that mortgage payments plus taxes and insurance and all
monthly payments extending beyond one year (including those mentioned above and
other fixed obligations, such as car payments) would equal no more than
specified percentages of the prospective mortgagor's gross income. These
guidelines will be applied only to the payments to be made during the first year
of the loan. For FHA and VA Loans, the Originator's lending guidelines will
follow HUD and VA guidelines, respectively. Other credit considerations may
cause an Originator to depart from these guidelines. For example, when two
individuals co-sign the loan documents, the incomes and expenses of both
individuals may be included in the computation.
The Mortgaged Properties may be located in states where, in general, a
lender providing credit on a single-family property may not seek a deficiency
judgment against the Mortgagor but rather must look solely to the property for
repayment in the event of foreclosure. The Depositor's underwriting standards
applicable to all states (including anti-deficiency states) require that the
value of the property being financed, as indicated by the appraisal, currently
supports and is anticipated to support in the future the outstanding loan
balance. Certain of the types of Mortgage Loans that may be included in the
Mortgage Pools or Trust Funds may involve additional uncertainties not present
in traditional types of loans. For example, Buy-Down Loans and GPM Loans provide
for escalating or variable payments by the Mortgagor. These types of Mortgage
Loans are underwritten on the basis of a judgment that the Mortgagor will have
the ability to make larger monthly payments in subsequent years. In some
instances the Mortgagor's income may not be sufficient to enable it to continue
to make scheduled loan payments as such payments increase.
To the extent specified in the related Prospectus Supplement, the
Depositor may purchase or cause the Trust to purchase Mortgage Loans for
inclusion in a Trust Fund that are underwritten under standards and procedures
which vary from and are less stringent than those described herein. For
instance, Mortgage Loans may be underwritten under a "limited documentation"
program if so specified in the related Prospectus Supplement. With respect to
such Mortgage Loans, minimal investigation into the borrowers' credit history
and income profile is undertaken by the originator and such Mortgage Loans may
be underwritten primarily on the basis of an appraisal of the Mortgaged Property
or Cooperative Dwelling and the Loan-to-Value Ratio at origination. Thus, if the
Loan-to-Value Ratio is less than a percentage specified in the related
Prospectus Supplement, the originator may forego certain aspects of the review
relating to monthly income, and traditional ratios of monthly or total expenses
to gross income may not be considered.
The underwriting standards for Mortgage Loans secured by Multifamily
Property will be described in the related Prospectus Supplement.
QUALIFICATIONS OF UNAFFILIATED SELLERS
Unless otherwise specified in the applicable Prospectus Supplement with
respect to an Unaffiliated Seller of Closed Loans secured by residential
properties, each Unaffiliated Seller must be an institution experienced in
originating conventional mortgage loans and/or FHA Loans or VA Loans in
accordance with
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accepted practices and prudent guidelines, and must maintain satisfactory
facilities to originate those loans. In addition, except as otherwise specified,
the Depositor requires adequate financial stability and adequate servicing
experience, where appropriate, as well as satisfaction of certain other
criteria.
REPRESENTATIONS BY UNAFFILIATED SELLERS; REPURCHASES
Unless otherwise specified in the related Prospectus Supplement, each
Unaffiliated Seller (or the Master Servicer, if the Unaffiliated Seller is also
the Master Servicer under the Agreement) will have made representations and
warranties in respect of the Mortgage Loans sold by such Unaffiliated Seller to
the Depositor. Such representations and warranties will generally include, among
other things: (i) with respect to each Mortgaged Property, that title insurance
(or in the case of Mortgaged Properties located in areas where such policies are
generally not available, an attorney's certificate of title) and any required
hazard and primary mortgage insurance was effective at the origination of each
Mortgage Loan, and that each policy (or certificate of title) remained in effect
on the date of purchase of the Mortgage Loan from the Unaffiliated Seller; (ii)
that the Unaffiliated Seller had good and marketable title to each such Mortgage
Loan; (iii) with respect to each Mortgaged Property, that each mortgage
constituted a valid first lien on the Mortgaged Property (subject only to
permissible title insurance exceptions); (iv) that there were no delinquent tax
or assessment liens against the Mortgaged Property; and (v) that each Mortgage
Loan was current as to all required payments (unless otherwise specified in the
related Prospectus Supplement). With respect to a Cooperative Loan, the
Unaffiliated Seller will represent and warrant that (a) the security interest
created by the cooperative security agreements constituted a valid first lien on
the collateral securing the Cooperative Loan (subject to the right of the
related Cooperative to cancel shares and terminate the proprietary lease for
unpaid assessments and to the lien of the related Cooperative for unpaid
assessments representing the Mortgagor's pro rata share of the Cooperative's
payments for its mortgage, current and future real property taxes, maintenance
charges and other assessments to which like collateral is commonly subject) and
(b) the related cooperative apartment was free from damage and was in good
repair.
All of the representations and warranties of an Unaffiliated Seller in
respect of a Mortgage Loan will have been made as of the date on which such
Unaffiliated Seller sold the Mortgage Loan to the Depositor or its affiliate. A
substantial period of time may have elapsed between such date and the date of
initial issuance of the Series of Securities evidencing an interest in, or
secured by, such Mortgage Loan. Since the representations and warranties of an
Unaffiliated Seller do not address events that may occur following the sale of a
Mortgage Loan by an Unaffiliated Seller, the repurchase obligation described
below will not arise if, during the period commencing on the date of sale of a
Mortgage Loan by the Unaffiliated Seller to or on behalf of the Depositor, the
relevant event occurs that would have given rise to such an obligation had the
event occurred prior to sale of the affected Mortgage Loan. However, the
Depositor will not include any Mortgage Loan in the Trust Fund for any Series of
Securities if anything has come to the Depositor's attention that would cause it
to believe that the representations and warranties of an Unaffiliated Seller
will not be accurate and complete in all material respects in respect of such
Mortgage Loan as of the related Cut-off Date.
The only representations and warranties to be made for the benefit of
holders of Securities of a Series in respect of any Mortgage Loan relating to
the period commencing on the date of sale of such Mortgage Loan to the Depositor
or its affiliates will be certain limited representations of the Depositor and
of the Master Servicer described below under "Description of the Securities --
Assignment of Mortgage Loans." If the Master Servicer is also an Unaffiliated
Seller of Mortgage Loans with respect to a particular Series, such
representations will be in addition to the representations and warranties made
in its capacity as an Unaffiliated Seller.
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Upon the discovery of the breach of any representation or warranty made
by an Unaffiliated Seller in respect of a Mortgage Loan that materially and
adversely affects the interests of the Securityholders of the related Series,
such Unaffiliated Seller or the Servicer of such Mortgage Loan will be obligated
to repurchase such Mortgage Loan at a purchase price equal to 100% of the unpaid
principal balance thereof at the date of repurchase or, in the case of a Series
of Securities as to which the Depositor has elected to treat the related Trust
Fund as a REMIC, at such other price as may be necessary to avoid a tax on a
prohibited transaction, as described in Section 860F(a) of the Code, in each
case together with accrued interest at the Mortgage Rate for the related
Mortgage Loan to the first day of the month following such repurchase and the
amount of any unreimbursed Advances made by the Master Servicer or the Servicer,
as applicable, in respect of such Mortgage Loan. The Master Servicer will be
required to enforce this obligation for the benefit of the Trustee and the
Securityholders, following the practices it would employ in its good faith
business judgment were it the owner of such Mortgage Loan. Unless otherwise
specified in the applicable Prospectus Supplement, and subject to the ability of
the Depositor, the Unaffiliated Seller or the Servicer to substitute for certain
Mortgage Loans as described below, this repurchase obligation constitutes the
sole remedy available to the Securityholders of such Series for a breach of
representation or warranty by an Unaffiliated Seller.
The obligation of the Master Servicer to purchase a Mortgage Loan if an
Unaffiliated Seller or a Servicer defaults on its obligation to do so is subject
to limitations, and no assurance can be given that Unaffiliated Sellers will
carry out their respective repurchase obligations with respect to Mortgage
Loans. However, to the extent that a breach of the representations and
warranties of an Unaffiliated Seller may also constitute a breach of the
representations and warranties made by the Depositor or by the Master Servicer
with respect to the insurability of the Mortgage Loans, the Depositor may have a
repurchase obligation, and the Master Servicer may have the limited purchase
obligation, in each case as described below under "Description of the Securities
-- Assignment of Mortgage Loans."
CLOSED LOAN PROGRAM
The Depositor may also acquire Closed Loans that have been originated
by Unaffiliated Sellers in accordance with underwriting standards acceptable to
the Depositor. Unless otherwise specified in the applicable Prospectus
Supplement, Closed Loans for which 11 or fewer monthly payments have been
received will be further subject to the Depositor's customary underwriting
standards. Unless otherwise specified in the applicable Prospectus Supplement,
Closed Loans for which 12 to 60 monthly payments have been received will be
subject to a review of payment history and will conform to the Depositor's
guidelines for the related mortgage program. In the event one or two payments
were over 30 days delinquent, a letter explaining the delinquencies will be
required of the Mortgagor. Unless otherwise specified in the applicable
Prospectus Supplement, the Depositor will not purchase for inclusion in a
Mortgage Pool a Closed Loan for which (i) more than two monthly payments were
over 30 days delinquent, (ii) one payment was over 60 days delinquent or (iii)
more than 60 monthly payments were received.
MORTGAGE CERTIFICATES
If so specified in the Prospectus Supplement with respect to a Series,
the Trust Fund for such Series may include certain conventional mortgage
pass-through certificates, collateralized mortgage bonds or other indebtedness
secured by mortgage loans or manufactured housing contracts (the "Mortgage
Certificates") issued by one or more trusts established by one or more private
entities and evidencing, unless otherwise specified in such Prospectus
Supplement, the entire interest in a pool of mortgage loans. A description of
the mortgage loans and/or manufactured housing contracts underlying the Mortgage
Certificates, the related pooling and servicing arrangements and the insurance
arrangements in respect of such mortgage loans will be set forth in the
applicable Prospectus Supplement or in the Current Report on Form 8-K referred
to
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below. Such Prospectus Supplement (or, if such information is not available in
advance of the date of such Prospectus Supplement, a Current Report on Form 8-K
to be filed by the Depositor with the Commission within 15 days of the issuance
of the Securities of such Series) will also set forth information with respect
to the entity or entities forming the related mortgage pool, the issuer of any
credit support with respect to such Mortgage Certificates and the aggregate
outstanding principal balance and the pass-through rate borne by each Mortgage
Certificate included in the Trust Fund, together with certain additional
information with respect to such Mortgage Certificates. The inclusion of
Mortgage Certificates in a Trust Fund with respect to a Series of Securities is
conditioned upon their characteristics being in form and substance satisfactory
to the Rating Agency rating the related Series of Securities. Mortgage
Certificates, together with the Mortgage Loans and Contracts, are referred to
herein as the "Trust Assets."
THE CONTRACT POOLS
If so specified in the Prospectus Supplement with respect to a Series,
the Trust Fund for such Series may include a Contract Pool evidencing interests
in manufactured housing installment or conditional sales contracts and
installment loan agreements originated by a manufactured housing dealer in the
ordinary course of business and purchased by the Depositor. The Contracts may be
conventional manufactured housing contracts or contracts insured by the FHA or
partially guaranteed by the VA. Each Contract will be secured by a Manufactured
Home, as defined below. Unless otherwise specified in the related Prospectus
Supplement, the Contracts will be fully amortizing and will bear interest at the
fixed annual percentage rates ("APRs") specified in such Prospectus Supplement.
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 or more
sections, which in the traveling mode, is eight body feet or more in width or
forty body feet or more in length, or, when erected on site, is three hundred
twenty or more square feet, and which is built on a permanent chassis and
designed to be used as a dwelling with or without a permanent foundation when
connected to the required utilities, and includes the plumbing, heating, air
conditioning, and electrical systems contained therein; except that such term
shall include any structure which meets all the requirements of [this] paragraph
except the size requirements and with respect to which the manufacturer
voluntarily files a certification required by the Secretary of Housing and Urban
Development and complies with the standards established under [this] chapter."
The Depositor will cause the Contracts constituting each Contract Pool
to be assigned and/or pledged to the related Trustee named in the related
Prospectus Supplement for the benefit of the related Securityholders. The Master
Servicer specified in the related Prospectus Supplement will service the
Contracts, either by itself or through other Servicers, pursuant to the
Agreement. See "Description of the Securities -- Servicing by Unaffiliated
Sellers." With respect to those Contracts serviced by the Master Servicer
through a Servicer, the Master Servicer will remain liable for its servicing
obligations under the Agreement as if the Master Servicer alone were servicing
such Contracts. The Contract documents, if so specified in the related
Prospectus Supplement, may be held for the benefit of the Trustee by a Custodian
(the "Custodian") appointed pursuant to the related Pooling and Servicing
Agreement or a Custodial Agreement (the "Custodial Agreement") among the
Depositor, the Trustee and the Custodian.
Unless otherwise specified in the related Prospectus Supplement, each
registered holder of a Security will be entitled to receive periodic
distributions, which will be monthly unless otherwise specified in the related
Prospectus Supplement, of all or a portion of principal of the underlying
Contracts or interest on the principal balance of the Security at the Interest
Rate, or both. See "Description of the Securities -- Payments on Contracts."
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Except as otherwise specified in the related Prospectus Supplement, the
related Prospectus Supplement (or, if such information is not available in
advance of the date of such Prospectus Supplement, a Current Report on Form 8-K
to be filed with the Commission) will specify, for the Contracts contained in
the related Contract Pool, among other things: (a) the dates of origination of
the Contracts; (b) the weighted average APR on the Contracts; (c) the range of
outstanding principal balances as of the Cut-off Date; (d) the average
outstanding principal balance of the Contracts as of the Cut-off Date; (e) the
weighted average term to maturity as of the Cut-off Date; and (f) the range of
original maturities of the Contracts.
With respect to the Contracts included in the Contract Pool, the
Depositor, the Master Servicer or such other party, as specified in the related
Prospectus Supplement, will make or cause to be made representations and
warranties as to the types and geographical distribution of such Contracts and
as to the accuracy in all material respects of certain information furnished to
the Trustee in respect of each such Contract. In addition, the Master Servicer
or the Unaffiliated Seller of the Contracts will represent and warrant that, as
of the Cut-off Date, unless otherwise specified in the related Prospectus
Supplement, no Contract was more than 30 days delinquent as to payment of
principal and interest. Upon a breach of any representation that materially and
adversely affects the interest of the related Securityholders in a Contract, the
Master Servicer, the Unaffiliated Seller or such other party, as appropriate,
will be obligated either to cure the breach in all material respects or to
purchase the Contract or, if so specified in the related Prospectus Supplement,
to substitute another Contract as described below. This repurchase or
substitution obligation constitutes the sole remedy available to the
Securityholders or the Trustee for a breach of a representation by the Master
Servicer, the Unaffiliated Seller or such other party.
If so specified in the related Prospectus Supplement, in addition to
making certain representations and warranties regarding its authority to enter
into, and its ability to perform its obligations under, the Agreement, the
Master Servicer will make certain other representations and warranties, except
to the extent that another party specified in the Prospectus Supplement makes
any such representations, to the Trustee with respect to the enforceability of
coverage under any applicable insurance policy or hazard insurance policy. See
"Description of Insurance" for information regarding the extent of coverage
under certain of such insurance policies. Upon a breach of the insurability
representation that materially and adversely affects the interests of the
Securityholders in a Contract, the Master Servicer, the Unaffiliated Seller or
such other party, as appropriate, will be obligated either to cure such breach
in all material respects or, unless otherwise specified in the related
Prospectus Supplement, to purchase such Contract at a price equal to the
principal balance thereof as of the date of purchase plus accrued interest at
the related Pass-Through Rate to the first day of the month following the month
of purchase. The Master Servicer, if required by the Rating Agency rating the
Securities, will procure a surety bond, guaranty, letter of credit or other
instrument (the "Performance Bond") acceptable to such Rating Agency to support
this purchase obligation. See "Credit Support -- Performance Bond." The purchase
obligation will constitute the sole remedy available to the Securityholders or
the Trustee for a breach of the Master Servicer's or seller's insurability
representation.
If provided in the related Prospectus Supplement, if the Depositor
discovers or receives notice of any breach of its representations and warranties
relating to a Contract within two years or such other period as may be specified
in the related Prospectus Supplement of the date of the initial issuance of the
Securities, the Depositor may remove such Contract from the Trust Fund (each, a
"Deleted Contract"), rather than repurchase the Contract as provided above, and
substitute in its place another Contract (each, a "Substitute Contract"). Any
Substitute Contract, on the date of substitution, will (i) have an outstanding
principal balance, after deduction of all scheduled payments due in the month of
substitution, not in excess of the outstanding principal balance of the Deleted
Contract (the amount of any shortfall to be distributed to Securityholders in
the month of substitution), (ii) have an APR not less than (and not more than 1%
greater than) the APR of the Deleted Contract, (iii) have a remaining term to
maturity not greater than (and not more than one year less than) that of the
Deleted Contract and (iv) comply with all the representations and
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warranties set forth in the Agreement as of the date of substitution. This
repurchase or substitution obligation constitutes the sole remedy available to
the Securityholders or the Trustee for any such breach.
UNDERWRITING POLICIES
Conventional Contracts will comply with the underwriting policies of
the Originator or Unaffiliated Seller of the Contracts described in the related
Prospectus Supplement. Except as described below or in the related Prospectus
Supplement, the Depositor believes that these policies were consistent with
those utilized by mortgage lenders or manufactured home lenders generally during
the period of origination. With respect to a Contract made in connection with
the Obligor's purchase of a Manufactured Home, the "appraised value" is the
amount determined by a professional appraiser. The appraiser must personally
inspect the Manufactured Home and prepare a report which includes market data
based on recent sales of comparable Manufactured Homes and, when deemed
applicable, a replacement cost analysis based on the current cost of a similar
Manufactured Home. Unless otherwise specified in the related Prospectus
Supplement, the Contract Loan-to-Value Ratio will be equal to the original
principal amount of the Contract divided by the lesser of the "appraised value"
or the sales price for the Manufactured Home.
THE DEPOSITOR
The Depositor was incorporated in the State of Delaware on December 31,
1985, and is a wholly owned subsidiary of Credit Suisse First Boston, Inc..
Credit Suisse First Boston Corporation, which may act as an underwriter in
offerings made hereby, as described in "Plan of Distribution" below, is also a
wholly owned subsidiary of Credit Suisse First Boston, Inc. The principal
executive offices of the Depositor are located at Eleven Madison Avenue, New
York, NY 10010. Its telephone number is (212) 325-2000.
The Depositor was organized, among other things, for the purposes of
establishing trusts, selling beneficial interests therein and acquiring and
selling mortgage assets to such trusts. Neither the Depositor, its parent nor
any of the Depositor's affiliates will ensure or guarantee distributions on the
Securities of any Series.
Trust Assets will be acquired by the Depositor directly or through one
or more affiliates.
USE OF PROCEEDS
Except as otherwise provided in the related Prospectus Supplement, the
Depositor will apply all or substantially all of the net proceeds from the sale
of each Series offered hereby and by the related Prospectus Supplement to
purchase the Trust Assets, to repay indebtedness which has been incurred to
obtain funds to acquire the Trust Assets, to establish the Reserve Funds or
Pre-Funding Accounts, if any, for the Series and to pay costs of structuring and
issuing the Securities. If so specified in the related Prospectus Supplement,
Securities may be exchanged by the Depositor for Trust Assets. Unless otherwise
specified in the related Prospectus Supplement, the Trust Assets for each Series
of Securities will be acquired by the Depositor either directly, or through one
or more affiliates which will have acquired such Trust Assets from time to time
either in the open market or in privately negotiated transactions.
MATURITY, PREPAYMENT AND YIELD CONSIDERATIONS
Unless otherwise specified in the related Prospectus Supplement, the
scheduled maturities of all of the Mortgage Loans (or the mortgage loans
underlying the Mortgage Certificates) at origination will not be less than
approximately 10 years or exceed 40 years and all the Contracts will have
maturities at origination of not more than 20 years, but such Mortgage Loans (or
such underlying mortgage loans) or Contracts may
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be prepaid in full or in part at any time. Unless otherwise specified in the
applicable Prospectus Supplement, no Mortgage Loan (or mortgage loan) or
Contract will provide for a prepayment penalty and each will contain (except in
the case of FHA and VA Loans) due-on-sale clauses permitting the mortgagee or
obligee to accelerate the maturity thereof upon conveyance of the related
Mortgaged Property, Cooperative Dwelling or Manufactured Home.
The FHA has compiled statistics relating to one- to four-family, level
payment mortgage loans insured by the FHA under the National Housing Act of
1934, as amended, at various interest rates, all of which permit assumption by
the new buyer if the home is sold. Such statistics indicate that while some of
such mortgage loans remain outstanding until their scheduled maturities, a
substantial number are paid prior to their respective stated maturities. The
Actuarial Division of HUD has prepared tables which, assuming full mortgage
prepayments at the rates experienced by FHA, set forth the percentages of the
original number of FHA Loans in pools of level payment mortgage loans of varying
maturities that will remain outstanding on each anniversary of the original date
of such mortgage loans (assuming they all have the same origination date) ("FHA
Experience"). Published information with respect to conventional residential
mortgage loans indicates that such mortgage loans have historically been prepaid
at higher rates than government-insured loans because, unlike government insured
mortgage loans, conventional mortgage loans may contain due-on-sale clauses that
allow the holder thereof to demand payment in full of the remaining principal
balance of such mortgage loans upon sales or certain transfers of the mortgaged
property. There are no similar statistics with respect to the prepayment rates
of cooperative loans or loans secured by multifamily properties.
It is customary in the residential mortgage industry in quoting yields
on a pool of (a) 30-year fixed-rate, level payment mortgages, to compute the
yield as if the pool were a single loan that is amortized according to a 30-year
schedule and is then prepaid in full at the end of the twelfth year and (b)
15-year fixed-rate, level payment mortgages, to compute the yield as if the pool
were a single loan that is amortized according to a 15-year schedule and then is
prepaid in full at the end of the seventh year.
Prepayments on residential mortgage loans are also commonly measured
relative to a prepayment standard or model. If so specified in the Prospectus
Supplement relating to a Series of Securities, the model used in a Prospectus
Supplement will be the Standard Prepayment Assumption ("SPA"). SPA represents an
assumed rate of prepayment relative to the then outstanding principal balance of
a pool of mortgages. A prepayment assumption of 100% of SPA assumes prepayment
rates of 0.2% per annum of the then outstanding principal balance of such
mortgages in the first month of the life of the mortgages and an additional 0.2%
per annum in each month thereafter until the thirtieth month and in each month
thereafter during the life of the mortgages, 100% of SPA assumes a constant
prepayment rate of 6% per annum each month.
Information regarding FHA Experience, other published information, SPA
or any other rate of assumed prepayments, as applicable, will be set forth in
the Prospectus Supplement with respect to a Series of Securities. There is,
however, no assurance that prepayment of the Mortgage Loans underlying a Series
of Securities will conform to FHA Experience, mortgage industry custom, any
level of SPA, or any other rate specified in the related Prospectus Supplement.
A number of factors, including homeowner mobility, economic conditions,
enforceability of due-on-sale clauses, mortgage market interest rates, mortgage
recording taxes and the availability of mortgage funds, may affect prepayment
experience on residential mortgage loans.
The terms of the Servicing Agreement will require the Servicer or the
Master Servicer to enforce any due-on-sale clause to the extent it has knowledge
of the conveyance or the proposed conveyance of the underlying Mortgaged
Property or Cooperative Dwelling; provided, however, that any enforcement action
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that would impair or threaten to impair any recovery under any related Insurance
Policy will not be required or permitted. See "Description of the Securities --
Enforcement of `Due-On-Sale' Clauses; Realization Upon Defaulted Mortgage Loans"
and "Certain Legal Aspects of the Mortgage Loans and Contracts -- The Mortgage
Loans -- `Due-On-Sale' Clauses" for a description of certain provisions of each
Agreement and certain legal developments that may affect the prepayment
experience on the Mortgage Loans.
At the request of the Mortgagor, the Servicer may refinance the
Mortgage Loans in any Mortgage Pool by accepting prepayments thereon and making
new loans secured by a mortgage on the same property. Upon such refinancing, the
new loans will not be included in the Mortgage Pool and the related Servicer
will be required to repurchase the affected Mortgage Loan. A Mortgagor may be
legally entitled to require the Servicer to allow such a refinancing. Any such
repurchase will have the same effect as a prepayment in full of the related
Mortgage Loan.
There are no uniform statistics compiled for prepayments of contracts
relating to Manufactured Homes. Prepayments on the Contracts may be influenced
by a variety of economic, geographic, social and other factors, including
repossessions, aging, seasonality and interest rate fluctuations. Other factors
affecting prepayment of mortgage loans or Contracts include changes in housing
needs, job transfers, unemployment and servicing decisions. An investment in
Securities evidencing interests in, or secured by, Contracts may be affected by,
among other things, a downturn in regional or local economic conditions. These
regional or local economic conditions are often volatile, and historically have
affected the delinquency, loan loss and repossession experience of the
Contracts. To the extent that losses on the Contracts are not covered by the
Subordinated Amount, if any, Letters of Credit, applicable Insurance Policies,
if any, or by any Alternative Credit Support, holders of the Securities of a
Series evidencing interests in, or secured by, such Contracts will bear all risk
of loss resulting from default by Obligors and will have to look primarily to
the value of the Manufactured Homes, which generally depreciate in value, for
recovery of the outstanding principal of and unpaid interest on the defaulted
Contracts. See "The Trust Fund -- The Contract Pools."
While most Contracts will contain "due-on-sale" provisions permitting
the holder of the Contract to accelerate the maturity of the Contract upon
conveyance by the borrower, to the extent provided in the related Prospectus
Supplement, the Master Servicer may permit proposed assumptions of Contracts
where the proposed buyer meets the underwriting standards described above. Such
assumption would have the effect of extending the average life of the Contracts.
FHA Mortgage Loans and Contracts and VA Mortgage Loans and Contracts are not
permitted to contain "due-on-sale" clauses, and are freely assumable.
Mortgage Loans made with respect to Multifamily Property may have
provisions that prevent prepayment for a number of years and may provide for
payments of interest only during a certain period followed by amortization of
principal on the basis of a schedule extending beyond the maturity of the
related Mortgage Loans. Prepayments of Mortgage Loans secured by Multifamily
Property may be affected by these and other factors, including changes in
interest rates and the relative tax benefits associated with ownership of
Multifamily Property.
If set forth in the applicable Prospectus Supplement, the Depositor or
other specified entity will have the option to repurchase the Trust Assets
included in the related Trust Fund under the conditions stated in such
Prospectus Supplement. For any Series of Securities for which the Depositor has
elected to treat the Trust Fund or certain assets of the Trust Fund as a REMIC
pursuant to the provisions or the Code, any such repurchase will be effected in
compliance with the requirements of Section 860F(a)(4) of the Code so as to
constitute a "qualifying liquidation" thereunder. In addition, the Depositor
will be obligated, under certain circumstances, to repurchase certain of the
Trust Assets. The Master Servicer and Unaffiliated Sellers will also have
certain repurchase obligations, as more fully described herein and in the
related Prospectus
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Supplement. In addition, the mortgage loans underlying the Mortgage Certificates
may be subject to repurchase under circumstances similar to those described
above. Such repurchases will have the same effect as prepayments in full. See
"The Trust Fund -- Mortgage Loan Program" and " -- Representations by
Unaffiliated Sellers; Repurchases," "Description of the Securities -- Assignment
of Mortgage Loans," "-- Assignment of Mortgage Certificates," "-- Assignment of
Contracts" and " -- Termination."
If so specified in the related Prospectus Supplement, a Mortgage Pool
may contain Mortgage Loans with fluctuating Mortgage Rates that adjust more
frequently than the monthly payment with respect to such Mortgage Loans. As a
result, the portion of each monthly payment allocated to principal may vary from
month to month. Negative amortization with respect to a Mortgage Loan will occur
if an adjustment to the Mortgage Rate causes the amount of interest accrued in
any month, calculated at the new Mortgage Rate for such period, to exceed the
amount of the monthly payment or if the allowable increase in any monthly
payment is limited to an amount that is less than the amount of interest accrued
in any month. The amount of any resulting Deferred Interest will be added to the
principal balance of the Mortgage Loan and will bear interest at the Mortgage
Rate in effect from time to time. To the extent that, as a result of the
addition of any Deferred Interest, the Mortgage Loan negatively amortizes over
its term, the weighted average life of the Securities of the related Series will
be greater than would otherwise be the case. As a result, the yield on any such
Mortgage Loan at any time may be less than the yields on similar adjustable rate
mortgage loans, and the rate of prepayment may be lower or higher than would
otherwise be anticipated.
Generally, when a full prepayment is made on a Mortgage Loan or
Contract, the Mortgagor or the borrower under a Contract (the "Obligor"), is
charged interest for the number of days actually elapsed from the due date of
the preceding monthly payment up to the date of such prepayment, at a daily
interest rate determined by dividing the Mortgage Rate or APR by 365. Full
prepayments will reduce the amount of interest paid by the Mortgagor or the
Obligor because interest on the principal amount of any Mortgage Loan or
Contract so prepaid will be paid only to the date of prepayment instead of for a
full month; however, unless otherwise provided in the applicable Prospectus
Supplement, the Master Servicer with respect to a Series will be required to
advance from its own funds the portion of any interest at the related Mortgage
Rate that is not so received. Partial prepayments generally are applied on the
first day of the month following receipt, with no resulting reduction in
interest payable for the period in which the partial prepayment is made. Unless
otherwise specified in the related Prospectus Supplement, full and partial
prepayments, together with interest on such full and partial prepayments at the
Mortgage Rate or APR for the related Mortgage Loan or Contract to the last day
of the month in which such prepayments occur, will be deposited in the
Certificate Account and will be available for distribution to Securityholders on
the next succeeding Distribution Date in the manner specified in the related
Prospectus Supplement.
Generally, the effective yield to holders of Securities having a
monthly Distribution Date will be lower than the yield otherwise produced
because, while interest will accrue on each Mortgage Loan or Contract, or
mortgage loan underlying a Mortgage Certificate, to the first day of the month,
the distribution of such interest to holders of such Securities will be made no
earlier than the 25th day of the month following the month of the accrual
(unless otherwise provided in the applicable Prospectus Supplement). The adverse
effect on yield will intensify with any increase in the period of time by which
the Distribution Date with respect to a Series of Securities succeeds such 25th
day. With respect to the Multi-Class Securities of a Series having other than
monthly Distribution Dates, the yield to holders of such Certificates will also
be adversely affected by any increase in the period of time from the date to
which interest accrues on such Certificate to the Distribution Date on which
such interest is distributed.
In the event that the Securities of a Series are divided into two or
more Classes or Subclasses and that a Class or Subclass is an Interest Weighted
Class, in the event that such Series includes a Class of Residual Certificates,
or as otherwise may be appropriate, the Prospectus Supplement for such Series
will
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indicate the manner in which the yield to Securityholders will be affected by
different rates of prepayments on the Mortgage Loans, on the Contracts or on the
mortgage loans underlying the Mortgage Certificates. In general, the yield on
Securities that are offered at a premium to their principal or notional amount
("Premium Securities") is likely to be adversely affected by a higher than
anticipated level of principal prepayments on the Mortgage Loans, on the
Contracts or on the mortgage loans underlying the Mortgage Certificates. This
relationship will become more sensitive as the amount by which the Percentage
Interest of such Class in each Interest Distribution is greater than the
corresponding Percentage Interest of such Class in each Principal Distribution.
If the differential is particularly wide (e.g., the Interest Distribution is
allocated primarily or exclusively to one Class or Subclass and the Principal
Distribution primarily or exclusively to another) and a high level of
prepayments occurs, there is a possibility that Securityholders of Premium
Securities will not only suffer a lower than anticipated yield but, in extreme
cases, will fail to recoup fully their initial investment. Conversely, a lower
than anticipated level of principal prepayments (which can be anticipated to
increase the expected yield to holders of Securities that are Premium
Securities) will likely result in a lower than anticipated yield to holders of
Securities that are offered at a discount to their principal amount ("Discount
Securities"). If so specified in the applicable Prospectus Supplement, a
disproportionately large amount of Principal Prepayments may be distributed to
the holders of the Senior Securities at the times and under the circumstances
described therein.
In the event that the Securities of a Series include one or more
Classes or Subclasses of Multi-Class Securities, the Prospectus Supplement for
such Series will set forth information, measured relative to a prepayment
standard or model specified in such Prospectus Supplement, with respect to the
projected weighted average life of each such Class or Subclass and the
percentage of the initial Stated Principal Balance of each such Subclass that
would be outstanding on special Distribution Dates for such Series based on the
assumptions stated in such Prospectus Supplement, including assumptions that
prepayments on the Mortgage Loans or Contracts or on the mortgage loans
underlying the Mortgage Certificates in the related Trust Fund are made at rates
corresponding to the various percentages of such prepayment standard or model.
DESCRIPTION OF THE SECURITIES
Each Series of Securities will be issued pursuant to either (a) an
agreement consisting of either (i) a Pooling and Servicing Agreement or (ii) a
Reference Agreement (the "Reference Agreement") and the Standard Terms and
Provisions of Pooling and Servicing Agreement (such Standard Terms, the
"Standard Terms"), (either the Standard Terms together with the Reference
Agreement or the Pooling and Servicing Agreement referred to herein as the
"Pooling and Servicing Agreement") among the Depositor, the Master Servicer, if
any, and the Trustee named in the applicable Prospectus Supplement or (b) if a
Series of Securities includes Notes, a deposit trust agreement or trust
agreement between the Depositor and the Trustee. Forms of the Pooling and
Servicing Agreement and the Trust Agreement have been filed as exhibits to the
Registration Statement of which this Prospectus is a part. If a Series of
Securities includes Notes, such Notes will be issued and secured pursuant to an
Indenture (each, an "Indenture") to be entered into between the related Issuer
and the indenture trustee specified in the related Prospectus Supplement (the
"Indenture Trustee"), and the related Trust Fund will be serviced by the Master
Servicer pursuant to a Sale and Servicing Agreement (the "Sale and Servicing
Agreement") among the Depositor, the Master Servicer or Servicer and the
Indenture Trustee. Forms of the Indenture and the Sale and Servicing Agreement
have been filed as exhibits to the Registration Statement of which this
Prospectus is a part. In addition, a Series of Securities may include a Warranty
and Servicing Agreement between the Master Servicer and the Servicer (the
"Warranty and Servicing Agreement"). As used herein, "Agreement" means, with
respect to a Series that only includes Certificates, the Pooling and Servicing
Agreement and, if applicable, the Warranty and Servicing Agreement, and with
respect to a Series that includes Notes, the Indenture, the Trust Agreement
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and the Sale and Servicing Agreement and, if applicable, the Warranty and
Servicing Agreement, as the context requires.
The following summaries describe certain provisions common to each
Agreement. The summaries do not purport to be complete and are subject to, and
are qualified in their entirety by reference to, all of the provisions of the
Agreement for the applicable Series and the related Prospectus Supplement.
Wherever defined terms of the Agreement are referred to, such defined terms are
thereby incorporated herein by reference.
GENERAL
Unless otherwise specified in the Prospectus Supplement with respect to
a Series, each Security offered hereby and by means of the related Prospectus
Supplement will be issued in fully registered form. Securities will represent
the undivided interest or beneficial interest attributable to such Class or
Subclass in, and Notes will be secured by, the Trust Fund. The Trust Fund with
respect to a Series will consist of: (i) such Mortgage Loans, Contracts and
Mortgage Certificates and distributions thereon as from time to time are subject
to the applicable Agreement; (ii) such assets as from time to time are
identified as deposited in the Certificate Account referred to below; (iii)
property acquired by foreclosure of Mortgage Loans or deed in lieu of
foreclosure, or Manufactured Homes acquired by repossession; (iv) the Letter of
Credit, if any, with respect to such Series; (v) the Pool Insurance Policy, if
any, with respect to such Series (described below under "Description of
Insurance"); (vi) the Special Hazard Insurance Policy, if any, with respect to
such Series (described below under "Description of Insurance"); (vii) the
Mortgagor Bankruptcy Bond and proceeds thereof, if any, with respect to such
Series (as described below under "Description of Insurance"); (viii) the
Performance Bond and proceeds thereof, if any, with respect to such Series; (ix)
the Primary Mortgage Insurance Policies, if any, with respect to such Series (as
described below under "Description of Insurance"); (x) the Security Guarantee
Insurance, if any, with respect to such Series; (xi) the Depositor's rights
under the Servicing Agreement with respect to the Mortgage Loans or Contracts,
if any, with respect to such Series; and (xii) the GPM and Buy-Down Funds, if
any, with respect to such Series; or, in lieu of some or all of the foregoing,
such Alternative Credit Support as shall be described in the applicable
Prospectus Supplement. Upon the original issuance of a Series of Securities,
Certificates representing the minimum undivided interest or beneficial ownership
interest in the related Trust Fund or the minimum notional amount allocable to
each Class will evidence the undivided interest, beneficial ownership interest
or percentage ownership interest specified in the related Prospectus Supplement.
If so specified in the related Prospectus Supplement, one or more
Servicers or the Depositor may directly perform some or all of the duties of a
Master Servicer with respect to a Series.
If so specified in the Prospectus Supplement for a Series with respect
to which the Depositor has elected to treat the Trust Fund as a REMIC under the
Code, ownership of the Trust Fund for such Series may be evidenced by
Multi-Class Certificates and/or Notes and Residual Certificates. Distributions
of principal and interest with respect to Multi-Class Securities may be made on
a sequential or concurrent basis, as specified in the related Prospectus
Supplement. If so specified in the related Prospectus Supplement, one or more of
such Classes or Subclasses may be Compound Interest Securities.
The Residual Certificates, if any, included in a Series will be
designated by the Depositor as the "residual interest" in the related REMIC for
purposes of Section 860G(a)(2) of the Code, and will represent the right to
receive distributions as specified in the Prospectus Supplement for such Series.
All other Classes of Securities of such Series will constitute "regular
interests" in the related REMIC. If so specified in the related Prospectus
Supplement, such Residual Certificates may be offered hereby and by means of
such Prospectus Supplement. See "Federal Income Tax Consequences."
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If so specified in the Prospectus Supplement for a Series which
includes Multi-Class Securities, each Trust Asset in the related Trust Fund will
be assigned an initial "Asset Value." Unless otherwise specified in the related
Prospectus Supplement, the Asset Value of each Trust Asset in the related Trust
Fund will be the Stated Principal Balance of each Class or Classes of Securities
of such Series that, based upon certain assumptions, can be supported by
distributions on such Trust Assets allocable to such Class or Subclass, together
with reinvestment income thereon, to the extent specified in the related
Prospectus Supplement, and amounts available to be withdrawn from any Buy-Down,
GPM Fund or Reserve Fund for such Series. The method of determining the Asset
Value of the Trust Assets in the Trust Fund for such a Series that includes
Multi-Class Securities will be specified in the related Prospectus Supplement.
If so specified in the Prospectus Supplement with respect to a Series,
ownership of the Trust Fund for such Series may be evidenced by one or more
Classes or Subclasses of Certificates that are Senior Certificates and one or
more Classes or Subclasses of Certificates that are Subordinated Certificates,
each representing the undivided interests in the Trust Fund specified in such
Prospectus Supplement. If so specified in the related Prospectus Supplement, one
or more Classes or Subclasses or Subordinated Securities of a Series may be
subordinated to the right of the holders of Securities of one or more Classes or
Subclasses within such Series to receive distributions with respect to the
Mortgage Loans, Mortgage Certificates or Contracts in the related Trust Fund, in
the manner and to the extent specified in such Prospectus Supplement. If so
specified in the related Prospectus Supplement, the holders of each Subclass of
Senior Securities will be entitled to the Percentage Interests in the principal
and/or interest payments on the underlying Mortgage Loans or Contracts specified
in such Prospectus Supplement. If so specified in the related Prospectus
Supplement, the Subordinated Securities of a Series will evidence the right to
receive distributions with respect to a specific pool of Mortgage Loans,
Mortgage Certificates or Contracts, which right will be subordinated to the
right of the holders of the Senior Securities of such Series to receive
distributions with respect to such specific pool of Mortgage Loans, Mortgage
Certificates or Contracts, as more fully set forth in such Prospectus
Supplement. If so specified in the related Prospectus Supplement, the holders of
the Senior Securities may have the right to receive a greater than pro rata
percentage of Principal Prepayments in the manner and under the circumstances
described in the Prospectus Supplement. If so specified in the related
Prospectus Supplement, if a Series of Securities includes Notes, one more
Classes or Subclasses of Notes may be subordinated to another Class or
Subclasses of Notes in the manner and under the circumstances described in the
Prospectus Supplement.
If so specified in the related Prospectus Supplement, the Depositor may
sell certain Classes or Subclasses of the Securities of a Series, including one
or more Classes or Subclasses of Subordinated or Residual Certificates, in
privately negotiated transactions exempt from registration under the Securities
Act of 1933, as amended (the "Securities Act"). Such Securities will be
transferable only pursuant to an effective registration statement or an
applicable exemption under the Securities Act and pursuant to any applicable
state law. Alternatively, if so specified in the related Prospectus Supplement,
the Depositor may offer one or more Classes or Subclasses of the Subordinated or
Residual Certificates of a Series by means of this Prospectus and such
Prospectus Supplement.
The Securities of a Series offered hereby and by means of the related
Prospectus Supplements will be transferable and exchangeable at the office or
agency maintained by the Trustee for such purpose set forth in the related
Prospectus Supplement, unless such Prospectus Supplement provides otherwise. No
service charge will be made for any transfer or exchange of Securities, but the
Trustee may require payment of a sum sufficient to cover any tax or other
governmental charge in connection with such transfer or exchange.
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DISTRIBUTIONS OF PRINCIPAL AND INTEREST
Beginning on the date specified in the related Prospectus Supplement,
distributions of principal of and interest on the Securities of a Series will be
made by the Master Servicer or Trustee, if so specified in the Prospectus
Supplement, on each Distribution Date to persons in whose name the Securities
are registered at the close of business on the day specified in such Prospectus
Supplement (the "Record Date"). Such distributions of interest will be made
periodically at the intervals, in the manner and at the per annum rate specified
in the related Prospectus Supplement, which rate may be fixed or variable.
Interest on the Securities will be calculated on the basis of a 360-day year
consisting of twelve 30-day months, unless otherwise specified in the related
Prospectus Supplement. Distributions of principal of the Securities will be made
in the priority and manner and in the amounts specified in the related
Prospectus Supplement.
If so specified in the Prospectus Supplement with respect to a Series
of Securities, distributions of interest and principal to a Certificateholder
will be equal to the product of the undivided interest evidenced by such
Certificate and the payments of principal and interest (adjusted as set forth in
the Prospectus Supplement) on or with respect to the Mortgage Loans or Contracts
(including any Advances thereof) or the Mortgage Certificates included in the
Trust Fund with respect to such Series.
If so specified in the related Prospectus Supplement, distributions on
a Class or Subclass of Securities of a Series may be based on the Percentage
Interest evidenced by a Security of such Class or Subclass in the distributions
(including any Advances thereof) of principal (the "Principal Distribution") and
interest (adjusted as set forth in the Prospectus Supplement) (the "Interest
Distribution") on or with respect to the Mortgage Loans, the Contracts or the
Mortgage Certificates in the related Trust Fund. Unless otherwise specified in
the related Prospectus Supplement, on each Distribution Date, the Trustee will
distribute to each holder of a Security of such Class or Subclass an amount
equal to the product of the Percentage Interest evidenced by such Security and
the interest of such Class or Subclass in the Principal Distribution and the
Interest Distribution. A Security of such a Class or Subclass may represent a
right to receive a percentage of both the Principal Distribution and the
Interest Distribution or a percentage of either the Principal Distribution or
the Interest Distribution, as specified in the related Prospectus Supplement.
If so specified in the related Prospectus Supplement, the holders of
the Senior Securities may have the right to receive a percentage of Principal
Prepayments that is greater than the percentage of regularly scheduled payments
of principal such holder is entitled to receive. Such percentages may vary from
time to time, subject to the terms and conditions specified in the Prospectus
Supplement.
Unless otherwise specified in the Prospectus Supplement relating to a
Series of Securities that includes Multi-Class Securities, distributions of
interest on each such Class or Subclass will be made on the Distribution Dates,
and at the Interest Rates, specified in such Prospectus Supplement. Unless
otherwise specified in the Prospectus Supplement relating to such a Series of
Securities, distributions of interest on each Class or Subclass of Compound
Interest Securities of such Series will be made on each Distribution Date after
the Stated Principal Balance of all Certificates and/or Notes of such Series
having a Final Scheduled Distribution Date prior to that of such Class or
Subclass of Compound Interest Securities has been reduced to zero. Prior to such
time, interest on such Class or Subclass of Compound Interest Securities will be
added to the Stated Principal Balance thereof on each Distribution Date for such
Series.
Unless otherwise specified in the Prospectus Supplement relating to a
Series of Securities that includes Multi-Class Securities, distributions in
reduction of the Stated Principal Balance of such Securities will be made as
described herein. Distributions in reduction of the Stated Principal Balance of
such Securities will be made on each Distribution Date for such Series to the
holders of the Securities of the Class or Subclass then entitled to receive such
distributions until the aggregate amount of such distributions
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have reduced the Stated Principal Balance of such Securities to zero. Allocation
of distributions in reduction of Stated Principal Balance will be made to each
Class or Subclass of such Securities in the order specified in the related
Prospectus Supplement, which, if so specified in such Prospectus Supplement, may
be concurrently. Unless otherwise specified in the related Prospectus
Supplement, distributions in reduction of the Stated Principal Balance of each
Security of a Class or Subclass then entitled to receive such distributions will
be made pro rata among the Securities of such Class or Subclass.
Unless otherwise specified in the Prospectus Supplement relating to a
Series of Securities that includes Multi-Class Securities, the maximum amount
which will be distributed in reduction of Stated Principal Balance to holders of
Securities of a Class or Subclass then entitled thereto on any Distribution Date
will equal, to the extent funds are available in the Certificate Account, the
sum of (i) the amount of the interest, if any, that has accrued but is not yet
payable on the Compound Interest Securities of such Series since the prior
Distribution Date (or since the date specified in the related Prospectus
Supplement in the case of the first Distribution Date) (the "Accrual
Distribution Amount"); (ii) the Stated Principal Distribution Amount; and (iii)
to the extent specified in the related Prospectus Supplement, the applicable
percentage of the Excess Cash Flow specified in such Prospectus Supplement.
Unless otherwise specified in the Prospectus Supplement relating to a
Series of Securities that includes Multi-Class Securities, the "Stated Principal
Distribution Amount" with respect to a Distribution Date will equal the sum of
the Accrual Distribution Amount, if any, and the amount, if any, by which the
then outstanding Stated Principal Balance of the Multi-Class Securities of such
Series (before taking into account the amount of interest accrued on any Class
of Compound Interest Securities of such Series to be added to the Stated
Principal Balance thereof on such Distribution Date) exceeds the Asset Value of
the Trust Assets in the Trust Fund underlying such Series as of the end of a
period (a "Due Period") specified in the related Prospectus Supplement. For
purposes of determining the Stated Principal Distribution Amount with respect to
a Distribution Date, the Asset Value of the Trust Assets will be reduced to take
into account the interest evidenced by such Classes or Subclasses of Securities
in the principal distributions on or with respect of such Trust Assets received
by the Trustee during the preceding Due Period.
Unless otherwise specified in the Prospectus Supplement relating to a
Series of Securities that includes Multi-Class Securities, Excess Cash Flow
represents the excess of (i) the interest evidenced by such Multi-Class
Securities in the distributions received on the Mortgage Loans or Contracts
underlying such Series in the Due Period preceding a Distribution Date for such
Series (and, in the case of the first Due Period, the amount deposited in the
Certificate Account on the closing day for the sale of such Securities),
together with income from the reinvestment thereof, and, to the extent specified
in such Prospectus Supplement, the amount of cash withdrawn from any Reserve,
GPM or Buy-Down Fund for such Series in the Due Period preceding such
Distribution Date, over (ii) the sum of all interest accrued, whether or not
then distributable, on the Multi-Class Securities since the preceding
Distribution Date (or since the date specified in the related Prospectus
Supplement in the case of the first Distribution Date), the Stated Principal
Distribution Amount for the then current Distribution Date and, if applicable,
any payments made on any Securities of such Class or Subclass pursuant to any
special distributions in reduction of Stated Principal Balance during such Due
Period.
The Stated Principal Balance of a Multi-Class Certificate of a Series
at any time represents the maximum specified dollar amount (exclusive of
interest at the related Interest Rate) to which the holder thereof is entitled
from the cash flow on the Trust Assets in the Trust Fund for such Series, and
will decline to the extent distributions in reduction of Stated Principal
Balance are received by such holder. The Initial Stated Principal Balance of
each Class or Subclass within a Series that has been assigned a Stated Principal
Balance will be specified in the related Prospectus Supplement.
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Distributions (other than the final distribution in retirement of the
Securities) will be made by check mailed to the address of the person entitled
thereto as it appears on the registers maintained for holders of Notes (the
"Note Register") or holders of Certificates (the "Certificate Register"), as
applicable, except that, with respect to any holder of a Security meeting the
requirements specified in the applicable Prospectus Supplement, except as
otherwise provided in the related Prospectus Supplement, distributions shall be
made by wire transfer in immediately available funds, provided that the Trustee
shall have been furnished with appropriate wiring instructions not less than two
Business Days prior to the related Distribution Date. The final distribution in
retirement of Securities will be made only upon presentation and surrender of
the Securities at the office or agency designated by the Master Servicer for
such purpose, as specified in the final distribution notice to Securityholders.
ASSIGNMENT OF MORTGAGE CERTIFICATES
Pursuant to the applicable Agreement for a Series of Securities that
includes Mortgage Certificates in the related Trust Fund, the Depositor will
cause such Mortgage Certificates to be transferred to the Trustee together with
all principal and interest distributed on such Mortgage Certificates after the
Cut-off Date. Each Mortgage Certificate included in a Trust Fund will be
identified in a schedule appearing as an exhibit to the applicable Agreement.
Such schedule will include information as to the principal balance of each
Mortgage Certificate as of the date of issuance of the Securities and its coupon
rate, maturity and original principal balance. In addition, such steps will be
taken by the Depositor as are necessary to cause the Trustee to become the
registered owner of each Mortgage Certificate which is included in a Trust Fund
and to provide for all distributions on each such Mortgage Certificate to be
made directly to the Trustee.
In connection with such assignment, the Depositor will make certain
representations and warranties in the Agreement as to, among other things, its
ownership of the Mortgage Certificates. In the event that these representations
and warranties are breached, and such breach or breaches adversely affect the
interests of the Securityholders in the Mortgage Certificates, the Depositor
will be required to repurchase the affected Mortgage Certificates at a price
equal to the principal balance thereof as of the date of purchase together with
accrued and unpaid interest thereon at the related pass-through rate to the
distribution date for such Mortgage Certificates or, in the case of a Series in
which an election has been made to treat the related Trust Fund as a REMIC, at
the lesser of the price set forth above, or the adjusted tax basis, as defined
in the Code, of such Mortgage Certificates. The Mortgage Certificates with
respect to a Series may also be subject to repurchase, in whole but not in part,
under the circumstances and in the manner described in the related Prospectus
Supplement. Any amounts received in respect of such repurchases will be
distributed to Securityholders on the immediately succeeding Distribution Date.
If so specified in the related Prospectus Supplement, within the
specified period following the date of issuance of a Series of Securities, the
Depositor may, in lieu of the repurchase obligation set forth above, and in
certain other circumstances, deliver to the Trustee Mortgage Certificates
("Substitute Mortgage Certificates") in substitution for any one or more of the
Mortgage Certificates ("Deleted Mortgage Certificates") initially included in
the Trust Fund. The required characteristics or any such Substitute Mortgage
Certificates and any additional restrictions relating to the substitution of
Mortgage Certificates will be set forth in the related Prospectus Supplement.
ASSIGNMENT OF MORTGAGE LOANS
The Depositor will cause the Mortgage Loans constituting a Mortgage
Pool to be assigned to the Trustee, together with all principal and interest
received on or with respect to such Mortgage Loans after the Cut-off Date, but
not including principal and interest due on or before the Cut-off Date. The
Trustee will, concurrently with such assignment, either deliver the Securities
to the Depositor in exchange for the
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Mortgage Loans or apply the proceeds from the sale of such Securities to the
purchase price for the Mortgage Loans. If a Series of Securities includes Notes,
the Trust Fund will be pledged by the Issuer to the Indenture Trustee as
security for the Notes. Each Mortgage Loan will be identified in a schedule
appearing as an exhibit to the related Agreement. Such schedule will include
information as to the adjusted principal balance of each Mortgage Loan as of the
Cut-off Date, as well as information respecting the Mortgage Rate, the currently
scheduled monthly payment of principal and interest, the maturity of the
Mortgage Note and the Loan-to-Value Ratio at origination.
In addition, the Depositor will, as to each Mortgage Loan that is not a
Cooperative Loan, deliver or cause to be delivered to the Trustee (or to the
custodian hereinafter referred to) the Mortgage Note endorsed to the order of
the Trustee, the Mortgage with evidence of recording indicated thereon (except
for any Mortgage not returned from the public recording office, in which case
the Depositor will deliver a copy of such Mortgage together with its certificate
that the original of such Mortgage was delivered to such recording office) and,
unless otherwise specified in the related Prospectus Supplement, an assignment
of the Mortgage in recordable form. Assignments of the Mortgage Loans to the
Trustee will be recorded in the appropriate public office for real property
records, except in states where, in the opinion of counsel acceptable to the
Trustee, such recording is not required to protect the Trustee's interest in the
Mortgage Loan against the claim of any subsequent transferee or any successor to
or creditor of the Depositor or the Originator of such Mortgage Loan.
The Depositor will cause to be delivered to the Trustee, its agent, or
a custodian, with respect to any Cooperative Loan, the related original security
agreement, the proprietary lease or occupancy agreement, the recognition
agreement, an executed financing statement and the relevant stock certificate
and related blank stock powers. The Master Servicer will file in the appropriate
office a financing statement evidencing the Trustee's security interest in each
Cooperative Loan.
The Trustee (or the custodian hereinafter referred to) will, generally
within 60 days after receipt thereof, review and hold such documents in trust
for the benefit of the Securityholders. Unless otherwise specified in the
applicable Prospectus Supplement, if any such document is found to be defective
in any material respect, the Trustee will promptly notify the Master Servicer
and the Depositor, and the Master Servicer will notify the related Servicer. If
the Servicer cannot cure the defect within 60 days after notice is given to the
Master Servicer, the Servicer will be obligated either to substitute for the
related Mortgage Loan a Replacement Mortgage Loan or Loans, or to purchase
within 90 days of such notice the related Mortgage Loan from the Trustee at a
price equal to the principal balance thereof as of the date of purchase or, in
the case of a Series as to which an election has been made to treat the related
Trust Fund as a REMIC, at such other price as may be necessary to avoid a tax on
a prohibited transaction, as described in Section 860F(a) of the Code, in each
case together with accrued interest at the applicable Mortgage Rate to the first
day of the month following such repurchase, plus the amount of any unreimbursed
Advances made by the Master Servicer or the Servicer, as applicable, in respect
of such Mortgage Loan. The Master Servicer is obligated to enforce the
repurchase obligation of the Servicer, to the extent described above under "The
Trust Fund -- Mortgage Loan Program" and " -- Representations by Unaffiliated
Sellers; Repurchases." Unless otherwise specified in the applicable Prospectus
Supplement, this purchase obligation constitutes the sole remedy available to
the Securityholders or the Trustee for a material defect in a constituent
document.
Unless otherwise specified in the applicable Prospectus Supplement,
with respect to the Mortgage Loans in a Mortgage Pool, the Depositor will make
representations and warranties as to the types and geographical distribution of
such Mortgage Loans and as to the accuracy in all material respects of certain
information furnished to the Trustee in respect of each such Mortgage Loan. In
addition, unless otherwise specified in the related Prospectus Supplement, the
Depositor will represent and warrant that, as of the Cut-off Date for the
related Series of Securities, no Mortgage Loan is more than 30 days delinquent
as to
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payment of principal and interest. Upon a breach of any representation or
warranty by the Depositor that materially and adversely affects the interest of
the Securityholders, the Depositor will be obligated either to cure the breach
in all material respects or to purchase the Mortgage Loan at the purchase price
set forth above. Unless otherwise specified in the applicable Prospectus
Supplement and subject to the ability of the Depositor, if so specified in the
applicable Prospectus Supplement, to substitute for certain Mortgage Loans as
described below, this repurchase obligation constitutes the sole remedy
available to the Securityholders or the Trustee for a breach of a representation
or warranty by the Depositor.
Within the period specified in the related Prospectus Supplement,
following the date of issuance of a Series of Securities, the Depositor, the
Master Servicer or the related Servicer, as the case may be, may deliver to the
Trustee Mortgage Loans ("Substitute Mortgage Loans") in substitution for any one
or more of the Mortgage Loans ("Deleted Mortgage Loans") initially included in
the Trust Fund but which do not conform in one or more respects to the
description thereof contained in the related Prospectus Supplement, or as to
which a breach of a representation or warranty is discovered, which breach
materially and adversely affects the interests of the Securityholders. The
required characteristics of any such Substitute Mortgage Loan and any additional
restrictions relating to the substitution of Mortgage Loans will generally be as
described under "The Trust Fund -- The Contract Pools" with respect to the
substitution of Contracts.
In addition to making certain representations and warranties regarding
its authority to enter into, and its ability to perform its obligations under
the Agreement relating to a Series of Securities, the Master Servicer may make
certain representations and warranties to the Trustee in such Agreement with
respect to the enforceability of coverage under any applicable Primary Insurance
Policy, Pool Insurance Policy, Special Hazard Insurance Policy or Mortgagor
Bankruptcy Bond. See "Description of Insurance" for information regarding the
extent of coverage under certain of the aforementioned insurance policies.
Unless otherwise specified in the applicable Prospectus Supplement, upon a
breach of any such representation or warranty that materially and adversely
affects the interests of the Securityholders of such Series in a Mortgage Loan,
the Master Servicer will be obligated either to cure the breach in all material
respects or to purchase such Mortgage Loan at the price calculated as set forth
above.
To the extent described in the related Prospectus Supplement, the
Master Servicer will procure a surety bond, corporate guaranty or another
similar form of insurance coverage acceptable to the Rating Agency rating the
related Series of Securities to support, among other things, this purchase
obligation. Unless otherwise stated in the applicable Prospectus Supplement, the
aforementioned purchase obligation constitutes the sole remedy available to the
Securityholders or the Trustee for a breach of the Master Servicer's
insurability representation. The Master Servicer's obligation to purchase
Mortgage Loans upon such a breach is subject to limitations.
The Trustee will be authorized, with the consent of the Depositor and
the Master Servicer, to appoint a custodian pursuant to a custodial agreement to
maintain possession of documents relating to the Mortgage Loans as the agent of
the Trustee.
Pursuant to each Agreement, the Master Servicer, either directly or
through Servicers, will service and administer the Mortgage Loans assigned to
the Trustee as more fully set forth below.
ASSIGNMENT OF CONTRACTS
The Depositor will cause the Contracts constituting the Contract Pool
to be assigned to the Trustee, together with principal and interest due on or
with respect to the Contracts after the Cut-off Date, but not including
principal and interest due on or before the Cut-off Date. If the Depositor is
unable to obtain a perfected security interest in a Contract prior to transfer
and assignment to the Trustee, the Unaffiliated
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Seller will be obligated to repurchase such Contract. The Trustee, concurrently
with such assignment, will authenticate and deliver the Securities. If a Series
of Securities includes Notes, the Trust fund will be pledged by the Issuer to
the Indenture Trustee as security for the Notes. Each Contract will be
identified in a schedule appearing as an exhibit to the Agreement (the "Contract
Schedule"). The Contract Schedule will specify, with respect to each Contract,
among other things: the original principal amount and the adjusted principal
balance as of the close of business on the Cut-off Date, the APR, the current
scheduled monthly level payment of principal and interest and the maturity of
the Contract.
In addition, the Depositor, as to each Contract, will deliver or cause
to be delivered to the Trustee, or, as specified in the related Prospectus
Supplement, the Custodian, the original Contract and copies of documents and
instruments related to each Contract and the security interest in the
Manufactured Home securing each Contract. In order to give notice of the right,
title and interest of the Certificateholders to the Contracts, the Depositor
will cause a UCC-1 financing statement to be executed by the Depositor
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 Depositor to the Trust Fund. 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 Mortgage Loans and Contracts -- The
Contracts."
The Trustee (or the Custodian) will review and hold such documents in
trust for the benefit of the Securityholders. Unless otherwise provided in the
related Prospectus Supplement, if any such document is found to be defective in
any material respect, the Unaffiliated Seller must cure such defect within 60
days, or within such other period specified in the related Prospectus
Supplement, the Unaffiliated Seller, not later than 90 days or within such other
period specified in the related Prospectus Supplement, after the Trustee's
notice to the Unaffiliated Seller of the defect. If the defect is not cured, the
Unaffiliated Seller will repurchase the related Contract or any property
acquired in respect thereof from the Trustee at a price equal to the remaining
unpaid principal balance of such Contract (or, in the case of a repossessed
Manufactured Home, the unpaid principal balance of such Contract immediately
prior to the repossession) or, in the case of a Series as to which an election
has been made to treat the related Trust Fund as a REMIC, at such other price as
may be necessary to avoid a tax on a prohibited transaction, as described in
Section 860F(a) of the Code, in each case together with accrued but unpaid
interest to the first day of the month following repurchase at the related APR,
plus any unreimbursed Advances respecting such Contract. Unless otherwise
specified in the related Prospectus Supplement, the repurchase obligation will
constitute the sole remedy available to the Securityholders or the Trustee for a
material defect in a Contract document.
Unless otherwise specified in the related Prospectus Supplement, each
Unaffiliated Seller of Contracts will have represented, among other things, that
(i) immediately prior to the transfer and assignment of the Contracts, the
Unaffiliated Seller had good title to, and was the sole owner of each Contract
and there had been no other sale or assignment thereof, (ii) as of the date of
such transfer, the Contracts are subject to no offsets, defenses or
counterclaims, (iii) each Contract at the time it was made complied in all
material respects with applicable state and federal laws, including usury, equal
credit opportunity and disclosure laws, (iv) as of the date of such transfer,
each Contract is a valid first lien on the related Manufactured Home and such
Manufactured Home is free of material damage and is in good repair, (v) as of
the date of such transfer, no Contract is more than 30 days delinquent in
payment and there are no delinquent tax or assessment liens against the related
Manufactured Home and (vi) with respect to each Contract, the Manufactured Home
securing the Contract is covered by a Standard Hazard Insurance Policy in the
amount required in the Agreement and that all premiums now due on such insurance
have been paid in full.
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All of the representations and warranties of an Unaffiliated Seller in
respect of a Contract will have been made as of the date on which such
Unaffiliated Seller sold the Contract to the Depositor or its affiliate; the
date such representations and warranties were made may be a date prior to the
date of initial issuance of the related series of Securities. A substantial
period of time may have elapsed between the date as of which the representations
and warranties were made and the date of initial issuance of the related Series
of Securities. Since the representations and warranties referred to in the
preceding paragraph are the only representations and warranties that will be
made by an Unaffiliated Seller, the Unaffiliated Seller's repurchase obligation
described below will not arise if, during the period commencing on the date of
sale of a Contract by the Unaffiliated Seller to the Depositor or its affiliate,
the relevant event occurs that would have given rise to such an obligation had
the event occurred prior to sale of the affected Contract. Nothing, however, has
come to the Depositor's attention that would cause it to believe that the
representations and warranties referred to in the preceding paragraph will not
be accurate and complete in all material respects in respect of Contracts as of
the date of initial issuance of the related Series of Securities.
The only representations and warranties to be made for the benefit of
Securityholders in respect of any Contract relating to the period commencing on
the date of sale of such Contract to the Depositor or its affiliate will be
certain limited representations of the Depositor and of the Master Servicer
described above under "The Trust Fund -- The Contract Pools."
If an Unaffiliated Seller cannot cure a breach of any representation or
warranty made by it in respect of a Contract that materially and adversely
affects the interest of the Securityholders in such Contract within 90 days (or
such other period specified in the related Prospectus Supplement) after notice
from the Master Servicer, such Unaffiliated Seller will be obligated to
repurchase such Contract at a price equal to, unless otherwise specified in the
related Prospectus Supplement, the principal balance thereof as of the date of
the repurchase or, in the case of a Series as to which an election has been made
to treat the related Trust Fund as a REMIC, at such other price as may be
necessary to avoid a tax on a prohibited transaction, as described in Section
860F(a) of the Code, in each case together with accrued and unpaid interest to
the first day of the month following repurchase at the related APR, plus the
amount of any unreimbursed Advances in respect of such Contract (the "Purchase
Price"). The Master Servicer will be required under the applicable Agreement to
enforce this obligation for the benefit of the Trustee and the Securityholders,
following the practices it would employ in its good faith business judgment were
it the owner of such Contract. Except as otherwise set forth in the related
Prospectus Supplement, this repurchase obligation will constitute the sole
remedy available to Securityholders or the Trustee for a breach of
representation by an Unaffiliated Seller.
Neither the Depositor nor the Master Servicer will be obligated to
purchase a Contract if an Unaffiliated Seller defaults on its obligation to do
so, and no assurance can be given that sellers will carry out their respective
repurchase obligations with respect to Contracts. However, to the extent that a
breach of the representations and warranties of an Unaffiliated Seller may also
constitute a breach of a representation made by the Depositor or the Master
Servicer, the Depositor or the Master Servicer may have a purchase obligation as
described above under "The Trust Fund -- The Contract Pools."
PRE-FUNDING
If so specified in the related Prospectus Supplement, a portion of the
issuance proceeds of the Securities of a particular Series (such amount, the
"Pre-Funded Amount") will be deposited in an account (the "Pre-Funding Account")
to be established with the Trustee, which will be used to acquire additional
Mortgage Loans, Contracts or Mortgage Certificates from time to time during the
time period specified in the related Prospectus Supplement (the "Pre-Funding
Period"). Prior to the investment of the Pre-Funded Amount in additional
Mortgage Loans, Contracts or Mortgage Certificates, such Pre-Funded Amount may
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be invested in one or more Eligible Investments. Except as otherwise provided in
the applicable Agreement, an "Eligible Investment" will be any of the following,
in each case as determined at the time of the investment or contractual
commitment to invest therein (to the extent such investments would not require
registration of the Trust Fund as an investment company pursuant to the
Investment Company Act of 1940): (a) negotiable instruments or securities
represented by instruments in bearer or registered or book-entry form which
evidence: (i) obligations which have the benefit of the full faith and credit of
the United States of America, including depository receipts issued by a bank as
custodian with respect to any such instrument or security held by the custodian
for the benefit of the holder of such depository receipt, (ii) demand deposits
or time deposits in, or bankers' acceptances issued by, any depositary
institution or trust company incorporated under the laws of the United States of
America or any state thereof and subject to supervision and examination by
Federal or state banking or depositary institution authorities; provided that at
the time of the Trustee's investment or contractual commitment to invest
therein, the certificates of deposit or short-term deposits (if any) or
long-term unsecured debt obligations (other than such obligations the rating of
which is based on collateral or on the credit of a Person other than such
institution or trust company) of such depositary institution or trust company
has a credit rating in the highest rating category from the Rating Agency rating
the Securities, (iii) certificates of deposit having a rating in the highest
rating category from the Rating Agency, or (iv) investments in money market
funds which are (or which are composed of instruments or other investments which
are) rated in the highest category from the Rating Agency; (b) demand deposits
in the name of the Trustee in any depositary institution or trust company
referred to in clause (a)(ii) above; (c) commercial paper (having original or
remaining maturities of no more than 270 days) having a credit rating in the
highest rating category from the Rating Agency; (d) Eurodollar time deposits
that are obligations of institutions the time deposits of which carry a credit
rating in the highest rating category from the Rating Agency; (e) repurchase
agreements involving any Eligible Investment described in any of clauses (a)(i),
(a)(iii) or (d) above, so long as the other party to the repurchase agreement
has its long-term unsecured debt obligations rated in the highest rating
category from the Rating Agency; and (f) any other investment with respect to
which the Rating Agency indicates will not result in the reduction or withdrawal
of its then existing rating of the Securities. Except as otherwise provided in
the applicable Agreement, any Eligible Investment must mature no later than the
Business Day prior to the next Distribution Date.
During any Pre-Funding Period, the Depositor will be obligated (subject
only to the availability thereof) to transfer to the related Trust Fund
additional Mortgage Loans, Contracts and/or Mortgage Certificates from time to
time during such Pre-Funding Period. Such additional Mortgage Loans or Contracts
will be required to satisfy certain eligibility criteria more fully set forth in
the related Prospectus Supplement which eligibility criteria will be consistent
with the eligibility criteria of the Mortgage Loans or Contracts included in the
Trust Fund as of the Closing Date subject to such exceptions as are expressly
stated in such Prospectus Supplement.
Although the specific parameters of the Pre-Funding Account with
respect to any issuance of Securities will be specified in the related
Prospectus Supplement, it is anticipated that: (a) the Pre-Funding Period will
not exceed 120 days from the related Closing Date, (b) that the additional loans
to be acquired during the Pre-Funding Period will be subject to the same
representations and warranties as the Mortgage Loans, Contracts and/or Mortgage
Certificates included in the related Trust Fund on the Closing Date (although
additional criteria may also be required to be satisfied, as described in the
related Prospectus Supplement) and (c) that the Pre-Funded Amount will not
exceed 25% of the principal amount of Securities issued pursuant to a particular
offering.
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SERVICING BY UNAFFILIATED SELLERS
Each Unaffiliated Seller of a Mortgage Loan or a Contract may have the
option to act as the Servicer (or Master Servicer) for such Mortgage Loan or
Contract pursuant to a Servicing Agreement. A representative form of Servicing
Agreement has been filed as an exhibit to the Registration Statement of which
this Prospectus is a part. The following description does not purport to be
complete and is qualified in its entirety by reference to the form of Servicing
Agreement and by the discretion of the Master Servicer or Depositor to modify
the Servicing Agreement and to enter into different Servicing Agreements. The
Agreement provides that, if for any reason the Master Servicer for such Series
of Securities is no longer the Master Servicer of the related Mortgage Loans or
Contracts, the Trustee or any successor master servicer must recognize the
Servicer's rights and obligations under such Servicing Agreement.
A Servicer may delegate its servicing obligations to third-party
servicers, but continue to act as Servicer under the related Servicing
Agreement. The Servicer will be required to perform the customary functions of a
servicer, including collection of payments from Mortgagors and Obligors and
remittance of such collections to the Master Servicer, maintenance of primary
mortgage, hazard insurance, FHA insurance and VA guarantees and filing and
settlement of claims thereunder, subject in certain cases to (a) the right of
the Master Servicer to approve in advance any such settlement; (b) maintenance
of escrow accounts of Mortgagors and Obligors for payment of taxes, insurance
and other items required to be paid by the Mortgagor pursuant to the terms of
the related Mortgage Loan or the Obligor pursuant to the related Contract; (c)
processing of assumptions or substitutions; (d) attempting to cure
delinquencies; (e) supervising foreclosures or repossessions; (f) inspection and
management of Mortgaged Properties, Cooperative Dwellings or Manufactured Homes
under certain circumstances; and (g) maintaining accounting records relating to
the Mortgage Loans and Contracts. Except as otherwise provided in the related
Prospectus Supplement, the Servicer will also be obligated to make Advances in
respect of delinquent installments of principal and interest on Mortgage Loans
and Contracts (as described more fully below under " -- Payments on Mortgage
Loans" and " -- Payments on Contracts"), and in respect of certain taxes and
insurance premiums not paid on a timely basis by Mortgagors and Obligors.
As compensation for its servicing duties, a Servicer will be entitled
to amounts from payments with respect to the Mortgage Loans and Contracts
serviced by it. The Servicer will also be entitled to collect and retain, as
part of its servicing compensation, certain fees and late charges provided in
the Mortgage Notes or related instruments. The Servicer will be reimbursed by
the Master Servicer for certain expenditures that it makes, generally to the
same extent that the Master Servicer would be reimbursed under the applicable
Agreement.
Each Servicer will be required to agree to indemnify the Master
Servicer for any liability or obligation sustained by the Master Servicer in
connection with any act or failure to act by the Servicer in its servicing
capacity.
Each Servicer will be required to service each Mortgage Loan or
Contract pursuant to the terms of the Servicing Agreement for the entire term of
such Mortgage Loan or Contract, unless the Servicing Agreement is earlier
terminated by the Master Servicer or unless servicing is released to the Master
Servicer. Unless otherwise set forth in the Prospectus Supplement, the Master
Servicer may terminate a Servicing Agreement upon 30 days' written notice to the
Servicer, without cause, upon payment of an amount equal to the fair market
value of the right to service the Mortgage Loans or Contracts serviced by any
such Servicer under such Servicing Agreement, or if such fair market value
cannot be determined, a specified percentage of the aggregate outstanding
principal balance of all such Mortgage Loans or Contracts, or immediately upon
the giving of notice upon certain stated events, including the violation of such
Servicing Agreement by the Servicer.
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The Master Servicer may agree with a Servicer to amend a Servicing
Agreement. The Master Servicer may also, at any time and from time to time,
release servicing to third-party servicers, but continue to act as Master
Servicer under the related Agreement. Upon termination of a Servicing Agreement,
the Master Servicer or Trustee may act as servicer of the related Mortgage Loans
or Contracts or the Master Servicer may enter into one or more new Servicing
Agreements. If the Master Servicer acts as servicer, it will not assume
liability for the representations and warranties of the Servicer that it
replaces. If the Master Servicer enters into a new Servicing Agreement, each new
Servicer must be an Unaffiliated Seller or meet the standards for becoming an
Unaffiliated Seller or have such servicing experience that is otherwise
satisfactory to the Master Servicer. The Master Servicer will make reasonable
efforts to have the new Servicer assume liability for the representations and
warranties of the terminated Servicer, but no assurance can be given that such
an assumption will occur. In the event of such an assumption, the Master
Servicer may, in the exercise of its business judgment, release the terminated
Servicer from liability in respect of such representations and warranties. Any
amendments to a Servicing Agreement or new Servicing Agreements may contain
provisions different from those described above that are in effect in the
original Servicing Agreements. However, the related Agreement will provide that
any such amendment or new agreement may not be inconsistent with or violate such
Agreement.
PAYMENTS ON MORTGAGE LOANS
The Master Servicer will, unless otherwise specified in the Prospectus
Supplement with respect to a Series of Securities, establish and maintain a
separate account or accounts in the name of the applicable Trustee (the
"Certificate Account"), which must be maintained with a depository institution
and in a manner acceptable to the Rating Agency rating the Securities of a
Series. If a Series of Securities includes Notes, the Master Servicer may
establish and maintain a separate account or accounts in the name of the
applicable Trustee (the "Collection Account") into which amounts received in
respect of the Trust Assets are required to be deposited and a separate account
or accounts in the name of the applicable Trustee from which distributions in
respect of the Notes (the "Note Distribution Account") and/or the Certificates
(the "Certificate Distribution Account") may be made. The Collection Account,
Note Distribution Account and Certificate Distribution Account must be
established with a depositary institution and in a manner acceptable to the
Rating Agencies rating the Securities of such Series. For ease of reference,
references in this Prospectus to the Certificate Account shall be deemed to
refer to the Collection Account, Note Distribution Account and Certificate
Distribution Account, as applicable.
If so specified in the applicable Prospectus Supplement, the Master
Servicer, in lieu of establishing a Certificate Account, may establish a
separate account or accounts in the name of the Trustee (the "Custodial
Account") meeting the requirements set forth herein for the Certificate Account.
In such a case, amounts in such Custodial Account, after making the required
deposits and withdrawals specified below, shall be remitted to the Certificate
Account maintained by the Trustee for distribution to Securityholders in the
manner set forth herein and in such Prospectus Supplement.
In those cases where a Servicer is servicing a Mortgage Loan pursuant
to a Servicing Agreement, the Servicer will establish and maintain an account
(the "Servicing Account") that will comply with either the standards set forth
above or, subject to the conditions set forth in the Servicing Agreement, be
maintained with a depository, meeting the requirements of the Rating Agency
rating the Securities of the related Series, and that is otherwise acceptable to
the Master Servicer. Unless otherwise specified in the related Prospectus
Supplement, the Servicer will be required to deposit into the Servicing Account
on a daily basis all amounts enumerated in the following paragraph in respect of
the Mortgage Loans received by the Servicer, less its servicing compensation. On
the date specified in the Servicing Agreement, the Servicer shall remit to the
Master Servicer all funds held in the Servicing Account with respect to each
Mortgage
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Loan. Except as otherwise provided in the related Prospectus Supplement, the
Servicer will also be required to advance any monthly installment of principal
and interest that was not timely received, less its servicing fee, provided
that, unless otherwise specified in the related Prospectus Supplement, such
requirement shall only apply to the extent such Servicer determines in good
faith any such advance will be recoverable out of Insurance Proceeds, proceeds
of the liquidation of the related Mortgage Loans or otherwise.
The Certificate Account may be maintained with a depository institution
that is an affiliate of the Master Servicer. Unless otherwise specified in the
related Prospectus Supplement, the Master Servicer will deposit in the
Certificate Account for each Series of Securities on a daily basis the following
payments and collections received or made by it subsequent to the Cut-off Date
(other than payments due on or before the Cut-off Date) in the manner set forth
in the related Prospectus Supplement:
(i) all payments on account of principal, including principal
prepayments, of the Mortgage Loans, net of any portion of such payments
that represent unreimbursed or unrecoverable Advances made by the
related Servicer;
(ii) all payments on account of interest on the Mortgage
Loans, net of any portion thereof retained by the Servicer, if any, as
its servicing fee;
(iii) all proceeds of (A) any Special Hazard Insurance Policy,
Primary Mortgage Insurance Policy, FHA Insurance, VA Guarantee,
Mortgagor Bankruptcy Bond or Pool Insurance Policy with respect to such
Series of Securities and any title, hazard or other insurance policy
covering any of the Mortgage Loans included in the related Mortgage
Pool (to the extent such proceeds are not applied to the restoration of
the related property or released to the Mortgagor in accordance with
customary servicing procedures) (collectively, "Insurance Proceeds") or
any Alternative Credit Support established in lieu of any such
insurance and described in the applicable Prospectus Supplement; and
(B) all other cash amounts received and retained in connection with the
liquidation of defaulted Mortgage Loans, by foreclosure or otherwise,
other than Insurance Proceeds, payments under the Letter of Credit or
proceeds of any Alternative Credit Support, if any, with respect to
such Series ("Liquidation Proceeds"), net of expenses of liquidation,
unpaid servicing compensation with respect to such Mortgage Loans and
unreimbursed or unrecoverable Advances made by the Servicers of the
related Mortgage Loans;
(iv) all payments under the Letter of Credit, if any, with
respect to such Series;
(v) all amounts required to be deposited therein from the
Reserve Fund, if any, for such Series;
(vi) any Advances made by a Servicer or the Master Servicer
(as described herein under " -- Advances");
(vii) any Buy-Down Funds (and, if applicable, investment
earnings thereon) required to be deposited in the Certificate Account,
as described below; and
(viii) all proceeds of any Mortgage Loan repurchased by the
Master Servicer, the Depositor, any Servicer or any Unaffiliated Seller
(as described under "The Trust Fund -- Mortgage Loan Program," "--
Representations by Unaffiliated Sellers; Repurchases" or " --
Assignment of Mortgage Loans" above) or repurchased by the Depositor
(as described under " -- Termination" below).
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With respect to each Buy-Down Loan, if so specified in the related
Prospectus Supplement, the Master Servicer or the related Servicer will deposit
the Buy-Down Funds with respect thereto in a custodial account complying with
the requirements set forth above for the Certificate Account, which, unless
otherwise specified in the related Prospectus Supplement, may be an
interest-bearing account. The amount of such required deposits, together with
investment earnings thereon at the rate specified in the applicable Prospectus
Supplement, will provide sufficient funds to support the full monthly payments
due on such Buy-Down Loan on a level debt service basis. Neither the Master
Servicer nor the Depositor will be obligated to add to the Buy-Down Fund should
investment earnings prove insufficient to maintain the scheduled level of
payments on the Buy-Down Loans. To the extent that any such insufficiency is not
recoverable from the Mortgagor under the terms of the related Mortgage Note,
distributions to Securityholders will be affected. With respect to each Buy-Down
Loan, the Master Servicer will withdraw from the Buy-Down Fund and deposit in
the Certificate Account on or before each Distribution Date the amount, if any,
for each Buy-Down Loan that, when added to the amount due on that date from the
Mortgagor on such Buy-Down Loan, equals the full monthly payment that would be
due on the Buy-Down Loan if it were not subject to the buy-down plan.
If the Mortgagor on a Buy-Down Loan prepays such loan in its entirety,
or defaults on such loan and the Mortgaged Property is sold in liquidation
thereof, during the period when the Mortgagor is not obligated, on account of
the buy-down plan, to pay the full monthly payment otherwise due on such loan,
the related Servicer will withdraw from the Buy-Down Fund and deposit in the
Certificate Account the amounts remaining in the Buy-Down Fund with respect to
such Buy-Down Loan. In the event of a default with respect to which a claim,
including accrued interest supplemented by amounts in the Buy-Down Fund with
respect to the related Buy-Down Loan, has been made, the Master Servicer or the
related Servicer will pay an amount equal to the remaining amounts in the
Buy-Down Fund with respect to the related Buy-Down Loan, to the extent the claim
includes accrued interest supplemented by amounts in the Buy-Down Fund, to the
related Pool Insurer or the insurer under the related Primary Insurance Policy
(the "Primary Insurer") if the Mortgaged Property is transferred to the Pool
Insurer or the Primary Insurer, as the case may be, which pays 100% of the
related claim (including accrued interest and expenses) in respect of such
default, to the L/C Bank in consideration of such payment under the related
Letter of Credit, or to the guarantor or other person which pays the same
pursuant to Alternative Credit Support described in the applicable Prospectus
Supplement. In the case of any such prepaid or defaulted Buy-Down Loan the
amounts in the Buy-Down Fund in respect of which were supplemented by investment
earnings, the Master Servicer will withdraw from the Buy-Down Fund and remit to
the Depositor or the Mortgagor, depending on the terms of the related buy-down
plan, any investment earnings remaining in the related Buy-Down Fund.
If so specified in the Prospectus Supplement with respect to a Series,
in lieu of, or in addition to the foregoing, the Depositor may deliver cash, a
letter of credit or a guaranteed investment contract to the Trustee to fund the
Buy-Down Fund for such Series, which shall be drawn upon by the Trustee in the
manner and at the times specified in such Prospectus Supplement.
PAYMENTS ON CONTRACTS
A Certificate Account meeting the requirements set forth under " --
Description of the Securities -- Payments on Mortgage Loans" will be established
in the name of the Trustee.
Except as otherwise provided in the related Prospectus Supplement,
there will be deposited in the Certificate Account on a daily basis the
following payments and collections received or made by it on or after the
Cut-off Date:
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(i) all Obligor payments on account of principal, including
principal prepayments, of the Contracts;
(ii) all Obligor payments on account of interest on the
Contracts;
(iii) all Liquidation Proceeds received with respect to
Contracts or property acquired in respect thereof by foreclosure or
otherwise;
(iv) all Insurance Proceeds received with respect to any
Contract, other than proceeds to be applied to the restoration or
repair of the Manufactured Home or released to the Obligor;
(v) any Advances made as described under " -- Advances" and
certain other amounts required under the related Agreement to be
deposited in the Certificate Account;
(vi) all amounts received from Credit Support provided with
respect to a Series of Securities;
(vii) all proceeds of any Contract or property acquired in
respect thereof repurchased by the Master Servicer, the Depositor or
otherwise as described above or under " -- Termination" below; and
(viii) all amounts, if any, required to be transferred to the
Certificate Account from the Reserve Fund.
COLLECTION OF PAYMENTS ON MORTGAGE CERTIFICATES
The Mortgage Certificates included in the Trust Fund with respect to a
Series of Securities will be registered in the name of the Trustee so that all
distributions thereon will be made directly to the Trustee. The related
Agreement will require the Trustee, if it has not received a distribution with
respect to any Mortgage Certificate by the second business day after the date on
which such distribution was due and payable pursuant to the terms of such
Mortgage Certificate, to request the issuer or guarantor, if any, of such
Mortgage Certificate to make such payment as promptly as possible and legally
permitted and to take such legal action against such issuer or guarantor as the
Trustee deems appropriate under the circumstances, including the prosecution of
any claims in connection therewith. The reasonable legal fees and expenses
incurred by the Trustee in connection with the prosecution of any such legal
action will be reimbursable to the Trustee out of the proceeds of any such
action and will be retained by the Trustee prior to the deposit of any remaining
proceeds in the Certificate Account pending distribution thereof to
Securityholders of the affected Series. In the event that the Trustee has reason
to believe that the proceeds of any such legal action may be insufficient to
reimburse it for its projected legal fees and expenses, the Trustee will notify
such Securityholders that it is not obligated to pursue any such available
remedies unless adequate indemnity for its legal fees and expenses is provided
by such Securityholders.
DISTRIBUTIONS ON SECURITIES
On each Distribution Date with respect to a Series of Securities as to
which credit support is provided by means other than the creation of a
Subordinated Class or Subclasses and the establishment of a Reserve Fund, the
Master Servicer will withdraw from the applicable Certificate Account funds on
deposit therein and distribute, or, if so specified in the applicable Prospectus
Supplement, will withdraw from the Custodial Account, funds on deposit therein
and remit to the Trustee, who will distribute such funds to Securityholders of
record on the applicable Record Date. Such distributions shall occur in the
manner described herein under " -- Description of the Securities --
Distributions of Principal and Interest" and in the
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related Prospectus Supplement. If so specified in the applicable Prospectus
Supplement, the Master Servicer will withdraw from the applicable Certificate
Account funds on deposit therein and distribute them to the Trustee. Such funds
shall consist of the aggregate of all previously undistributed payments on
account of principal (including principal prepayments, if any) and interest
received after the Cut-off Date and on or prior to the 20th day (or if such day
is not a business day, the next preceding business day) of the month of such
distribution or such other day as may be specified in the related Prospectus
Supplement (in either case, the "Determination Date"), except:
(i) all payments that were due on or before the Cut-off Date;
(ii) all principal prepayments received during the month of
distribution and all payments of interest representing interest for the
month of distribution or any portion thereof;
(iii) all payments which represent early receipt (other than
prepayments) of scheduled payments of principal and interest due on a
date or dates subsequent to the first day of the month of distribution;
(iv) amounts received on particular Mortgage Loans or
Contracts as late payments of principal or interest and respecting
which the Master Servicer has made an unreimbursed Advance;
(v) amounts representing reimbursement for other Advances
which the Master Servicer has determined to be otherwise nonrecoverable
and amounts representing reimbursement for certain losses and expenses
incurred or Advances made by the Master Servicer and discussed below;
and
(vi) that portion of each collection of interest on a
particular Mortgage Loan in such Mortgage Pool or on a particular
Contract in such Contract Pool that represents (A) servicing
compensation to the Master Servicer, (B) amounts payable to the entity
or entities specified in the applicable Prospectus Supplement or
permitted withdrawals from the Certificate Account out of payments
under the Letter of Credit, if any, with respect to the Series, (C)
related Insurance Proceeds or Liquidation Proceeds, (D) amounts in the
Reserve Fund, if any, with respect to the Series or (E) proceeds of any
Alternative Credit Support, each deposited in the Certificate Account
to the extent described under "Description of the Securities --
Maintenance of Insurance Policies," "-- Presentation of Claims," "--
Enforcement of `Due-on-Sale' Clauses; Realization Upon Defaulted
Mortgage Loans" and " -- Enforcement of `Due-on-Sale' Clauses;
Realization Upon Defaulted Contracts" or in the applicable Prospectus
Supplement.
Except as otherwise specified in the related Prospectus Supplement, no
later than the Business Day immediately preceding the Distribution Date for a
Series of Securities, the Master Servicer will furnish a statement to the
Trustee setting forth the amount to be distributed on the next succeeding
Distribution Date on account of principal of and interest on the Mortgage Loans
or Contracts, stated separately or the information enabling the Trustee to
determine the amount of distribution to be made on the Securities and a
statement setting forth certain information with respect to the Mortgage Loans
or Contracts.
If so specified in the applicable Prospectus Supplement, the Trustee
will establish and maintain the Certificate Account for the benefit of the
holders of the Securities of the related Series in which the Trustee shall
deposit, as soon as practicable after receipt, each distribution made to the
Trustee by the Master Servicer, as set forth above, with respect to the Mortgage
Loans or Contracts, any distribution received by the Trustee with respect to the
Mortgage Certificates, if any, included in the Trust Fund and deposits from any
Reserve Fund or GPM Fund. If so specified in the applicable Prospectus
Supplement, prior to making any distributions to Securityholders, any portion of
the distribution on the Mortgage Certificates that represents servicing
compensation, if any, payable to the Trustee shall be deducted and paid to the
Trustee.
Funds on deposit in the Certificate Account may be invested in Eligible
Investments maturing in general not later than the Business Day preceding the
next Distribution Date. Unless otherwise provided in the Prospectus Supplement,
all income and gain realized from any such investment will be for the benefit of
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the Master Servicer. The Master Servicer will be required to deposit the amount
of any losses incurred with respect to such investments out of its own funds,
when realized. Unless otherwise provided in the Prospectus Supplement, the
Certificate Account established pursuant to the Trust Agreement shall be a
non-interest bearing account or accounts.
The timing and method of distribution of funds in the Certificate
Account to Classes or Subclasses of Securities having differing terms, whether
subordinated or not, to the extent not described herein, shall be set forth in
the related Prospectus Supplement.
SPECIAL DISTRIBUTIONS
To the extent specified in the Prospectus Supplement relating to a
Series of Securities, one or more Classes of Multi-Class Securities that do not
provide for monthly Distribution Dates may receive Special Distributions in
reduction of Stated Principal Balance ("Special Distributions") in any month,
other than a month in which a Distribution Date occurs, if, as a result of
principal prepayments on the Trust Assets in the related Trust Fund and/or low
reinvestment yields, the Trustee determines, based on assumptions specified in
the related Agreement, that the amount of cash anticipated to be on deposit in
the Certificate Account on the next Distribution Date for such Series and
available to be distributed to the holders of the Securities of such Classes or
Subclasses may be less than the sum of (i) the interest scheduled to be
distributed to holders of the Securities of such Classes or Subclasses and (ii)
the amount to be distributed in reduction of Stated Principal Balance or such
Securities on such Distribution Date. Any such Special Distributions will be
made in the same priority and manner as distributions in reduction of Stated
Principal Balance would be made on the next Distribution Date.
REPORTS TO SECURITYHOLDERS
Unless otherwise specified or modified in the related Prospectus
Supplement for each Series, the Master Servicer or the Trustee will include with
each distribution to Securityholders of record of such Series, or within a
reasonable time thereafter, a statement generally setting forth, among other
things, the following information, if applicable (per each Security, as to (i)
through (iii) or (iv) through (vi) below, as applicable):
(i) to each holder of a Security, other than a Multi-Class
Certificate or Residual Certificate, the amount of such distribution
allocable to principal of the Trust Assets, separately identifying the
aggregate amount of any Principal Prepayments included therein, and the
portion, if any, advanced by a Servicer or the Master Servicer;
(ii) to each holder of a Security, other than a Multi-Class
Certificate or Residual Certificate, the amount of such distribution
allocable to interest on the related Trust Assets and the portion, if
any, advanced by a Servicer or the Master Servicer;
(iii) to each holder of a Security, the amount of servicing
compensation with respect to the related Trust Assets and such other
customary information as the Master Servicer deems necessary or
desirable to enable Securityholders to prepare their tax returns;
(iv) to each holder of a Multi-Class Certificate on which an
interest distribution and a distribution in reduction of Stated
Principal Balance are then being made, the amount of such interest
distribution and distribution in reduction of Stated Principal Balance,
and the Stated Principal Balance of each Class after giving effect to
the distribution in reduction of Stated Principal Balance made on such
Distribution Date or on any Special Distribution Date occurring
subsequent to the last report;
(v) to each holder of a Multi-Class Certificate on which a
distribution of interest only is then being made, the aggregate Stated
Principal Balance of Securities outstanding of each Class or
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Subclass after giving effect to the distribution in reduction of Stated
Principal Balance made on such Distribution Date and on any Special
Distribution Date occurring subsequent to the last such report and
after including in the aggregate Stated Principal Balance the Stated
Principal Balance of the Compound Interest Securities, if any,
outstanding and the amount of any accrued interest added to the
Compound Value of such Compound Interest Securities on such
Distribution Date;
(vi) to each holder of a Compound Interest Security (but only
if such holder shall not have received a distribution of interest on
such Distribution Date equal to the entire amount of interest accrued
on such Certificate with respect to such Distribution Date):
(a) the information contained in the report delivered
pursuant to clause (v) above;
(b) the interest accrued on such Class or Subclass of
Compound Interest Securities with respect to such Distribution
Date and added to the Compound Value of such Compound Interest
Security; and
(c) the Stated Principal Balance of such Class or
Subclass of Compound Interest Securities after giving effect
to the addition thereto of all interest accrued thereon;
(vii) in the case of a series of Securities with a variable
Interest Rate, the Interest Rate applicable to the distribution in
question;
(viii) the amount or the remaining obligations of an L/C Bank
with respect to a Letter of Credit, after giving effect to the
declining amount available and any payments thereunder and other
amounts charged thereto on the applicable Distribution Date, expressed
as a percentage of the amount reported pursuant to (x) below, and the
amount of coverage remaining under the Pool Insurance Policy, Special
Hazard Insurance Policy, Mortgagor Bankruptcy Bond or Reserve Fund, as
applicable, in each case as of the applicable Determination Date, after
giving effect to any amounts with respect thereto to be distributed to
Securityholders on the Distribution Date;
(ix) in the case of a Series of Securities benefiting from the
Alternative Credit Support described in the related Prospectus
Supplement, the amount of coverage under such Alternative Credit
Support as of the close of business on the applicable Determination
Date, after giving effect to any amounts with respect thereto
distributed to Securityholders on the Distribution Date;
(x) the aggregate scheduled principal balance of the Trust
Assets as of a date not earlier than such Distribution Date after
giving effect to payments of principal distributed to Securityholders
on the Distribution Date;
(xi) the book value of any collateral acquired by the Mortgage
Pool or Contract Pool through foreclosure, repossession or otherwise;
and
(xii) the number and aggregate principal amount of Mortgage
Loans or Contracts one month and two months delinquent.
In addition, within a reasonable period of time after the end of each
calendar year, the Master Servicer, or the Trustee, if specified in the
applicable Prospectus Supplement, will cause to be furnished to each
Securityholder of record at any time during such calendar year a report as to
the aggregate of amounts reported pursuant to (i) through (iii) or (iv) through
(vi) above and such other information as in the judgment of the Master Servicer
or the Trustee, as the case may be, is needed for the Securityholder to prepare
its tax return, as applicable, for such calendar year or, in the event such
person was a Securityholder of record during a portion of such calendar year,
for the applicable portion of such year.
ADVANCES
Unless otherwise stated in the related Prospectus Supplement, each
Servicer and the Master Servicer (with respect to Mortgage Loans or Contracts
serviced by it and with respect to Advances required to be made by the Servicers
that were not so made) will be obligated to advance funds in an amount equal to
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the aggregate scheduled installments of payments of principal and interest that
were due on the Due Date with respect to a Mortgage Loan or Contract and that
were delinquent (including any payments that have been deferred by the Servicer
or the Master Servicer) as of the close of business on the date specified in the
related Servicing Agreement, to be remitted no later than the close of business
on the business day immediately preceding the Distribution Date, subject to
(unless otherwise provided in the applicable Prospectus Supplement) their
respective determinations that such advances are reimbursable under any Letter
of Credit, Pool Insurance Policy, Primary Mortgage Insurance Policy, Mortgagor
Bankruptcy Bond, from the proceeds of Alternative Credit Support, from cash in
the Reserve Fund, the Servicing or Certificate Accounts or otherwise. In making
such Advances, the Servicers and Master Servicer will endeavor to maintain a
regular flow of scheduled interest and principal payments to the
Securityholders, rather than to guarantee or insure against losses. Any such
Advances are reimbursable to the Servicer or Master Servicer out of related
recoveries on the Mortgage Loans respecting which such amounts were advanced. In
addition, such Advances are reimbursable from cash in the Reserve Fund, the
Servicing or Certificate Accounts to the extent that the Servicer or the Master
Servicer, as the case may be, shall determine that any such Advances previously
made are not ultimately recoverable. The Servicers and the Master Servicer
generally will also be obligated to make advances in respect of certain taxes
and insurance premiums not paid by Mortgagors or Obligors on a timely basis and,
to the extent deemed recoverable, foreclosure costs, including reasonable
attorney's fees. Funds so advanced are reimbursable out of recoveries on the
related Mortgage Loans. This right of reimbursement for any Advance will be
prior to the rights of the Securityholders to receive any amounts recovered with
respect to such Mortgage Loans or Contracts. Unless otherwise provided in the
applicable Prospectus Supplement, the Servicers and the Master Servicer will
also be required to advance an amount necessary to provide a full month's
interest in connection with full or partial prepayments, liquidations, defaults
and repurchases of the Mortgage Loans or Contracts. Any such Advances will not
be reimbursable to the Servicers or the Master Servicer.
COLLECTION AND OTHER SERVICING PROCEDURES
The Master Servicer, directly or through the Servicers, as the case may
be, will make reasonable efforts to collect all payments called for under the
Mortgage Loans or Contracts and will, consistent with the applicable Servicing
Agreement and any applicable Letter of Credit, Pool Insurance Policy, Special
Hazard Insurance Policy, Primary Mortgage Insurance Policy, Mortgagor Bankruptcy
Bond or Alternative Credit Support, follow such collection procedures as it
follows with respect to mortgage loans or contracts serviced by it that are
comparable to the Mortgage Loans or Contracts, except when, in the case of FHA
or VA Loans, applicable regulations require otherwise. Consistent with the
above, if so provided in the related Prospectus Supplement, the Master Servicer
may, in its discretion, waive any late payment charge or any prepayment charge
or penalty interest in connection with the prepayment of a Mortgage Loan or
Contract or extend the due dates for payments due on a Mortgage Note or Contract
for a period of not greater than 270 days, provided that the insurance coverage
for such Mortgage Loan or Contract or the coverage provided by any Letter of
Credit or any Alternative Credit Support, will not be adversely affected.
If specified in the related Prospectus Supplement, under the applicable
Servicing Agreement, the Master Servicer, either directly or through Servicers,
to the extent permitted by law, may establish and maintain an escrow account
(the "Escrow Account") in which Mortgages or Obligors will be required to
deposit amounts sufficient to pay taxes, assessments, mortgage and hazard
insurance premiums and other comparable items. This obligation may be satisfied
by the provision of insurance coverage against loss occasioned by the failure to
escrow insurance premiums rather than causing such escrows to be made.
Withdrawals from the Escrow Account may be made to effect timely payment of
taxes, assessments, mortgage and hazard insurance, to refund to Mortgagors or
Obligors amounts determined to be overages, to pay interest to Mortgagors or
Obligors on balances in the Escrow Account, if required, and to clear and
terminate such account. The Master Servicer will be responsible for the
administration of each Escrow
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Account and will be obliged to make advances to such accounts when a deficiency
exists therein. Alternatively, in lieu of establishing an Escrow Account, the
Servicer may procure a performance bond or other form of insurance coverage, in
an amount acceptable to the Rating Agency rating the related Series of
Securities, covering loss occasioned by the failure to escrow such amounts.
MAINTENANCE OF INSURANCE POLICIES
To the extent that the applicable Prospectus Supplement does not
expressly provide for a method of credit support described below under "Credit
Support" or for Alternative Credit Support in lieu of some or all of the
insurance coverage set forth below, the following paragraphs on insurance shall
apply.
STANDARD HAZARD INSURANCE
To the extent specified in a related Prospectus Supplement, the terms
of each Servicing Agreement will require the Servicer to cause to be maintained
for each Mortgage Loan or Contract that it services (and the Master Servicer
will be required to maintain for each Mortgage Loan or Contract serviced by it
directly) a policy of standard hazard insurance (a "Standard Hazard Insurance
Policy") covering the Mortgaged Property underlying such Mortgage Loan or
Manufactured Home underlying such Contract in an amount equal to the lesser of
the maximum insurable value of the improvements securing such Mortgage Loan or
Contract or the principal balance of such Mortgage Loan or Contract. Each
Servicer or the Master Servicer, as the case may be, shall also maintain on
property acquired upon foreclosure, or deed in lieu of foreclosure, of any
Mortgage Loan or Contract, a Standard Hazard Insurance Policy in an amount that
is at least equal to the maximum insurable value of the improvements that are a
part of the Mortgaged Property or Manufactured Home. Any amounts collected by
the Servicer or the Master Servicer under any such policies (other than amounts
to be applied to the restoration or repair of the Mortgaged Property or
Manufactured Home or released to the borrower in accordance with normal
servicing procedures) shall be deposited in the related Servicing Account for
deposit in the Certificate Account or, in the case of the Master Servicer, shall
be deposited directly into the Certificate Account. Any cost incurred in
maintaining any such insurance shall not, for the purpose of calculating monthly
distributions to Securityholders, be added to the amount owing under the
Mortgage Loan or Contract, notwithstanding that the terms of the Mortgage Loan
or Contract may so permit. Such cost shall be recoverable by the Servicer only
by withdrawal of funds from the Servicing Account or by the Master Servicer only
by withdrawal from the Certificate Account, as described in the applicable
Servicing Agreement. No earthquake or other additional insurance is to be
required of any borrower or maintained on property acquired in respect of a
Mortgage Loan or Contract, other than pursuant to such applicable laws and
regulations as shall at any time be in force and as shall require such
additional insurance. When the Mortgaged Property or Manufactured Home is
located at the time of origination of the Mortgage Loan or Contract in a
federally designated flood area, the related Servicer (or the Master Servicer,
in the case of each Mortgage Loan or Contract serviced by it directly) will
cause flood insurance to be maintained, to the extent available, in those areas
where flood insurance is required under the National Flood Insurance Act of
1968, as amended.
The Depositor 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 corporation itself is responsible
for maintenance of hazard insurance for the property owned by the cooperative
and the tenant-stockholders of that cooperative do not maintain individual
hazard insurance policies. To the extent, however, that a Cooperative and the
related borrower on a Cooperative Loan do not maintain 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.
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The applicable Servicing Agreement will require the Master Servicer to
perform the aforementioned obligations of the Servicer in the event the Servicer
fails to do so. In the event that the Master Servicer obtains and maintains a
blanket policy insuring against hazard losses on all of the related Mortgage
Loans or Contracts, it will conclusively be deemed to have satisfied its
obligations to cause to be maintained a Standard Hazard Insurance Policy for
each Mortgage Loan or Contract that it services. This blanket policy may contain
a deductible clause, in which case the Master Servicer will, in the event that
there has been a loss that would have been covered by such policy absent such
deductible, deposit in the Certificate Account the amount not otherwise payable
under the blanket policy because of the application of such deductible clause.
Since the amount of hazard insurance to be maintained on the
improvements securing the Mortgage Loans or Contracts may decline as the
principal balances owing thereon decrease, and since residential properties have
historically appreciated in value over time, in the event of partial loss,
hazard insurance proceeds may be insufficient to fully restore the damaged
Mortgaged Property or Manufactured Home. See "Description of Insurance --
Special Hazard Insurance Policies" for a description of the limited protection
afforded by a Special Hazard Insurance Policy against losses occasioned by
certain hazards that are otherwise uninsured against as well as against losses
caused by the application of the coinsurance provisions contained in the
Standard Hazard Insurance Policies.
SPECIAL HAZARD INSURANCE
If so specified in the related Prospectus Supplement, the Master
Servicer will be required to exercise its best reasonable efforts to maintain
the Special Hazard Insurance Policy, if any, with respect to a Series of
Securities in full force and effect, unless coverage thereunder has been
exhausted through payment of claims, and will pay the premium for the Special
Hazard Insurance Policy on a timely basis; provided, however, that the Master
Servicer shall be under no such obligation if coverage under the Pool Insurance
Policy with respect to such Series has been exhausted. In the event that the
Special Hazard Insurance Policy is cancelled or terminated for any reason (other
than the exhaustion of total policy coverage), the Master Servicer will exercise
its best reasonable efforts to obtain from another insurer a replacement policy
comparable to the Special Hazard Insurance Policy with a total coverage that is
equal to the then existing coverage of the Special Hazard Insurance Policy;
provided that if the cost of any such replacement policy is greater than the
cost of the terminated Special Hazard Insurance Policy, the amount of coverage
under the replacement Special Hazard Insurance Policy may be reduced to a level
such that the applicable premium will not exceed the cost of the Special Hazard
Insurance Policy that was replaced. Certain characteristics of the Special
Hazard Insurance Policy are described under "Description of Insurance -- Special
Hazard Insurance Policies."
POOL INSURANCE
To the extent specified in a related Prospectus Supplement, the Master
Servicer will exercise its best reasonable efforts to maintain a Pool Insurance
Policy with respect to a Series of Securities in effect throughout the term of
the applicable Agreement, unless coverage thereunder has been exhausted through
payment of claims, and will pay the premiums for such Pool Insurance Policy on a
timely basis. In the event that the Pool Insurer ceases to be a qualified
insurer because it is not qualified to transact a mortgage guaranty insurance
business under the laws of the state of its principal place of business or any
other state which has jurisdiction over the Pool Insurer in connection with the
Pool Insurance Policy, or if the Pool Insurance Policy is cancelled or
terminated for any reason (other than the exhaustion of total policy coverage),
the Master Servicer will exercise its best reasonable efforts to obtain a
replacement policy of pool insurance comparable to the Pool Insurance Policy and
may obtain, under the circumstances described
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above with respect to the Special Hazard Insurance Policy, a replacement policy
with reduced coverage. In the event the Pool Insurer ceases to be a qualified
insurer because it is not approved as an insurer by FHLMC, FNMA or any
successors thereto, the Master Servicer will agree to review, not less often
than monthly, the financial condition of the Pool Insurer with a view towards
determining whether recoveries under the Pool Insurance Policy are jeopardized
and, if so, will exercise its best reasonable efforts to obtain from another
qualified insurer a replacement insurance policy under the above-stated
limitations. Certain characteristics of the Pool Insurance Policy are described
under "Description of Insurance -- Pool Insurance Policies."
PRIMARY MORTGAGE INSURANCE
To the extent specified in the related Prospectus Supplement, the
Master Servicer will be required to keep in force and effect for each Mortgage
Loan secured by Single Family Property serviced by it directly, and each
Servicer of a Mortgage Loan secured by Single Family Property will be required
to keep in full force and effect with respect to each such Mortgage Loan
serviced by it, in each case to the extent required by the underwriting
standards of the Depositor, a Primary Mortgage Insurance Policy issued by a
qualified insurer (the "Primary Mortgage Insurer") with regard to each Mortgage
Loan for which such coverage is required pursuant to the applicable Servicing
Agreement and Agreement and to act on behalf of the Trustee (the "Insured")
under each such Primary Mortgage Insurance Policy. Neither the Servicer nor the
Master Servicer will cancel or refuse to renew any such Primary Mortgage
Insurance Policy in effect at the date of the initial issuance of a Series of
Securities that is required to be kept in force under the applicable Agreement
or Servicing Agreement unless the replacement Primary Mortgage Insurance Policy
for such cancelled or non-renewed policy is maintained with an insurer whose
claims-paying ability is acceptable to the Rating Agency rating the Securities.
See "Description of Insurance -- Primary Mortgage Insurance Policies."
MORTGAGOR BANKRUPTCY BOND
If so specified in the related Prospectus Supplement, the Master
Servicer will exercise its best reasonable efforts to maintain a Mortgagor
Bankruptcy Bond for a Series of Securities in full force and effect throughout
the term of the applicable Agreement, unless coverage thereunder has been
exhausted through payment of claims, and will pay the premiums for such
Mortgagor Bankruptcy Bond on a timely basis. At the request of the Depositor,
coverage under a Mortgagor Bankruptcy Bond will be cancelled or reduced by the
Master Servicer to the extent permitted by the Rating Agency rating the related
Series of Securities, provided that such cancellation or reduction does not
adversely affect the then current rating of such Series. See "Description of
Insurance -- Mortgagor Bankruptcy Bond."
PRESENTATION OF CLAIMS
The Master Servicer, on behalf of itself, the Trustee and the
Securityholders, will present claims to HUD, the VA, the Pool Insurer, the
Special Hazard Insurer, the issuer of the Mortgagor Bankruptcy Bond, and each
Primary Mortgage Insurer, as applicable, and take such reasonable steps as are
necessary to permit recovery under such insurance policies or Mortgagor
Bankruptcy Bond, if any, with respect to a Series concerning defaulted Mortgage
Loans or Contracts or Mortgage Loans or Contracts that are the subject of a
bankruptcy proceeding. All collections by the Master Servicer under any FHA
insurance or VA guarantee, any Pool Insurance Policy, any Primary Mortgage
Insurance Policy or any Mortgagor Bankruptcy Bond and, where the related
property has not been restored, any Special Hazard Insurance Policy, are to be
deposited in the Certificate Account, subject to withdrawal as heretofore
described. In those cases in which a Mortgage Loan or Contract is serviced by a
Servicer, the Servicer, on behalf of itself, the Trustee and the
Securityholders, will present claims to the applicable Primary Mortgage Insurer
and to the FHA and the VA,
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as applicable, and all collections thereunder shall be deposited in the
Servicing Account, subject to withdrawal, as set forth above, for deposit in the
Certificate Account.
If any property securing a defaulted Mortgage Loan or Contract is
damaged and proceeds, if any, from the related Standard Hazard Insurance Policy
or the applicable Special Hazard Insurance Policy are insufficient to restore
the damaged property to a condition sufficient to permit recovery under any Pool
Insurance Policy or any Primary Mortgage Insurance Policy, neither the related
Servicer nor the Master Servicer, as the case may be, will be required to expend
its own funds to restore the damaged property unless it determines, and, in the
case of a determination by a Servicer, the Master Servicer agrees, (i) that such
restoration will increase the proceeds to Securityholders on liquidation of the
Mortgage Loan or Contract after reimbursement of the expenses incurred by the
Servicer or the Master Servicer, as the case may be, and (ii) that such expenses
will be recoverable through proceeds of the sale of the Mortgaged Property or
proceeds of any related Pool Insurance Policy, any related Primary Mortgage
Insurance Policy or otherwise.
If recovery under a Pool Insurance Policy or any related Primary
Mortgage Insurance Policy is not available because the related Servicer or the
Master Servicer has been unable to make the above determinations or otherwise,
the Servicer or the Master Servicer is nevertheless obligated to follow such
normal practices and procedures as are deemed necessary or advisable to realize
upon the defaulted Mortgage Loan. If the proceeds of any liquidation of the
Mortgaged Property or Manufactured Home are less than the principal balance of
the defaulted Mortgage Loan or Contract, respectively, plus interest accrued
thereon at the Mortgage Rate, and if coverage under any other method of credit
support with respect to such Series is exhausted, the related Trust Fund will
realize a loss in the amount of such difference plus the aggregate of expenses
incurred by the Servicer or the Master Servicer in connection with such
proceedings and which are reimbursable under the related Servicing Agreement or
Agreement. In the event that any such proceedings result in a total recovery
that is, after reimbursement to the Servicer or the Master Servicer of its
expenses, in excess of the principal balance of the related Mortgage Loan or
Contract, together with accrued and unpaid interest thereon at the applicable
Mortgage Rate or APR, as the case may be, the Servicer and the Master Servicer
will be entitled to withdraw amounts representing normal servicing compensation
on such Mortgage Loan or Contract from the Servicing Account or the Certificate
Account, as the case may be.
ENFORCEMENT OF "DUE-ON-SALE" CLAUSES; REALIZATION UPON DEFAULTED MORTGAGE LOANS
Each Servicing Agreement and the applicable Agreement with respect to
Securities representing interests in or secured by a Mortgage Pool will provide
that, when any Mortgaged Property has been conveyed by the borrower, such
Servicer or the Master Servicer, as the case may be, will, to the extent it has
knowledge of such conveyance, exercise its rights to accelerate the maturity of
such Mortgage Loan under any "due-on-sale" clause applicable thereto, if any,
unless it reasonably believes that such enforcement is not exercisable under
applicable law or regulations or if such exercise would result in loss of
insurance coverage with respect to such Mortgage Loan. In either case, where the
due-on-sale clause will not be exercised, the Servicer or the Master Servicer is
authorized to take or enter into an assumption and modification agreement from
or with the person to whom such Mortgaged Property has been or is about to be
conveyed, pursuant to which such person becomes liable under the Mortgage Note
and, unless prohibited by applicable state law, the Mortgagor remains liable
thereon, provided that the Mortgage Loan will continue to be covered by any Pool
Insurance Policy and any related Primary Mortgage Insurance Policy. In the case
of an FHA Loan, such an assumption can occur only with HUD approval of the
substitute Mortgagor. Each Servicer and the Master Servicer will also be
authorized, with the prior approval of the Insurer under any required insurance
policies, to enter into a substitution of liability agreement with such
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person, pursuant to which the original Mortgagor is released from liability and
such person is substituted as Mortgagor and becomes liable under the Mortgage
Note.
Under the Servicing Agreements and the applicable Agreement, the
Servicer or the Master Servicer, as the case may be, will foreclose upon or
otherwise comparably convert the ownership of properties securing such of the
related Mortgage Loans 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 foreclosure or other conversion, the Servicer or the Master
Servicer will follow such practices and procedures as are deemed necessary or
advisable and as shall be normal and usual in its general mortgage servicing
activities and in accordance with FNMA guidelines, except when, in the case of
FHA or VA Loans, applicable regulations require otherwise. However, neither the
Servicer nor the Master Servicer will be required to expend its own funds in
connection with any foreclosure or towards the restoration of any property
unless it determines and, in the case of a determination by a Servicer, the
Master Servicer agrees (i) that such restoration and/or foreclosure will
increase the proceeds of liquidation of the related Mortgage Loan to
Securityholders after reimbursement to itself for such expenses and (ii) that
such expenses will be recoverable to it either through Liquidation Proceeds,
Insurance Proceeds, payments under the Letter of Credit, or amounts in the
Reserve Fund, if any, with respect to the related Series, or otherwise.
Any prospective purchaser of a Cooperative Dwelling will generally be
required to obtain the approval of the board of directors of the related
Cooperative before purchasing the shares and acquiring rights under the
proprietary lease or occupancy agreement securing the Cooperative Loan. See
"Certain Legal Aspects of the Mortgage Loans and Contracts -- The Mortgage Loans
-- Foreclosure" 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.
The market value of any Multifamily Property obtained in foreclosure or
by deed in lieu of foreclosure will be based substantially on the operating
income obtained from renting the dwelling units. Since a default on a Mortgage
Loan secured by Multifamily Property is likely to have occurred because
operating income, net of expenses, is insufficient to make debt service payments
on the related Mortgage Loan, it can be anticipated that the market value of
such property will be less than was anticipated when such Mortgage Loan was
originated. To the extent that the equity in the property does not absorb the
loss in market value and such loss is not covered by other credit support, a
loss may be experienced by the related Trust Fund. With respect to Multifamily
Property consisting of an apartment building owned by a Cooperative, the
Cooperative's ability to meet debt service obligations on the Mortgage Loan, as
well as all other operating expenses, will be dependent in large part on the
receipt of maintenance payments from the tenant-stockholders, as well as any
rental income from units or commercial areas the Cooperative might control.
Unanticipated expenditures may in some cases have to be paid by special
assessments of the tenant-stockholders. The Cooperative's ability to pay the
principal amount of the Mortgage Loan at maturity may depend on its ability to
refinance the Mortgage Loan. The Depositor, the Unaffiliated Seller and the
Master Servicer will have no obligation to provide refinancing for any such
Mortgage Loan.
ENFORCEMENT OF `DUE-ON-SALE' CLAUSES; REALIZATION UPON DEFAULTED CONTRACTS
Each applicable Agreement and Servicing Agreement with respect to
Securities representing interests in or secured by a Contract Pool will provide
that, when any Manufactured Home securing a Contract is about to be conveyed by
the Obligor, the Master 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
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rights to accelerate the maturity of such Contract under the applicable
"due-on-sale" clause, if any, unless it is not exercisable under applicable law.
In such case, the Master Servicer 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 and, unless determined to be materially adverse to the
interests of Securityholders, with the prior approval of the Pool Insurer, if
any, to enter into a substitution of liability agreement with such person,
pursuant to which the original Obligor is released from liability and such
person is substituted as Obligor and becomes liable under the Contract. Where
authorized by the Contract, the APR may be increased, upon assumption, to the
then-prevailing market rate, but shall not be decreased.
Under the Servicing Agreement or the applicable Agreement, the Master
Servicer will repossess or otherwise comparably convert the ownership of
properties securing such of the related Manufactured Homes 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 Servicer or Master Servicer will follow such practices and
procedures as it shall deem necessary or advisable and as shall be normal and
usual in its general Contract servicing activities. The Servicer or Master
Servicer, 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.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
Under the applicable Agreement for a Series of Securities, the
Depositor or the person or entity specified in the related Prospectus Supplement
and any Master Servicer will be entitled to receive an amount described in such
Prospectus Supplement. As compensation for its servicing duties, a Servicer will
be entitled to receive a monthly servicing fee in the amount specified in the
related Servicing Agreement. Such servicing compensation shall be payable by
withdrawal from the related Servicing Account prior to deposit in the
Certificate Account. Each Servicer (with respect to the Mortgage Loans or
Contracts serviced by it) and the Master Servicer will be entitled to servicing
compensation out of Insurance Proceeds, Liquidation Proceeds, or Letter of
Credit payments. Additional servicing compensation in the form of prepayment
charges, assumption fees, late payment charges or otherwise shall be retained by
the Servicers and the Master Servicer to the extent not required to be deposited
in the Certificate Account.
The Servicers and the Master Servicer, unless otherwise specified in
the related Prospectus Supplement, will pay from their servicing compensation
certain expenses incurred in connection with the servicing of the Mortgage Loans
or Contracts, including, without limitation, payment of the Insurance Policy
premiums and, in the case of the Master Servicer, fees or other amounts payable
for any Alternative Credit Support, payment of the fees and disbursements of the
Trustee (and any custodian selected by the Trustee), the Note Register, the
Certificate Register and independent accountants and payment of expenses
incurred in enforcing the obligations of Servicers and Unaffiliated Sellers.
Certain of these expenses may be reimbursable by the Depositor pursuant to the
terms of the applicable Agreement. In addition, the Master Servicer will be
entitled to reimbursement of expenses incurred in enforcing the obligations of
Servicers and Unaffiliated Sellers under certain limited circumstances.
As set forth in the preceding section, the Servicers and the Master
Servicer will be entitled to reimbursement for certain expenses incurred by them
in connection with the liquidation of defaulted Mortgage Loans or Contracts. The
related Trust Fund will suffer no loss by reason of such expenses to the extent
claims are fully paid under the Letter of Credit, if any, the related insurance
policies, from amounts in
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the Reserve Fund or under any applicable Alternative Credit Support described in
a Prospectus Supplement. In the event, however, that claims are either not made
or fully paid under such Letter of Credit, Insurance Policies or Alternative
Credit Support, or if coverage thereunder has ceased, or if amounts in the
Reserve Fund are not sufficient to fully pay such losses, the related Trust Fund
will suffer a loss to the extent that the proceeds of the liquidation
proceedings, after reimbursement of the expenses of the Servicers or the Master
Servicer, as the case may be, are less than the principal balance of the related
Mortgage Loan or Contract. In addition, the Servicers and the Master Servicer
will be entitled to reimbursement of expenditures incurred by them in connection
with the restoration of a Mortgaged Property, Cooperative Dwelling or
Manufactured Home, such right of reimbursement being prior to the rights of the
Securityholders to receive any payments under the Letter of Credit, or from any
related Insurance Proceeds, Liquidation Proceeds, amounts in the Reserve Fund or
any proceeds of Alternative Credit Support.
Under the Trust Agreement, the Trustee will be entitled to deduct, from
distributions of interest with respect to the Mortgage Certificates, a specified
percentage of the unpaid principal balance of each Mortgage Certificate as
servicing compensation. The Trustee shall be required to pay all expenses,
except as expressly provided in the Trust Agreement, subject to limited
reimbursement as provided therein.
EVIDENCE AS TO COMPLIANCE
The Master Servicer will deliver to the Depositor and the Trustee, on
or before the date specified in the applicable Agreement or Servicing Agreement,
an Officer's Certificate stating that (i) a review of the activities of the
Master Servicer and the Servicers during the preceding calendar year and of its
performance under such Agreement or Servicing Agreement has been made under the
supervision of such officer, and (ii) to the best of such officer's knowledge,
based on such review, the Master Servicer and each Servicer has fulfilled all
its obligations under such Agreement or Servicing Agreement and the applicable
Servicing Agreement throughout such year, or, if there has been a default in the
fulfillment of any such obligation, specifying each such default known to such
officer and the nature and status thereof. Such Officer's Certificate shall be
accompanied by a statement of a firm of independent public accountants to the
effect that, on the basis of an examination of certain documents and records
relating to servicing of the Mortgage Loans or Contract, conducted in accordance
with generally accepted accounting principles in the mortgage banking industry,
the servicing of the Mortgage Loans or Contract was conducted in compliance with
the provisions of the Agreement and/or the Servicing Agreements, except for such
exceptions as such firm believes it is required to report.
CERTAIN MATTERS REGARDING THE MASTER SERVICER, THE DEPOSITOR AND THE TRUSTEE AND
THE INDENTURE TRUSTEE
The Master Servicer under each Agreement will be named in the
applicable Prospectus Supplement. The entity acting as Master Servicer may be an
Unaffiliated Seller and have other normal business relationships with the
Depositor and/or affiliates of the Depositor and may be an affiliate of the
Depositor. In the event there is no Master Servicer under an Agreement, all
servicing of Mortgage Loans or Contracts will be performed by a Servicer
pursuant to a Servicing Agreement.
The Master Servicer may not resign from its obligations and duties
under the applicable Agreement except upon a determination that its duties
thereunder are no longer permissible under applicable law. No such resignation
will become effective until the Trustee or a successor servicer has assumed the
Master Servicer's obligations and duties under such Agreement.
The Trustee under each Pooling and Servicing Agreement or Trust
Agreement will be named in the applicable Prospectus Supplement. The commercial
bank or trust company serving as Trustee may have
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normal banking relationships with the Depositor and/or its affiliates and with
the Master Servicer and/or its affiliates.
The Trustee may resign from its obligations under the Pooling and
Servicing Agreement at any time, in which event a successor trustee will be
appointed. In addition, the Depositor may remove the Trustee if the Trustee
ceases to be eligible to act as Trustee under the Pooling and Servicing
Agreement or if the Trustee becomes insolvent, at which time the Depositor will
become obligated to appoint a successor Trustee. The Trustee may also be removed
at any time by the holders of Certificates evidencing voting rights aggregating
not less than 50% of the voting rights evidenced by the Certificates of such
Series. Any resignation and removal of the Trustee, and the appointment of a
successor trustee, will not become effective until acceptance of such
appointment by the successor Trustee.
The Trustee may resign at any time from its obligations and duties
under the Trust Agreement by executing an instrument in writing resigning as
Trustee, filing the same with the Depositor, mailing a copy of a notice of
resignation to all Certificateholders then of record, and appointing a qualified
successor trustee. No such resignation will become effective until the successor
trustee has assumed the Trustee's obligations and duties under the Trust
Agreement.
The Indenture Trustee under the Indenture will be named in the
applicable Prospectus Supplement. The commercial bank or trust company serving
as Indenture Trustee may have normal banking relationships with the Depositor
and/or its affiliates and with the Master Servicer and/or its affiliates.
The Indenture Trustee may resign from its obligations under the
Indenture at any time, in which event a successor trustee will be appointed. In
addition, the Depositor may remove the Indenture Trustee if the Indenture
Trustee ceases to be eligible to act as Indenture Trustee under the Indenture or
if the Indenture Trustee becomes insolvent, at which time the Depositor will
become obligated to appoint a successor Indenture Trustee. Unless otherwise
specified in the related Prospectus Supplement, the Indenture Trustee may also
be removed at any time by the holders of Notes evidencing voting rights
aggregating not less than 50% of the voting rights evidenced by the Notes of
such Series. Any resignation and removal of the Trustee, and the appointment of
a successor trustee, will not become effective until acceptance of such
appointment by the successor Trustee.
Each Pooling and Servicing Agreement and Trust Agreement will also
provide that neither the Depositor nor any director, officer, employee or agent
of the Depositor or the Trustee, or any responsible officers of the Trustee will
be under any liability to the Certificateholders, for the taking of any action
or for refraining from the taking of any action in good faith pursuant to the
Pooling and Servicing Agreement, or for errors in judgment; provided, however,
that none of the Depositor or the Trustee nor any such person will be protected
against, in the case of the Depositor, any breach of representations or
warranties made by them, and in the case of the Depositor and the Trustee,
against any liability that would otherwise be imposed by reason of willful
misfeasance, bad faith or negligence in the performance of its duties or by
reason of reckless disregard of its obligations and duties thereunder. Each
Pooling and Servicing Agreement and Trust Agreement will further provide that
the Depositor and the Trustee and any director, officer and employee or agent of
the Depositor or the Trustee shall be entitled to indemnification, by the Trust
Fund in the case of the Depositor and by the Master Servicer in the case of the
Trustee and will be held harmless against any loss, liability or expense
incurred in connection with any legal action relating to the applicable
Agreement or the Certificates and in the case of the Trustee, resulting from any
error in any tax or information return prepared by the Master Servicer or from
the exercise of any power of attorney granted pursuant to the Pooling and
Servicing Agreement, other than any loss, liability or expense related to any
specific Mortgage Loan, Contract or Mortgage Certificate (except any such loss,
liability or expense otherwise reimbursable pursuant to the applicable
Agreement) and any loss, liability or expense incurred by reason of willful
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misfeasance, bad faith or negligence in the performance of their duties
thereunder or by reason of reckless disregard of their obligations and duties
thereunder. In addition, each Agreement will provide that neither the Depositor
nor the Master Servicer, as the case may be, will be under any obligation to
appear in, prosecute or defend any legal action that is not incidental to its
duties under the Agreement and that in its opinion may involve it in any expense
or liability. The Depositor or the Master Servicer may, however, in their
discretion, undertake any such action deemed by them necessary or desirable with
respect to the applicable Agreement and the rights and duties of the parties
thereto and the interests of the Securityholders 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 Master
Servicer or the Depositor, as the case may be, will be entitled to be reimbursed
therefor out of the Certificate Account.
DEFICIENCY EVENT
To the extent a deficiency event is specified in the Prospectus
Supplement, a deficiency event (a "Deficiency Event") with respect to the
Securities of each Series may be defined in the applicable Agreement as being
the inability of the Trustee to distribute to holders of one or more Classes of
Securities of such Series, in accordance with the terms thereof and the
Agreement, any distribution of principal or interest thereon when and as
distributable, in each case because of the insufficiency for such purpose of the
funds then held in the related Trust Fund.
Except as otherwise provided in the related Prospectus Supplement, to
the extent a deficiency event is specified in such Prospectus Supplement, upon
the occurrence of a Deficiency Event, the Trustee is required to determine
whether or not the application on a monthly basis (regardless of the frequency
of regular Distribution Dates) of all future scheduled payments on the Mortgage
Loans, Contracts and Mortgage Certificates included in the related Trust Fund
and other amount receivable with respect to such Trust Fund towards payments on
such Securities in accordance with the priorities as to distributions of
principal and interest set forth in such Securities will be sufficient to make
distributions of interest at the applicable Interest Rates and to distribute in
full the principal balance of each such Security on or before the latest Final
Distribution Date of any outstanding Securities of such Series.
Except as otherwise provided in the related Prospectus Supplement, to
the extent a deficiency event is specified in such Prospectus Supplement, the
Trustee will obtain and rely upon an opinion or report of a firm of independent
accountants of recognized national reputation as to the sufficiency of the
amounts receivable with respect to such Trust Fund to make such distributions on
the Securities, which opinion or report will be conclusive evidence as to such
sufficiency. Pending the making of any such determination, distributions on the
Securities shall continue to be made in accordance with their terms.
Except as otherwise provided in the related Prospectus Supplement, to
the extent a deficiency event is specified in such Prospectus Supplement, in the
event that the Trustee makes a positive determination, the Trustee will apply
all amounts received in respect of the related Trust Fund (after payment of fees
and expenses of the Trustee and accountants for the Trust Fund) to distributions
on the Securities of such Series in accordance with their terms, except that
such distributions shall be made on each Distribution Date or such other more
frequent dates specified in the related Prospectus Supplement and without regard
to the amount of principal that would otherwise be distributable on the related
Distribution Date. Under certain circumstances following such positive
determination, the Trustee may resume making distributions on such Securities
expressly in accordance with their terms.
Except as otherwise provided in the related Prospectus Supplement, to
the extent a deficiency event is specified in such Prospectus Supplement, if the
Trustee is unable to make the positive determination described above, the
applicable Trustee will apply all amounts received in respect of the related
Trust Fund
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(after payment of Trustee and accountants' fees and expenses) to monthly
distributions on Securities of such Series or on all Senior Securities of such
Series pro rata, without regard to the priorities as to distribution of
principal set forth in such Securities, and such Securities will, to the extent
permitted by applicable law and specified in the related Prospectus Statement,
accrue interest at the highest Interest Rate borne by any Security or Securities
with the same credit rating by the Rating Agencies of such Series, or in the
event any Class of such Series shall accrue interest at a floating rate, at the
weighted average Interest Rate, calculated on the basis of the maximum interest
rate applicable to the Class having such floating interest rate and on the
original principal amount of the Securities of that Class. In such event, the
holders of a majority in outstanding principal balance of such Securities may
direct the Trustee to sell the related Trust Fund, any such direction being
irrevocable and binding upon the holders of all Securities of such Series and
upon the owners of the residual interests in such Trust Fund. In the absence of
such a direction, the Trustee may not sell all or any portion of such Trust
Fund.
EVENTS OF DEFAULT
Except as otherwise provided in the related Prospectus Supplement,
Events of Default under the related Pooling and Servicing Agreement or Sale and
Servicing will consist of: (i) any failure to make a specified payment which
continues unremedied, in most cases, for five business days after the giving of
written notice; (ii) any failure by the Trustee, the Servicer or the Master
Servicer, as applicable, duly to observe or perform in any material respect any
other of its covenants or agreements in the applicable Agreement which failure
shall continue for the number of days specified in the related Prospectus
Supplement or any breach of any representation and warranty made by the Master
Servicer or the Servicer, if applicable, which continues unremedied for the
number of days specified in the related Prospectus Supplement after the giving
of written notice of such failure or breach; (iii) certain events of insolvency,
readjustment of debt, marshalling of assets and liabilities or similar
proceedings regarding the Master Servicer or a Servicer, as applicable; and (iv)
any lowering, withdrawal or notice of an intended or potential lowering, of the
outstanding rating of the Securities by the Rating Agency rating such Securities
because the existing or prospective financial condition or mortgage loan
servicing capability of the Master Servicer is insufficient to maintain such
rating.
Unless otherwise specified in the related Prospectus Supplement, Events
of Default under the Indenture for each Series of Notes include: (i) a default
of five days or more in the payment of any principal of or interest on any Note
of such Series; (ii) failure to perform any other covenant of the Depositor or
the Trust Fund in the Indenture which continues for a period of thirty days
after notice thereof is given in accordance with the procedures described in the
related Prospectus Supplement; (iii) any representation or warranty made by the
Depositor or the Trust Fund in the Indenture or in any certificate or other
writing delivered pursuant thereto or in connection therewith with respect to or
affecting such Series having been incorrect in a material respect as of the time
made, and such breach is not cured within thirty days after notice thereof is
given in accordance with the procedures described in the related Prospectus
Supplement; (iv) certain events of bankruptcy, insolvency, receivership or
liquidation of the Depositor or the Trust Fund; or (v) any other Event of
Default provided with respect to Notes of that Series.
RIGHTS UPON EVENT OF DEFAULT
If an Event of Default with respect to the Notes of any Series at the
time outstanding occurs and is continuing, either the Indenture Trustee or the
Noteholders of a majority of the then aggregate outstanding amount of the Notes
of such Series may declare the principal amount of all the Notes of such Series
to be due and payable immediately. Such declaration may, under certain
circumstances, be rescinded and annulled by the Noteholders of a majority in
aggregate outstanding amount of the Notes of such Series.
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If, following an Event of Default with respect to any Series of Notes,
the Notes of such Series have been declared to be due and payable, the Indenture
Trustee may, in its discretion, notwithstanding such acceleration, elect to
maintain possession of the collateral securing the Notes of such Series and to
continue to apply distributions on such collateral as if there had been no
declaration of acceleration if such collateral continues to provide sufficient
funds for the payment of principal of and interest on the Notes of such Series
as they would have become due if there had not been such a declaration. In
addition, the Indenture Trustee may not sell or otherwise liquidate the
collateral securing the Notes of a Series following an Event of Default other
than a default in the payment of any principal of or interest on any Note of
such Series for thirty days or more, unless (a) the Noteholders of 100% of the
then aggregate outstanding amount of the Notes of such Series consent to such
sale, (b) the proceeds of such sale or liquidation are sufficient to pay in full
the principal of and accrued interest due and unpaid on the outstanding Notes of
such Series at the date of such sale or (c) the Indenture Trustee determines
that such collateral would not be sufficient on an ongoing basis to make all
payments on such Notes as such payments would have become due if such Notes had
not been declared due and payable, and the Indenture Trustee obtains the consent
of the Holders of 66 2/3% of the then aggregate outstanding amount of the Notes
of such Series.
In the event that the Indenture Trustee liquidates the collateral in
connection with an Event of Default involving a default for thirty days or more
in the payment of principal of or interest on the Notes of a Series, the
Indenture provides that the Indenture Trustee will have a prior lien on the
proceeds of any such liquidation for unpaid fees and expenses. As a result, upon
the occurrence of such an Event of Default, the amount available for
distribution to the Noteholders may be less than would otherwise be the case.
However, the Indenture Trustee may not institute a proceeding for the
enforcement of its lien except in connection with a proceeding for the
enforcement of the lien of the Indenture for the benefit of the Noteholders
after the occurrence of such an Event of Default.
Unless otherwise specified in the related Prospectus Supplement, in the
event the principal of the Notes of a Series is declared due and payable, as
described above, the Noteholders of any such Notes issued at a discount from par
may be entitled to receive no more than an amount equal to the unpaid principal
amount thereof less the amount of such discount which is unamortized.
Except as otherwise provided in the related Prospectus Supplement, so
long as an Event of Default with respect to a Series of Securities remains
unremedied, the Depositor, the Trustee or the holders of Notes of such Series
(or, if no Notes are issued as part of such Series, Certificate) evidencing not
less than 25% of the principal amount of such Securities of such Series may
terminate all of the rights and obligations of the Master Servicer under the
applicable Agreement and/or Servicing Agreement and in and to the Mortgage Loans
and Contracts and the proceeds thereof, whereupon (subject to applicable law
regarding the Trustee's ability to make advances) the Trustee or, if the
Depositor so notifies the Trustee and the Master Servicer, the Depositor or its
designee, will succeed to all the responsibilities, duties and liabilities of
the Master Servicer under such Agreement and will be entitled to similar
compensation arrangements. In the event that the Trustee would be obligated to
succeed the Master Servicer but is unwilling or unable so to act, it may
appoint, or petition to a court of competent jurisdiction for the appointment
of, a successor master servicer. Pending such appointment, the Trustee (unless
prohibited by law from so acting) shall be obligated to act in such capacity.
The Trustee and such successor master servicer may agree upon the servicing
compensation to be paid to such successor, which in no event may be greater than
the compensation to the Master Servicer under the applicable Agreement.
AMENDMENT
Except as otherwise provided in the related Prospectus Supplement, the
Pooling and Servicing Agreement or Sale and Servicing Agreement, as applicable,
for each Series of Securities may be amended
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by the Depositor, the Master Servicer and the Trustee, without the consent of
the Securityholders, (i) to cure any ambiguity, (ii) to correct or supplement
any provision therein that may be inconsistent with any other provision therein
or (iii) to make any other provisions with respect to matters or questions
arising under such Agreement that are not inconsistent with the provisions
thereof, provided that such action will not adversely affect in any material
respect the interests of any Securityholder of the related Series. Except as
otherwise provided in the related Prospectus Supplement, the Pooling and
Servicing Agreement or Sale and Servicing Agreement, as applicable, for each
Series of Securities may also be amended by the Depositor, the Master Servicer
and the Trustee with the consent of holders of Securities evidencing not less
than 66 2/3% of the aggregate outstanding principal amount of the Securities of
such Series, 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 the Securityholders; provided, however, that no such
amendment may (i) reduce in any manner the amount of, delay the timing of or
change the manner in which payments received on or with respect to Mortgage
Loans and Contracts are required to be distributed with respect to any Security
without the consent of the holder of such Security, (ii) adversely affect in any
material respect the interests of the holders of a Class or Subclass of the
Senior Securities, if any, of a Series in a manner other than that set forth in
(i) above without the consent of the holders of the Senior Securities of such
Subclass evidencing not less than 66 2/3% of such Class or Subclass, (iii)
adversely affect in any material respect the interests of the holders of the
Subordinated Securities of a Series in a manner other than that set forth in (i)
above without the consent of the holders of Subordinated Securities evidencing
not less than 66 2/3% of such Class or Subclass or (iv) reduce the aforesaid
percentage of the Securities, the holders of which are required to consent to
such amendment, without the consent of the holders of the Class affected
thereby.
The Trust Agreement for a Series may be amended by the Trustee and the
Depositor without Certificateholder consent, to cure any ambiguity, to correct
or supplement any provision therein that may be inconsistent with any other
provision therein, or to make any other provisions with respect to matters or
questions arising thereunder that are not inconsistent with any other provisions
thereof, provided that such action will not, as evidenced by an opinion of
counsel, adversely affect the interests of any Certificateholders of that Series
in any material respect. The Trust Agreement for each Series may also be amended
by the Trustee and the Depositor with the consent of the Holders of Securities
evidencing Percentage Interests aggregating not less than 66 2/3% of each Class
of the Securities of such Series affected thereby for the purpose of adding any
provisions to or changing in any manner or eliminating any of the provisions of
such Agreement or 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, or change the manner in which
payments received on Mortgage Certificates are required to be distributed in
respect of any Certificate, without the consent of the Holder of such
Certificate or (ii) reduce the aforesaid percentage of Securities the Holders of
which are required to consent to any such amendment, without the consent of the
Holders of all Securities of such Series then outstanding.
TERMINATION
Except as otherwise provided in the related Prospectus Supplement, the
obligations created by the Pooling and Servicing Agreement or Sale and Servicing
Agreement, as applicable, for a Series of Securities will terminate upon the
earlier of (a) the repurchase of all Mortgage Loans or Contracts and all
property acquired by foreclosure of any such Mortgage Loan or Contract and (b)
the later of (i) the maturity or other liquidation of the last Mortgage Loan or
Contract subject thereto and the disposition of all property acquired upon
foreclosure of any such Mortgage Loan or Contract and (ii) the payment to the
Securityholders of all amounts held by the Master Servicer and required to be
paid to them pursuant to the applicable Agreement. The obligations created by
the Trust Agreement for a Series of Certificates will terminate upon the
distribution to Certificateholders of all amounts required to be distributed to
them pursuant to such Trust
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Agreement. In no event, however, will the Trust created by either such Agreement
continue beyond the expiration of 21 years from the death of the last survivor
of certain persons identified therein. For each Series of Securities, the Master
Servicer will give written notice of termination of the applicable Agreement of
each Securityholder, and the final distribution will be made only upon surrender
and cancellation of the Securities at an office or agency specified in the
notice of termination.
If so provided in the related Prospectus Supplement, the Pooling and
Servicing Agreement or Sale and Servicing Agreement for each Series of
Securities will permit, but not require, the Depositor or such other person as
may be specified in the Prospectus Supplement to repurchase from the Trust Fund
for such Series all remaining Mortgage Loans or Contracts subject to the
applicable Agreement at a price specified in such Prospectus Supplement. In the
event that the Depositor elects to treat the related Trust Fund as a REMIC under
the Code, any such repurchase will be effected in compliance with the
requirements of Section 860F(a)(4) of the Code, in order to constitute a
"qualifying liquidation" thereunder. The exercise of any such right will effect
early retirement of the Securities of that Series, but the right so to
repurchase may be effected only on or after the aggregate principal balance of
the Mortgage Loans or Contracts for such Series at the time of repurchase is
less than a specified percentage of the aggregate principal balance at the
Cut-off Date for the Series, or on or after the date set forth in the related
Prospectus Supplement.
The Indenture will be discharged with respect to a Series of Notes
(except with respect to certain continuing rights specified in the Indenture)
upon the delivery to the Indenture Trustee for cancellation of all the Notes of
such Series or, with certain limitations, upon deposit with the Indenture
Trustee of funds sufficient for the payment in full of all the Notes of such
Series.
CREDIT SUPPORT
Credit support for a Series of Securities may be provided by one or
more Letters of Credit, the issuance of Subordinated Classes or Subclasses of
Securities (which may, if so specified in the related Prospectus Supplement, be
issued in notional amounts), the issuance of subordinated Classes or Subclasses
of Notes, the provision for shifting interest credit enhancement, the
establishment of a Reserve Fund, the method of Alternative Credit Support
specified in the applicable Prospectus Supplement, or any combination of the
foregoing, in addition to, or in lieu of, the insurance arrangements set forth
below under "Description of Insurance." The amount and method of credit support
will be set forth in the Prospectus Supplement with respect to a Series of
Securities.
LETTERS OF CREDIT
The Letters of Credit, if any, with respect to a Series of Securities
will be issued by the bank or financial institution specified in the related
Prospectus Supplement (the "L/C Bank"). The maximum obligation of the L/C Bank
under the Letter of Credit will be to honor requests for payment thereunder in
an aggregate fixed dollar amount, net of unreimbursed payments thereunder, equal
to the percentage of the aggregate principal balance on the related Cut-off Date
of the Mortgage Loans or Contracts evidenced by each Series (the "L/C
Percentage") specified in the Prospectus Supplement for such Series. The
duration of coverage and the amount and frequency of any reduction in coverage
provided by the Letter of Credit with respect to a Series of Securities will be
in compliance with the requirements established by the Rating Agency rating such
Series and will be set forth in the Prospectus Supplement relating to such
Series of Securities. The amount available under the Letter of Credit in all
cases shall be reduced to the extent of the unreimbursed payments thereunder.
The obligations of the L/C Bank under the Letter of Credit for each Series of
Securities will expire a specified number of days after the latest of the
scheduled final maturity dates of the Mortgage Loans or Contracts in the related
Mortgage Pool or Contract Pool or the repurchase of
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all Mortgage Loans or Contracts in the Mortgage Pool or Contract Pool in the
circumstances specified above. See "Description of the Securities --
Termination."
Unless otherwise specified in the applicable Prospectus Supplement,
under the applicable Agreement and/or Servicing Agreement, the Master Servicer
will be required not later than three business days prior to each Distribution
Date to determine whether a payment under the Letter of Credit will be necessary
on the Distribution Date and will, no later than the third business day prior to
such Distribution Date, advise the L/C Bank and the Trustee of its
determination, setting forth the amount of any required payment. On the
Distribution Date, the L/C Bank will be required to honor the Trustee's request
for payment thereunder in an amount equal to the lesser of (A) the remaining
amount available under the Letter of Credit and (B) the outstanding principal
balances of any Liquidating Loans to be assigned on such Distribution Date
(together with accrued and unpaid interest thereon at the related Mortgage Rate
or APR to the related Due Date). The proceeds of such payments under the Letter
of Credit will be deposited into the Certificate Account and will be distributed
to Securityholders, in the manner specified in the related Prospectus
Supplement, on such Distribution Date, except to the extent of any unreimbursed
Advances, servicing compensation due to the Servicers and the Master Servicer
and other amounts payable to the Depositor or the person or entity named in the
applicable Prospectus Supplement therefrom.
If at any time the L/C Bank makes a payment in the amount of the full
outstanding principal balance and accrued interest on a Liquidating Loan, it
will be entitled to receive an assignment by the Trustee of such Liquidating
Loan, and the L/C Bank will thereafter own such Liquidating Loan free of any
further obligation to the Trustee or the Securityholders with respect thereto.
Payments made to the Certificate Account by the L/C Bank under the Letter of
Credit with respect to such a Liquidating Loan will be reimbursed to the L/C
Bank only from the proceeds (net of liquidation costs) of such Liquidating Loan.
The amount available under the Letter of Credit will be increased to the extent
it is reimbursed for such payments.
To the extent the proceeds of liquidation of a Liquidating Loan
acquired by the L/C Bank in the manner described in the preceding paragraph
exceed the amount of payments made with respect thereto, the L/C Bank will be
entitled to retain such proceeds as additional compensation for issuance of the
Letter of Credit.
Prospective purchasers of Securities of a Series with respect to which
credit support is provided by a Letter of Credit must look to the credit of the
L/C Bank, to the extent of its obligations under the Letter of Credit, in the
event of default by Mortgagors or Obligors. If the amount available under the
Letter of Credit is exhausted, or the L/C Bank becomes insolvent, and amounts in
the Reserve Fund, if any, with respect to such Series are insufficient to pay
the entire amount of the loss and still be maintained at the level specified in
the related Prospectus Supplement (the "Required Reserve"), the Securityholders
(in the priority specified in the related Prospectus Supplement) will thereafter
bear all risks of loss resulting from default by Mortgagors or Obligors
(including losses not covered by insurance or Alternative Credit Support), and
must look primarily to the value of the properties securing defaulted Mortgage
Loans or Contracts for recovery of the outstanding principal and unpaid
interest.
In the event that a Subordinated Class or Subclass of a Series of
Securities is issued with a notional amount, the coverage provided by the Letter
of Credit with respect to such Series, and the terms and conditions of such
coverage, will be set forth in the related Prospectus Supplement.
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SUBORDINATED SECURITIES
To the extent specified in the Prospectus Supplement with respect to a
Series of Securities, credit support may be provided by the subordination of the
rights of the holders of one or more Classes or Subclasses of Securities to
receive distributions with respect to the Mortgage Loans or Mortgage
Certificates in the Mortgage Pool or Contracts in the Contract Pool underlying
such Series, or with respect to a Subordinated Pool of mortgage loans or
contracts, to the rights of the Senior Securityholders or holders of one or more
Classes or Subclasses of Subordinated Securities of such Series to receive such
distributions, to the extent of the applicable Subordinated Amount or as
otherwise specified in the related Prospectus Supplement. In such a case, credit
support may also be provided by the establishment of a Reserve Fund, as
described below. Except as otherwise provided in the related Prospectus
Supplement, the Subordinated Amount, as described below, will be reduced by an
amount equal to Aggregate Losses. Aggregate Losses will be defined in the
related Agreement for any given period as the aggregate amount of delinquencies,
losses and other deficiencies in the amounts due to the holders of the
Securities of one or more Classes or Subclasses of such Series paid or borne by
the holders of one or more Classes or Subclasses of Subordinated Securities of
such Series ("payment deficiencies"), but excluding any payments of interest on
any amounts originally due to the holders of the Securities of a Class or
Subclass to which the applicable Class or Subclass of Subordinated Securities
are subordinated on a previous Distribution Date, but not paid as due, whether
by way of withdrawal from the Reserve Fund (including, prior to the time that
the Subordinated Amount is reduced to zero, any such withdrawal of amounts
attributable to the Initial Deposit, if any), reduction in amounts otherwise
distributable to the Subordinated Securityholders on any Distribution Date or
otherwise, less the aggregate amount of previous payment deficiencies recovered
by the related Trust Fund during such period in respect of the Mortgage Loans or
Contracts giving rise to such previous payment deficiencies, including, without
limitation, such recoveries resulting from the receipt of delinquent principal
and/or interest payments, Liquidation Proceeds or Insurance Proceeds (net, in
each case, of servicing compensation, foreclosure costs and other servicing
costs, expenses and unreimbursed Advances relating to such Mortgage Loans or
Contracts). The Prospectus Supplement for each Series of Securities with respect
to which credit support will be provided by one or more Classes or Subclasses of
Subordinated Securities will set forth the Subordinated Amount for such Series
and/or the manner by which one or more Classes or Subclasses of Securities may
be subordinated to other Classes or Subclasses or Securities. If specified in
the related Prospectus Supplement, the Subordinated Amount will decline over
time in accordance with a schedule which will also be set forth in the related
Prospectus Supplement.
In addition, if so specified in the related Prospectus Supplement, if a
Series of Securities includes Notes, one more Classes or Subclasses of Notes may
be subordinated to another Class or Subclasses of Notes and may be entitled to
receive disproportionate amounts of distributions in respect of principal and
all the Certificates of such Series will be subordinated to all the Notes.
SHIFTING INTEREST
If specified in the Prospectus Supplement for a Series of Securities
for which credit enhancement is provided by shifting interest as described
herein, the rights of the holders of the Subordinated Securities of a Series to
receive distributions with respect to the Mortgage Loans, Mortgage Certificates
or Contracts in the related Trust Fund or Subsidiary Trust will be subordinated
to such right of the holders of the Senior Securities of the same Series to the
extent described in such Prospectus Supplement. This subordination feature is
intended to enhance the likelihood of regular receipt by holders of Senior
Securities of the full amount of scheduled monthly payments of principal and
interest due them and to provide limited protection to the holders of the Senior
Securities against losses due to mortgagor defaults.
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The protection afforded to the holders of Senior Securities of a Series
by the shifting interest subordination feature will be effected by distributing
to the holders of the Senior Securities a disproportionately greater percentage
(the "Senior Prepayment Percentage") of Principal Prepayments. The initial
Senior Prepayment Percentage will be the percentage specified in the related
Prospectus Supplement and will decrease in accordance with the schedule and
subject to the conditions set forth in the Prospectus Supplement. This
disproportionate distribution of Principal Prepayments will have the effect of
accelerating the amortization of the Senior Securities while increasing the
respective interest of the Subordinated Securities in the Mortgage Pool or
Contract Pool. Increasing the respective interest of the Subordinated Securities
relative to that of the Senior Securities is intended to preserve the
availability of the benefits of the subordination provided by the Subordinated
Securities.
SWAP AGREEMENT
If so specified in the Prospectus Supplement relating to a Series of
Securities, the related Trust will enter into or obtain an assignment of a swap
agreement or other similar agreement pursuant to which the trust will have the
right to receive certain payments of interest (or other payments) as set forth
or determined as described therein. The Prospectus Supplement relating to a
Series of Securities having the benefit of an interest rate or currency rate
swap, cap or floor agreement will describe the material terms of such agreement
and the particular risks associated with the interest rate swap feature,
including market and credit risk, the effect of counterparty defaults and other
risks, if any, addressed by the rating. The Prospectus Supplement relating to
such Series of Securities also will set forth certain information relating to
the corporate status, ownership and credit quality of the counterparty or
counterparties to such swap agreement in accordance with applicable rules and
regulations of the Commission.
RESERVE FUND
If so specified in the related Prospectus Supplement, credit support
with respect to one or more Classes or Subclasses of Securities of a Series may
be provided by the establishment and maintenance with the Trustee for such
Series of Securities, in trust, of a Reserve Fund for such Series. Unless
otherwise specified in the applicable Prospectus Supplement, the Reserve Fund
for a Series will not be included in the Trust Fund for such Series. The Reserve
Fund for each Series will be created by the Depositor and shall be funded by the
retention by the Master Servicer of certain payments on the Mortgage Loans or
Contracts, by the deposit with the Trustee, in escrow, by the Depositor of a
Subordinated Pool of mortgage loans or Contracts with the aggregate principal
balance, as of the related Cut-off Date, set forth in the related Prospectus
Supplement, by any combination of the foregoing, or in another manner specified
in the related Prospectus Supplement. Except as otherwise provided in the
related Prospectus Supplement, following the initial issuance of the Securities
of a Series and until the balance of the Reserve Fund first equals or exceeds
the Required Reserve, the Master Servicer will retain specified distributions on
the related Mortgage Loans or Contracts and/or on the Contracts in the
Subordinated Pool otherwise distributable to the holders of the applicable Class
or Subclasses of Subordinated Securities and deposit such amounts in the Reserve
Fund. After the amounts in the Reserve Fund for a Series first equal or exceed
the applicable Required Reserve, the Master Servicer will retain such
distributions and deposit so much of such amounts in the Reserve Fund as may be
necessary, after the application of such distributions to amounts due and unpaid
on the Securities or on the Securities of such Series to which the applicable
Class or Subclass of Subordinated Securities are subordinated and the
reimbursement of unreimbursed Advances and liquidation expenses, to maintain the
Reserve Fund at the Required Reserve. Except as otherwise provided in the
related Prospectus Supplement, the balance in the Reserve Fund in excess of the
Required Reserve shall be paid to the applicable Class or Subclass of
Subordinated Securities, or to another specified person or entity, as set forth
in the related Prospectus Supplement, and shall be unavailable thereafter for
future distribution to Certificateholders of either Class. The Prospectus
Supplement for each Series will set forth the amount of the Required Reserve
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applicable from time to time. The Required Reserve may decline over time in
accordance with a schedule which will also be set forth in the related
Prospectus Supplement.
Except as otherwise provided in the related Prospectus Supplement,
amounts held in the Reserve Fund for a Series from time to time will continue to
be the property of the Subordinated Securityholders of the Classes or Subclasses
specified in the related Prospectus Supplement until withdrawn from the Reserve
Fund and transferred to the Certificate Account as described below. Except as
otherwise provided in the related Prospectus Supplement, if on any Distribution
Date the amount in the Certificate Account available to be applied to
distributions on the applicable Senior Securities of such Series, after giving
effect to any Advances made by the Servicers or the Master Servicer on such
Distribution Date, is less than the amount required to be distributed to such
Senior Securityholders (the "Required Distribution") on such Distribution Date,
the Master Servicer will withdraw from the Reserve Fund and deposit into the
Certificate Account the lesser of (i) the entire amount on deposit in the
Reserve Fund available for distribution to such Senior Securityholders (which
amount will not in any event exceed the Required Reserve) or (ii) the amount
necessary to increase the funds in the Certificate Account eligible for
distribution to the Senior Securityholders on such Distribution Date to the
Required Distribution; provided, however, that unless specified in the related
Prospectus Supplement no amount representing investment earnings on amounts held
in the Reserve Fund be transferred into the Certificate Account or otherwise
used in any manner for the benefit of the Senior Securityholders. If so
specified in the applicable Prospectus Supplement, the balance, if any, in the
Reserve Fund in excess of the Required Reserve shall be released to the
applicable Subordinated Securityholders. Unless otherwise specified in the
related Prospectus Supplement, whenever the Reserve Fund is less than the
Required Reserve, holders of the Subordinated Securities of the applicable Class
or Subclass will not receive any distributions with respect to the Mortgage
Loans, Mortgage Certificates or Contracts other than amounts attributable to
interest on the Mortgage Loans, Mortgage Certificates or Contracts after the
initial Required Reserve has been attained and amounts attributable to any
income resulting from investment of the Reserve Fund as described below. Except
as otherwise provided in the related Prospectus Supplement, whether or not the
amount of the Reserve Fund exceeds the Required Reserve on any Distribution
Date, the holders of the Subordinated Securities of the applicable Class or
Subclass are entitled to receive from the Certificate Account their share of the
proceeds of any Mortgage Loan, Mortgage Certificates or Contract, or any
property acquired in respect thereof, repurchased by reason of defective
documentation or the breach of a representation or warranty pursuant to the
Pooling and Servicing Agreement. Except as otherwise provided in the related
Prospectus Supplement, amounts in the Reserve Fund shall be applied in the
following order:
(i) to the reimbursement of Advances determined by the Master
Servicer and the Servicers to be otherwise unrecoverable, other than
Advances of interest in connection with prepayments in full,
repurchases and liquidations, and the reimbursement of liquidation
expenses incurred by the Servicers and the Master Servicer if
sufficient funds for such reimbursement are not otherwise available in
the related Servicing Accounts and Certificate Account;
(ii) to the payment to the holders of the applicable Senior
Securities of such Series of amounts distributable to them on the
related Distribution Date in respect of scheduled payments of principal
and interest due on the related Due Date to the extent that sufficient
funds in the Certificate Account are not available therefor; and
(iii) to the payment to the holders of the Senior Securities
of such Series of the principal balance or purchase price, as
applicable, of Mortgage Loans or Contracts repurchased, liquidated or
foreclosed during the period ending on the day prior to the Due Date to
which such distribution relates and interest thereon at the related
Mortgage Rate or APR, as applicable, to the extent that sufficient
funds in the Certificate Account are not available therefor.
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Except as otherwise provided in the related Prospectus Supplement,
amounts in the Reserve Fund in excess of the Required Reserve, including any
investment income on amounts therein, as set forth below, shall then be released
to the holders of the Subordinated Securities, or to such other person as is
specified in the applicable Prospectus Supplement, as set forth above.
Funds in the Reserve Fund for a Series shall be invested as provided in
the related Agreement and/or Indenture in certain types of eligible investments.
The earnings on such investments will be withdrawn and paid to the holders of
the applicable Class or Subclass of Subordinated Securities in accordance with
their respective interests in the Reserve Fund in the priority specified in the
related Prospectus Supplement. Unless otherwise specified in the related
Prospectus Supplement, investment income in the Reserve Fund is not available
for distribution to the holders of the Senior Securities of such Series or
otherwise subject to any claims or rights of the holders of the applicable Class
or Subclass of Senior Securities. Eligible investments for monies deposited in
the Reserve Fund will be specified in the applicable Agreement and/or Indenture
for a Series of Securities for which a Reserve Fund is established and in some
instances will be limited to investments acceptable to the Rating Agency rating
the Securities of such Series from time to time as being consistent with its
outstanding rating of such Securities. Such eligible investments will be
limited, however, to obligations or securities that mature at various time
periods up to 30 days according to a schedule in the applicable Agreement based
on the current balance of the Reserve Fund at the time of such investment or the
contractual commitment providing for such investment.
The time necessary for the Reserve Fund of a Series to reach and
maintain the applicable Required Reserve at any time after the initial issuance
of the Securities of such Series and the availability of amounts in the Reserve
Fund for distributions on such Securities will be affected by the delinquency,
foreclosure and prepayment experience of the Mortgage Loans or Contracts in the
related Trust Fund and/or in the Subordinated Pool and therefore cannot be
accurately predicted.
SECURITY GUARANTEE INSURANCE
If so specified in the related Prospectus Supplement, Security
Guarantee Insurance, if any, with respect to a Series of Securities may be
provided by one or more insurance companies. Such Security Guarantee Insurance
will guarantee, with respect to one or more Classes of Securities of the related
Series, timely distributions of interest and full distributions of principal on
the basis of a schedule of principal distributions set forth in or determined in
the manner specified in the related Prospectus Supplement. If so specified, in
the related Prospectus Supplement, the Security Guarantee Insurance will also
guarantee against any payment made to a Series of Securities which is
subsequently recovered as a "voidable preference" payment under the Bankruptcy
Code. A copy of the Security Guarantee Insurance for a Series, if any, will be
filed with the Commission as an exhibit to a Current Report on Form 8-K to be
filed with the Commission within 15 days of issuance of the Securities of the
related Series.
PERFORMANCE BOND
If so specified in the related Prospectus Supplement, the Master
Servicer may be required to obtain a Performance Bond that would provide a
guarantee of the performance by the Master Servicer of one or more of its
obligations under the applicable Agreement and/or Servicing Agreement, including
its obligation to make Advances and its obligation to repurchase Mortgage Loans
or Contracts in the event of a breach by the Master Servicer of a representation
or warranty contained in the applicable Agreement. In the event that the
outstanding credit rating of the obligor of the Performance Bond is lowered by
the Rating Agency, with the result that the outstanding rating on any Class or
Subclass of Securities would be reduced by such
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Rating Agency, the Master Servicer will be required to secure a substitute
Performance Bond issued by an entity with a rating sufficient to maintain the
outstanding rating on such Securities or to deposit and maintain with the
Trustee cash in the amount specified in the applicable Prospectus Supplement.
DESCRIPTION OF INSURANCE
To the extent that the applicable Prospectus Supplement does not
expressly provide for a form of credit support specified above or for
Alternative Credit Support in lieu of some or all of the insurance mentioned
below, the following paragraphs on insurance shall apply with respect to the
Mortgage Loans included in the related Trust Fund. To the extent specified in
the related Prospectus Supplement, each Manufactured Home that secures a
Contract will be covered by a standard hazard insurance policy and other
insurance policies to the extent described in the related Prospectus Supplement.
Any material changes in such insurance from the description that follows or the
description of any Alternative Credit Support will be set forth in the
applicable Prospectus Supplement.
PRIMARY MORTGAGE INSURANCE POLICIES
To the extent specified in the related Prospectus Supplement, each
Servicing Agreement will require the Servicer to cause a Primary Mortgage
Insurance Policy to be maintained in full force and effect with respect to each
Mortgage Loan that is secured by a Single Family Property covered by the
Servicing Agreement requiring such insurance and to act on behalf of the Insured
with respect to all actions required to be taken by the Insured under each such
Primary Mortgage Insurance Policy. Any primary mortgage insurance or primary
credit insurance policies relating to the Contracts underlying a Series of
Securities will be described in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, the
amount of a claim for benefits under a Primary Mortgage Insurance Policy
covering a Mortgage Loan in the related Mortgage Pool (herein referred to as the
"Loss") will consist of the insured portion of the unpaid principal amount of
the covered Mortgage Loan (as described herein) and accrued and unpaid interest
thereon and reimbursement of certain expenses, less (i) all rents or other
payments collected or received by the Insured (other than the proceeds of hazard
insurance) that are derived from or in any way related to such Mortgaged
Property, (ii) hazard insurance proceeds in excess of the amount required to
restore such Mortgaged Property and which have not been applied to the payment
of such Mortgage Loan, (iii) amounts expended but not approved by the Primary
Mortgage Insurer, (iv) claim payments previously made by the Primary Mortgage
Insurer, and (v) unpaid premiums.
Unless otherwise specified in the related Prospectus Supplement, as
conditions precedent to the filing of or payment of a claim under a Primary
Mortgage Insurance Policy covering a Mortgage Loan in the related Mortgage Pool,
the Insured will be required to, in the event of default by the Mortgagor: (i)
advance or discharge (A) all hazard insurance premiums and (B) as necessary and
approved in advance by the Primary Mortgage Insurer, (1) real estate property
taxes, (2) all expenses required to preserve, repair and prevent waste to the
Mortgaged Property so as to maintain such Mortgaged Property in at least as good
a condition as existed at the effective date of such Primary Mortgage Insurance
Policy, ordinary wear and tear excepted, (3) property sales expenses, (4) any
outstanding liens (as defined in such Primary Mortgage Insurance Policy) on the
Mortgaged Property and (5) foreclosure costs, including court costs and
reasonable attorneys' fees; (ii) in the event of a physical loss or damage to
the Mortgaged Property, have restored and repaired the Mortgaged Property to at
least as good a condition as existed at the effective date of such Primary
Mortgage Insurance Policy, ordinary wear and tear excepted; and (iii) tender to
the Primary Mortgage Insurer good and merchantable title to and possession of
the mortgaged property.
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Unless otherwise specified in the related Prospectus Supplement, other
provisions and conditions of each Primary Mortgage Insurance Policy covering a
Mortgage Loan in the related Mortgage Pool generally will provide that: (a) no
change may be made in the terms of such Mortgage Loan without the consent of the
Primary Mortgage Insurer; (b) written notice must be given to the Primary
Mortgage Insurer within 10 days after the Insured becomes aware that a Mortgagor
is delinquent in the payment of a sum equal to the aggregate of two scheduled
monthly payments due under such Mortgage Loan or that any proceedings affecting
the Mortgagor's interest in the Mortgaged Property securing such Mortgage Loan
have commenced, and thereafter the Insured must report monthly to the Primary
Mortgage Insurer the status of any such Mortgage Loan until such Mortgage Loan
is brought current, such proceedings are terminated or a claim is filed; (c) the
Primary Mortgage Insurer will have the right to purchase such Mortgage Loan, at
any time subsequent to the 10 days' notice described in (b) above and prior to
the commencement of foreclosure proceedings, at a price equal to the unpaid
principal amount of the Mortgage Loan, plus accrued and unpaid interest thereon
and reimbursable amounts expended by the Insured for the real estate taxes and
fire and extended coverage insurance on the Mortgaged Property for a period not
exceeding 12 months, and less the sum of any claim previously paid under the
Primary Mortgage Insurance Policy and any due and unpaid premiums with respect
to such policy; (d) the Insured must commence proceedings at certain times
specified in the Primary Mortgage Insurance Policy and diligently proceed to
obtain good and merchantable title to and possession of the Mortgaged Property;
(e) the Insured must notify the Primary Mortgage Insurer of the price specified
in (c) above at least 15 days prior to the sale of the Mortgaged Property by
foreclosure, and bid such amount unless the Mortgage Insurer specifies a lower
or higher amount; and (f) the Insured may accept a conveyance of the Mortgaged
Property in lieu of foreclosure with written approval of the Mortgage Insurer
provided the ability of the Insured to assign specified rights to the Primary
Mortgage Insurer are not thereby impaired or the specified rights of the Primary
Mortgage Insurer are not thereby adversely affected.
Unless otherwise specified in the related Prospectus Supplement, the
Primary Mortgage Insurer will be required to pay to the Insured either: (1) the
insured percentage of the Loss; or (2) at its option under certain of the
Primary Mortgage Insurance Policies, the sum of the delinquent monthly payments
plus any advances made by the Insured, both to the date of the claim payment,
and thereafter, monthly payments in the amount that would have become due under
the Mortgage Loan if it had not been discharged plus any advances made by the
Insured until the earlier of (A) the date the Mortgage Loan would have been
discharged in full if the default had not occurred or (B) an approved sale. Any
rents or other payments collected or received by the Insured which are derived
from or are in any way related to the Mortgaged Property will be deducted from
any claim payment.
FHA INSURANCE AND VA GUARANTEES
The FHA is responsible for administering various federal programs,
including mortgage insurance, authorized under the National Housing Act, as
amended, and the United States Housing Act of 1937, as amended. Any FHA
Insurance or VA Guarantees relating to Contracts underlying a Series of
Securities will be described in the related Prospectus Supplement.
The insurance premiums for FHA Loans are collected by HUD approved
lenders or by the Servicers of such FHA Loans and are paid to the FHA. The
regulations governing FHA single-family mortgage insurance programs provide that
insurance benefits are payable either upon foreclosure (or other acquisition of
possession) and conveyance of the mortgaged premises to HUD or upon assignment
of the defaulted FHA Loan to HUD. With respect to a defaulted FHA Loan, the
Servicer of such FHA Loan will be limited in its ability to initiate foreclosure
proceedings. When it is determined, either by the Servicer or HUD, that default
was caused by circumstances beyond the Mortgagor's control, the Servicer will be
expected to make an effort to avoid foreclosure by entering, if feasible, into
one of a number of available forms of forbearance plans with the Mortgagor. Such
plans may involve the reduction or suspension of scheduled mortgage
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payments for a specified period, with such payments to be made upon or before
the maturity date of the mortgage, or the recasting of payments due under the
mortgage up to or beyond the scheduled maturity date. In addition, when a
default caused by such circumstances is accompanied by certain other criteria,
HUD may provide relief by making payments to the Servicer of such Mortgage Loan
in partial or full satisfaction of amounts due thereunder (which payments are to
be repaid by the Mortgagor to HUD) or by accepting assignment of the Mortgage
Loan from the Servicer. With certain exceptions, at least three full monthly
installments must be due and unpaid under the Mortgage Loan, and HUD must have
rejected any request for relief from the Mortgagor before the Servicer may
initiate foreclosure proceedings.
HUD has the option, in most cases, to pay insurance claims in cash or
in debentures issued by HUD. Presently, claims are being paid in cash, and
claims have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debenture interest rate. The Servicer of each FHA Loan in a Mortgage Pool will
be obligated to purchase any such debenture issued in satisfaction of a
defaulted FHA Loan serviced by it for an amount equal to the principal amount of
the FHA Loan.
The amount of insurance benefits generally paid by the FHA is equal to
the entire unpaid principal balance of the defaulted FHA Loan, adjusted to
reimburse the Servicer of such FHA Loan for certain costs and expenses and to
deduct certain amounts received or retained by such Servicer after default. When
entitlement to insurance benefits results from foreclosure (or other acquisition
of possession) and conveyance to HUD, the Servicer is compensated for no more
than two-thirds of its foreclosure costs, and is compensated for interest
accrued and unpaid prior to such date in general only to the extent it was
allowed pursuant to a forbearance plan approved by HUD. When entitlement to
insurance benefits results from assignment of the FHA Loan to HUD, the insurance
payment includes full compensation for interest accrued and unpaid to the
assignment date. The insurance payment itself, upon foreclosure of an FHA Loan,
bears interest from a date 30 days after the mortgagor's first uncorrected
failure to perform any obligation or make any payment due under the Mortgage
Loan and, upon assignment, from the date of assignment, to the date of payment
of the claim, in each case at the same interest rate as the applicable HUD
debenture interest rate as described above.
The maximum guarantee that may be issued by the VA under a VA Loan is
50% of the principal amount of the VA Loan if the principal amount of the
Mortgage Loan is $45,000 or less, the lesser of $36,000 and 40% if the principal
amount of the VA Loan if the principal amount of such VA Loan is greater than
$45,000 but less than or equal to $144,000, and the lesser of $46,000 and 25% of
the principal amount of the Mortgage Loan if the principal amount of the
Mortgage Loan is greater than $144,000. The liability on the guarantee is
reduced or increased pro rata with any reduction or increase in the amount of
indebtedness, but in no event will the amount payable on the guarantee exceed
the amount of the original guarantee. The VA may, at its option and without
regard to the guarantee, make full payment to a mortgage holder of unsatisfied
indebtedness on a Mortgage upon its assignment to the VA.
With respect to a defaulted VA Loan, the Servicer is, absent
exceptional circumstances, authorized to announce its intention to foreclose
only when the default has continued for three months. Generally, a claim for the
guarantee is submitted after liquidation of the Mortgaged Property.
The amount payable under the guarantee will be the percentage of the VA
Loan originally guaranteed applied to indebtedness outstanding as of the
applicable date of computation specified in the VA regulations. Payments under
the guarantee will be equal to the unpaid principal amount of the VA Loan,
interest accrued on the unpaid balance of the VA Loan to the appropriate date of
computation and limited expenses of the mortgagee, but in each case only to the
extent that such amounts have not been recovered
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through liquidation of the Mortgaged Property. The amount payable under the
guarantee may in no event exceed the amount of the original guarantee.
STANDARD HAZARD INSURANCE POLICIES ON MORTGAGE LOANS
Unless otherwise specified in the related Prospectus Supplement, any
Standard Hazard Insurance Policies covering the Mortgage Loans in a Mortgage
Pool will provide for coverage at least equal to the applicable state standard
form of fire insurance policy with extended coverage. In general, the standard
form of fire and extended coverage policy will cover physical damage to, or
destruction of, the improvements on the Mortgaged Property caused by fire,
lightning, explosion, smoke, windstorm, hail, riot, strike and civil commotion,
subject to the conditions and exclusions particularized in each policy. Because
the Standard Hazard Insurance Policies relating to such Mortgage Loans will be
underwritten by different insurers and will cover Mortgaged Properties located
in various states, such policies will not contain identical terms and
conditions. The most significant terms thereof, however, generally will be
determined by state law and generally will be similar. Most such policies
typically will not cover any physical damage resulting from the following: war,
revolution, governmental actions, floods and other water-related causes, earth
movement (including earthquakes, landslides and mudflows), nuclear reaction, 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.
The Standard Hazard Insurance Policies covering Mortgaged Properties
securing Mortgage Loans typically will contain a "coinsurance" clause which, in
effect, will require the insured at all times to carry insurance of a specified
percentage (generally 80% to 90%) of the full replacement value of the
dwellings, structures and other improvements on the Mortgaged Property in order
to recover the full amount of any partial loss. If the insured's coverage falls
below this specified percentage, such clause will provide that the insurer's
liability in the event of partial loss will not exceed the greater of (i) the
actual cash value (the replacement cost less physical depreciation) of the
dwellings, structures and other improvements damaged or destroyed or (ii) such
proportion of the loss, without deduction for depreciation, as the amount of
insurance carried bears to the specified percentage of the full replacement cost
of such dwellings, structures and other improvements.
The Depositor 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 corporation itself is responsible
for maintenance of hazard insurance for the property owned by the cooperative
and the tenant-stockholders of that cooperative do not maintain individual
hazard insurance policies. To the extent, however, that a Cooperative and the
related borrower on a Cooperative Loan do not maintain 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.
Any losses incurred with respect to Mortgage Loans due to uninsured
risks (including earthquakes, mudflows and, with respect to Mortgaged Properties
located other than in HUD designated flood areas, floods) or insufficient hazard
insurance proceeds and any hazard losses incurred with respect to Cooperative
Loans could affect distributions to the Certificateholders.
With respect to Mortgage Loans secured by Multifamily Property, certain
additional insurance policies may be required with respect to the Multifamily
Property; for example, general liability insurance for bodily injury and
property damage, steam boiler coverage where a steam boiler or other pressure
vessel is in operation, and rent loss insurance to cover income losses following
damage or destruction of the
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Mortgaged Property. The related Prospectus Supplement will specify the required
types and amounts of additional insurance that may be required in connection
with Mortgage Loans secured by Multifamily Property and will describe the
general terms of such insurance and conditions to payment thereunder.
STANDARD HAZARD INSURANCE POLICIES ON THE MANUFACTURED HOMES
The applicable Pooling and Servicing Agreement or Sale and Servicing
Agreement for each Series will require the Master Servicer to cause to be
maintained with respect to each Contract one or more Standard Hazard Insurance
Policies which provide, at a minimum, the same coverage as a standard form file
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 lesser of the maximum insurable value of such Manufactured Home or the
principal balance due from the Obligor on the related Contract; provided,
however, that the amount of coverage provided by each Standard Hazard Insurance
Policy shall be sufficient to avoid the application of any co-insurance clause
contained therein. When a Manufactured Home's location was, at the time of
origination of the related Contract, within a federally designated flood area,
the Master Servicer 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. Each Standard Hazard Insurance Policy caused to be
maintained by the Master Servicer shall contain a standard loss payee clause in
favor of the Master Servicer and its successors and assigns. If any Obligor is
in default in the payment of premiums on its Standard Hazard Insurance Policy or
Policies, the Master Servicer shall pay such premiums out of its own funds, and
may add separately such premium to the Obligor's obligation as provided by the
Contract, but may not add such premium to the remaining principal balance of the
Contract.
The Master Servicer may maintain, in lieu of causing individual
Standard 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 Obligor to maintain a Standard Hazard Insurance Policy with
respect to the related Manufactured Home, one or more blanket insurance policies
covering losses on the Obligor's interest in the Contracts resulting from the
absence or insufficiency of individual Standard Hazard Insurance Policies. Any
such blanket policy shall be substantially in the form and in the amount carried
by the Master Servicer as of the date of the Pooling and Servicing Agreement.
The Master Servicer shall pay the premium for such policy on the basis described
therein and shall pay any deductible amount with respect to claims under such
policy relating to the Contracts. If the insurer thereunder shall cease to be
acceptable to the Master Servicer, the Master Servicer shall use its best
reasonable efforts to obtain from another insurer a replacement policy
comparable to such policy.
If the Master Servicer shall have repossessed a Manufactured Home on
behalf of the Trustee, the Master Servicer shall 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.
POOL INSURANCE POLICIES
If so specified in the related Prospectus Supplement, the Master
Servicer will obtain a Pool Insurance Policy for a Mortgage Pool underlying
Securities of such Series. Such Pool Insurance Policy will be issued by the Pool
Insurer named in the applicable Prospectus Supplement. Any Pool Insurance Policy
for a Contract Pool underlying a Series of Securities will be described in the
related Prospectus Supplement. Each Pool Insurance Policy will cover any loss
(subject to the limitations described below) by reason of default to the extent
the related Mortgage Loan is not covered by any Primary Mortgage Insurance
Policy,
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FHA insurance or VA guarantee. The amount of the Pool Insurance Policy, if any,
with respect to a Series will be specified in the related Prospectus Supplement.
A Pool Insurance Policy, however, will not be a blanket policy against loss,
because claims thereunder may only be made for particular defaulted Mortgage
Loans and only upon satisfaction of certain conditions precedent described
below. The Prospectus Supplement will contain such financial information
regarding the Pool Insurer as may be required by the rules and regulations of
the Commission.
Unless otherwise specified in the related Prospectus Supplement, the
Pool Insurance Policy will provide that as a condition precedent to the payment
of any claim the Insured will be required (i) to advance hazard insurance
premiums on the Mortgaged Property securing the defaulted Mortgage Loan; (ii) to
advance, as necessary and approved in advance by the Pool Insurer, (a) real
estate property taxes, (b) all expenses required to preserve and repair the
Mortgaged Property, to protect the Mortgaged Property from waste, so that the
Mortgaged Property is in at least as good a condition as existed on the date
upon which coverage under the Pool Insurance Policy with respect to such
Mortgaged Property first became effective (ordinary wear and tear excepted), (c)
property sales expenses, (d) any outstanding liens on the Mortgaged Property and
(e) foreclosure costs including court costs and reasonable attorneys' fees; and
(iii) if there has been physical loss or damage to the Mortgaged Property, to
restore the Mortgaged Property to its condition (reasonable wear and tear
excepted) as of the issue date of the Pool Insurance Policy. It also will be a
condition precedent to the payment of any claim under the Pool Insurance Policy
that the Insured maintain a Primary Mortgage Insurance Policy that is acceptable
to the Pool Insurer on all Mortgage Loans that have Loan-to-Value Ratios at the
time of origination in excess of 80%. FHA insurance and VA guarantees will be
deemed to be an acceptable Primary Mortgage Insurance Policy under the Pool
Insurance Policy. Assuming satisfaction of these conditions, the Pool Insurer
will pay to the Insured the amount of loss, determined as follows: (i) the
amount of the unpaid principal balance of the Mortgage Loan immediately prior to
the Approved Sale (as described below) of the Mortgaged Property, (ii) the
amount of the accumulated unpaid interest on such Mortgage Loan to the date of
claim settlement at the applicable Mortgage Rate and (iii) advances as described
above, less (a) all rents or other payments (excluding proceeds of fire and
extended coverage insurance) collected or received by the Insured, which are
derived from or in any way related to the Mortgaged Property, (b) amounts paid
under applicable fire and extended coverage policies which are in excess of the
cost of restoring and repairing the Mortgaged Property and which have not been
applied to the payment of the Mortgage Loan, (c) any claims payments previously
made by the Pool Insurer on the Mortgage Loan, (d) due and unpaid premiums
payable with respect to the Pool Insurance Policy and (e) all claim payments
received by the Insured pursuant to any Primary Mortgage Insurance Policy. An
"Approved Sale" is (1) a sale of the Mortgaged Property acquired because of a
default by the Mortgagor to which the Pool Insurer has given prior approval, (2)
a foreclosure or trustee's sale of the Mortgaged Property at a price exceeding
the maximum amount specified by the Pool Insurer, (3) the acquisition of the
Mortgaged Property under the Primary Insurance Policy by the Primary Mortgage
Insurer or (4) the acquisition of the Mortgaged Property by the Pool Insurer.
The Pool Insurer must be provided with good and merchantable title to the
Mortgaged Property as a condition precedent to the payment of any Loss. If any
Mortgaged Property securing a defaulted Mortgage Loan is damaged and the
proceeds, if any, from the related Standard Hazard Insurance Policy or the
applicable Special Hazard Insurance Policy are insufficient to restore the
Mortgaged Property to a condition sufficient to permit recovery under the Pool
Insurance Policy, the Master Servicer or the Servicer of the related Mortgage
Loan will not be required to expend its own funds to restore the damaged
Mortgaged Property unless it is determined (A) that such restoration will
increase the proceeds to the Securityholders of the related Series on
liquidation of the Mortgage Loan, after reimbursement of the expenses of the
Master Servicer or the Servicer, as the case may be, and (B) that such expenses
will be recoverable by it through payments under the Letter of Credit, if any,
with respect to such Series, Liquidation Proceeds, Insurance Proceeds, amounts
in the Reserve Fund, if any, or payments under any Alternative Credit Support,
if any, with respect to such Series.
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No Pool Insurance Policy will insure (and many Primary Mortgage
Insurance Policies may not insure) against loss sustained by reason of a default
arising from, among other things, (i) fraud or negligence in the origination or
servicing of a Mortgage Loan, including misrepresentation by the Mortgagor, the
Unaffiliated Seller, the Originator or other persons involved in the origination
thereof, (ii) the exercise by the Insured of its right to call the Mortgage
Loan, or the term of the Mortgage Loan is shorter than the amortization period
and the defaulted payment is for an amount more than twice the regular periodic
payments of principal and interest for such Mortgage Loan, or (iii) the exercise
by the Insured of a "due-on-sale" clause or other similar provision in the
Mortgage Loan; provided, in either case of clause (ii) or (iii), such exclusion
shall not apply if the Insured offers a renewal or extension of the Mortgage
Loan or a new Mortgage Loan at the market rate in an amount not less than the
then outstanding principal balance with no decrease in the amortization period.
A failure of coverage attributable to one of the foregoing events might result
in a breach of the Master Servicer's insurability representation described under
"Description of the Securities -- Assignment of Mortgage Loans," and in such
event, subject to the limitations described therein, might give rise to an
obligation on the part of the Master Servicer to purchase the defaulted Mortgage
Loan if the breach materially and adversely affects the interests of the
Securityholders of the related Series and cannot be cured by the Master
Servicer. Depending upon the nature of the event, a breach of representation
made by the Depositor or an Unaffiliated Seller may also have occurred. Such a
breach, if it materially and adversely affects the interests of the
Securityholders of such Series and cannot be cured, would give rise to a
repurchase obligation on the part of the Unaffiliated Seller as more fully
described under "The Trust Fund -- Mortgage Loan Program" and " --
Representations by Unaffiliated Sellers; Repurchases" and "Description of the
Securities -- Assignment of Mortgage Loans."
The original amount of coverage under the Pool Insurance Policy will be
reduced over the life of the Securities of the related Series 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 Mortgaged Properties covered
thereby. The amount of claims paid will include certain expenses incurred by the
Master Servicer or by the Servicer of the defaulted Mortgage Loan as well as
accrued interest on delinquent Mortgage Loans to the date of payment of the
claim. Accordingly, if aggregate net claims paid under a Pool Insurance Policy
reach the original policy limit, coverage under the Pool Insurance Policy will
lapse and any further losses will be borne by the holders of the Securities of
such Series. In addition, unless the Master Servicer or the related Servicer
could determine that an Advance in respect of a delinquent Mortgage Loan would
be recoverable to it from the proceeds of the liquidation of such Mortgage Loan
or otherwise, neither such Servicer nor the Master Servicer would be obligated
to make an Advance respecting any such delinquency, since the Advance would not
be ultimately recoverable to it from either the Pool Insurance Policy or from
any other related source. See "Description of the Securities -- Advances."
SPECIAL HAZARD INSURANCE POLICIES
If so specified in the related Prospectus Supplement, the Master
Servicer shall obtain a Special Hazard Insurance Policy for the Mortgage Pool
underlying a Series of Securities. Any Special Hazard Insurance Policies for a
Contract Pool underlying a Series of Securities will be described in the related
Prospectus Supplement. The Special Hazard Insurance Policy for the Mortgage Pool
underlying the Securities of a Series will be issued by the Special Hazard
Insurer named in the applicable Prospectus Supplement. Each Special Hazard
Insurance Policy will, subject to the limitations described below, protect
against loss by reason of damage to Mortgaged Properties caused by certain
hazards (including vandalism and earthquakes and, except where the Mortgagor is
required to obtain flood insurance, floods and mudflows) not insured against
under the standard form of hazard insurance policy for the respective states in
which the Mortgaged Properties are located. See "Description of the Securities
-- Maintenance of Insurance Policies" and " -- Standard Hazard Insurance." The
Special Hazard Insurance Policy will not cover losses occasioned by war, certain
governmental actions, nuclear reaction and certain other perils.
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Coverage under a Special Hazard Insurance Policy will be at least equal to the
amount set forth in the related Prospectus Supplement.
Subject to the foregoing limitations, each Special Hazard Insurance
Policy will provide that, when there has been damage to the Mortgaged Property
securing a defaulted Mortgage Loan and to the extent such damage is not covered
by the Standard Hazard Insurance Policy, if any, maintained by the Mortgagor,
the Master Servicer or the Servicer, the Special Hazard Insurer will pay the
lesser of (i) the cost of repair or replacement of such Mortgaged Property or
(ii) upon transfer of such Mortgaged Property to the Special Hazard Insurer, the
unpaid balance of such Mortgage Loan at the time of acquisition of such
Mortgaged Property by foreclosure or deed in lieu of foreclosure, plus accrued
interest to the date of claim settlement (excluding late charges and penalty
interest) and certain expenses incurred in respect of such Mortgaged Property.
No claim may be validly presented under a Special Hazard Insurance Policy unless
(i) hazard insurance on the Mortgaged Property has been kept in force and other
reimbursable protection, preservation and foreclosure expenses have been paid
(all of which must be approved in advance as necessary by the insurer) and (ii)
the insured has acquired title to the Mortgaged Property as a result of default
by the Mortgagor. If the sum of the unpaid principal balance plus accrued
interest and certain expenses is paid by the Special Hazard 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 Mortgaged
Property. Any amount paid as the cost of repair of the Mortgaged Property will
further reduce coverage by such amount.
The terms of the applicable Agreement and/or Servicing Agreement will
require the Master Servicer to maintain the Special Hazard Insurance Policy in
full force and effect throughout the term of the Agreement. If a Pool Insurance
Policy is required to be maintained pursuant to the Agreement, the Special
Hazard Insurance Policy will be designed to permit full recoveries under the
Pool Insurance Policy in circumstances where such recoveries would otherwise be
unavailable because Mortgaged Property has been damaged by a cause not insured
against by a Standard Hazard Insurance Policy. In such event the Agreement
and/or Servicing Agreement will provide that, if the related Pool Insurance
Policy shall have terminated or been exhausted through payment of claims, the
Master Servicer will be under no further obligation to maintain such Special
Hazard Insurance Policy.
MORTGAGOR BANKRUPTCY BOND
In the event of a personal bankruptcy of a Mortgagor, a bankruptcy
court may establish the value of the related Mortgaged Property or Cooperative
Dwelling at an amount less than the then outstanding principal balance of the
related Mortgage Loan. The amount of the secured debt could be reduced to such
value, and the holder of such Mortgage Loan thus would become an unsecured
creditor to the extent the outstanding principal balance of such Mortgage Loan
exceeds the value so assigned to the Mortgaged Property or Cooperative Dwelling
by the bankruptcy court. In addition, certain other modifications of the terms
of a Mortgage Loan can result from a bankruptcy proceeding. If so specified in
the related Prospectus Supplement, losses resulting from a bankruptcy proceeding
affecting the Mortgage Loans in a Mortgage Pool with respect to a Series of
Securities will be covered under a Mortgagor Bankruptcy Bond (or any other
instrument that will not result in a downgrading of the rating of the Securities
of a Series by the Rating Agency that rated such Series). Any Mortgagor
Bankruptcy Bond will provide for coverage in an amount acceptable to the Rating
Agency rating the Securities of the related Series, which will be set forth in
the related Prospectus Supplement. Subject to the terms of the Mortgagor
Bankruptcy Bond, the issuer thereof may have the right to purchase any Mortgage
Loan with respect to which a payment or drawing has been made or may be made for
an amount equal to the outstanding principal amount of such Mortgage Loan plus
accrued and unpaid interest thereon. The coverage of the Mortgagor Bankruptcy
Bond with respect to a Series of Securities may be reduced as long as any such
reduction will not result in a reduction of the outstanding rating of the
Securities of such Series by the Rating Agency rating such Series.
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CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS AND CONTRACTS
The following discussion contains summaries of certain legal aspects of
mortgage loans and manufactured housing installment or conditional sales
contracts and installment loan agreements which are general in nature. Because
such legal aspects are governed 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 and Contracts.
THE MORTGAGE LOANS
GENERAL
The Mortgage Loans (other than the Cooperative Loans) comprising or
underlying the Trust Assets for a Series will be secured by either first
mortgages or deeds of trust, depending upon the prevailing practice in the state
in which the underlying property is located. The filing of a mortgage, deed of
trust or deed to secure debt creates a lien or title interest upon the real
property covered by such instrument and represents the security for the
repayment of an obligation that is customarily evidenced by a promissory note.
It is not prior to the lien for real estate taxes and assessments or other
charges imposed under governmental police powers. Priority with respect to such
instruments depends on their terms, the knowledge of the parties to the mortgage
and generally on the order of recording with the applicable state, county or
municipal office. There are two parties to a mortgage: the mortgagor, who is the
borrower and homeowner, and the mortgagee, who is the lender. In a mortgage
state, the mortgagor delivers to the mortgagee a note or bond evidencing the
loan and the mortgage. Although a deed of trust is similar to a mortgage, a deed
of trust has three parties: the borrower-homeowner called the trustor (similar
to a mortgagor) a lender called the beneficiary (similar to a mortgagee) and a
third-party grantee called the trustee. Under a deed of trust, the borrower
grants the property, irrevocably until the debt is paid, in trust, generally
with a power of sale, to the trustee to secure payment of the loan. The
trustee's authority under a deed of trust and the mortgagee's authority under a
mortgage are governed by the express provisions of the deed of trust or
mortgage, applicable law and, in some cases, with respect to the deed of trust,
the directions of the beneficiary.
FORECLOSURE
Foreclosure of a mortgage is generally accomplished by judicial action.
Generally, the action is initiated by the service of legal pleadings upon all
parties having an interest of record in the real property. Delays in completion
of the foreclosure occasionally may result from difficulties in locating
necessary parties defendant. When the mortgagee's right to foreclosure is
contested, the legal proceedings necessary to resolve the issue can be
time-consuming. After the completion of a judicial foreclosure proceeding, the
court may issue a judgment of foreclosure and appoint a receiver or other
officer to conduct the sale of the property. In some states, mortgages may also
be foreclosed by advertisement, pursuant to a power of sale provided in the
mortgage. Foreclosure of a mortgage by advertisement is essentially similar to
foreclosure of a deed of trust by non-judicial power of sale.
Though a deed of trust may also be foreclosed by judicial action,
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 upon a default by the borrower under the terms
of the note or deed
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of trust. In some states, the trustee must record a notice of default and send a
copy to the borrower-trustor and to any person who has recorded a request for a
copy of a notice of default and notice of sale. In addition, the trustee must
provide notice in some states to any other individual having an interest in the
real property, including any junior lienholders. If the loan is not reinstated
within any applicable cure period, a notice of sale must be posted in a public
place and, in most states, published for a specified period of time in one or
more newspapers. In addition, some state laws require that a copy of the notice
of sale be posted on the property and sent to all parties having an interest of
record in the property.
In some states, the borrower-trustor has the right to reinstate the
loan at any time following default until shortly before the trustee's sale. In
general, the borrower, or any other person having a junior encumbrance on the
real estate, may, during a reinstatement period, cure the default by paying the
entire amount in arrears plus the costs and expenses incurred in enforcing the
obligation. Certain state laws control the amount of foreclosure expenses and
costs, including attorneys' fees, which may be recovered by a lender.
In case of foreclosure under either a mortgage or a deed of trust, the
sale by the receiver or other designated officer, or by the trustee, is a public
sale. However, because of a number of factors, including the difficulty a
potential buyer at the sale would have in determining the exact status of title
and the fact that 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 receiver for a credit bid less than or
equal to the unpaid principal amount of the note, accrued and unpaid interest
and the expenses of foreclosure. Thereafter, subject to the right of the
borrower in some states to remain in possession during the redemption period,
the lender will assume the burdens of ownership, including obtaining hazard
insurance and making such repairs at its own expense as are necessary to render
the property suitable for sale. The lender commonly will obtain the services of
a real estate broker and pay the broker a 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 mortgage insurance proceeds.
COOPERATIVE LOANS
If specified in the Prospectus Supplement relating to a Series of
Securities, the Mortgage Loans may also contain Cooperative Loans evidenced by
promissory notes secured by security interests in shares issued by private
corporations which are entitled to be treated as housing cooperatives under the
Code and in the related proprietary leases or occupancy agreements granting
exclusive rights to occupy specific dwelling units in the corporations'
buildings. The security agreement will create a lien upon, or grant a title
interest in, the property that it covers, the priority of which will depend on
the terms of the particular security agreement as well as the order of
recordation of the agreement in the appropriate recording office. Such a lien or
title interest is not prior to the lien for real estate taxes and assessments
and other charges imposed under governmental police powers.
A corporation that is entitled to be treated as a housing cooperative
under the Code owns all the real property or some interest therein sufficient to
permit it to own the building and all separate dwelling units therein. The
cooperative is directly responsible for property management and, in most cases,
payment of real estate taxes and hazard and liability insurance. If there is a
blanket mortgage or mortgages on the cooperative apartment building and/or
underlying land, as is generally the case, or an underlying lease of the land,
as is the case in some instances, the cooperative, as property mortgagor, is
also responsible for meeting these mortgage or rental obligations. The interest
of the occupancy under proprietary leases or occupancy agreements as to which
that cooperative is the landlord are generally subordinate to the interest of
the holder
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of a blanket mortgage and to the interest of the holder of a land lease. If the
cooperative is unable to meet the payment obligations (i) arising under a
blanket mortgage, the mortgagee holding a blanket mortgage could foreclose on
that mortgage and terminate all subordinate proprietary leases and occupancy
agreements or (ii) arising under its land lease, the holder of the land lease
could terminate it and all subordinate proprietary leases and occupancy
agreements. Also, a blanket mortgage on a cooperative may provide financing in
the form of a mortgage that does not fully amortize, with a significant portion
of principal being due in one final payment at maturity. The inability of the
cooperative to refinance a mortgage and its consequent inability to make such
final payment could lead to foreclosure by the mortgagee. Similarly, a land
lease has an expiration date and the inability of the cooperative to extend its
term or, in the alternative, to purchase the land could lead to termination of
the cooperative's interest in the property and termination of all proprietary
leases and occupancy agreements. A foreclosure by the holder of a blanket
mortgage could eliminate or significantly diminish the value of any collateral
held by the lender who financed an individual tenant-stockholder of cooperative
shares including, in the case of the Cooperative Loans, the collateral securing
the Cooperative Loans. Similarly, the termination of the land lease by its
holder could eliminate or significantly diminish the value of any collateral
held by the lender who financed an individual tenant-stockholder of the
cooperative shares or, in the case of the Cooperative Loans, the collateral
securing the Cooperative Loans.
Each cooperative is owned by tenant-stockholders who, through ownership
of stock or shares 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 are 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. See " -- Realizing upon Cooperative Loan Security" below.
TAX ASPECTS OF COOPERATIVE LOANS
In general, a "tenant-stockholder" (as defined in Section 216(b)(2) of
the Code) of a corporation that qualifies as a "cooperative housing corporation"
within the meaning of Section 216(b)(1) of the Code 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 Section 216(a) of the Code to the
corporation under Sections 163 and 164 of the Code. In order for a corporation
to qualify under Section 216(b)(1) of the Code 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-stockholder. By virtue of this
requirement the status of a corporation for purposes of Section 216(b)(1) of the
Code 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 Section 216(a) of the Code
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with respect to those years. In view of the significance of the tax benefits
accorded tenant-stockholders of a corporation that qualifies under Section
216(b)(1) of the Code, the likelihood that such a failure would be permitted to
continue over a period of years appears remote.
REALIZING UPON COOPERATIVE LOAN SECURITY
The cooperative shares and proprietary lease or occupancy agreement
owned by the tenant-stockholder and pledged to the lender are, in almost all
cases, subject to restrictions on transfer as set forth in the cooperative's
certificate of incorporation and by-laws, as well as in the proprietary lease or
occupancy agreement. The proprietary lease or occupancy agreement, even while
pledged, may be cancelled 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. Commonly, rent and other
obligations and charges arising under a proprietary lease or occupancy agreement
which are owed to the cooperative are made liens upon the shares to which the
proprietary lease or occupancy agreement relates. In addition, the proprietary
lease or occupancy agreement generally permits the cooperative to terminate such
lease or agreement in the event the borrower defaults in the performance of
covenants thereunder. The lender and the cooperative will typically 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 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 or that have become liens on the shares relating to the
proprietary lease or occupancy agreement. The total amount owed to the
cooperative by the tenant-stockholder, which the lender generally cannot
restrict and does not monitor, could reduce the value of the collateral below
the outstanding principal balance of the cooperative loan and accrued and unpaid
interest thereon.
Recognition agreements also provide that in the event the lender
succeeds to the tenant-shareholder's shares and proprietary lease or occupancy
agreement as the result of realizing upon the collateral for 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. Such approval or consent is usually based on the
prospective purchaser's income and net worth, among other factors, and may
significantly reduce the number of potential purchasers, which could limit the
ability of the lender to sell and realize upon the value of the collateral.
Generally, the lender is not limited in any rights it may have to dispossess the
tenant- shareholders.
The terms of the Cooperative Loans do not require either the Mortgagor
or the Cooperative to obtain title insurance of any type. Consequently, the
existence of any prior liens or other imperfections of title also may adversely
affect the marketability of the Cooperative Dwelling in the event of
foreclosure.
In New York, lenders generally realize upon the pledged shares and
proprietary lease or occupancy agreement given to secure a cooperative loan by
public 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 sale has been
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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 sale.
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.
In the case of foreclosure on a Multifamily Property that was converted
from a rental building to a building owned by a cooperative housing corporation
under a non-eviction plan, some states require that a purchaser at a foreclosure
sale take the property subject to rent control and rent stabilization laws which
apply to certain tenants who elected to remain in the building but not to
purchase shares in the cooperative when the building was so converted. Any such
restrictions could adversely affect the number of potential purchasers for and
the value of such property.
RIGHTS OF REDEMPTION
In some states, after a sale pursuant to a deed of trust or foreclosure
of a mortgage, the borrower and certain foreclosed junior lienors are given a
statutory period in which to redeem the property from the foreclosure sale. In
certain other states, this right of redemption applies only to a sale following
judicial foreclosure, and not a sale pursuant to a non-judicial power of sale.
In most states where the right of redemption is available, statutory redemption
may occur upon payment of the foreclosure purchase price, accrued interest and
taxes. In some states, the right to redeem is an equitable right. The effect of
a statutory right of redemption is to diminish the ability of the lender to sell
the foreclosed property. The exercise of a right of redemption would defeat the
title of any purchaser from the lender subsequent to foreclosure or sale under a
deed of trust. Consequently, the practical effect of the redemption right is to
force the lender to retain the property and pay the expenses of ownership until
the redemption period has run.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states have imposed statutory restrictions 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 a
non-judicial sale under a deed of trust. A deficiency judgment is a personal
judgment against the former borrower equal in most cases to the difference
between the amount due to the lender and the net amount realized upon the
foreclosure sale. Other statutes prohibit a deficiency judgment where the loan
proceeds were used to purchase a dwelling occupied by the borrower.
Some state statutes may require the beneficiary or mortgagee to exhaust
the security afforded under a deed of trust or mortgage by foreclosure in an
attempt to satisfy the full debt before bringing a personal action against the
borrower. In certain other states, the lender has the option of bringing a
personal action against the borrower on the debt without first exhausting such
security; however, in some of these states, the lender, following judgment on
such personal action, may be deemed to have elected a remedy and may be
precluded from exercising remedies with respect to the security. Consequently,
the practical effect of the
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election requirement, when applicable, is that lenders will usually proceed
first against the security rather than bringing a personal action against the
borrower.
Other statutory provisions may limit any deficiency judgment against
the former borrower following a foreclosure sale to the excess of the
outstanding debt over the fair market value of the property at the time of such
sale. The purpose of these statutes is to prevent a beneficiary or a mortgagee
from obtaining a large deficiency judgment against the former borrower as a
result of low or no bids at the foreclosure sale.
In some states, exceptions to the anti-deficiency statutes are provided
for in certain instances where the value of the lender's security has been
impaired by acts or omissions of the borrower, for example, in the event of
waste of the property.
In the case of cooperative loans, lenders generally realize on
cooperative shares and the accompanying proprietary lease or occupancy agreement
given to secure a cooperative loan under Article 9 of the UCC. Some courts have
interpreted Section 9-504 of the UCC to prohibit a deficiency award unless the
creditor establishes that the sale of the collateral (which, in the case of a
Cooperative Loan, would be the shares of the Cooperative and the related
proprietary lease or occupancy agreement) was conducted in a commercially
reasonable manner.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws,
the federal Soldiers' and Sailors' Civil Relief Act of 1940 and state laws
affording relief to debtors, may interfere with or affect the ability of a
secured mortgage lender to realize upon its security. For example, in a Chapter
13 proceeding under the federal Bankruptcy Code, when a court determines that
the value of a home is less than the principal balance of the loan, the court
may prevent a lender from foreclosing on the home, and, as part of the
rehabilitation plan, reduce the amount of the secured indebtedness to the value
of the home as it exists at the time of the proceeding, leaving the lender as a
general unsecured creditor for the difference between that value and the amount
of outstanding indebtedness. A bankruptcy court may grant the debtor a
reasonable time to cure a payment default, and in the case of a mortgage loan
not secured by the debtor's principal residence, also may reduce the monthly
payments due under such mortgage loan, change the rate of interest and alter the
mortgage loan repayment schedule. Certain court decisions have applied such
relief to claims secured by the debtor's principal residence.
The Code provides priority to certain tax liens over the lien of the
mortgage or deed of trust. The laws of some states provide priority to certain
tax liens over the lien of the mortgage or deed of trust. Numerous federal and
some state consumer protection laws impose substantive requirements upon
mortgage lenders in connection with the origination, servicing and the
enforcement of mortgage loans. These laws include the federal Truth in Lending
Act, Real Estate Settlement Procedures Act, Equal Credit Opportunity Act, Fair
Credit Billing Act, Fair Credit Reporting Act, and related statutes and
regulations. These federal laws and state laws impose specific statutory
liabilities upon lenders who originate or service 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.
Unless otherwise specified in the related Prospectus Supplement, each
Mortgage Loan secured by Multifamily Property will be a non-recourse loan to the
Mortgagor. As a result, the Mortgagor's obligation to repay the Mortgage Loan
can be enforced only against the Mortgaged Property regardless of whether the
Mortgagor has other assets from which it could repay the loan.
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Unless otherwise specified in the related Prospectus Supplement, the
mortgage securing each Mortgage Loan relating to Multifamily Property will
contain an assignment of rents and an assignment of leases, pursuant to which
the borrower assigns its right, title and interest as landlord under each lease
and the income derived therefrom to the Depositor, while retaining a license to
collect the rents so long as there is no default. In the event the borrower
defaults, the license terminates and the Trustee (as the assignee of such
assignment) is entitled to collect the rents. The Trustee may enforce its right
to such rents by seeking the appointment of a receiver to collect the rents
immediately after giving notice to the borrower of the default.
"DUE-ON-SALE" CLAUSES
The forms of note, mortgage and deed of trust relating to conventional
Mortgage Loans may contain a "due-on-sale" clause permitting acceleration of the
maturity of a loan if the borrower transfers its interest in the property. The
enforceability of these clauses has been 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
that prohibits 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.
The Garn-St Germain Act also sets forth nine specific instances in
which a mortgage lender covered by the Garn-St Germain Act 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 also prohibit
the imposition of prepayment penalty upon the acceleration of a loan pursuant to
a due-on-sale clause.
The inability to enforce a due-on-sale clause may result in a mortgage
loan bearing an interest rate below the current market rate being assumed by a
new home buyer rather than being paid off, which may have an impact upon the
average life of the Mortgage Loans and the number of Mortgage Loans which may be
outstanding until maturity.
ENFORCEABILITY OF CERTAIN PROVISIONS
Standard forms of note, mortgage and deed of trust generally contain
provisions obligating the borrower to pay a late charge if payments are not
timely made and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states, there
are or may be specific limitations upon late charges which a lender may collect
from a borrower for delinquent payments. State and federal statutes or
regulations may also limit a lender's right to collect a prepayment penalty when
the prepayment is caused by the lender's acceleration of the loan pursuant to a
due-on-sale clause. Certain states also limit the amounts that a lender may
collect from a borrower as an additional charge if the loan is prepaid. Under
the Servicing Agreements and the applicable Agreement, late charges and
prepayment fees (to the extent permitted by law and not waived by the Servicers)
will be retained by the Servicers or Master Servicer as additional servicing
compensation.
Courts have imposed general equitable principles upon foreclosure.
These equitable principles are generally designed to relieve the borrower from
the legal effect of defaults under the loan documents. Examples of judicial
remedies that may be fashioned include judicial requirements that the lender
undertake affirmative and sometimes expensive actions to determine the causes
for the borrower's default and the
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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 lenders to reinstate loans or recast payment schedules to accommodate
borrowers who are suffering from temporary financial disability. In some cases,
courts have limited the right of lenders to foreclose if the default under the
mortgage instrument is not monetary, such as the borrower failing to adequately
maintain or insure the property or the borrower executing a second mortgage or
deed of trust affecting the property. In other cases, some courts have been
faced with the issue whether federal or state constitutional provisions
reflecting due process concerns for adequate notice require that borrowers under
the deeds of trust receive notices in addition to the statutorily-prescribed
minimum requirements. 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.
ENVIRONMENTAL CONSIDERATIONS
Under the federal Comprehensive Environmental Response Compensation and
Liability Act, as amended, a secured party which takes a deed in lieu of
foreclosure or purchases a mortgaged property at a foreclosure sale 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 costs could become a liability of the Trust Fund and reduce
the amounts otherwise distributable to the Securityholders if a Mortgaged
Property securing a Mortgage Loan became the property of the Trust Fund in
certain circumstances and if such Cleanup Costs were incurred.
Except as otherwise specified in the related Prospectus Supplement,
each Unaffiliated Seller will represent, as of the date of delivery of the
related Series of Securities, that to the best of its knowledge no Mortgaged
Property secured by Multifamily Property is subject to an environmental hazard
that would have to be eliminated under applicable law before the sale of, or
which could otherwise affect the marketability of, such Mortgaged Property or
which would subject the owner or operator of such Mortgaged Property or a lender
secured by such Mortgaged Property to liability under law, and that there are no
liens which relate to the existence of any clean-up of a hazardous substance
(and to the best of its knowledge no circumstances are existing that under law
would give rise to any such lien) affecting the Mortgaged Property which are or
may be liens prior to or on a parity with the lien of the related mortgage. The
applicable Agreement and/or Servicing Agreement will further provide that the
Master Servicer, acting on behalf of the Trust Fund, may not acquire title to a
Mortgaged Property or take over its operation unless the Master Servicer has
received a report from a qualified independent person selected by the Master
Servicer setting forth whether such Mortgaged Property is subject to or presents
any toxic wastes or environmental hazards and an estimate of the cost of curing
or cleaning up such hazard.
THE CONTRACTS
GENERAL
As a result of the Depositor's assignment of the Contract 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 Depositor. 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.
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The Contracts generally are "chattel paper" as defined in the Uniform
Commercial Code 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 applicable Agreement and/or Servicing Agreement, the Master
Servicer or the Depositor, as the case may be, will transfer physical possession
of the Contracts to the Trustee or Indenture Trustee, or their respective
custodian, as the case may be. In addition, the Master Servicer 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 or the Indenture
Trustee's security interest in the Contracts, as the case may be. Unless
otherwise specified in the related Prospectus Supplement, the Contracts will not
be stamped or marked otherwise to reflect their assignment from the Depositor to
the Trustee or their pledge to the Indenture Trustee. Therefore, if a subsequent
purchaser were able to take physical possession of the Contracts without notice
of such assignment or pledge, the respective Trustees' interest in the Contracts
could be defeated.
SECURITY INTERESTS IN THE MANUFACTURED HOMES
The law governing perfection of a security interest in a Manufactured
Home varies from state to state. 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 lender or
Master Servicer 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
Master Servicer or the lender 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 Securityholders 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 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
manufactured home is located. These filings must be made in the real estate
records office of the county where the manufactured home is located.
Substantially all of the Contracts will contain provisions prohibiting the
borrower from permanently attaching the Manufactured Home to its site. So long
as the Obligor does not violate this agreement, a security interest in the
Manufactured Home will be governed by the certificate of title laws or the UCC,
and the notation of the security interest on the certificate of title or the
filing of a UCC financing statement will be effective to maintain the priority
of the seller's security interest in the Manufactured Home. If, however, a
Manufactured Home is permanently attached to its site, other parties could
obtain an interest in the Manufactured Home which is prior to the security
interest originally retained by the Unaffiliated Seller and transferred to the
Depositor. With respect to a Series of Securities and as described in the
related Prospectus Supplement, the Master Servicer 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 Securityholders would be against the
Unaffiliated Seller pursuant to its repurchase obligation for breach of
warranties. Based on the representations of the Unaffiliated Seller, the
Depositor, however, believes that it has obtained a perfected first priority
security interest by proper notation or delivery of the required documents and
fees with respect to substantially all of the Manufactured Homes securing the
Contracts.
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The Depositor will assign its security interests in the Manufactured
Homes to the Trustee on behalf of the Certificateholders and, if a Series of
Securities includes Notes, such security interest will be pledged to the
Indenture Trustee on behalf of the Noteholders. Unless otherwise specified in
the related Prospectus Supplement, neither the Depositor nor the Trustee or
Indenture Trustee will amend the certificates of title to identify the Trustee
or the Indenture Trustee, as applicable, as the new secured party. Accordingly,
the Depositor or such other entity as may be specified in the Prospectus
Supplement 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 assignor'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 assignor.
In the absence of fraud, forgery or permanent affixation of the
Manufactured Home to its site by the Manufactured Home owner, or administrative
error by state recording officials, the notation of the lien of the Depositor on
the certificate of title or delivery of the required documents and fees will be
sufficient to protect the Securityholders 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 Depositor and the Certificateholders
and pledged to the Noteholders, if any, 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 applicable Securityholders as the new
secured party on the certificate of title that, through fraud or negligence, the
security interest of the Securityholders 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 or the Indenture Trustee, or the
Master Servicer as custodian for the Trustee and/or Indenture 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 on the certificate of title, the applicable Trustee would
receive notice of surrender if the security interest in the Manufactured Home is
noted on the certificate of title. Accordingly, the Trustee and Indenture
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 manufactured
housing installment or conditional sales contracts and installment loan
agreements, the Master Servicer 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 Contract sells a Manufactured
Home, the Trustee or the Indenture Trustee, or the Master Servicer as custodian
for the Trustee or Indenture 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 Contract before release of the lien. Under the applicable Agreement, the
Master Servicer, on behalf of the Depositor, will be obligated to take such
steps, at the Master Servicer's expense, as are necessary to maintain perfection
of security interests in the Manufactured Homes.
Under the laws of most states, liens for repairs performed on a
Manufactured Home take priority even over a perfected security interest. The
Depositor will represent in the applicable Agreement that it has
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no knowledge of any such liens with respect to any Manufactured Home securing
payment on any Contract. However, such liens could arise at any time during the
term of a Contract. No notice will be given to the Trustee, Indenture Trustee or
Securityholders in the event such a lien arises and such lien would not give
rise to a repurchase obligation on the part of the party specified in the
applicable Agreement.
ENFORCEMENT OF SECURITY INTERESTS IN MANUFACTURED HOMES
The Master Servicer on behalf of the Trustee or the Indenture Trustee,
to the extent required by the related Agreement and/or Indenture, may take
action to enforce the applicable Trustee's security interest with respect to
Contracts in default by repossession and resale of the Manufactured Homes
securing such Defaulted Contracts. Except in Louisiana, 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 and/or Indenture 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 against such Obligor. Numerous other federal and state consumer
protection laws impose requirements applicable to the origination and lending
pursuant to the Contracts, including the Truth in Lending Act, the Federal Trade
Commission Act, the Fair Credit Billing Act, the Fair Credit Reporting Act, the
Equal Credit Opportunity Act, the Fair Debt Collection Practices Act and the
Uniform Consumer Credit Code. In the case of some of these laws, the failure to
comply with their provisions may affect the enforceability of the related
Contract.
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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 Depositor or the Master Servicer
and permit the acceleration of the maturity of the Contracts by the Depositor or
the Master Servicer upon any such sale or transfer that is not consented to.
Unless otherwise specified in the related Prospectus Supplement, the Depositor
or the Master Servicer 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
Depositor desires to accelerate the maturity of the related Contract, the
Depositor'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. In some states the
Depositor or the Master Servicer may be prohibited from enforcing a
"due-on-sale" clause in respect of certain Manufactured Homes.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980, as amended ("Title V"), provides that, subject to the
following conditions, state usury limitations shall not apply to any loan that
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 that 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 has been included in the Trust Assets or
Fund. The Depositor, or the party specified in the related Agreement will
represent that all of the Contracts comply with applicable usury laws.
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FEDERAL INCOME TAX CONSEQUENCES
I. GENERAL
The following is a general discussion of the anticipated material
federal income tax consequences of the purchase, ownership and disposition of
Securities. Where appropriate, additional consequences will be discussed in the
Prospectus Supplement relating to a particular Series. Stroock & Stroock & Lavan
LLP, New York, New York, Brown & Wood LLP, San Francisco, California, or other
counsel to the Depositor specified in the related Prospectus Supplement (each,
"Special Tax Counsel"), is delivering its opinion regarding certain federal
income tax matters discussed below. The opinion addresses only those issues
specifically identified below as being covered by such opinion; however, such
opinion also states that the additional discussion set forth below accurately
sets forth Special Tax Counsel's advice with respect to material federal income
tax issues. As used hereinafter in "Federal Income Tax Consequences," "Mortgage
Loans" shall include Mortgage Certificates and Contracts and "Mortgage Pool"
shall include "Contract Pool." The following discussion does not purport to
discuss all federal income tax consequences that may be applicable to particular
categories of investors, some of which may be subject to special rules. Further,
the authorities on which this discussion are based are subject to change or
differing interpretation, which change or differing interpretation could apply
retroactively. This discussion does not address the state or local tax
consequences of the purchase, ownership and disposition of such Securities. It
is recommended that investors consult their own tax advisers in determining the
federal, state, local or other tax consequences to them of the purchase,
ownership and disposition of the Securities offered hereunder.
The following discussion addresses securities of two general types: (i)
certificates and/or notes ("REMIC Certificates") representing interests in a
Mortgage Pool ("REMIC Mortgage Pool") which the Master Servicer elects to have
treated as a real estate mortgage investment conduit ("REMIC") under Code
Sections 860A through 860G ("REMIC Provisions") and (ii) certificates and/or
notes ("Trust Certificates") representing certain interests in a Trust Fund
which the Master Servicer does not elect to have treated as a REMIC. REMIC
Certificates and Trust Certificates will be referred to collectively as
"Certificates."
Under the REMIC Provisions, REMICs may issue one or more classes of
"regular" interests and must issue one and only one class of "residual"
interests. A REMIC Certificate representing a regular interest in a REMIC
Mortgage Pool will be referred to as a "REMIC Regular Certificate" and a REMIC
Certificate representing a residual interest in a REMIC Mortgage Pool will be
referred to as a "REMIC Residual Certificate."
A Trust Certificate representing an undivided equitable ownership
interest in the principal of the Mortgage Loans constituting the related Trust
Fund, together with interest thereon at a remittance rate (which may be less
than, greater than or equal to the related pass-through interest rate), will be
referred to as a "Trust Fractional Certificate" and a Trust Certificate
representing an equitable ownership of all or a portion of the interest paid on
each Mortgage Loan constituting the related Trust Fund (net of normal servicing
fees) will be referred to as a "Trust Interest Certificate."
The following discussion is based in part upon the rules governing
original issue discount that are set forth in Code Sections 1271 through 1275
and in Treasury regulations issued under the original issue discount provisions
of the Code (the "OID Regulations"), and the Treasury regulations issued under
the provisions of the Code relating to REMICs (the "REMIC Regulations").
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II. REMIC TRUST FUNDS
A. CLASSIFICATION OF REMIC TRUST FUNDS
With respect to each Series of REMIC Certificates relating to a REMIC
Mortgage Pool, Special Tax Counsel will deliver its opinion generally to the
effect that, assuming that (i) a REMIC election is made timely in the required
form, (ii) there is ongoing compliance with all provisions of the related
Pooling and Servicing Agreement, (iii) certain representations set forth in the
Pooling and Servicing Agreement are true and (iv) there is continued compliance
with applicable provisions of the Code and applicable Treasury regulations
issued thereunder, such REMIC Mortgage Pool will qualify as a REMIC and the
classes of interests offered will be considered to be "regular interests" or
"residual interests" in that REMIC Mortgage Pool within the meaning of the REMIC
Provisions.
Holders of REMIC Certificates ("REMIC Certificateholders") should be
aware that, if an entity electing to be treated as a REMIC fails to comply with
one or more of the ongoing requirements of the Code for REMIC status during any
taxable year, the Code provides that the entity will not be treated as a REMIC
for such year and thereafter. In such event, an entity electing to be treated as
a REMIC may be taxable as a separate corporation under Treasury regulations, and
the REMIC Certificates issued by such entity may not be accorded the status
described below under " -- Characterization of Investments in REMIC
Certificates." In the case of an inadvertent termination of REMIC status, the
Code provides the Treasury Department with authority to issue regulations
providing relief. Any such relief, however, may be accompanied by sanctions,
such as the imposition of a corporate tax on all or a portion of the REMIC's
income for the period of time in which the requirements for REMIC status are not
satisfied.
Among the ongoing requirements in order to qualify for REMIC treatment
is that substantially all of the assets of the Trust Fund (as of the close of
the third calendar month beginning after the creation of the REMIC and
continually thereafter) must consist of only "qualified mortgages" and
"permitted investments." In order to be a "qualified mortgage" or to support
treatment of a certificate of participation therein as a "qualified mortgage,"
an obligation must be principally secured by an interest in real property. The
REMIC Regulations treat an obligation secured by manufactured housing qualifying
as a single family residence under Code Section 25(e)(10) as an obligation
secured by real property, without regard to the treatment of the obligation or
the property under state law. Under Code Section 25(e)(10), a single family
residence includes any manufactured home that has a minimum of 400 square feet
of living space and a minimum width in excess of 102 inches and that is of a
kind customarily used at a fixed location.
B. CHARACTERIZATION OF INVESTMENTS IN REMIC CERTIFICATES
In general, REMIC Certificates are not treated for federal income tax
purposes as ownership interests in the assets of a REMIC Mortgage Pool. However,
(i) REMIC Certificates held by a domestic building and loan association will
constitute a "regular or residual interest in a REMIC" within the meaning of
Code Section 7701(a)(19)(C)(xi) in the same proportion that the assets of the
REMIC Mortgage Pool underlying such Certificates ("Assets") would be treated as
"loans secured by an interest in real property" within the meaning of Code
Section 7701(a)(19)(C)(v) or as other assets described in Code Section
7701(a)(19)(C)(i) through (x); and (ii) REMIC Certificates held by a real estate
investment trust ("REIT") will constitute "real estate assets" within the
meaning of Code Section 856(c)(4)(A), and any amount includible in gross income
on the REMIC Certificates will be considered "interest on obligations secured by
mortgages on real property or on interests in real property" within the meaning
of Code Section 856(c)(3)(B) in the same proportion that, for both purposes, the
Assets of the REMIC would be treated as "interests in real property" as defined
in Code Section 856(c)(6)(C) (or, as provided in the Committee Report, as "real
estate assets" as defined in Code Section 856(c)(6)(B)). See " -- Non-REMIC
Trust Funds --
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Characterization of Investments in Trust Certificates -- Buydown Mortgage
Loans." Moreover, if 95% or more of the Assets qualify for any of the foregoing
treatments, the REMIC Certificates (and income thereon) will qualify for the
corresponding status in their entirety. Investors should be aware that the
investment of amounts in any Reserve Fund or GPM Fund in non-qualifying assets
would, and holding property acquired by foreclosure pending sale might, reduce
the amount of the REMIC Certificates that would qualify for the foregoing
treatment. The REMIC Regulations provide that payments on Mortgage Loans held
pending distribution are considered part of the Mortgage Loans for purposes of
Code Section 856(c)(4)(A); it is unclear whether such collected payments would
be so treated for purposes of Code Section 7701(a)(19)(C)(v), but there appears
to be no reason why analogous treatment should not be given to such collected
payments under that provision. The determination as to the percentage of the
REMIC's assets (or income) that will constitute assets (or income) described in
the foregoing Sections of the Code will be made with respect to each calendar
quarter based on the average adjusted basis (or average amount of income) of
each category of the assets held (or income accrued) by the REMIC during such
calendar quarter. The REMIC will report those determinations to
Certificateholders in the manner and at the times required by applicable
Treasury regulations. The Prospectus Supplement or the related Current Report on
Form 8-K for each Series of REMIC Certificates will describe the Assets as of
the Cut-off Date. REMIC Certificates held by certain financial institutions will
constitute an "evidence of indebtedness" within the meaning of Code Section
582(c)(1); in addition, regular interests in any other REMIC acquired by a REMIC
in accordance with the requirements of Code Section 860G(a)(3) or Section
860G(a)(4) will be treated as "qualified mortgages" within the meaning of Code
Section 860D(a)(4).
For purposes of characterizing an investment in REMIC Certificates, a
Contract secured by a Manufactured Home qualifying as a "single family
residence" under Code Section 25(e)(10) will constitute (i) a "real estate
asset" within the meaning of Code Section 856 and (ii) an asset described in
Code Section 7701(a)(19)(C). With respect to the Contracts included in a Trust
Fund that makes an election to be treated as a REMIC, each Unaffiliated Seller
will represent and warrant that each of the Manufactured Homes securing such
Contracts meets the definition of a "single family residence."
C. TIERED REMIC STRUCTURES
For certain Series of Certificates, two or more separate elections may
be made to treat designated portions of the related Trust Fund as REMICs
("Tiered REMICs") for federal income tax purposes. Upon the issuance of any such
series of Certificates, Special Tax Counsel will deliver its opinion generally
to the effect that, assuming compliance with all provisions of the related
Pooling and Servicing Agreement, the Tiered REMICs will each qualify as a REMIC
and the REMIC Certificates issued by the Tiered REMICs will be considered to
evidence ownership of REMIC Regular Certificates or REMIC Residual Certificates
in the related REMIC within the meaning of the REMIC Provisions.
Solely for purposes of determining whether the REMIC Certificates will
be "real estate assets" within the meaning of Code Section 856(c)(4)(A), and
assets described in Code Section 7701(a)(19)(C), and whether the income on such
Certificates is interest described in Code Section 856(c)(3)(B), the Tiered
REMICs will be treated as one REMIC.
D. TAXATION OF OWNERS OF REMIC REGULAR CERTIFICATES
Except as otherwise stated in this discussion, the REMIC Regular
Certificates will be treated for federal income tax purposes as debt instruments
issued by the REMIC Mortgage Pool and not as ownership interests in the REMIC
Mortgage Pool or its Assets. In general, interest, original issue discount and
market discount paid or accrued on a REMIC Regular Certificate will be treated
as ordinary income to the holder of such REMIC Regular Certificate.
Distributions in reduction of the stated redemption price at maturity of the
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REMIC Regular Certificate will be treated as a return of capital to the extent
of such holder's basis in such REMIC Regular Certificate. Holders of REMIC
Regular Certificates that otherwise report income under a cash method of
accounting will be required to report income with respect to REMIC Regular
Certificates under an accrual method.
1. Original Issue Discount
Certain REMIC Regular Certificates may be issued with "original issue
discount" within the meaning of Code Section 1273(a). Any holders of REMIC
Regular Certificates issued with original issue discount generally will be
required to include original issue discount in income as it accrues, in
accordance with a constant yield method that takes into account the compounding
of interest, in advance of the receipt of the cash attributable to such income.
The Master Servicer will report annually (or more frequently if required) to the
Internal Revenue Service (the "IRS") and to Certificateholders such information
with respect to the original issue discount accruing on the REMIC Regular
Certificates as may be required under Code Section 6049 and the regulations
thereunder. See " -- Reporting and Other Administrative Matters of REMICs"
below.
Rules governing original issue discount are set forth in Code Sections
1271 through 1275 and in the OID Regulations. Code Section 1272(a)(6) provides
special original issue discount rules applicable to REMIC Regular Certificates.
Code Section 1272(a)(6) requires that a mortgage prepayment assumption
("Prepayment Assumption") be used in computing the accrual of original issue
discount on REMIC Regular Certificates, and for certain other federal income tax
purposes. The Prepayment Assumption is to be determined in the manner prescribed
in Treasury regulations. To date, no such regulations have been promulgated. The
Committee Report indicates that the regulations will provide that the Prepayment
Assumption, if any, used with respect to a particular transaction must be the
same as that used by the parties in pricing the transaction. The Master Servicer
will use a Prepayment Assumption in reporting original issue discount that is
consistent with this standard. However, neither the Depositor nor the Master
Servicer makes any representation that the Mortgage Loans will in fact prepay at
the rate reflected in the Prepayment Assumption or at any other rate. Each
investor must make its own decision as to the appropriate prepayment assumption
to be used in deciding whether or not to purchase any of the REMIC Regular
Certificates. The Prospectus Supplement with respect to a Series of REMIC
Certificates will disclose the Prepayment Assumption to be used in reporting
original issue discount, if any, and for certain other federal income tax
purposes.
The total amount of original issue discount on a REMIC Regular
Certificate is the excess of the "stated redemption price at maturity" of the
REMIC Regular Certificate over its "issue price." Except as discussed in the
following two paragraphs, in general, the issue price of a particular class of
REMIC Regular Certificates offered hereunder will be the price at which a
substantial amount of REMIC Regular Certificates of that class is first sold to
the public (excluding bond houses and brokers), and the stated redemption price
at maturity of a REMIC Regular Certificate will be its Stated Principal Balance.
If a REMIC Regular Certificate is sold with accrued interest that
relates to a period prior to the issue date of such REMIC Regular Certificate,
the amount paid for the accrued interest will be treated instead as increasing
the issue price of the REMIC Regular Certificate. In addition, that portion of
the first interest payment in excess of interest accrued from the date of
initial issuance of the REMIC Regular Certificates (the "Closing Date") to the
first Distribution Date will be treated for federal income tax reporting
purposes as includible in the stated redemption price at maturity of the REMIC
Regular Certificates, and as excludible from income when received as a payment
of interest on the first Distribution
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Date (except to the extent of any accrued market discount as of that date). The
OID Regulations suggest, however, that some or all of this pre-issuance accrued
interest "may" be treated as a separate asset (and hence not includible in a
REMIC Regular Certificate's issue price or stated redemption price at maturity),
whose cost is recovered entirely out of interest paid on the first Distribution
Date.
The stated redemption price at maturity of a REMIC Regular Certificate
is equal to the total of all payments to be made on such Certificate other than
"qualified stated interest." Under the OID Regulations, "qualified stated
interest" is interest that is unconditionally payable at least annually during
the entire term of the Certificate at either (i) a single fixed rate that
appropriately takes into account the length of the interval between payments or
(ii) a current value of a single "qualified floating rate" or "objective rate"
(each, a "Single Variable Rate"). A "current value" is the value of a variable
rate on any day that is no earlier than three months prior to the first day on
which that value is in effect and no later than one year following that day. A
"qualified floating rate" is a rate whose variations can reasonably be expected
to measure contemporaneous variations in the cost of newly borrowed funds in the
currency in which the Certificate is denominated. Such a rate remains qualified
even though it is multiplied by a fixed, positive multiple greater than 0.65 but
not exceeding 1.35, increased or decreased by a fixed rate, or both. Certain
combinations of rates constitute a single qualified floating rate, including (i)
interest stated at a fixed rate for an initial period of less than one year
followed by a qualified floating rate if the value of the floating rate at the
Closing Date is intended to approximate the fixed rate, and (ii) two or more
qualified floating rates that can reasonably be expected to have approximately
the same values throughout the term of the Certificate. A combination of such
rates is conclusively presumed to be a single floating rate if the values of all
rates on the Closing Date are within 0.25 percentage points of each other. A
variable rate that is subject to an interest rate cap, floor, governor or
similar restriction on rate adjustment may be a qualified floating rate only if
such restriction is fixed throughout the term of the instrument, or is not
reasonably expected as of the Closing Date to cause the yield on the debt
instrument to differ significantly from the expected yield absent the
restriction. Final regulations issued on June 11, 1996 define an "objective
rate" as a rate determined using a single fixed formula and based on objective
financial information or economic information. However, an objective rate does
not include a rate based on information that is in the control of the issuer or
that is unique to the circumstances of a related party. A combination of
interest stated at a fixed rate for an initial period of less than one year
followed by an objective rate is treated as a single objective rate if the value
of the objective rate at the Closing Date is intended to approximate the fixed
rate; such a combination of rates is conclusively presumed to be a single
objective rate if the objective rate on the Closing Date does not differ from
the fixed rate by more than 0.25 percentage points. For a REMIC Regular
Certificate with a Single Variable Rate the qualified stated interest allocable
to an accrual period is increased (or decreased) if the interest actually paid
during an accrual period exceeds (or is less than) the interest assumed to be
paid under the Single Variable Rate. The qualified stated interest payable with
respect to certain variable rate debt instruments not bearing stated interest at
a Single Variable Rate is discussed below under " -- Variable Rate
Certificates." Under the foregoing rules, some of the payments of interest on a
Certificate bearing a fixed rate of interest for an initial period followed by a
qualified floating rate of interest in subsequent periods could be treated as
included in the stated redemption price at maturity if the initial fixed rate
were to differ sufficiently from the rate that would have been set using the
formula applicable to subsequent periods. See " -- Variable Rate Certificates."
Under a de minimis rule in the Code, as interpreted in the OID
Regulations, original issue discount on a REMIC Regular Certificate will be
considered to be zero if such original issue discount is less than 0.25% of the
stated redemption price at maturity of the REMIC Regular Certificate multiplied
by the weighted average life of the REMIC Regular Certificate. For this purpose,
the weighted average life of the REMIC Regular Certificate is computed as the
sum of the amounts determined by multiplying the amount of each payment under
the instrument (other than a payment of qualified stated interest) by a
fraction, whose numerator is the number of complete years from the issue date
until such payment is made and whose
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denominator is the stated redemption price at maturity of such REMIC Regular
Certificate. The IRS may take the position that this rule should be applied
taking into account the Prepayment Assumption and the effect of any anticipated
investment income. Under the OID Regulations, REMIC Regular Certificates bearing
only qualified stated interest except for any "teaser" rate, interest holiday or
similar provision are treated as subject to the de minimis rule if the greater
of the foregone interest or any excess of the Certificates' stated principal
amount over their issue price is less than such de minimis amount.
The OID Regulations generally treat de minimis original issue discount
as includible in income as each principal payment is made, based on the product
of the total amount of such de minimis original issue discount and a fraction,
whose numerator is the amount of such principal payment and whose denominator is
the outstanding principal balance of the REMIC Regular Certificate. The OID
Regulations also permit a Certificateholder to elect to accrue de minimis
original issue discount (together with stated interest, market discount and
original issue discount) into income currently based on a constant yield method.
See " -- Market Discount and Premium."
Each holder of a REMIC Regular Certificate must include in gross income
the sum of the "daily portions" of original issue discount on its REMIC Regular
Certificate for each day during its taxable year on which it held such REMIC
Regular Certificate. For this purpose, in the case of an original holder of a
REMIC Regular Certificate, the daily portions of original issue discount will be
determined as follows. A calculation will first be made of the portion of the
original issue discount that accrued during each accrual period, that is
generally each period that ends on a date that corresponds to a Distribution
Date on the REMIC Regular Certificate and begins on the first day following the
immediately preceding accrual period (or in the case of the first such period,
begins on the Closing Date). For any accrual period such portion will equal the
excess, if any, of (i) the sum of (a) the present value of all of the
distributions remaining to be made on the REMIC Regular Certificate, if any, as
of the end of the accrual period and (b) distributions made on such REMIC
Regular Certificate during the accrual period of amounts included in the stated
redemption price at maturity, over (ii) the adjusted issue price of such REMIC
Regular Certificate at the beginning of the accrual period. The present value of
the remaining payments referred to in the preceding sentence will be calculated
based on (i) the yield to maturity of the REMIC Regular Certificate, calculated
as of the settlement date, giving effect to the Prepayment Assumption, (ii)
events (including actual prepayments) that have occurred prior to the end of the
accrual period and (iii) the Prepayment Assumption. The adjusted issue price of
a REMIC Regular Certificate at the beginning of any accrual period will equal
the issue price of such Certificate, increased by the aggregate amount of
original issue discount with respect to such REMIC Regular Certificate that
accrued in prior accrual periods, and reduced by the amount of any distributions
made on such REMIC Regular Certificate in prior accrual periods of amounts
included in the stated redemption price at maturity. The original issue discount
accruing during any accrual period will then be allocated ratably to each day
during the period to determine the daily portion of original issue discount for
each day. With respect to an accrual period between the settlement date and the
first Distribution Date on a REMIC Regular Certificate that is shorter than a
full accrual period, the OID Regulations permit the daily portions of original
issue discount to be determined according to any reasonable method.
A subsequent purchaser of a REMIC Regular Certificate that purchases
such REMIC Regular Certificate at a cost (not including payment for accrued
qualified stated interest) less than its remaining stated redemption price at
maturity will also be required to include in gross income, for each day on which
it holds such REMIC Regular Certificate, the daily portions of original issue
discount with respect to such REMIC Regular Certificate, but reduced, if such
cost exceeds the "adjusted issue price," by an amount equal to the product of
(i) such daily portions and (ii) a constant fraction, whose numerator is such
excess and whose denominator is the sum of the daily portions of original issue
discount on such REMIC Regular Certificate for all days on or after the day of
purchase. The adjusted issued price of a REMIC Regular Certificate on any given
day is equal to the sum of the adjusted issue price (or, in the case of the
first accrual
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period, the issue price) of the REMIC Regular Certificate at the beginning of
the accrual period during which such day occurs and the daily portions of
original issue discount for all days during such accrual period prior to such
day, reduced by the aggregate amount of distributions made during such accrual
period prior to such day other than distributions of qualified stated interest.
Variable Rate Certificates. REMIC Regular Certificates bearing interest
at one or more variable rates are subject to certain special rules. The
qualified stated interest payable with respect to certain variable rate debt
instruments not bearing interest at a Single Variable Rate generally is
determined under the OID Regulations by converting such instruments into fixed
rate debt instruments. Instruments qualifying for such treatment generally
include those providing for stated interest at (i) more than one qualified
floating rate or (ii) a single fixed rate and (a) one or more qualified floating
rates or (b) a single "qualified inverse floating rate" (each, a "Multiple
Variable Rate"). A qualified inverse floating rate is an objective rate equal to
a fixed rate reduced by a qualified floating rate, the variations in which can
reasonably be expected to inversely reflect contemporaneous variations in the
qualified floating rate (disregarding permissible rate caps, floors, governors
and similar restrictions such as are described above).
Purchasers of REMIC Regular Certificates bearing a variable rate of
interest should be aware that there is uncertainty concerning the application of
Code Section 1272(a)(6) and the OID Regulations to such Certificates. In the
absence of other authority, the Master Servicer intends to be guided by the
provisions of the OID Regulations governing variable rate debt instruments in
adapting the provisions of Code Section 1272(a)(6) to such Certificates for the
purpose of preparing reports furnished to Certificateholders. The effect of the
application of such provisions generally will be to cause Certificateholders
holding Certificates bearing interest at a Single Variable Rate to take into
account for each period an amount corresponding approximately to the sum of (i)
the qualified stated interest accruing on the outstanding face amount of the
REMIC Regular Certificate as the stated interest rate for that Certificate
varies from time to time and (ii) the amount of original issue discount that
would have been attributable to that period on the basis of a constant yield to
maturity for a bond issued at the same time and issue price as the REMIC Regular
Certificate, having the same face amount and schedule of payments of principal
as such Certificate, subject to the same Prepayment Assumption, and bearing
interest at a fixed rate equal to the value of the applicable qualified floating
rate or qualified inverse floating rate in the case of a Certificate providing
for either such rate, or equal to the fixed rate that reflects the reasonably
expected yield on the Certificate in the case of a Certificate providing for an
objective rate other than an inverse floating rate, in each case as of the issue
date. Certificateholders holding REMIC Regular Certificates bearing interest at
a Multiple Variable Rate generally will take into account interest and original
issue discount under a similar methodology, except that the amounts of qualified
stated interest and original issue discount attributable to such a Certificate
first will be determined for an "equivalent" debt instrument bearing fixed
rates, the assumed fixed rates for which are (a) for each qualified floating
rate, the value of each such rate as of the Closing Date (with appropriate
adjustment for any differences in intervals between interest adjustment dates),
(b) for a qualified inverse floating rate, the value of the rate as of the
Closing Date and (c) for any other objective rate, the fixed rate that reflects
the yield that is reasonably expected for the Certificate. If the interest paid
or accrued with respect to a Multiple Variable Rate Certificate during an
accrual period differs from the assumed fixed interest rate, such difference
will be an adjustment (to interest or original issue discount, as applicable) to
the Certificateholder's taxable income for the taxable period or periods to
which such difference relates.
In the case of a Certificate that provides for stated interest at a
fixed rate in one or more accrual periods and either one or more qualified
floating rates or a qualified inverse floating rate in other accrual periods,
the fixed rate is first converted into an assumed variable rate. The assumed
variable rate will be a qualified floating rate or a qualified inverse floating
rate according to the type of actual variable rates provided by the Certificate,
and must be such that the fair market value of the REMIC Regular Certificate as
of issuance is approximately the same as the fair market value of an otherwise
identical debt instrument that
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provides for the assumed variable rate in lieu of the fixed rate. The REMIC
Regular Certificate is then subject to the determination of the amount and
accrual of original issue discount as described above, by reference to the
hypothetical variable rate instrument.
Purchasers of variable rate REMIC Regular Certificates further should
be aware that the provisions of the OID Regulations applicable to variable rate
debt instruments have been limited and may not apply to some REMIC Regular
Certificates having variable rates. Since the Treasury regulations, issued in
final form on June 11, 1996, applicable to instruments having contingent
payments (the "1996 Contingent Debt Regulations") are not applicable to
instruments that are subject to Code Section 1272(a)(6), prospective purchasers
of variable rate REMIC Regular Certificates are advised to consult their tax
advisers concerning the tax treatment of such Certificates.
2. Market Discount and Premium
A Certificateholder that purchases a REMIC Regular Certificate at a
market discount, that is, at a purchase price less than the REMIC Regular
Certificate's stated redemption price at maturity, or, in the case of a REMIC
Regular Certificate issued with original issue discount, the REMIC Regular
Certificate's adjusted issue price (as defined under " -- Original Issue
Discount"), will recognize market discount upon receipt of each payment of
principal. In particular, such a holder will generally be required to allocate
each payment of principal on a REMIC Regular Certificate first to accrued market
discount, and to recognize ordinary income to the extent such principal payment
does not exceed the aggregate amount of accrued market discount on such REMIC
Regular Certificate not previously included in income. Such market discount must
be included in income in addition to any original issue discount includible in
income with respect to such REMIC Regular Certificate.
A Certificateholder may elect to include market discount in income
currently as it accrues, rather than including it on a deferred basis in
accordance with the foregoing. If made, such election will apply to all market
discount bonds acquired by such Certificateholder on or after the first day of
the first taxable year to which such election applies. In addition, the OID
Regulations permit a Certificateholder to elect to accrue all interest, discount
(including de minimis market or original issue discount), reduced by any
premium, in income as interest, based on a constant yield method. If such an
election were made for a REMIC Regular Certificate with market discount, the
Certificateholder is deemed to have made an election to currently include market
discount in income with respect to all other debt instruments having market
discount that such Certificateholder acquires during the year of the election or
thereafter. Similarly, a Certificateholder that makes this election for a
Certificate that is acquired at a premium is deemed to have made an election to
amortize bond premium, as described below, with respect to all debt instruments
having amortizable bond premium that such Certificateholder owns at the
beginning of the first taxable year to which the election applies or acquires
thereafter. The election to accrue interest, discount and premium on a constant
yield method with respect to a Certificate is irrevocable, unless the IRS
consents to a revocation.
Under a statutory de minimis exception, market discount with respect to
a REMIC Regular Certificate will be considered to be zero for purposes of Code
Sections 1276 through 1278 if such market discount is less than 0.25% of the
stated redemption price at maturity of such REMIC Regular Certificate multiplied
by the number of complete years to maturity remaining after the date of its
purchase. In interpreting a similar de minimis rule with respect to original
issue discount on obligations payable in installments, the OID Regulations refer
to the weighted average maturity of obligations, and it is likely that the same
rule will be applied in determining whether market discount is de minimis. It
appears that de minimis market discount on a REMIC Regular Certificate would be
treated in a manner similar to original issue discount of a de minimis amount.
See "Taxation of Holders of REMIC Regular Certificates -- Original Issue
Discount." Such treatment would result in discount being included in income at a
slower rate than
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discount would be required to be included using the method described above.
However, Treasury regulations implementing the market discount de minimis
exception have not been issued in proposed, temporary or final form, and the
precise treatment of de minimis market discount on obligations payable in more
than one installment therefore remains uncertain.
The Tax Reform Act of 1986 (the "1986 Act") grants authority to the
Treasury Department to issue regulations providing for the method for accruing
market discount of more than a de minimis amount on debt instruments, the
principal of which is payable in more than one installment. Until such time as
regulations are issued by the Treasury Department, certain rules described in
the Committee Report might apply. Under those rules, the holder of a bond
purchased with more than de minimis market discount may elect to accrue such
market discount either on the basis of a constant yield method or on the basis
of the appropriate proportionate method described below. Under the proportionate
method for obligations issued with original issue discount, the amount of market
discount that accrues during a period is equal to the product of (i) the total
remaining market discount, multiplied by (ii) a fraction, the numerator of which
is the original issue discount accruing during the period and the denominator of
which is the total remaining original issue discount at the beginning of the
period. Under the proportionate method for obligations issued without original
issue discount, the amount of market discount that accrues during a period is
equal to the product of (i) the total remaining market discount, multiplied by
(ii) a fraction, the numerator of which is the amount of stated interest paid
during the accrual period and the denominator of which is the total amount of
stated interest remaining to be paid at the beginning of the period. The
Prepayment Assumption, if any, used in calculating the accrual of original issue
discount is to be used in calculating the accrual of market discount under any
of the above methods. Because the regulations referred to in this paragraph have
not been issued, it is not possible to predict what effect such regulations
might have on the tax treatment of a REMIC Regular Certificate purchased at a
discount in the secondary market.
Further, a purchaser generally will be required to treat a portion of
any gain on sale or exchange of a REMIC Regular Certificate as ordinary income
to the extent of the market discount accrued to the date of disposition under
one of the foregoing methods, less any accrued market discount previously
reported as ordinary income. Such purchaser also may be required to defer a
portion of its interest deductions for the taxable year attributable to any
indebtedness incurred or continued to purchase or carry such REMIC Regular
Certificate. 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. If such holder elects to include market discount in income currently
as it accrues on all market discount instruments acquired by such holder in that
taxable year or thereafter, the interest deferral rule described above will not
apply.
A REMIC Regular Certificate purchased at a cost (not including payment
for accrued qualified stated interest) greater than its remaining stated
redemption price at maturity will be considered to be purchased at a premium.
The holder of such a REMIC Regular Certificate may elect to amortize such
premium under the constant yield method. The OID Regulations also permit
Certificateholders to elect to include all interest, discount and premium in
income based on a constant yield method, further treating the Certificateholder
as having made the election to amortize premium generally, as described above.
The Committee Report indicates a Congressional intent that the same rules that
will apply to accrual of market discount on installment obligations will also
apply in amortizing bond premium under Code Section 171 on installment
obligations such as the REMIC Regular Certificates.
Treasury regulations under Code Section 171 were issued on December 30,
1997 ("Bond Premium Amortization Regulations") which generally provide that
amortizable bond premium is amortized over the term of a note by offsetting the
qualified stated interest allocable to an accrual period with the amortizable
bond premium allocable to
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such period using a specified constant yield method. To the extent that the
amortizable bond premium allocated to an accrual period exceeds the qualified
stated interest allocable to such period, the excess is deductible under Code
Section 171 to the extent such excess does not exceed the difference between (i)
prior interest inclusions over (ii) prior amortizable bond premium deductions on
the bond ("Bond Premium Amortization Limit"), with the excess over the Bond
Premium Amortization Limit carried forward to the next accrual period and
treated as amortizable bond premium allocable to that period. The Bond Premium
Amortization Regulations are effective for notes acquired on or after March 2,
1998. However, if a holder makes the election to amortize bond premium for the
taxable year containing March 2, 1998, or any subsequent taxable year, the
Treasury regulations would apply to debt instruments held on or after the first
day for the taxable year in which the election is made. The Bond Premium
Amortization Regulations specifically do not apply to debt instruments described
in Code Section 1272(a)(b) such as the REMIC Regular Certificates. However, it
is possible that by analogy to these Regulations, any premium on a REMIC Regular
Certificate in excess of interest income may be deductible to the extent of
prior accruals of interests.
3. Treatment of Subordinated Securities
As described above under "Credit Support -- Subordinated Certificates,"
certain Series of Securities may contain one or more Classes or Subclasses of
Subordinated Securities. Holders of Subordinated Securities will be required to
report income with respect to such Securities on the accrual method without
giving effect to delays and reductions in distributions attributable to defaults
or delinquencies on any Mortgage Loans or Contracts, except possibly, in the
case of income that constitutes qualified stated interest, to the extent that it
can be established that such amounts are uncollectible. As a result, the amount
of income reported by a Securityholder of a Subordinated Security in any period
could significantly exceed the amount of cash distributed to such Securityholder
in that period.
Although not entirely clear, it appears that a corporate holder or a
holder who holds a Regular Certificate in the course of a trade or business
generally should be allowed to deduct as an ordinary loss any loss sustained on
account of partial or complete worthlessness of a Subordinated Security.
Although similarly unclear, a noncorporate holder who does not hold such Regular
Certificate in the course of a trade or business generally should be allowed to
deduct as a short-term capital loss any loss sustained on account of complete
worthlessness of a Subordinated Security. Special rules are applicable to banks
and thrift institutions, including rules regarding reserves for bad debts.
Holders of Subordinated Securities should consult their own tax advisers
regarding the appropriate timing, character and amount of any loss sustained
with respect to Subordinated Securities.
E. TAXATION OF OWNERS OF REMIC RESIDUAL CERTIFICATES
1. General
An owner of a REMIC Residual Certificate ("Residual Owner") generally
will be required to report its daily portion of the taxable income or, subject
to the limitation described below in " -- Basis Rules and Distributions," the
net loss of the REMIC Mortgage Pool for each day during a calendar quarter that
the Residual Owner owned such REMIC Residual Certificate. For this purpose, the
daily portion will be determined by allocating to each day in the calendar
quarter, using a 30 days per month/90 days per quarter/360 days per year
counting convention, its ratable portion of the taxable income or net loss of
the REMIC Mortgage Pool for such quarter, and by allocating the daily portions
among the Residual Owners (on such day) in accordance with their percentage of
ownership interests on such day. Any amount included in the gross income of, or
allowed as a loss to, any Residual Owner by virtue of the rule referred to in
this paragraph will be treated as ordinary income or loss. Purchasers of REMIC
Residual Certificates should be aware that taxable income from such Certificates
may exceed cash distributions with respect thereto in any taxable year. For
example, if the Mortgage Loans are acquired by a REMIC at a discount, then the
holder of a residual interest may recognize income without corresponding cash
distributions. This result could occur
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because a payment produces recognition by the REMIC of discount on the Mortgage
Loan while all or a portion of such payment could be used in whole or in part to
make principal payments on REMIC Regular Certificates issued without substantial
discount. Taxable income may also be greater in earlier years as a result of the
fact that interest expense deductions, expressed as a percentage of the
outstanding principal amount of the REMIC Regular Certificates, will increase
over time as the lower yielding sequences of Certificates are paid, whereas
interest income with respect to any given fixed rate Mortgage Loan will remain
constant over time as a percentage of the outstanding principal amount of that
loan.
Any payments received by a holder of a REMIC Residual Certificate in
connection with the acquisition of such Certificate will be taken into account
in determining the income of such holder for federal income tax purposes.
Although it appears likely that any such payment would be includible in income
immediately upon its receipt, the IRS might assert that such payment should be
included in income over time according to an amortization schedule or according
to some other method. Because of the uncertainty concerning the treatment of
such payments, holders of REMIC Residual Certificates should consult their tax
advisers concerning the treatment of such payments for income tax purposes.
2. Taxable Income or Net Loss of the REMIC Trust Fund
The taxable income or net loss of the REMIC Mortgage Pool will reflect
a netting of income from the Mortgage Loans, any cancellation of indebtedness
income due to the allocation of Realized Losses to REMIC Regular Certificates,
and the deductions and losses allowed to the REMIC Mortgage Pool. Such taxable
income or net loss for a given calendar quarter will be determined in the same
manner as for an individual having the calendar year as his taxable year and
using the accrual method of accounting, with certain modifications. The first
modification is that a deduction will be allowed for accruals of interest
(including original issue discount) on the REMIC Regular Certificates. Second,
market discount equal to the excess of any Mortgage Loan's adjusted issue price
(as determined above under " -- Taxation of Owners of REMIC Regular Certificates
-- Market Discount and Premium") over its fair market value at the time of its
transfer to the REMIC Mortgage Pool generally will be included in income as it
accrues, based on a constant yield method and on the Prepayment Assumption. For
this purpose, the Master Servicer intends to treat the fair market value of the
Mortgage Loans as being equal to the aggregate issue prices of the REMIC Regular
Certificates and REMIC Residual Certificates; if one or more classes of REMIC
Regular Certificates or REMIC Residual Certificates are retained by the
Depositor, the Master Servicer will estimate the value of such retained
interests in order to determine the fair market value of the Mortgage Loans for
this purpose. Third, no item of income, gain, loss or deduction allocable to a
prohibited transaction (see " -- Prohibited Transactions and Other Possible
REMIC Taxes" below) will be taken into account. Fourth, the REMIC Mortgage Pool
generally may not deduct any item that would not be allowed in calculating the
taxable income of a partnership by virtue of Code Section 703(a)(2). Fifth, the
REMIC Regulations provide that the limitation on miscellaneous itemized
deductions imposed on individuals by Code Section 67 will not be applied at the
Mortgage Pool level to the servicing fees paid to the Master Servicer or
sub-servicers if any. See, however, "-- Pass-Through of Servicing Fees" below.
Sixth, net income from foreclosure property is reduced by the amount of tax on
net income from foreclosure property. If the deductions allowed to the REMIC
Mortgage Pool exceed its gross income for a calendar quarter, such excess will
be the net loss for the REMIC Mortgage Pool for that calendar quarter.
3. Basis Rules and Distributions
Any distribution by a REMIC Mortgage Pool to a Residual Owner will not
be included in the gross income of such Residual Owner to the extent it does not
exceed the adjusted basis of such Residual Owner's interest in a REMIC Residual
Certificate. Such distribution will reduce the adjusted basis of such interest,
but not below zero. To the extent a distribution exceeds the adjusted basis of
the REMIC Residual
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Certificate, it will be treated as gain from the sale of the REMIC Residual
Certificate. See " -- Sales of REMIC Certificates" below. The adjusted basis of
a REMIC Residual Certificate is equal to the amount paid for such REMIC Residual
Certificate, increased by amounts included in the income of the Residual Owner
and decreased by distributions and by net losses taken into account with respect
to such interest.
A Residual Owner is not allowed to take into account any net loss for
any calendar quarter to the extent such net loss exceeds such Residual Owner's
adjusted basis in its REMIC Residual Certificate as of the close of such
calendar quarter (determined without regard to such net loss). Any loss
disallowed by reason of this limitation may be carried forward indefinitely to
future calendar quarters and, subject to the same limitation, may be used only
to offset income from the REMIC Residual Certificate.
The effect of these basis and distribution rules is that a Residual
Owner may not amortize its basis in a REMIC Residual Certificate, but may only
recover its basis through distributions, through the deduction of any net losses
of the REMIC Mortgage Pool or upon the sale of its REMIC Residual Certificate.
See " -- Sales of REMIC Certificates" below.
4. Excess Inclusions
Any "excess inclusions" with respect to a REMIC Residual Certificate
are subject to certain special tax rules. With respect to a Residual Owner, the
excess inclusion for any calendar quarter is defined as the excess (if any) of
the daily portions of taxable income over the sum of the "daily accruals" for
each day during such quarter that such REMIC Residual Certificate was held by
such Residual Owner. The daily accruals are determined by allocating to each day
during a calendar quarter its ratable portion of the product of the "adjusted
issue price" of the REMIC Residual Certificate at the beginning of the calendar
quarter and 120% of the long-term "applicable federal rate" (generally, an
average of current yields on Treasury securities of comparable maturity, and
hereafter the "AFR") in effect at the time of issuance of the REMIC Residual
Certificate. For this purpose, the adjusted issue price of a REMIC Residual
Certificate as of the beginning of any calendar quarter is the issue price of
the REMIC Residual Certificate, increased by the amount of daily accruals for
all prior quarters and decreased by any distributions made with respect to such
REMIC Residual Certificate before the beginning of such quarter. The issue price
of a REMIC Residual Certificate is the initial offering price to the public
(excluding bond houses and brokers) at which a substantial amount of the REMIC
Residual Certificates were sold.
For Residual Owners, an excess inclusion cannot be offset by
deductions, losses or loss carryovers from other activities. However, net
operating loss carryovers are determined without regard to excess inclusion
income. For Residual Owners that are subject to tax on unrelated business
taxable income (as defined in Code Section 511), an excess inclusion is treated
as unrelated business taxable income. For Residual Owners that are nonresident
alien individuals or foreign corporations generally subject to United States 30%
withholding tax, even if interest paid to such Residual Owners is generally
eligible for exemptions from such tax, an excess inclusion will be subject to
such tax and no tax treaty rate reduction or exemption may be claimed with
respect thereto. See " -- Foreign Investors in REMIC Certificates" below. The
Small Business Job Protection Act of 1996 ("SBJPA of 1996") has eliminated the
special rule permitting Section 593 institutions ("thrift institutions") to use
net operating losses and other allowable deductions to offset their excess
inclusion income from REMIC Residual Certificates that have "significant value"
within the meaning of the REMIC Regulations, effective for taxable years
beginning after December 31, 1995, except with respect to REMIC Residual
Certificates continuously held by thrift institutions since November 1, 1995.
In addition, the SBJPA of 1996 provides three rules for determining the
effect of excess inclusions on the alternative minimum taxable income of a
Residual Owner. First, alternative minimum taxable income
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for a Residual Owner is determined without regard to the special rule, discussed
above, that taxable income cannot be less than excess inclusions. Second, a
Residual Owner's alternative minimum taxable income for a taxable year cannot be
less than the excess inclusions for the year. Third, the amount of any
alternative minimum tax net operating loss deduction must be computed without
regard to any excess inclusions. These rules are effective for taxable years
beginning after December 31, 1986, unless a Residual Owner elects to have such
rules apply only to taxable years beginning after August 20, 1996.
In the case of any REMIC Residual Certificates held by a REIT, the
aggregate excess inclusions with respect to such REMIC Residual Certificates,
reduced (but not below zero) by the real estate investment trust taxable income
(within the meaning of Code Section 857(b)(2), excluding any net capital gain),
will be allocated among the shareholders of such trust in proportion to the
dividends received by such shareholders from such trust, and any amount so
allocated will be treated as an excess inclusion with respect to a REMIC
Residual Certificate as if held directly by such shareholder.
5. Noneconomic REMIC Residual Certificates
Under the REMIC Regulations, transfers of "noneconomic" REMIC Residual
Certificates will be disregarded for all federal income tax purposes if "a
significant purpose of the transfer was to enable the transferor to impede the
assessment or collection of tax." If such transfer is disregarded, the purported
transferor will continue to remain liable for any taxes due with respect to the
income on such "noneconomic" REMIC Residual Certificate. The REMIC Regulations
provide that a REMIC Residual Certificate is noneconomic unless, at the time of
its transfer and based on the Prepayment Assumption and any required or
permitted clean up calls or required liquidation provided for in the REMIC's
organizational documents, (i) the present value of the expected future
distributions (discounted using the AFR) on the REMIC Residual Certificate
equals at least the product of the present value of the anticipated excess
inclusions and the highest tax rate applicable to corporations for the year of
the transfer and (ii) the transferor reasonably expects that the transferee will
receive distributions with respect to the REMIC Residual Certificate at or after
the time the taxes accrue on the anticipated excess inclusions in an amount
sufficient to satisfy the accrued taxes. Accordingly, all transfers of REMIC
Residual Certificates that may constitute noneconomic residual interests will be
subject to certain restrictions under the terms of the related Pooling and
Servicing Agreement that are intended to reduce the possibility of any such
transfer being disregarded. Such restrictions will require each party to a
transfer to provide an affidavit that no purpose of such transfer is to impede
the assessment or collection of tax, including certain representations as to the
financial condition of the prospective transferee. Prior to purchasing a REMIC
Residual Certificate, prospective purchasers should consider the possibility
that a purported transfer of such REMIC Residual Certificate by such a purchaser
to another purchaser at some future date may be disregarded in accordance with
the above-described rules, which would result in the retention of tax liability
by such purchaser. The applicable Prospectus Supplement will disclose whether
offered REMIC Residual Certificates may be considered "noneconomic" residual
interests under the REMIC Regulations; provided, however, that any disclosure
that a REMIC Residual Certificate will or will not be considered "noneconomic"
will be based upon certain assumptions, and the Depositor will make no
representation that a REMIC Residual Certificate will not be considered
"noneconomic" for purposes of the above-described rules or that a REMIC Residual
Owner will receive distributions calculated pursuant to such assumptions. See "
-- Foreign Investors in REMIC Certificates" below for additional restrictions
applicable to transfers of certain REMIC Residual Certificates to foreign
persons.
6. Tax-Exempt Investors
Tax-exempt organizations (including employee benefit plans) that are
subject to tax on unrelated business taxable income (as defined in Code Section
511) will be subject to tax on any excess inclusions
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attributed to them as owners of Residual Certificates. Excess inclusion income
associated with a Residual Certificate may significantly exceed cash
distributions with respect thereto. See " -- Excess Inclusions" above.
Generally, tax-exempt organizations that are not subject to federal
income taxation on "unrelated business taxable income" pursuant to Code Section
511 are treated as "disqualified organizations" under provisions of the
"Technical and Miscellaneous Revenue Act of 1988" (the "1988 Act"). Under
provisions of the applicable Agreement, such organizations generally are
prohibited from owning Residual Certificates. See " -- Sales of REMIC
Certificates" below.
7. Real Estate Investment Trusts
If the applicable Prospectus Supplement so provides, a Mortgage Pool
may hold Mortgage Loans bearing interest based wholly or partially on Mortgagor
profits, Mortgaged Property appreciation, or similar contingencies. Such
interest, if earned directly by a REIT, would be subject to the limitations of
Code Sections 856(f) and 856(j). Treasury regulations treat a REIT holding a
REMIC Residual Certificate for a principal purpose of avoiding such Code
provisions as receiving directly the income of the REMIC Mortgage Pool, hence
potentially jeopardizing its qualification for taxation as a REIT and exposing
such income to taxation as a prohibited transaction at a 100% rate.
8. Mark-to-Market Rules
Code Section 475 generally requires that securities dealers include
securities in inventory at their fair market value, recognizing gain or loss as
if the securities were sold at the end of each tax year. Treasury regulations
provide that, for purposes of this mark-to-market requirement, a REMIC Residual
Certificate acquired on or after January 4, 1995 is not treated as a security
and thus may not be marked to market.
9. Partnership Holders
Special rules for electing partnerships with at least 100 members were
adopted in the Taxpayer Relief Act of 1997 (the "1997 Act"). There are special
rules relating to such electing partnerships that hold REMIC Residual
Certificates. Large partnerships which have or are considering making this
election should consult with their tax advisors concerning the consequences of
holding a REMIC Residual Certificate.
F. SALES OF REMIC CERTIFICATES
If a REMIC Certificate is sold, the seller will recognize gain or loss
equal to the difference between the amount realized on the sale and its adjusted
basis in the REMIC Certificate. The adjusted basis of a REMIC Regular
Certificate generally will equal the cost of such REMIC Regular Certificate to
the seller, increased by any original issue discount or market discount included
in the seller's gross income with respect to such REMIC Regular Certificate and
reduced by premium amortization deductions and distributions previously received
by the seller of amounts included in the stated redemption price at maturity of
such REMIC Regular Certificate. The adjusted basis of a REMIC Residual
Certificate will be determined as described under " -- Taxation of Owners of
REMIC Residual Certificates -- Basis Rules and Distributions." Gain from the
disposition of a REMIC Regular Certificate that might otherwise be treated as a
capital gain will be treated as ordinary income to the extent that such gain
does not exceed the excess, if any, of (i) the amount that would have been
includible in such holder's income had income accrued at a rate equal to 110% of
the AFR as of the date of purchase over (ii) the amount actually includible in
such holder's income. Except as otherwise provided under " -- Taxation of Owners
of REMIC Regular Certificates -- Market Discount and Premium" and under Code
Section 582(c), any additional gain or any loss on the sale
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or exchange of a REMIC Certificate will be capital gain or loss, provided such
REMIC Certificate is held as a capital asset (generally, property held for
investment) within the meaning of Code Section 1221.
All or a portion of any gain from the sale of a REMIC Certificate that
might otherwise be capital gain may be treated as ordinary income (i) if such
Certificate is held as part of a "conversion transaction" as defined in Code
Section 1258(c), up to the amount of interest that would have accrued on the
holder's net investment in the conversion transaction at 120% of the appropriate
applicable Federal rate under Code Section 1274(d) in effect at the time the
taxpayer entered into the transaction reduced by any amount treated as ordinary
income with respect to any prior disposition or other termination of a position
that was held as part of such transaction, or (ii) in the case of a noncorporate
taxpayer that has made an election under Code Section 163(d)(4) to have net
capital gains taxed as investment income at ordinary income rates.
If a Residual Owner sells a REMIC Residual Certificate at a loss, the
loss will not be recognized if, within six months before or after the sale of
the REMIC Residual Certificate, such Residual Owner purchases another residual
in any REMIC or any interest in a taxable mortgage pool (as defined in Code
Section 7701(i)) comparable to a residual interest in a REMIC. Such disallowed
loss will be allowed upon the sale of the other residual interest (or comparable
interest) if the rule referred to in the preceding sentence does not apply to
that sale. While the Committee Report states that this rule may be modified by
Treasury regulations, the REMIC Regulations do not address this issue and it is
not clear whether any such modification will in fact be implemented or, if
implemented, what its precise nature or effective date would be.
The 1988 Act makes transfers of a REMIC Residual Certificate to certain
"disqualified organizations" subject to an additional tax on the transferor in
an amount equal to the maximum corporate tax rate applied to the present value
(using a discount rate equal to the AFR) of the total anticipated excess
inclusions with respect to such residual interest for the periods after the
transfer. For this purpose, "disqualified organizations" includes (i) the United
States, any state or political subdivision of a state, any foreign government or
international organization or any agency or instrumentality of any of the
foregoing, (ii) any tax-exempt entity (other than a Code Section 521
cooperative) which is not subject to the tax on unrelated business income and
(iii) any rural electrical or telephone cooperative. The anticipated excess
inclusions must be determined as of the date that the REMIC Residual Certificate
is transferred and must be based on events that have occurred up to the time of
such transfer, the Prepayment Assumption and any required or permitted clean up
calls or required liquidation provided for in the REMIC's organizational
documents. The tax generally is imposed on the transferor of the REMIC Residual
Certificate, except that it is imposed on an agent for a disqualified
organization if the transfer occurs through such agent. The applicable Agreement
requires, as a prerequisite to any transfer of a Residual Certificate, the
delivery to the Trustee of an affidavit of the transferee to the effect that it
is not a disqualified organization and contains other provisions designed to
render any attempted transfer of a Residual Certificate to a disqualified
organization void.
In addition, if a "pass-through entity" includes in income excess
inclusions with respect to a REMIC Residual Certificate, and a disqualified
organization is the record holder of an interest in such entity at any time
during any taxable year of such entity, then a tax will be imposed on such
entity equal to the product of (i) the amount of excess inclusions on the REMIC
Residual Certificate for such taxable year that are allocable to the interest in
the pass-through entity held by such disqualified organization and (ii) the
highest marginal federal income tax rate imposed on corporations. A pass-through
entity will not be subject to this tax for any period with respect to any
holder, however, if the record holder of the interest in such entity furnishes
to such entity (i) such holder's social security number and a statement under
penalty of perjury that such social security number is that of the record holder
or (ii) a statement under penalty of perjury that such record holder is not a
disqualified organization. For these purposes, a "pass-through entity" means any
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regulated investment company, REIT, trust, partnership or certain other entities
described in Code Section 860E(e)(6). In addition, a person holding an interest
in a pass-through entity as a nominee for another person shall, with respect to
such interest, be treated as a pass-through entity.
The 1997 Act provides that for taxable years beginning after December
31, 1997, all partners of certain electing partnerships having 100 or more
partners ("electing large partnerships") will be treated as disqualified
organizations for purposes of the tax imposed on pass-through entities if such
electing large partnerships hold residual interests in a REMIC. However, the
electing large partnership would be entitled to exclude the excess inclusion
income from gross income for purposes of determining the taxable income of the
partners. When applicable, the provisions would also disallow 70% of an electing
large partnership's miscellaneous itemized deductions, including deductions for
servicing and guaranty fees and any expenses of the REMIC, although the
remaining deductions would generally be allowed at the partnership level and
would not be subject to the 2% floor applicable to individual partners. See "G.
Pass-Through of Servicing Fees" below.
G. PASS-THROUGH OF SERVICING FEES
The general rule is that Residual Owners take into account taxable
income or net loss of the related REMIC Mortgage Pool. Under that rule,
servicing compensation of the Master Servicer and the subservicers (if any) will
be allocated to the holders of the REMIC Residual Certificates, and therefore
will not affect the income or deductions of holders of REMIC Regular
Certificates. However, in the case of a "single-class REMIC," such expenses and
an equivalent amount of additional gross income will be allocated among all
holders of REMIC Regular Certificates and REMIC Residual Certificates for
purposes of the limitations on the deductibility of certain miscellaneous
itemized deductions by individuals contained in Code Sections 56(b)(1) and 67.
Generally, any holder of a REMIC Residual Certificate and any holder of a REMIC
Residual Certificate issued by a "single-class REMIC" who is an individual,
estate or trust (including such a person that holds an interest in a
pass-through entity holding such a REMIC Certificate) will be able to deduct
such expenses in determining regular taxable income only to the extent that such
expenses together with certain other miscellaneous itemized deductions of such
individual, estate or trust exceed 2% of adjusted gross income; such a holder
may not deduct such expenses to any extent in determining liability for
alternative minimum tax. Accordingly, REMIC Residual Certificates, and REMIC
Regular Certificates receiving an allocation of servicing compensation, may not
be appropriate investments for individuals, estates or trusts, and such persons
should carefully consult with their own tax advisers regarding the advisability
of an investment in such Certificates.
A "single-class REMIC" is a REMIC that either (i) would be treated as
an investment trust under the provisions of Treasury Regulation Section
301.7701-4(c) in the absence of a REMIC election, or (ii) is substantially
similar to such an investment trust and is structured with the principal purpose
of avoiding the allocation of investment expenses to holders of REMIC Regular
Certificates. The Depositor intends (subject to certain exceptions which, if
applicable, will be stated in the applicable Prospectus Supplement) to treat
each REMIC Mortgage Pool as other than a "single-class REMIC," consequently
allocating servicing compensation expenses and related income amounts entirely
to REMIC Residual Certificates and in no part to REMIC Regular Certificates.
H. PROHIBITED TRANSACTIONS AND OTHER POSSIBLE REMIC TAXES
The Code imposes a tax on REMIC Mortgage Pools equal to 100% of the net
income derived from "prohibited transactions." In general, a prohibited
transaction means the disposition of a Mortgage Loan other than pursuant to
certain specified exceptions, the receipt of income from a source other than a
Mortgage Loan or certain other permitted investments, the receipt of
compensation for services, or gain
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from the disposition of an asset purchased with the payments on the Mortgage
Loans for temporary investment pending distribution on the REMIC Certificates.
The Code also imposes a 100% tax on the value of any contribution of assets to
the REMIC after the "startup day" (generally the day on which the regular and
residual interests are issued), other than pursuant to specified exceptions, and
subjects "net income from foreclosure property" to tax at the highest corporate
rate. It is not anticipated that a REMIC Mortgage Pool will engage in any such
transactions or receive any such income.
I. TERMINATION OF A REMIC TRUST FUND
In general, no special tax consequences will apply to a holder of a
REMIC Regular Certificate upon the termination of the REMIC Mortgage Pool by
virtue of the final payment or liquidation of the last Mortgage Loan remaining
in the REMIC Mortgage Pool. If a Residual Owner's adjusted basis in its REMIC
Residual Certificate at the time such termination occurs exceeds the amount of
cash distributed to such Residual Owner in liquidation of its interest, then,
although the matter is not entirely free from doubt, it appears that the
Residual Owner would be entitled to a loss (which could be a capital loss) equal
to the amount of such excess.
J. REPORTING AND OTHER ADMINISTRATIVE MATTERS OF REMICS
Reporting of interest income, including any original issue discount,
with respect to REMIC Regular Certificates is required annually, and may be
required more frequently under Treasury regulations. Certain holders of REMIC
Regular Certificates who are generally exempt from information reporting on debt
instruments, such as corporations, banks, registered securities or commodities
brokers, real estate investment trusts, registered investment companies, common
trust funds, charitable remainder annuity trusts and unitrusts, will be provided
interest and original issue discount income information and the information set
forth in the following paragraph upon request in accordance with the
requirements of the Treasury regulations. The information must be provided by
the later of 30 days after the end of the quarter for which the information was
requested, or two weeks after the receipt of the request. The REMIC Mortgage
Pool must also comply with rules requiring the face of a REMIC Certificate
issued at more than a de minimis discount to disclose the amount of original
issue discount and the issue date and requiring such information to be reported
to the Treasury Department.
The REMIC Regular Certificate information reports must include a
statement of the "adjusted issue price" of the REMIC Regular Certificate at the
beginning of each accrual period. In addition, the reports must include
information necessary to compute the accrual of any market discount that may
arise upon secondary trading of REMIC Regular Certificates. Because exact
computation of the accrual of market discount on a constant yield method would
require information relating to the holder's purchase price which the REMIC
Mortgage Pool may not have, it appears that this provision will only require
information pertaining to the appropriate proportionate method of accruing
market discount.
The responsibility for complying with the foregoing reporting rules
will be borne by the Master Servicer.
For purposes of the administrative provisions of the Code, REMIC Pools
will be treated as partnerships and the holders of Residual Certificates will be
treated as partners. The Master Servicer will file federal income tax
information returns on behalf of the related REMIC Pool, and will be designated
as agent for and will act on behalf of the "tax matters person" with respect to
the REMIC Pool in all respects.
As agent for the tax matters person, the Master Servicer will, subject
to certain notice requirements and various restrictions and limitations,
generally have the authority to act on behalf of the REMIC and the
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Residual Owners in connection with the administrative and judicial review of
items of income, deduction, gain or loss of the REMIC Mortgage Pool, as well as
the REMIC Mortgage Pool's classification. Residual Owners will generally be
required to report such REMIC Mortgage Pool items consistently with their
treatment on the REMIC Mortgage Pool's federal income tax information return and
may in some circumstances be bound by a settlement agreement between the Master
Servicer, as agent for the tax matters person, and the IRS concerning any such
REMIC Mortgage Pool item. Adjustments made to the REMIC Mortgage Pool tax return
may require a Residual Owner to make corresponding adjustments on its return,
and an audit of the REMIC Mortgage Pool's tax return, or the adjustments
resulting from such an audit, could result in an audit of a Residual Owner's
return.
K. BACKUP WITHHOLDING WITH RESPECT TO REMIC CERTIFICATES
Payments of interest and principal on REMIC Regular Certificates, as
well as payment of proceeds from the sale of REMIC Certificates, may be subject
to the "backup withholding tax" under Code Section 3406 at a rate of 31% if
recipients of such payments fail to furnish to the payor certain information,
including their taxpayer identification numbers, or otherwise fail to establish
an exemption from such tax. Any amounts deducted and withheld from a
distribution to a recipient would be allowed as a credit against such
recipient's federal income tax. Furthermore, certain penalties may be imposed by
the IRS on a recipient of payments that is required to supply information but
that does not do so in the manner required.
L. FOREIGN INVESTORS IN REMIC CERTIFICATES
1. REMIC Regular Certificates
Except as qualified below, payments made on a REMIC Regular Certificate
to a REMIC Regular Certificateholder that is not a U.S. Person, as hereinafter
defined (a "non-U.S. Person"), or to a person acting on behalf of such a
Certificateholder, generally will be exempt from U.S. federal income and
withholding taxes, provided that (i) the holder of the Certificate is not
subject to U.S. tax as a result of a connection to the United States other than
ownership of such Certificate, (ii) the holder of such Certificate signs a
statement under penalty of perjury that certifies that such holder is a non-U.S.
Person and the beneficial owner, and provides the name and address of such
holder and (iii) the last U.S. Person in the chain of payment to the holder
receives such statement from such holder or a financial institution holding on
its behalf and does not have actual knowledge that such statement is false. If
the holder does not qualify for exemption, distributions of interest, including
distributions in respect of accrued original issue discount, to such holder may
be subject to a withholding tax rate of 30%, subject to reduction under an
applicable tax treaty.
"U.S. Person" means a citizen or resident of the United States, a
corporation, partnership or other entity treated as a corporation or partnership
for United States federal income tax purposes, created or organized in or under
the laws of the United States or any political subdivision thereof (unless, in
the case of a partnership, future Treasury regulations provide otherwise), an
estate that is subject to U.S. federal income tax regardless of the source of
its income, or a trust other than a "foreign trust," as defined in Code Section
7701(a)(31).
Holders of REMIC Regular Certificates should be aware that the IRS may
take the position that exemption from U.S. withholding taxes does not apply to
such a holder that also directly or indirectly owns 10% or more of the REMIC
Residual Certificates.
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2. REMIC Residual Certificates
Amounts paid to a Residual Owner that is a non-U.S. Person generally
will be treated as interest for purposes of applying the withholding tax on
non-U.S. Persons with respect to income on its REMIC Residual Certificate.
However, it is unclear whether distributions on REMIC Residual Certificates will
be eligible for the general exemption from withholding tax that applies to REMIC
Regular Certificates as described above. Treasury regulations provide that, for
purposes of the portfolio interest exception, payments to the foreign owner of a
REMIC Residual Certificate are to be considered paid on the obligations held by
the REMIC, rather than on the Certificate itself. Such payments will thus only
qualify for the portfolio interest exception if the underlying obligations held
by the REMIC would so qualify. Such withholding tax generally is imposed at a
rate of 30% but is subject to reduction under any tax treaty applicable to the
Residual Owner. However, there is no exemption from withholding tax nor may the
rate of such tax be reduced, under a tax treaty or otherwise, with respect to
any distribution of income that is an excess inclusion. Although no regulations
have been proposed or adopted addressing withholding on residual interests held
by non-U.S. Persons, the provisions of the REMIC Regulations, described below,
relating to the transfer of residual interests to non-U.S. Persons can be read
as implying that withholding with respect to excess inclusion income is to be
determined by reference to the amount of the accrued excess inclusion income
rather than to the amount of cash distributions. If the IRS were successfully to
assert such a position, cash distributions on Residual Certificates held by
non-U.S. Persons could be subject to withholding at rates as high as 100%,
depending on the relationship of accrued excess inclusion income to cash
distributions with respect to such Residual Certificates. See " -- Taxation of
Owners of REMIC Residual Certificates -- Excess Inclusions."
Certain restrictions relating to transfers of REMIC Residual
Certificates to and by investors who are non-U.S. Persons are also imposed by
the REMIC Regulations. First, transfers of REMIC Residual Certificates to a
non-U.S. Person that have "tax avoidance potential" are disregarded for all
federal income tax purposes. If such transfer is disregarded, the purported
transferor of such a REMIC Residual Certificate to a non-U.S. Person continues
to remain liable for any taxes due with respect to the income on such REMIC
Residual Certificate as if held by the U.S. Person. A transfer of a REMIC
Residual Certificate has tax avoidance potential unless, at the time of the
transfer, the transferor reasonably expects (i) that the REMIC will distribute
to the transferee Residual Certificateholder amounts that will equal at least
30% of each excess inclusion and (ii) that such amounts 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. This rule
does not apply to transfers if the income from the REMIC Residual Certificate is
taxed in the hands of the transferee as income effectively connected with the
conduct of a U.S. trade or business. Second, if a non-U.S. Person transfers a
REMIC Residual Certificate to a U.S. Person (or to a non-U.S. Person in whose
hands income from the REMIC Residual Certificate would be effectively
connected), and the transfer has the effect of allowing the transferor to avoid
tax on accrued excess inclusions, that transfer is disregarded for all federal
income tax purposes and the purported non-U.S. Person transferor continues to be
treated as the owner of the REMIC Residual Certificate. Thus, the REMIC's
liability to withhold 30% of the accrued excess inclusions is not terminated
even though the REMIC Residual Certificate is no longer held by a non-U.S.
Person.
Recently issued Treasury regulations (the "Final Withholding
Regulations"), which are generally effective with respect to payments made after
December 31, 1999, consolidate and modify the current certification requirements
and means by which a holder may claim exemption from United States federal
income tax withholding and provide certain presumptions regarding the status of
holders when payments to the holders cannot be reliably associated with
appropriate documentation provided to the payor. All holders of REMIC Regular
Certificates and REMIC Residual Certificates should consult their tax advisers
regarding the application of the Final Withholding Regulations.
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M. STATE AND LOCAL TAXATION
Many states do not automatically conform to changes in the federal
income tax laws. Consequently, a REMIC Mortgage Pool that would not qualify as a
fixed investment trust for federal income tax purposes may be characterized as a
corporation, a partnership or some other entity for purposes of state income tax
law. Such characterization could result in entity level income or franchise
taxation of the REMIC Mortgage Pool formed in, owning mortgages or property in,
or having servicing activity performed in a state without conforming REMIC
provisions in its income or franchise tax law. Further, REMIC Regular
Certificateholders resident in non-conforming states may have their ownership of
REMIC Regular Certificates characterized as an interest other than debt of the
REMIC such as stock or a partnership interest. Investors are advised to consult
their tax advisers concerning the state and local income tax consequences of
their purchase and ownership of REMIC Regular Certificates.
III. NON-REMIC TRUST FUNDS
The discussion that follows relates only to Non-REMIC Trust Funds that
have not issued Trust Certificates structured as debt for federal income tax
purposes and that are not intended to be treated as partnerships for federal
income tax purposes. For a discussion of Trust Certificates in a Non-REMIC Trust
Fund which have been structured as debt for federal income tax purposes, see
"IV. Characterization of the Trust Certificates as Indebtedness." For a
discussion of Trust Certificates and Notes in a Non-REMIC Trust Fund which is
intended to be treated as a partnership for federal income tax purposes, see "V.
Tax Characterization as a Partnership."
A. CLASSIFICATION OF TRUST FUNDS
With respect to each series of Trust Certificates, Special Tax Counsel
will deliver their opinion to the effect that the arrangements pursuant to which
such Trust Fund will be administered and such Trust Certificates will be issued
will not be classified as an association taxable as a corporation and that each
such Trust Fund will be classified as a trust whose taxation will be governed by
the provisions of subpart E, Part I of subchapter J of the Code.
B. CHARACTERIZATION OF INVESTMENTS IN TRUST CERTIFICATES
1. Trust Fractional Certificates
In the case of Trust Fractional Certificates, counsel to the Depositor
will deliver an opinion that, in general (and subject to the discussion below of
Contracts and under " -- Buydown Mortgage Loans"), (i) Trust Fractional
Certificates held by a thrift institution taxed as a "domestic building and loan
association" will represent "loans . . . secured by an interest in real
property" within the meaning of Code Section 7701 (a)(19)(C)(v), (ii) Trust
Fractional Certificates held by a REIT will represent "real estate assets"
within the meaning of Code Section 856(c)(4)(A) and interest on Trust Fractional
Certificates will be considered "interest on obligations secured by mortgages on
real property or on interests in real property" within the meaning of Code
Section 856(c)(3)(B) and (iii) Trust Fractional Certificates acquired by a REMIC
in accordance with the requirements of Code Section 860G(a)(3)(A)(i) and (ii) or
Section 860G(a)(4)(B) will be treated as "qualified mortgages" within the
meaning of Code Section 860D(a)(4). In the case of a Trust Fractional
Certificate evidencing interests in Contracts, such Certificates will qualify
for the treatment described in (i) through (iii) of the preceding sentence only
to the extent of the fraction of such Certificate corresponding to the fraction
of the Contract Pool that consists of Contracts that would receive such
treatment if held directly by the Trust Fractional Certificateholder.
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2. Trust Interest Certificates
With respect to each Series of Certificates, Special Tax Counsel will
advise the Depositor that in their opinion, based on the legislative history, a
REMIC that acquires a Trust Interest Certificate in accordance with the
requirements of Code Section 860G(a)(3) or Section 860G(a)(4) will be treated as
owning a "Qualified Mortgage" within the meaning of Code Section 860(G)(a)(3).
Although there appears to be no policy reason not to accord to Trust
Interest Certificates the treatment described above for Trust Fractional
Certificates, there is no authority addressing such characterization for
instruments similar to Trust Interest Certificates. Consequently, it is unclear
to what extent, if any, (i) a Trust Interest Certificate owned by a "domestic
building and loan association" within the meaning of Code Section 7701(a)(19)
would be considered to represent "loans . . . secured by an interest in real
property" within the meaning of Code Section 7701(a)(19)(C)(v) or (ii) a REIT
which owns a Trust Interest Certificate would be considered to own "real estate
assets" within the meaning of Code Section 856(c)(4)(A), and interest income
thereon would be considered "interest on obligations secured by mortgages on
real property" within the meaning of Code Section 856(c)(3)(B). Prospective
purchasers to which such characterization of an investment in Trust Interest
Certificates is material should consult their own tax advisers regarding whether
the Trust Interest Certificates, and the income therefrom, will be so
characterized.
3. Buydown Mortgage Loans
It is contemplated that the assets of certain Trust Funds may include
Buydown Mortgage Loans. The characterization of an investment in Buydown
Mortgage Loans will depend upon the precise terms of the related Buydown
Agreement. There are no directly applicable precedents with respect to the
federal income tax treatment or the characterization of investments in Buydown
Mortgage Loans. Accordingly, holders of Trust Certificates should consult their
own tax advisers with respect to characterization of investments in Trust Funds
that include Buydown Mortgage Loans.
Although the matter is not entirely free from doubt, the portion of a
Trust Certificate representing an interest in Buydown Mortgage Loans may be
considered to represent an investment in "loans . . . secured by an interest in
real property" within the meaning of Code Section 7701(a)(19)(C)(v) to the
extent the outstanding principal balance of the Buydown Mortgage Loans exceeds
the amount held from time to time in the Buydown Fund. It is also possible that
the entire interest in Buydown Mortgage Loans may be so considered, because the
fair market value of the real property securing each Buydown Mortgage Loan will
exceed the amount of such loan at the time it is made.
For similar reasons, the portion of such Trust Certificate representing
an interest in Buydown Mortgage Loans may be considered to represent "real
estate assets" within the meaning of Code Section 856(c)(4)(A). Purchasers and
their tax advisers are advised to review Section 1.856-5(c)(1)(i) of the
Treasury regulations, which specifies that if a mortgage loan is secured by both
real property and by other property and the value of the real property alone
equals or exceeds the amount of the loan, then all interest income will be
treated as "interest on obligations secured by mortgages on real property"
within the meaning of Code Section 856(c)(3)(B).
C. TAXATION OF OWNERS OF TRUST FRACTIONAL CERTIFICATES
Each holder of a Trust Fractional Certificate (a "Trust Fractional
Certificateholder") will be treated as the owner of an undivided percentage
interest in the principal of, and possibly a different undivided percentage
interest in the interest portion of, each of the Trust Funds included in a
Mortgage Pool.
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Accordingly, each Trust Fractional Certificateholder must report on its federal
income tax return its allocable share of income from its interests, as described
below, at the same time and in the same manner as if it had held directly
interests in the Mortgage Loans and received directly its share of the payments
on such Mortgage Loans. Because those fractional interests having differing
undivided percentage interests in principal and interest represent interests in
"stripped bonds" or "stripped coupons" within the meaning of Code Section 1286,
such interests would be considered to be newly issued debt instruments, and thus
to have no market discount or premium, and the amount of original issue discount
may differ from the amount of original issue discount on the Mortgage Loans and
the amount includible in income on account of a Trust Fractional Certificate may
differ significantly from the amount payable thereon from payments of interest
on the Mortgage Loans. Each Trust Fractional Certificateholder may report and
deduct its allocable share of the servicing and related fees and expenses paid
to or retained by the Depositor at the same time, to the same extent, and in the
same manner as such items would have been reported and deducted had it held
directly interests in the Mortgage Loans and paid directly its share of the
servicing and related fees and expenses. A holder of a Trust Fractional
Certificate who is an individual, estate or trust will be allowed a deduction
for servicing fees in determining its regular tax liability only to the extent
that the aggregate of such holder's miscellaneous itemized deductions exceeds
two percent of such holder's adjusted gross income. In addition, the amount of
itemized deductions otherwise allowable for the taxable year for an individual
whose adjusted gross income exceeds the "applicable amount" ($100,000 (or
$50,000 in the case of a separate return by a married individual) adjusted for
changes in the cost of living subsequent to 1990) will be reduced by the lesser
of (i) 3 percent of the excess of adjusted gross income over the applicable
amount, or (ii) 80 percent of the amount of itemized deductions allowable for
such taxable year. For taxable years beginning after December 31, 1997, in the
case of a partnership that has 100 or more partners and elects to be treated as
an "electing large partnership," 70 percent of such partnership's miscellaneous
itemized deductions will be disallowed, although the remaining deductions will
generally be allowed at the partnership level and will not be subject to the 2
percent flood that would otherwise be applicable to individual partners.
Moreover, a holder of a Trust Fractional Certificate that is not a corporation
cannot deduct such fees for purposes of the alternative minimum tax (if
applicable). Amounts received by Trust Fractional Certificateholders in lieu of
amounts due with respect to any Mortgage Loan but not received by the Depositor
from the Mortgagor will be treated for federal income tax purposes as having the
same character as the payments which they replace.
Purchasers of Trust Fractional Certificates identified in the
applicable Prospectus Supplement as representing interests in Stripped Mortgage
Loans should read the material under the headings " -- Application of Stripped
Bond Rules," "-- Market Discount and Premium" and " -- Allocation of Purchase
Price" for a discussion of particular rules applicable to their Certificates. A
"Stripped Mortgage Loan" means a Mortgage Loan having a Retained Yield (as that
term is defined below) or a Mortgage Loan included in a Trust Fund having either
Trust Interest Certificates or more than one class of Trust Fractional
Certificates or identified in the Prospectus Supplement as related to a Class of
Trust Certificates identified as representing interests in Stripped Mortgage
Loans.
Purchasers of Trust Fractional Certificates identified in the
applicable Prospectus Supplement as representing interests in Unstripped
Mortgage Loans should read the material under the headings " -- Treatment of
Unstripped Certificates," "-- Market Discount and Premium," and " -- Allocation
of Purchase Price" for a discussion of particular rules applicable to their
Certificates. However, the IRS has indicated that under some circumstances it
will view a portion of servicing and related fees and expenses paid to or
retained by the Master Servicer or sub-servicers as an interest in the Mortgage
Loans, ("Retained Yield"). If such a view were sustained with respect to a
particular Trust Fund, such purchasers would be subject to the rules set forth
under " -- Application of Stripped Bond Rules" rather than those under " --
Treatment of Unstripped Certificates." The Depositor does not expect any
servicing compensation payable to the Master Servicer, as described under
"Description of the Securities -- Servicing Compensation and Payment of
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Expenses," to constitute a retained interest in the Mortgage Loans;
nevertheless, any such expectation generally will be a matter of uncertainty,
and prospective purchasers are advised to consult their own tax advisers with
respect to the existence of a retained interest and any effects on investment in
Trust Fractional Certificates.
1. Application of Stripped Bond Rules
Each Trust Fund will consist of an interest in each of the Mortgage
Loans relating thereto, exclusive of the Depositor's Retained Yield, if any.
With respect to each Series of Certificates, Special Tax Counsel will advise the
Depositor that, in their opinion, any Retained Yield will be treated for federal
income tax purposes as an ownership interest retained by the Depositor in a
portion of each interest payment on the underlying Mortgage Loans. The sale of
the Trust Certificates associated with any Trust Fund for which there is a class
of Trust Interest Certificates or two or more Classes of Trust Fractional
Certificates bearing different interest rates or of Trust Certificates
identified in the Prospectus Supplement as representing interests in Stripped
Mortgage Loans (subject to certain exceptions which, if applicable, will be
stated in the applicable Prospectus Supplement) will be treated for federal
income tax purposes as having effected a separation in ownership between the
principal of each Mortgage Loan and some or all of the interest payable thereon.
As a consequence, each Stripped Mortgage Loan will become subject to the
"stripped bond" rules of the Code (the "Stripped Bond Rules"). The effect of
applying those rules will generally be to require each Trust Fractional
Certificateholder to accrue and report income attributable to its share of the
principal and interest on each of the Stripped Mortgage Loans as original issue
discount on the basis of the yield to maturity of such Stripped Mortgage Loans,
as determined in accordance with the provisions of the Code dealing with
original issue discount. For a description of the general method of calculating
original issue discount, see " -- REMIC Trust Funds -- Taxation of Owners of
REMIC Regular Certificates -- Original Issue Discount." The yield to maturity of
a Trust Fractional Certificateholder's interest in the Stripped Mortgage Loans
will be calculated taking account of the price at which the holder purchased the
Certificate and the holder's share of the payments of principal and interest to
be made thereon. Although the provisions of the Code and the OID Regulations do
not directly address the treatment of instruments similar to Trust Fractional
Certificates, in reporting to Trust Fractional Certificateholders the Trustee
intends to treat such Certificates as a single obligation with payments
corresponding to the aggregate of the payments allocable thereto from each of
the Mortgage Loans, and to determine the amount of original issue discount on
such Certificates accordingly. See " -- Aggregate Reporting."
Under Treasury regulations, original issue discount so determined with
respect to a particular Stripped Mortgage Loan may be considered to be zero
under the de minimis rule described above, in which case it is treated as market
discount. See " -- REMIC Trust Funds -- Taxation of Owners of REMIC Regular
Certificates -- Original Issue Discount." Those regulations also provide that
original issue discount so determined with respect to a particular Stripped
Mortgage Loan will be treated as market discount if the rate of interest on the
Stripped Mortgage Loan, including a reasonable Servicing Fee, is no more than
one percentage point less than the unstripped rate of interest. See " -- Market
Discount and Premium." The Trustee intends to apply the foregoing de minimis and
market discount rules on an aggregate poolwide basis, although it is possible
that investors may be required to apply them on a loan by loan basis. The loan
by loan information required for such application of those rules may not be
available. See " -- Aggregate Reporting." Unless the market discount rules
apply, subsequent purchasers of the Certificates may be required to include
"original issue discount" in an amount computed using the price at which such
subsequent purchaser purchased the Certificates.
Variable Rate Certificates. Purchasers of Trust Fractional Certificates
bearing a variable rate of interest should be aware that there is considerable
uncertainty concerning the application of the OID Regulations to Mortgage Loans
bearing a variable rate of interest. Although such regulations are subject to a
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different interpretation, as discussed below, in the absence of other contrary
authority in preparing reports furnished to Certificateholders the Trustee
intends to treat Stripped Mortgage Loans bearing a variable rate of interest
(other than those treated as having market discount pursuant to the regulations
described above) as subject to the provisions therein governing variable rate
debt instruments. The effect of the application of such provisions generally
will be to cause Certificateholders holding Trust Fractional Certificates
bearing interest at a Single Variable Rate or at a Multiple Variable Rate (as
defined above under " -- REMIC Trust Funds -- Taxation of Owners of REMIC
Regular Certificates -- Original Issue Discount") to accrue original issue
discount and interest as though the value of each variable rate were a fixed
rate, which is (a) for each qualified floating rate, the value of each such rate
as of the Closing Date (with appropriate adjustment for any differences in
intervals between interest adjustment dates), (b) for a qualified inverse
floating rate, the value of the rate as of Closing Date and (c) for any other
objective rate, the fixed rate that reflects the yield that is reasonably
expected for the Trust Fractional Certificate. If the interest paid or accrued
with respect to such Variable Rate Trust Fractional Certificate during an
accrual period differs from the assumed fixed interest rate, such difference
will be an adjustment (to interest or original issue discount, as applicable) to
the Certificateholder's taxable income for the taxable period or periods to
which such difference relates.
Prospective purchasers of Trust Fractional Certificates bearing a
variable rate of interest should be aware that the provisions in the OID
Regulations applicable to variable rate debt instruments may not apply to
certain adjustable and variable rate mortgage loans, possibly including the
Mortgage Loans, or to Stripped Certificates representing interests in such
Mortgage Loans. If variable rate Trust Fractional Certificates are not governed
by the provisions of the OID Regulations applicable to variable rate debt
instruments, such Certificates may be subject to the provisions of the 1996
Contingent Debt Regulations. The application of those provisions to instruments
such as the Trust Fractional Certificates is subject to differing
interpretations. Prospective purchasers of variable rate Trust Fractional
Certificates are advised to consult their tax advisers concerning the tax
treatment of such Certificates.
Aggregate Reporting. The Trustee intends in reporting information
relating to original issue discount to Certificateholders to provide such
information on an aggregate poolwide basis. Applicable law is unclear, however,
and it is possible that investors may be required to compute original issue
discount on a Mortgage Loan by Mortgage Loan basis (or on the basis of the
rights to individual payments) taking account of an allocation of their basis in
the Certificates among the interests in the various Mortgage Loans represented
by such Certificates according to their respective fair market values. Investors
should be aware that it may not be possible to reconstruct after the fact
sufficient mortgage by mortgage information should a computation on that basis
be required by the IRS.
Because the treatment of the Certificates under the OID Regulations is
both complicated and uncertain, Certificateholders should consult their tax
advisers to determine the proper method of reporting amounts received or accrued
on Certificates.
2. Treatment of Unstripped Certificates
Mortgage Loans in a Trust Fund for which there is neither any Class of
Trust Interest Certificates, nor more than one Class of Trust Fractional
Certificates, nor any Retained Yield and which are not otherwise identified in
the Prospectus Supplement as being stripped mortgage loans ("Unstripped Mortgage
Loans") will be treated as wholly owned by the Trust Fractional
Certificateholders of a Trust Fund. Trust Fractional Certificateholders using
the cash method of accounting must take into account their pro rata share of
original issue discount as it accrues and qualified stated interest (as
described in " -- REMIC Trust Funds -- Taxation of Owners of REMIC Regular
Certificates -- Original Issue Discount") from Unstripped Mortgage Loans as and
when collected by the Trustee. Trust Fractional Certificateholders using an
accrual method of accounting must take into account their pro rata shares of
qualified stated interest from
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Unstripped Mortgage Loans as it accrues or is received by the Trustee, whichever
is earlier. Under the 1997 Act, gain or loss from the termination of a newly
originated mortgage will be treated as capital gain or loss.
Code Sections 1272 through 1275 provide rules for the current inclusion
in income of original issue discount on obligations issued by natural persons on
or after March 2, 1984. Generally those sections provide that original issue
discount should be included in income on the basis of a constant yield to
maturity. However, the application of the original issue discount rules to
mortgages is unclear in certain respects. The Treasury Department has issued the
OID Regulations relating to original issue discount, which generally address the
treatment of mortgages issued on or after April 4, 1994. The OID Regulations
provide a new de minimis rule for determining whether certain self-amortizing
installment obligations, such as the Mortgage Loans, are to be treated as having
original issue discount. Such obligations have original issue discount if the
points charged at origination (or other loan discount) exceed the greater of
approximately one-sixth of one percent times the number of full years to final
maturity or one-fourth of one percent times weighted average maturity. For a
description of the general method of calculating the amount of original issue
discount see " -- REMIC Trust Funds -- Taxation of Owners of REMIC Regular
Certificates -- Original Issue Discount" and " -- Application of Stripped Bond
Rules -- Variable Rate Certificates."
A subsequent purchaser of a Trust Fractional Certificate that purchases
such Certificate at a cost (not including payment for accrued qualified stated
interest) less than its allocable portion of the aggregate of the remaining
stated redemption prices at maturity of the Unstripped Mortgage Loans will also
be required to include in gross income, for each day on which it holds such
Trust Fractional Certificate, its allocable share of the daily portion of
original issue discount with respect to each Unstripped Mortgage Loan, but
reduced, if the cost of such subsequent purchaser's interest in such Unstripped
Mortgage Loan exceeds its "adjusted issue price," by an amount equal to the
product of (i) such daily portion and (ii) a constant fraction, whose numerator
is such excess and whose denominator is the sum of the daily portions of
original issue discount allocable to such subsequent purchaser's interest for
all days on or after the day of purchase. The adjusted issue price of an
Unstripped Mortgage Loan on any given day is equal to the sum of the adjusted
issue price (or, in the case of the first accrual period, the issue price) of
such Unstripped Mortgage Loan at the beginning of the accrual period during
which such day occurs and the daily portions of original issue discount for all
days during such accrual period prior to such day, reduced by the aggregate
amount of payments made during such accrual period prior to such day other than
payments of qualified stated interest.
3. Market Discount and Premium
In general, if the Stripped Bond Rules do not apply to a Trust
Fractional Certificate, a purchaser of a Trust Fractional Certificate will be
treated as acquiring market discount bonds to the extent that the share of such
purchaser's purchase price allocable to any Unstripped Mortgage Loan is less
than its allocable share of the "adjusted issue price" of such Mortgage Loan.
See " -- Treatment of Unstripped Certificates" and " -- Application of Stripped
Bond Rules." Thus, with respect to such Mortgage Loans, a holder will be
required, under Code Section 1276, to include as ordinary income the previously
unrecognized accrued market discount in an amount not exceeding each principal
payment on any such Mortgage Loans at the time each principal payment is
received or due, in accordance with the purchaser's method of accounting, or
upon a sale or other disposition of the Certificate. In general, the amount of
market discount that has accrued is determined on a ratable basis. A Trust
Fractional Certificateholder may, however, elect to determine the amount of
accrued market discount on a constant yield to maturity basis. This election is
made on a bond-by-bond basis and is irrevocable. In addition, the description of
the market discount rules in " -- REMIC Trust Funds -- Taxation of Owners of
REMIC Regular Certificates -- Market Discount and Premium" with respect to (i)
conversion to ordinary income of a portion of any gain recognized on sale or
exchange of a market discount bond, (ii) deferral of interest expense
deductions, (iii) the de minimis
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exception from the market discount rules and (iv) the elections to include in
income either market discount or all interest, discount and premium as they
accrue, is also generally applicable to Trust Fractional Certificates. Treasury
regulations implementing the market discount rules, including the 1986 Act
amendments thereto, have not yet been issued and investors therefore should
consult their own tax advisers regarding the application of these rules.
If a Trust Fractional Certificate is purchased at a premium, under
existing law such premium must be allocated among each of the Mortgage Loans (on
the basis of their relative fair market values). The portion of any premium
allocated to Unstripped Mortgage Loans originated after September 27, 1985 can
be amortized and deducted under the provisions of the Code relating to
amortizable bond premium.
The Bond Premium Amortization Regulations generally provide that
amortizable bond premium is amortized over the term of a note by offsetting the
qualified stated interest allocable to an accrual period with the amortizable
bond premium allocable to such period using a specified constant yield method.
To the extent that the amortizable bond premium allocated to an accrual period
exceeds the qualified stated interest allocable to such period, the excess is
deductible under Code Section 171 to the extent such excess does not exceed the
difference between (i) prior interest inclusions over (ii) the Bond Premium
Amortization Limit, with the excess over the Bond Premium Amortization Limit
carried forward to the next accrual period and treated as amortizable bond
premium allocable to that period. The Bond Premium Amortization Regulations are
effective for notes acquired on or after March 2, 1998. However, if a holder
makes the election to amortize bond premium for the taxable year containing
March 2, 1998, or any subsequent taxable year, the Treasury regulations would
apply to debt instruments held on or after the first day for the taxable year in
which the election is made. The Bond Premium Amortization Regulations
specifically do not apply to a pool of prepayable debt instruments subject to
Code Section 1272(a)(6). However, by analogy to these regulations, it may be
possible to deduct any premium in excess of interest income to the extent of
prior accrual of interest.
4. Allocation of Purchase Price
As noted above, a purchaser of a Trust Fractional Certificate relating
to Unstripped Mortgage Loans will be required to allocate the purchase price
thereof to the undivided interest it acquires in each of the Mortgage Loans, in
proportion to the respective fair market values of the portions of such Mortgage
Loans included in the Trust Fund at the time the Certificate is purchased. The
Depositor believes that it may be reasonable to make such allocation in
proportion to the respective principal balances of the Mortgage Loans, where the
interests in the Mortgage Loans represented by a Trust Fractional Certificate
have a common remittance rate and other common characteristics, and otherwise so
as to produce a common yield for each interest in a Mortgage Loan, provided the
Mortgage Loans are not so diverse as to evoke differing prepayment expectations.
However, if there is any significant variation in interest rates among the
Mortgage Loans, a disproportionate allocation of the purchase price taking
account of prepayment expectations may be required.
D. TAXATION OF OWNERS OF TRUST INTEREST CERTIFICATES
With respect to each Series of Certificates, Special Tax Counsel will
advise the Depositor that, in their opinion, each holder of a Trust Interest
Certificate (a "Trust Interest Certificateholder") will be treated as the owner
of an undivided interest in the interest portion ("Interest Coupon") of each of
the Mortgage Loans. Accordingly, and subject to the discussion under
"Application of Stripped Bond Rules," each Trust Interest Certificateholder is
treated as owning its allocable share of the entire Interest Coupon from the
Mortgage Loans, will report income as described below, and may deduct its
allocable share of the servicing and related fees and expenses paid to or
retained by the Depositor at the same time and in the same manner
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as such items would have been reported under the Trust Interest
Certificateholder's tax accounting method had it held directly an interest in
the Interest Coupon from the Mortgage Loans, received directly its share of the
amounts received with respect to the Mortgage Loans and paid directly its share
of the servicing and related fees and expenses. An individual, estate or trust
holder of a Trust Interest Certificate will be allowed a deduction for servicing
fees in determining its regular tax liability only to the extent that the
aggregate of such holder's miscellaneous itemized deductions exceeds two percent
of such holder's adjusted gross income. In addition, the amount of itemized
deductions otherwise allowable for the taxable year for an individual whose
adjusted gross income exceeds the "applicable amount" ($100,000 (or $50,000 in
the case of a separate return by a married individual), adjusted for changes in
the cost of living subsequent to 1990) will be reduced by the lesser of (i) 3
percent of the excess of adjusted gross income over the applicable amount, or
(ii) 80 percent of the amount of itemized deductions allowable for such taxable
year. For taxable years beginning after December 31, 1997, in the case of a
partnership that has 100 or more partners and elects to be treated as an
"electing large partnership," 70 percent of such partnership's miscellaneous
itemized deductions will be disallowed, although the remaining deductions will
generally be allowed at the partnership level and will not be subject to the 20
percent flood that would otherwise be applicable to individual partners.
Moreover, a holder of a Trust Fractional Certificate that is not a corporation
cannot deduct such fees for purposes of the alternative minimum tax (if
applicable). Amounts, if any, received by Trust Interest Certificateholders in
lieu of amounts due with respect to any Mortgage Loan but not received by the
Master Servicer from the Mortgagor will be treated for federal income tax
purposes as having the same character as the payment which they replace.
1. Application of Stripped Bond Rules
A Trust Interest Certificate will consist of an undivided interest in
the Interest Coupon of each of the Mortgage Loans. With respect to each Series
of Certificates, Special Tax Counsel will advise the Depositor that, in their
opinion a Trust Interest Certificate will be treated for federal income tax
purposes as comprised of an ownership interest in a portion of the Interest
Coupon of each of the Mortgage Loans (a "Stripped Interest") separated by the
Depositor from the right to receive principal payments and the remainder, if
any, of each interest payment on the underlying Mortgage Loan. As a consequence,
the Trust Interest Certificates will become subject to the Stripped Bond Rules.
Each Trust Interest Certificateholder will be required to apply the Stripped
Bond Rules to its interest in the Interest Coupon under the method prescribed by
the Code, taking account of the price at which the holder purchased the Trust
Interest Certificate and the Trust Interest Certificateholder's share of the
scheduled payment to be made thereon. The Stripped Bond Rules generally require
a holder of Stripped Coupons to accrue and report income from such Stripped
Coupons daily on the basis of the yield to maturity of such stripped bonds or
coupons, as determined in accordance with the provisions of the Code dealing
with original issue discount. For a discussion of the general method of
calculating original issue discount, see "REMIC Trust Funds -- Taxation of
Owners of REMIC Regular Certificates -- Original Issue Discount." The provisions
of the Code and the OID Regulations do not directly address the treatment of
instruments similar to Trust Interest Certificates. In reporting to Trust
Interest Certificateholders such Certificates will be treated as a single
obligation with payment corresponding to the aggregate of the payments allocable
thereto from each of the Mortgage Loans. See "Aggregate Reporting."
Alternatively, Trust Interest Certificateholders may be required by the
IRS to treat each scheduled payment on each Stripped Interest (or their
interests in all scheduled payments from each of the Stripped Interests) as a
separate obligation for purposes of allocating purchase price and computing
original issue discount.
The tax treatment of the Trust Interest Certificates with respect to
the application of the original issue discount provisions of the Code is
currently unclear. However, the Trustee intends to treat each Trust
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Interest Certificate as a single debt instrument issued on the day it is
purchased for purposes of calculating any original issue discount. Original
issue discount with respect to a Trust Interest Certificate must be included in
ordinary gross income for federal income tax purposes as it accrues in
accordance with a constant yield method that takes into account the compounding
of interest and such accrual of income may be in advance of the receipt of any
cash attributable to such income. In general, the rules for accruing original
issue discount set forth under " -- REMIC Trust Funds -- Taxation of Owners of
REMIC Regular Certificates -- Original Issue Discount" apply. For purposes of
applying the original issue discount provisions of the Code, the issue price
used in reporting original issue discount with respect to a Trust Interest
Certificate will be the purchase price paid by each holder thereof and the
stated redemption price at maturity may include the aggregate amount of all
payments to be made with respect to the Trust Interest Certificate whether or
not denominated as interest.
Aggregate Reporting. The Trustee intends in reporting information
relating to original issue discount to Certificateholders to provide such
information on an aggregate poolwide basis. Applicable law is unclear, however,
and it is possible that investors may be required to compute original issue
discount either on a Mortgage Loan by Mortgage Loan basis or on a payment by
payment basis taking account of an allocation of their basis in the Certificates
among the interests in the various Mortgage Loans represented by such
Certificates according to their respective fair market values. Investors should
be aware that it may not be possible to reconstruct after the fact sufficient
mortgage by mortgage information should a computation on that basis be required
by the IRS.
Because the treatment of the Trust Interest Certificates under current
law and the potential application of the 1996 Contingent Debt Regulations are
both complicated and uncertain, Trust Interest Certificateholders should consult
their tax advisers to determine the proper method of reporting amounts received
or accrued on Trust Interest Certificates.
E. PREPAYMENTS
The 1986 Act contains a provision requiring original issue discount on
certain obligations issued after December 31, 1986 to be calculated taking into
account a prepayment assumption and requiring such discount to be taken into
income on the basis of a constant yield to assumed maturity taking account of
actual prepayments. The 1997 Act provides that the prepayment rules of Code
Section 1272(a)(6), discussed above, will also apply to pools of debt
instruments the yield on which may be affected by reason of prepayments. Trust
Fractional Certificateholders and Trust Interest Certificateholders should
consult their tax advisers as to the proper reporting of income from Trust
Fractional Certificates and Trust Interest Certificates, as the case may be, in
the light of the possibility of prepayment and, as to the possible application
of the 1996 Contingent Debt Regulations.
F. SALES OF TRUST CERTIFICATES
If a Certificate is sold, gain or loss will be recognized by the holder
thereof in an amount equal to the difference between the amount realized on the
sale and the Certificateholder's adjusted tax basis in the Certificate. Such tax
basis will equal the Certificateholder's cost for the Certificate, increased by
any original issue or market discount with respect to the interest in the
Mortgage Loans represented by such Certificate previously included in income,
and decreased by any deduction previously allowed for premium and by the amount
of payments, other than payments of qualified stated interest, previously
received with respect to such Certificate. The portion of any such gain
attributable to accrued market discount not previously included in income will
be ordinary income, as will gain attributable to a Certificate which is part of
a "conversion transaction" or which the holder elects to treat as ordinary. See
" -- REMIC Trust Funds -- Sales of REMIC Certificates" above. Any remaining gain
or any loss will be capital gain or loss if the
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Certificate was held as a capital asset except to the extent that code Section
582(c) applies to such gain or loss. Any such gain or loss would be long-term
capital gain or loss if the Certificateholder's holding period exceeded one
year.
G. TRUST REPORTING
The Master Servicer will furnish to each holder of a Trust Fractional
Certificate with each distribution a statement setting forth the amount of such
distribution allocable to principal on the underlying Mortgage Loans and to
interest thereon at the Interest Rate. In addition, the Master Servicer will
furnish, within a reasonable time after the end of each calendar year, to each
holder of a Trust Certificate who was such a holder at any time during such
year, information regarding the amount of servicing compensation received by the
Master Servicer and sub-servicer (if any) and such other customary factual
information as the Master Servicer deems necessary or desirable to enable
holders of Trust Certificates to prepare their tax returns.
H. BACK-UP WITHHOLDING
In general, the rules described in "REMIC Trust Funds -- Back-up
Withholding with respect to REMIC Certificates" will also apply to Trust
Certificates.
I. FOREIGN CERTIFICATEHOLDERS
Payments in respect of interest or original issue discount (including
amounts attributable to servicing fees) on the Mortgage Loans to a
Certificateholder who is not a citizen or resident of the United States, a
corporation or other entity organized in or under the laws of the United States
or of any State thereof (unless, in the case of a partnership, future Treasury
regulations provide otherwise), or a United States estate or trust, will not
generally be subject to 30% United States withholding tax, provided that such
Certificateholder (i) does not own, directly or indirectly, 10% or more of, and
is not a controlled foreign corporation (within the meaning of Code Section 957)
related to, an issuer of Mortgage Loan and (ii) provides required certification
as to its non-United States status under penalty of perjury and then will be
free of such tax only to the extent that the underlying Mortgage Loans were
issued after July 18, 1984. Notwithstanding the foregoing, if any such payments
are effectively connected with a United States trade or business conducted by
the Certificateholder, they will be subject to regular United States income tax
and, in the case of a corporation, to a possible branch profits tax, but will
ordinarily be exempt from United States withholding tax provided that applicable
documentation requirements are met. This withholding tax may be reduced or
eliminated by an applicable tax treaty.
Recently issued Treasury regulations (the "Final Withholding
Regulations"), which are generally effective with respect to payments made after
December 31, 1999, consolidate and modify the current certification requirements
and means by which a holder may claim exemption from United States federal
income tax withholding and provide certain presumptions regarding the status of
holders when payments to the holders cannot be reliably associated with
appropriate documentation provided to the payor. All holders of Trust Fractional
Certificates and Trust Interest Certificates should consult their tax advisers
regarding the application of the Final Withholding Regulations.
J. STATE AND LOCAL TAXATION
In addition to the federal income tax consequences described above,
potential investors should consider the state income tax consequences of the
acquisition, ownership, and disposition of the Securities. State income tax law
may differ substantially from the corresponding federal law, and this discussion
does
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not purport to describe any aspect of the income tax laws of any state.
Therefore, potential investors should consult their own tax advisers with
respect to the various state tax consequences of an investment in the
Securities.
IV. CHARACTERIZATION OF THE TRUST CERTIFICATES AS INDEBTEDNESS
A. CHARACTERIZATION OF INVESTMENTS IN TRUST CERTIFICATES
With respect to each Series of Trust Certificates that have been
structured as debt for federal income tax purposes, Special Tax Counsel will
deliver their opinion to the effect that the Trust Certificates will be treated
as debt instruments for federal income tax purposes as of such date rather than
as ownership interests in the Trust Fund.
The Depositor, each Unaffiliated Seller and the Certificateholders will
express in the Agreement their intent that, for applicable tax purposes, the
Trust Certificates will be indebtedness secured by the Mortgage Loans. The
Depositor, each Unaffiliated Seller and each Certificateholder, by its
acceptance and acquisition of a beneficial interest in a Trust Certificate, will
have agreed to treat the Trust Certificates as indebtedness for federal income
tax purposes. However, because different criteria are used to determine the
non-tax accounting characterization of a securitization transaction, the
transaction may be treated as a sale of an interest in the Mortgage Loans for
financial accounting purposes.
In general, whether for federal income tax purposes a transaction
constitutes a sale of property or a loan, the repayment of which is secured by
property, is a question of fact, the resolution of which is based upon the
economic substance of the transaction rather than its form or the manner in
which it is labeled. While the IRS and the courts have set forth several factors
to be taken into account in determining whether the substance of a transaction
is a sale of property or a secured loan, the primary factor in making this
determination is whether the transferee has assumed the risk of loss or other
economic burdens relating to the property and has obtained the benefits of
ownership thereof. Special Tax Counsel has analyzed and relied on several
factors in reaching its opinion that the weight of the benefits and burdens of
ownership of the Mortgage Loans has been retained by the Depositor or an
Unaffiliated Seller and has not been transferred to the Certificateholders.
In some instances, courts have held that a taxpayer is bound by the
particular form it has chosen for a transaction, even if the substance of the
transaction does not accord with its form. Special Tax Counsel has advised that
the rationale of those cases will not apply to this transaction, because the
form of the transaction as reflected in the operative provisions of the
documents either accords with the characterization of the Trust Certificates as
debt or otherwise makes the rationale of those cases inapplicable to this
situation.
B. TAXATION OF INTEREST INCOME OF CERTIFICATEHOLDERS
Assuming that the Certificateholders are holders of debt obligations
for federal income tax purposes, the Trust Certificates generally will be
taxable as debt. The stated interest thereon will be taxable to a
Certificateholder as ordinary interest income when received or accrued in
accordance with such Certificateholder's method of tax accounting. Under the OID
Regulations, a holder of a debt instrument issued with a de minimis amount of
original issue discount must include such original issue discount in income, on
a pro rata basis, as principal payments are made on the debt instrument. A
subsequent purchaser who buys a Trust Certificate for more or less than its
principal amount will generally be subject, respectively, to the premium
amortization or market discount rules of the Code.
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A holder of a Trust Certificate that has a fixed maturity date of not
more than one year from the issue date of such Trust Certificate (a "Short-Term
Certificate") may be subject to special rules. An accrual basis holder of a
Short-Term Certificate (and certain cash method holders, including regulated
investment companies, as set forth in Code Section 1281) generally would be
required to report interest income as interest accrues on a straight-line basis
over the term of each interest period, unless an election is made to accrue
interest income pursuant to a constant yield method, compared on a daily basis.
Other cash basis holders of a Short-Term Certificate would, in general, be
required to report interest income as interest is paid (or, if earlier, upon the
taxable disposition of the Short-Term Certificate). However, a cash basis holder
of a Short-Term Certificate reporting interest income as it is paid may be
required to defer a portion of any interest expense otherwise deductible on
indebtedness incurred to purchase or carry the Short-Term Certificate until the
taxable disposition of the Short-Term Certificate. A cash basis taxpayer may
elect under Code Section 1281 to accrue interest income on all nongovernment
debt obligations with a term of one year or less, in which case the taxpayer
would include interest on a Short-Term Certificate in income as it accrues, and
would not be subject to the interest expense deferral rule referred to in the
preceding sentence. Certain special rules apply if a Short-Term Certificate is
purchased for more or less than its principal amount.
While it is not anticipated that the Trust Certificates will be issued
at a greater than de minimis discount, it is possible that the Trust
Certificates could nevertheless be deemed to have been issued with original
issue discount if interest with respect to the Trust Certificates were not
treated as "unconditionally payable" under the OID Regulations. In such event,
all of the taxable income to be recognized with respect to the Trust
Certificates would be includible in income of Certificateholders as original
issue discount, but would not be includible again when the interest is actually
received.
C. POSSIBLE CLASSIFICATION AS A PARTNERSHIP OR ASSOCIATION TAXABLE AS A
CORPORATION
The opinion of Special Tax Counsel is not binding on the courts or the
IRS. It is possible that the IRS could assert that, for federal income tax
purposes, the transaction contemplated with respect to the Certificates
constitutes a sale of the Mortgage Loans (or an interest therein) to the
Certificateholders and that the proper classification of the legal relationship
between the Depositor, any Unaffiliated Seller and the Certificateholders
resulting from this transaction is that of a partnership, or a publicly traded
partnership taxable as a corporation. Since Special Tax Counsel has advised that
the Trust Certificates will be treated as indebtedness in the hands of the
Certificateholders for federal income tax purposes, neither the Depositor nor
any Unaffiliated Seller will attempt to comply with federal income tax reporting
requirements applicable to partnerships or corporations.
If it were determined that this transaction created an entity
classified as a corporation (i.e. a publicly traded partnership taxable as a
corporation), the Trust Fund would be subject to federal income tax at corporate
income tax rates on the income it derives from the Mortgage Loans, which would
reduce the amounts available for distribution to the Certificateholders. Cash
distributions to the Certificateholders generally would be treated as dividends
for federal income tax purposes to the extent of such corporation's earnings and
profits.
If the transaction were treated as creating a partnership, the
partnership itself would not be subject to federal income tax (unless it were to
be characterized as a publicly traded partnership taxable as a corporation);
rather, each partner (including each Certificateholder) would be taxed
individually on its respective distributive shares of the partnership's income,
gain, loss, deductions and credits. The amount and timing of items of income and
deductions of the Certificateholders could differ if the Certificates were held
to constitute partnership interests rather than indebtedness. Assuming that all
of the provisions of the
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Agreement, as in effect on the date of the issuance, are complied with, it is
the opinion of Special Tax Counsel that the Trust Fund will not be treated as a
corporation.
D. POSSIBLE CLASSIFICATION AS A TAXABLE MORTGAGE POOL
In relevant part, Section 7701(i) of the Code provides that any entity
(or a portion of an entity) that is a "taxable mortgage pool" will be classified
as a taxable corporation and will not be permitted to file a consolidated
federal income tax return with another corporation. Any entity (or a portion of
any entity) will be a taxable mortgage pool if (i) it is not a REMIC (or, after
September 1, 1997, a FASIT), (ii) substantially all of its assets consist of
debt instruments, more than 50% of which are real estate mortgages, (iii) the
entity is the obligor under debt obligations with two or more maturities, and
(iv) under the terms of the entity's debt obligations (or an underlying
arrangement), payments on such debt obligations bear a relationship to the debt
instruments held by the entity.
Assuming that all of the provisions of the Agreement, as in effect on
the date of issuance, are complied with, Special Tax Counsel is of the opinion
that the arrangement created by the Agreement will not be a taxable mortgage
pool under Section 7701(i) of the Code because only one class of indebtedness
secured by the Mortgage Loans is being issued.
The opinion of Special Tax Counsel is not binding on the courts or the
IRS. If the IRS were to contend successfully (or future regulations were to
provide) that the arrangement created by the Agreement is a taxable mortgage
pool, such arrangement would be subject to federal corporate income tax on its
taxable income generated by ownership of the Mortgage Loans. Such a tax might
reduce amounts available for distributions to Certificateholders. The amount of
such a tax would depend upon whether distributions to Certificateholders would
be deductible as interest expense in computing the taxable income of such an
arrangement as a taxable mortgage pool.
E. FOREIGN INVESTORS
In general, subject to certain exceptions, interest (including original
issue discount) paid on a Trust Certificate to a nonresident alien individual,
foreign corporation or other non-United States person is not subject to United
States federal income tax, provided that such interest is not effectively
connected with a trade or business of the recipient in the United States and the
Certificateholder provides the required certification of foreign status.
If the interests of the Certificateholders were deemed to be
partnership interests, the partnership would be required, on a quarterly basis,
to pay withholding tax equal to the product, for each foreign partner, of such
foreign partner's distributive share of "effectively connected" income of the
partnership multiplied by the highest United States rate of tax applicable to
that foreign partner. In addition, such foreign partner, if a corporation or
association taxable as a corporation, could be subject to branch profits tax.
Each non-foreign partner would be required to certify to the partnership that it
is not a foreign person. The tax withheld from each foreign partner would be
credited against such foreign partner's United States federal income tax
liability.
If the Trust Fund were taxable as a corporation, distributions to
foreign persons, to the extent treated as dividends, would generally be subject
to withholding at the rate of 30%, unless such rate were reduced by an
applicable tax treaty.
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F. BACKUP WITHHOLDING
Certain Certificateholders may be subject to backup withholding at the
rate of 31% with respect to interest paid on the Trust Certificates if the
Certificateholder, upon issuance, fails to supply the Trustee or his broker with
his taxpayer identification number, furnishes an incorrect taxpayer
identification number, fails to report interest, dividends, or other "reportable
payments" (as defined in the Code) properly, or, under certain circumstances,
fails to provide the Trustee or his broker with a statement, certified under
penalties of perjury, that he is not subject to backup withholding.
The Trustee will be required to report annually to the IRS, and to each
Certificateholder of record, the amount of interest paid (and original issue
discount accrued, if any) on the Trust Certificates (and the amount of interest
withheld for federal income taxes, if any) for each calendar year, except as to
exempt holders (generally, holders that are corporations, certain tax-exempt
organizations or nonresident aliens who provide certification as to their status
as nonresidents). As long as the only "Certificateholder" of record is Cede, as
nominee for DTC, Certificateholders and the IRS will receive tax and other
information including the amount of interest paid on the Trust Certificates from
other persons holding Trust Certificates directly or indirectly through DTC,
rather than from the Trustee. (The Trustee, however, will respond to requests
for necessary information to enable such other persons to complete their
reports.) Each non-exempt Certificateholder will be required to provide, under
penalties of perjury, a certificate on IRS Form W-9 containing his or her name,
address, correct federal taxpayer identification number and a statement that he
or she is not subject to backup withholding. Should a non-exempt
Certificateholder fail to provide the required certification, 31% of the
interest (and principal) otherwise payable to the Certificateholder will be
required to be withheld and remitted to the IRS as a credit against the
Certificateholder's federal income tax liability.
G. SALE OR OTHER DISPOSITION
If a Certificateholder sells a Trust Certificate, the holder will
recognize gain or loss in an amount equal to the difference between the amount
realized on the sale and the Certificateholder's adjusted tax basis in the Trust
Certificate. The adjusted tax basis of a Trust Certificate to a particular
Certificateholder will equal the holder's cost for the Trust Certificate,
increased by any market discount, acquisition discount, original issue discount
and gain previously included by such Certificateholder in income with respect to
the Trust Certificate and decreased by the amount of bond premium (if any)
previously amortized and by the amount of principal payments previously received
by such Certificateholder with respect to such Trust Certificate. Any such gain
or loss will generally be capital gain or loss if the Trust Certificate was held
as a capital asset, except for gain representing accrued interest and accrued
market discount not previously included in income. Any such capital gain or loss
would be long-term capital gain or loss if the Certificateholder's holding
period exceeded one year. Capital losses generally may be used only to offset
capital gains.
H. STATE AND LOCAL TAXATION
In addition to the federal income tax consequences described above,
potential investors should consider the state income tax consequences of the
acquisition. ownership, and disposition of the Trust Certificates. State income
tax law may differ substantially from the corresponding federal law and this
discussion does not purport to describe any aspect of the income tax laws of any
state. Therefore, potential investors should consult their own tax advisers with
respect to the various state tax consequences of an investment in the Trust
Certificates.
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V. TAX CHARACTERIZATION AS A PARTNERSHIP OR DIVISION
Special Tax Counsel will deliver its opinion for an Issuer which is
intended to be a partnership for federal income tax purposes, as specified in
the related Prospectus Supplement, generally to the effect that the Issuer will
not be an association (or publicly traded partnership) taxable as a corporation
for federal income tax purposes. This opinion will be based on the assumption
that the terms of the Trust Agreement and related documents will be complied
with, and on counsel's conclusion that the nature of the income of the Issuer
will exempt it from the rule that certain publicly traded partnerships are
taxable as corporations or such rule is otherwise inapplicable to the Issuer, so
that the Issuer will not be characterized as a publicly traded partnership
taxable as a corporation, and that no action will be taken that is inconsistent
with the treatment of the Issuer as a partnership (such as an election to treat
the Issuer as a corporation for federal income tax purposes). If, however, the
Issuer has a single owner for federal income tax purposes, it will be treated as
a division of its owner and as such will be disregarded as an entity separate
from its owner for federal income tax purposes, assuming no election will be
made to treat the Issuer as a corporation for federal income tax purposes.
Certain entities classified as "taxable mortgage pools" are subject to
corporate level tax on their net income. A "taxable mortgage pool" is generally
defined as an entity that meets the following requirements: (i) the entity is
not a REMIC (or, after September 1, 1997, a FASIT), (ii) substantially all of
the assets of the entity are debt obligations, and more than 50 percent of such
debt obligations consists of real estate mortgages (or interests therein), (iii)
the entity is the obligor under debt obligations with two or more maturities,
and (iv) payments on the debt obligations on which the entity is the obligor
bear a relationship to the payments on the debt obligations which the entity
holds as assets. With respect to requirement (iii), the Code authorizes the
Internal Revenue Service to provide by regulations that equity interests may be
treated as debt for purposes of determining whether there are two or more
maturities. If the Issuer were treated as a taxable mortgage pool, it would be
ineligible to file consolidated returns with any other corporation and could be
liable for corporate tax. Treasury regulations do not provide for the
recharacterization of equity as debt for purposes of determining whether an
entity has issued debt with two maturities, except in the case of transactions
structured to avoid the taxable mortgage pool rules. Special Tax Counsel will
deliver its opinion for an Issuer which is intended to be a partnership for
federal income tax purposes, as specified in the related Prospectus Supplement,
generally to the effect that the Issuer will not be a taxable mortgage pool.
This opinion will be based on the assumption that the terms of the Trust
Agreement and related documents will be complied with, and on counsel's
conclusion that either the number of classes of debt obligations issued by the
Issuer, or the nature of the assets held by the Issuer, will exempt the Issuer
from treatment as a taxable mortgage pool.
If the Issuer were taxable as a corporation for federal income tax
purposes, the Issuer would be subject to corporate income tax on its taxable
income. The Issuer's taxable income would include all its income, possibly
reduced by its interest expense on the Notes. Any such corporate income tax
could materially reduce cash available to make payments on the Notes and
distributions on the Certificates, and Certificateholders could be liable for
any such tax that is unpaid by the Issuer. In addition, distributions to the
Certificateholders generally would be taxable as dividends.
A. TAX CONSEQUENCES TO HOLDERS OF THE NOTES ISSUED BY A PARTNERSHIP OR DIVISION
1. Treatment of the Notes as Indebtedness
The Issuer will agree, and the Noteholders will agree by their purchase
of Notes, to treat the Notes as debt for federal income tax purposes. Except as
otherwise provided in the related Prospectus Supplement,
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Special Tax Counsel will advise the Depositor that in its opinion the Notes will
be classified as debt for federal income tax purposes.
2. Possible Alternative Treatments of the Notes
If, contrary to the opinion of counsel, the IRS successfully asserted
that one or more of the Notes did not represent debt for federal income tax
purposes, the Notes might be treated as equity interests in the Issuer. If so
treated, the Issuer might be treated as a publicly traded partnership that would
not be taxable as a corporation because it would meet certain qualifying income
tests. Nonetheless, treatment of the Notes as equity interests in such a
publicly traded partnership could have adverse tax consequences to certain
holders. For example, income to foreign holders generally would be subject to
United States federal income tax and United States federal income tax return
filing and withholding requirements, and individual holders might be subject to
certain limitations on their ability to deduct their share of the Issuer's
expenses.
3. Interest Income on the Notes
The stated interest on the Notes will be taxable to a Noteholder as
ordinary income when received or accrued in accordance with such Noteholder's
method of tax accounting. It is not anticipated that the Notes will be issued
with original issue discount within the meaning of Section 1273 of the Code. A
subsequent holder who purchases a Note at a discount that exceeds a statutorily
defined de minimis amount will be subject to the "market discount" rules of the
Code, and a holder who purchases a Note at a premium will be subject to the
premium amortization rules of the Code.
4. Sale or Other Disposition
If a Noteholder sells a Note, the holder will recognize gain or loss in
an amount equal to the difference between the amount realized on the sale and
the holder's adjusted tax basis in the Note. The adjusted tax basis of a Note to
a particular Noteholder will equal the holder's cost for the Note, increased by
original issue discount (if any), and market discount previously included by
such Noteholder in income with respect to the Note and decreased by the amount
of bond premium (if any) previously amortized and by the amount of principal
payments previously received by such Noteholder with respect to such Note.
Subject to the rules of the Code concerning market discount on the Notes, any
such gain or loss generally will be capital gain or loss if the Note was held as
a capital asset. Any such gain or loss would be long-term capital gain or loss
if the Noteholder's holding period exceeded one year. Capital losses generally
may be deducted only to the extent the Noteholder has capital gains for the
taxable year, although under certain circumstances non-corporate Noteholders can
deduct losses in excess of available capital gains.
5. Foreign Holders
If interest paid (or accrued) to a Noteholder who is a nonresident
alien, foreign corporation or other non-United States person (a "foreign
person") is not effectively connected with the conduct of a trade or business
within the United States by the foreign person, the interest generally will be
considered "portfolio interest," and generally will not be subject to United
States Federal income tax and withholding tax, if the foreign person (i) is not
actually or constructively a "10 percent shareholder" of the Trust or the
Depositor (including a holder of 10% of the outstanding Certificates) or a
"controlled foreign corporation" with respect to which the Trust or the
Depositor is a "related person" within the meaning of the Code and (ii) provides
the person otherwise required to withhold United States tax with an appropriate
statement, signed under penalties of perjury, certifying that the beneficial
owner of the Note is a foreign person and providing the foreign person's name
and address. If the information provided in the statement changes, the foreign
person must so inform the person otherwise required to withhold United States
tax within 30 days of such
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change. The statement generally must be provided in the year a payment occurs
(prior to such payment) or in either of the two preceding years. If a Note is
held through a securities clearing organization or certain other financial
institutions, the organization or institution may provide a signed statement to
the withholding agent. However, in that case, the signed statement must be
accompanied by a Form W-8 or substitute form provided by the foreign person that
owns the Note. If such interest in not portfolio interest, then it will be
subject to United States federal income and withholding tax at a rate of 30%,
unless reduced or eliminated pursuant to an applicable tax treaty.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Note by a foreign person will be exempt from United
States federal income and withholding tax, provided that (i) the gain is not
effectively connected with the conduct of a trade or business in the United
States by the foreign person and (ii) in the case of an individual foreign
person, the foreign individual is not present in the United States for 183 days
or more in the taxable year.
If the interest, gain or income on a Note held by a foreign person is
effectively connected with the conduct of a trade or business in the United
States by the foreign person (although exempt from the withholding tax
previously discussed if the holder provides an appropriate statement), the
holder generally will be subject to United States federal income tax on the
interest, gain or income at regular federal income tax rates. In addition, if
the foreign person is a corporation or association taxable as a corporation, it
may be subject to a branch profits tax equal to 30% of its "effectively
connected earnings and profits" within the meaning of the Code for the taxable
year, as adjusted for certain items, unless it qualifies for a lower rate under
an applicable tax treaty (as modified by the branch profits tax rules). The
Final Withholding Regulations, which are generally effective with respect to
payments made after December 31, 1999, consolidate and modify the current
certification requirements and means by which a holder may claim exemption from
United States federal income tax withholding and provide certain presumptions
regarding the status of holders when payments to the holders cannot be reliably
associated with appropriate documentation provided to the payor. All Noteholders
should consult their own tax advisers regarding the application of these
regulations.
6. Information Reporting and Backup Withholding
The Trust will be required to report annually to the IRS, and to each
Noteholder of record, the amount of interest paid on the Notes (and the amount
of interest withheld for federal income taxes, if any) for each calendar year,
except as to exempt holders (generally, holders that are corporations,
tax-exempt organizations, qualified pension and profit-sharing trusts,
individual retirement accounts, or nonresident aliens who provide certification
as to their status as nonresidents). Accordingly, each holder (other than exempt
holders who are not subject to the reporting requirements) will be required to
provide, under penalties of perjury, a certificate containing the holder's name,
address, correct federal taxpayer identification number and a statement that the
holder is not subject to backup withholding. Should a nonexempt Noteholder fail
to provide the required certification, the Trust will be required to withhold
31% of the amount otherwise payable to the holder, and remit the withheld amount
to the IRS, as a credit against the holder's federal income tax liability.
B. TAX CONSEQUENCES TO HOLDERS OF THE CERTIFICATES ISSUED BY A PARTNERSHIP OR
DIVISION
1. Treatment of the Issuer as a Partnership
In the case of an Issuer intended to qualify as a partnership for
federal income tax purposes, the Issuer and the Depositor will agree, and the
Certificateholders will agree by their purchase of Certificates, to
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treat the Issuer as a partnership for purposes of United States federal and
state income tax, franchise tax and any other tax measured in whole or in part
by income, with the assets of the partnership, or if there is a single
Certificateholder for federal income tax purposes, to disregard the Issuer as an
entity separate from the Certificateholder, being the assets held by the Issuer,
the partners of the partnership being the Certificateholders, and the Notes, if
any, being debt of the partnership. However, the proper characterization of the
arrangement involving the Certificates, the Notes, the Issuer and the Servicer
is not clear because there is no authority on transactions closely comparable to
that contemplated herein.
A variety of alternative characterizations are possible. For example,
because the Certificates have certain features characteristic of debt, the
Certificates might be considered debt of the Issuer. Generally, provided the
Certificates are issued at or close to face value, any such characterization
would not result in materially adverse tax consequences to Certificateholders as
compared to the consequences from treatment of the Certificates as equity in a
partnership, described below. The following discussion assumes that the
Certificates represent equity interests in a partnership.
2. Partnership Taxation
As a partnership, the Issuer will not be subject to federal income tax.
Rather, each Certificateholder will be required to separately take into account
such holder's allocated share of income, gains, losses, deductions and credits
of the Issuer. The Issuer's income will consist primarily of interest and
finance charges earned on the Mortgage Loans (including appropriate adjustments
for market discount, original issue discount and bond premium) and any gain upon
collection or disposition of Mortgage Loans. The Issuer's deductions will
consist primarily of interest and original issue discount accruing with respect
to the Notes, servicing and other fees, and losses or deductions upon collection
or disposition of Mortgage Loans.
The tax items of a partnership are allocable to the partners in
accordance with the Code, Treasury regulations and the partnership agreement
(here, the Trust Agreement and related documents). The Trust Agreement will
provide, in general, that the Certificateholders will be allocated taxable
income of the Issuer for each month equal to the sum of (i) the interest that
accrues on the Certificates in accordance with their terms for such month,
including interest accruing at the Interest Rate for such month and interest on
amounts previously due on the Certificates but not yet distributed; (ii) any
Issuer income attributable to discount on the Mortgage Loans that corresponds to
any excess of the principal amount of the Certificates over their initial issue
price; (iii) prepayment premium payable to the Certificateholders for such
month; and (iv) any other amounts of income payable to the Certificateholders
for such month. Such allocation will be reduced by any amortization by the
Issuer of premium on Mortgage Loans that corresponds to any excess of the issue
price of Certificates over their principal amount. All remaining taxable income
of the Issuer will be allocated to the Depositor. Based on the economic
arrangement of the parties, this approach for allocating Issuer income should be
permissible under applicable Treasury regulations, although no assurance can be
given that the IRS would not require a greater amount of income to be allocated
to Certificateholders. Moreover, even under the foregoing method of allocation,
Certificateholders may be allocated income equal to the entire Interest Rate
plus the other items described above even though the Issuer might not have
sufficient cash to make current cash distributions of such amount. Thus, cash
basis holders will in effect be required to report income from the Certificates
on the accrual basis and Certificateholders may become liable for taxes on
Issuer income even if they have not received cash from the Issuer to pay such
taxes. In addition, because tax allocations and tax reporting will be done on a
uniform basis for all Certificateholders but Certificateholders may be
purchasing Certificates at different times and at different prices,
Certificateholders may be required to report on their tax returns taxable income
that is greater or less than the amount reported to them by the Issuer.
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If Notes are also issued, some or all of the taxable income allocated
to a Certificateholder that is a pension, profit sharing or employee benefit
plan or other tax-exempt entity (including an individual retirement account)
will constitute "unrelated business taxable income" generally taxable to such a
holder under the Code.
An individual taxpayer's share of expenses of the Issuer (including
fees to the Servicer but not interest expense) would be miscellaneous itemized
deductions. Such deductions might be disallowed to the individual in whole or in
part and might result in such holder being taxed on an amount of income that
exceeds the amount of cash actually distributed to such holder over the life of
the Issuer. Such deductions may also be subject to reduction under Section 68 of
the Code if the individual's adjusted gross income exceeds certain limits. See "
--Non-REMIC Trust Funds--Taxation of Owners of Trust Traction Certificates."
The Issuer intends to make all tax calculations relating to income and
allocations to Certificateholders on an aggregate basis. If the IRS were to
require that such calculations be made separately for each Mortgage Loan, the
Issuer might be required to incur additional expense but it is believed that
there would not be a material adverse effect on Certificateholders.
3. Discount and Premium
It is believed that the Mortgage Loans were not issued with original
issue discount and, therefore, the Trust should not have original issue discount
income. However, the purchase price paid by the Issuer for the Mortgage Loans
may be greater or less than the remaining principal balance of the Mortgage
Loans at the time of purchase. If so, the Mortgage Loan will have been acquired
at a premium or discount, as the case may be. (As indicated above, the Issuer
will make this calculation on an aggregate basis, but might be required to
recompute it on a Mortgage Loan by Mortgage Loan basis.)
If the Issuer acquires the Mortgage Loans at a market discount or
premium, the Issuer will elect to include any such discount in income currently
as it accrues over the life of the Mortgage Loans or to offset any such premium
against interest income on the Mortgage Loans. As indicated above, a portion of
such market discount income or premium deduction may be allocated to
Certificateholders.
4. Section 708 Termination
Under Section 708 of the Code, the Issuer will be deemed to terminate
for federal income tax purposes if 50% or more of the capital and profits
interests in the Issuer are sold or exchanged within a 12-month period. If such
a termination occurs, the partnership will be considered to have transferred its
assets and liabilities to a new partnership in exchange for interests in that
new partnership, which it would then be treated as transferring to its partners.
5. Disposition of Certificates
Generally, capital gain or loss will be recognized on a sale of
Certificates in an amount equal to the difference between the amount realized
and the seller's tax basis in the Certificates sold. Any such gain or loss would
be long-term capital gain or loss if the Certificateholder's holding period
exceeded one year. A Certificateholder's tax basis in a Certificate will
generally equal the holder's cost increased by the holder's share of Issuer
income (includible in income) and decreased by any distributions received with
respect to such Certificate. In addition, both the tax basis in the Certificates
and the amount realized on a sale of a Certificate would include the holder's
share of the Notes and other liabilities of the Issuer. A holder acquiring
Certificates at different prices may be required to maintain a single aggregate
adjusted tax basis in
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such Certificates, and, upon sale or other disposition of some of the
Certificates, allocate a portion of such aggregate tax basis to the Certificates
sold (rather than maintaining a separate tax basis in each Certificate for
purposes of computing gain or loss on a sale of that Certificate).
Any gain on the sale of a Certificate attributable to the holder's
share of unrecognized accrued market discount on the Mortgage Loans would
generally be treated as ordinary income to the holder and would give rise to
special tax reporting requirements. The Issuer does not expect to have any other
assets that would give rise to such special reporting requirements. Thus, to
avoid those special reporting requirements, the Issuer will elect to include
market discount in income as it accrues.
If a Certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the Certificates that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise to
a capital loss upon the retirement of the Certificates.
6. Allocations Between Depositors and Transferees
In general, the Issuer's taxable income and losses will be determined
monthly and the tax items for a particular calendar month will be apportioned
among the Certificateholders in proportion to the principal amount of
Certificates owned by them as of the close of the last day of such month. As a
result, a holder purchasing Certificates may be allocated tax items (which will
affect its tax liability and tax basis) attributable to periods before the
actual transaction.
The use of such a monthly convention may not be permitted by existing
regulations and federal tax counsel is unable to opine on the matter. If a
monthly convention is not allowed (or only applies to transfers of less than all
of the partner's interest), taxable income or losses of the Issuer might be
reallocated among the Certificateholders. The Issuer's method of allocation
between transferors and transferees may be revised to conform to a method
permitted by future regulations.
7. Section 754 Election
In the event that a Certificateholder sells its Certificates at a
profit (or loss), the purchasing Certificateholder will have a higher (or lower)
basis in the Certificates than the selling Certificateholder had. The tax basis
of the Issuer's assets will not be adjusted to reflect that higher (or lower)
basis unless the Issuer were to file an election under Section 754 of the Code.
In order to avoid the administrative complexities that would be involved in
keeping accurate accounting records, as well as potentially onerous information
reporting requirements, the Issuer currently does not intend to make such
election. As a result, Certificateholders might be allocated a greater or lesser
amount of Issuer income than would be appropriate based on their own purchase
price for Certificates.
8. Administrative Matters
The Trustee is required to keep or have kept complete and accurate
books of the Issuer. Such books will be maintained for financial reporting and
tax purposes on an accrual basis and the fiscal year of the Issuer will be the
calendar year. The Trustee will file a partnership information return (IRS Form
1065) with the IRS for each taxable year of the Issuer and will report each
Certificateholder's allocable share of items of Issuer income and expense to
holders and the IRS on Schedule K-1. The Issuer will provide the Schedule K-1
information to nominees that fail to provide the Issuer with the information
statement described below and such nominees will be required to forward such
information to the beneficial owners of the Certificates.
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Generally, holders must file tax returns that are consistent with the
information return filed by the Issuer or be subject to penalties unless the
holder timely notifies the IRS of all such inconsistencies.
Under Section 6031 of the Code, any person that holds Certificates as a
nominee at any time during a calendar year is required to furnish the Issuer
with a statement containing certain information on the nominee, the beneficial
owners and the Certificates so held. Such information includes (i) the name,
address and taxpayer identification number of the nominee and (ii) as to each
beneficial owner (x) the name, address and identification number of such person,
(y) whether such person is a United States person, a tax-exempt entity or a
foreign government, an international organization, or any wholly owned agency or
instrumentality of either of the foregoing, and (z) certain information on
Certificates that were held, bought or sold on behalf of such person throughout
the year. In addition, brokers and financial institutions that hold Certificates
through a nominee are required to furnish directly to the Issuer information as
to themselves and their ownership of Certificates. A clearing agency registered
under Section 17A of the Exchange Act is not required to furnish any such
information statement to the Issuer. The information referred to above for any
calendar year must be furnished to the Issuer on or before the following January
31. Nominees, brokers and financial institutions that fail to provide the Issuer
with the information described above may be subject to penalties.
The Depositor will be designated as the tax matters partner in the
related Trust Agreement and, as such, will be responsible for representing the
Certificateholders in certain disputes with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years after the date on which the
partnership information return is filed. Any adverse determination following an
audit of the return of the Issuer by the appropriate taxing authorities could
result in an adjustment of the returns of the Certificateholders, and, under
certain circumstances, a Certificateholder may be precluded from separately
litigating a proposed adjustment to the items of the Issuer. An adjustment could
also result in an audit of a Certificateholder's returns and adjustments of
items not related to the income and losses of the Issuer.
9. Tax Consequences to Foreign Certificateholders
It is not clear and federal tax counsel is unable to opine whether the
Issuer would be considered to be engaged in a trade or business in the United
States for purposes of federal withholding taxes with respect to non-United
States persons because there is no clear authority dealing with that issue under
facts substantially similar to those described herein. Although it is not
expected that the Issuer would be engaged in a trade or business in the United
States for such purposes, the Issuer will withhold as if it were so engaged in
order to protect the Issuer from possible adverse consequences of a failure to
withhold. The Issuer expects to withhold on the portion of its taxable income
that is allocable to foreign Certificateholders pursuant to Section 1446 of the
Code, as if such income were effectively connected to a United States trade or
business, at a rate of 35% for foreign holders that are taxable as corporations
and 39.6% for all other foreign holders. Subsequent adoption of Treasury
regulations or the issuance of other administrative pronouncements may require
the Issuer to change its withholding procedures.
If the trust is engaged in a United States trade or business, each
foreign holder might be required to file a United States individual or corporate
income tax return (including, in the case of a corporation, the branch profits
tax) on its share of the Issuer's income. A foreign holder generally would be
entitled to file with the IRS a claim for refund with respect to taxes withheld
by the Issuer taking the position that no taxes were due because the Issuer was
not engaged in a United States trade or business. However, interest payments
made (or accrued) to a Certificateholder who is a foreign person generally will
be considered guaranteed payments to the extent such payments are determined
without regard to the income of the Issuer,
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and for that reason or because of the nature of the assets of the Issuer
probably will not be considered "portfolio interest." As a result, even if the
Issuer was not considered to be engaged in a United States trade or business,
Certificateholders will be subject to United States federal income tax which
must be withheld at a rate of 30%, unless reduced or eliminated pursuant to an
applicable treaty. A foreign holder would be entitled to claim a refund for such
withheld tax, taking the position that the interest was portfolio interest and
therefore not subject to United States tax. However, the IRS may disagree and no
assurance can be given as to the appropriate amount of tax liability. As a
result, each potential foreign Certificateholder should consult its tax advisor
as to whether an interest in a Certificate is an unsuitable investment.
10. Backup Withholding
Distributions made on the Certificates and proceeds from the sale of
the Certificates will be subject to a "backup" withholding tax of 31% if, in
general, the Certificateholder fails to comply with certain identification
procedures, unless the holder is an exempt recipient under applicable provisions
of the Code.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), imposes certain restrictions on employee benefit plans subject to
ERISA ("ERISA Plans") and on those persons who are ERISA fiduciaries with
respect to the assets of such ERISA Plans. In accordance with the general
fiduciary standards of ERISA, an ERISA Plan fiduciary should consider whether an
investment in the Securities is permitted by the documents and instruments
governing the Plan, consistent with the Plan's overall investment policy and
appropriate in view of the composition of its investment portfolio. Fiduciaries
should also consider ERISA's prohibition on improper delegation of control over,
or responsibility for, plan assets.
Employee benefit plans which are governmental plans and certain church
plans (if no election has been made under Section 410(d) of the Code) are not
subject to ERISA requirements. Accordingly, assets of such plans may be invested
in the Securities subject to the provisions of applicable federal and state law
and, in the case of any such plan which is qualified under Section 401(a) of the
Code and exempt from taxation under Section 501(a) of the Code, the restrictions
imposed under Section 503 of the Code.
In addition to imposing general fiduciary standards, ERISA and Section
4975 of the Code prohibit a broad range of transactions involving assets of
ERISA Plans and other plans subject to Section 4975 of the Code or any entity
whose underlying assets include plan assets by reason of a plan or account
investing in such entity, including an insurance company general account
(together with ERISA Plans, "Plans") and certain persons ("Parties in Interest")
who have certain specified relationships to the Plans and taxes and/or imposes
other penalties on any such transaction under ERISA and/or Section 4975 of the
Code, unless an exemption applies. If the assets of a Trust Fund are treated for
ERISA purposes as the assets of the Plans that purchase or hold Securities of
the applicable Series, an investment in Securities of that Series by or with
"plan assets" of a Plan might constitute or give rise to a prohibited
transaction under ERISA or Section 4975 of the Code, unless a statutory or
administrative exemption applies. Violation of the prohibited transaction rules
could result in the imposition of excise taxes and/or other penalties under
ERISA and/or Section 4975 of the Code.
FINAL PLAN ASSETS REGULATION
The United States Department of Labor ("DOL") has issued a regulation
(the "Plan Assets Regulation") under which assets of an entity in which a Plan
makes an equity investment will be treated as assets of the investing Plan in
certain circumstances. Unless the Plan Assets Regulation provides an
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exemption from this "plan asset" treatment, and if such an exemption is not
otherwise available under ERISA, an undivided portion of the assets of a Trust
Fund will be treated, for purposes of applying the fiduciary standards and
prohibited transaction rules of ERISA and Section 4975 of the Code, as an asset
of each Plan which becomes a Securityholder of the applicable Series.
The Plan Assets Regulation provides an exemption from "plan asset"
treatment for securities issued by an entity if, immediately after the most
recent acquisition of any equity interest in the entity, less than 25% of the
value of each class of equity interests in the entity, excluding interests held
by a person who has discretionary authority or control with respect to the
assets of the entity (or any affiliate of such a person), are held by "benefit
plan investors" (e.g., Plans, governmental and other benefit plans not subject
to ERISA and entities holding assets deemed to be "plan assets"). Because the
availability of this exemption to any Trust Fund depends upon the identity of
the Securityholders of the applicable Series at any time, there can be no
assurance that any Series or Class of Securities will qualify for this
exemption.
PROHIBITED TRANSACTION CLASS EXEMPTION APPLICABLE TO CERTIFICATES
Prohibited Transaction Class Exemption 83-1 (Class Exemption for
Certain Transactions Involving Mortgage Pool Investment Trusts) ("PTCE 83-1")
permits, subject to certain conditions, certain transactions involving the
creation, maintenance and termination of certain residential mortgage pools and
the acquisition and holding of certain residential mortgage pool pass-through
Certificates by Plans, regardless of whether (a) the mortgage pool is exempt
from "plan asset" treatment or (b) the transactions would otherwise be
prohibited under ERISA or Section 4975 of the Code. A Series of Certificates
will be eligible for prohibited transaction relief if the general conditions
(described below) of PTCE 83-1 are satisfied, and if the applicable Series of
Certificates evidences ownership interests in Trust Assets which do not include
Mortgage Certificates, Cooperative Loans, Mortgage Loans secured by cooperative
buildings, Mortgage Loans secured by Multifamily Property, or Contracts
(collectively "Nonexempt Assets"). An investment by a Plan in Certificates of a
Series qualifying for relief under PTCE 83-1 (1) will be exempt from the
prohibitions of Section 406(a) of ERISA (relating generally to Plan transactions
involving Parties in Interest who are not fiduciaries) if the Plan purchases the
Certificates at no more than fair market value, and (2) will be exempt from the
prohibitions of Sections 406(b) (1) and (2) of ERISA (relating generally to Plan
transactions with fiduciaries) if, in addition, (i) the purchase is approved by
an independent fiduciary, (ii) no sales commission is paid to the Depositor as
Mortgage Pool sponsor, (iii) the Plan does not purchase more than 25% of the
Certificates of that Series and (iv) at least 50% of the Certificates of that
Series is purchased by persons independent of the Depositor, the Trustee and the
Insurer, as applicable. PTCE 83-1 will not apply to a Series of Securities with
respect to which the Trust Assets include Nonexempt Assets.
PTCE 83-1 sets forth three general conditions that must be satisfied
for any transaction to be eligible for exemption: (1) the existence of a pool
trustee who is not an affiliate of the pool sponsor; (2) 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 payment due to property damage or defaults in loan
payments; and (3) a limitation on the amount of the payment retained by the pool
sponsor, together with other benefits inuring to it, to not more than adequate
consideration for selling the mortgage loans and reasonable compensation for
services provided by the pool sponsor to the mortgage pool.
The Trustee for all Series will be unaffiliated with the Depositor,
and, accordingly, the first general condition will be satisfied. With respect to
the second general condition of PTCE 83-1, the credit support method represented
by the issuance of a Subordinated Class or Subclasses of Certificates and/or the
establishment of a Reserve Fund, with respect to any Series intending to meet
the conditions of PTCE 83-1 for which such a method of Credit Support is
provided (see "Credit Support -- Subordinated Securities" and
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" -- Reserve Fund"), is substantially similar to a system for protecting
Certificateholders against reductions in pass-through payments which has been
reviewed and accepted by the DOL as an alternative to pool insurance or a letter
of credit indemnification system. This may support a Plan fiduciary's conclusion
that the second general condition is satisfied with respect to any such Series
although, in the absence of a ruling to this effect, there can be no assurance
that these features will be so viewed by the DOL. In addition, the Depositor
intends to use its best efforts to establish, for each such Series for which
credit support is provided by a Letter of Credit (see "Credit Support -- Letters
of Credit") and/or the insurance arrangements set forth above under "Description
of Insurance" (an "Insured Series"), a system that will adequately protect the
Mortgage Pools and indemnify Certificateholders of the applicable Series against
pass-through payment reductions resulting from property damage or defaults in
loan payments. With respect to the third general condition of PTCE 83-1, the
Depositor intends to use its best efforts to establish a compensation system
which will produce for the Depositor total compensation that will not exceed
adequate consideration for forming the Mortgage Pool and selling the
Certificates. However, the Depositor does not guarantee that its systems will be
sufficient to meet the second and third general conditions (described above)
with respect to any such Series.
If a Series of Certificates is subdivided into two or more Classes or
Subclasses which are entitled to disproportionate allocations of the principal
and interest payments on the Mortgage Loans held by the applicable Trust Fund,
the availability of the exemption afforded by PTCE 83-1 may be adversely
affected, as described in the applicable Prospectus Supplement. Moreover, if the
Certificateholders of any Class or Subclass of Certificates are entitled to
pass-through payment of principal (but no or only nominal interest) or interest
(but no or only nominal principal), it appears that PTCE 83-1 will not exempt
Plans which acquire Certificates of that Class or Subclass from the prohibited
transaction rules of ERISA and Section 4975 of the Code.
If a Series of Certificates includes a Class of Subordinated
Certificates, PTCE 83-1 will not provide an exemption from the prohibited
transaction rules of ERISA for Plans that acquire such Subordinated
Certificates.
UNDERWRITER'S PROHIBITED TRANSACTION EXEMPTION APPLICABLE TO CERTIFICATES
Credit Suisse First Boston Corporation ("First Boston") is the
recipient of a final prohibited transaction exemption, 54 Fed. Reg. 42597 (Oct.
17, 1989) (the "Underwriter's PTE" or "Credit Suisse First Boston Corporation's
PTE" if specified in the applicable Prospectus Supplement), which may accord
protection from violations under Sections 406 and 407 of ERISA and Section 4975
of the Code for Plans that acquire Certificates. The Underwriter's PTE applies
to Certificates (a) which represent (1) a beneficial ownership interest in the
assets of a trust and entitle the holder to pass-through payments of principal,
interest and/or other payments made with respect to the assets of the trust, or
(2) an interest in a REMIC if the Certificates are issued by and are obligations
of a trust; and (b) with respect to which First Boston or any of its affiliates
is either the sole underwriter, the manager or co-manager of the underwriting
syndicate or a selling or placement agent. The corpus of a trust to which the
Underwriter's PTE applies include (i) obligations which bear interest or are
purchased at a discount and which are secured by (A) single-family residential,
multifamily residential or commercial real property (including obligations
secured by leasehold interests on commercial real property) or (B) shares issued
by a cooperative housing association; (ii) "guaranteed governmental mortgage
pool certificates" (as defined in the Plan Assets Regulation) and (iii)
undivided fractional interests in the above.
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Plans acquiring Certificates may be eligible for protection under the
Underwriter's PTE if:
(a) assets of the type included as Trust Assets have been
included in other investment pools ("Other Pools");
(b) Certificates evidencing interests in Other Pools have been
both (1) rated in one of the three highest generic rating categories by
Standard & Poor's, a division of The McGraw-Hill Companies, Inc.,
Moody's Investors Service, Inc., Duff & Phelps Credit Rating Co. or
Fitch IBCA, Inc. and (2) purchased by investors, other than Plans, for
at least one year prior to a Plan's acquisition of Certificates in
reliance upon the Underwriter's PTE;
(c) at the time of such acquisition, the Class of Certificates
acquired by the Plan has received a rating in one of the rating
categories referred to in condition (b) above;
(d) the Trustee is not an affiliate of any member of the
Restricted Group (as defined below);
(e) the Class of Certificates acquired by the Plan are not
subordinated to other Classes of Certificates of that Series with
respect to the right to receive payment in the event of defaults or
delinquencies on the underlying Trust Assets;
(f) the Plan is an "accredited investor" (as defined in Rule
501(a)(1) of Regulation D under the Securities Act);
(g) the acquisition of the Certificates by a Plan is on terms
(including the price for the Securities) that are at least as favorable
to the Plan as they would be in an arm's length transaction with an
unrelated party; and
(h) the sum of all payments made to and retained by the
Underwriter or members of any underwriting syndicate in connection with
the distribution of the Certificates represents not more than
reasonable compensation for underwriting the Certificates; the sum of
all payments made to and retained by the Seller pursuant to the sale of
the Trust Assets to the Trust represents not more than the fair market
value of such Trust Assets; and the sum of all payments made to and
retained by the Master Servicer and all Servicers represents not more
than reasonable compensation for such Servicers' services under the
Pooling and Servicing Agreement and reimbursement of such Servicers'
reasonable expenses in connection herewith.
In addition, the Underwriter's PTE will not apply to a Plan's
investment in Certificates if the Plan fiduciary responsible for the decision to
invest in a Class of Certificates is a Mortgagor or Obligor with respect to more
than 5% of the fair market value of the obligations constituting the Trust
Assets or an affiliate of such person and will not apply, unless:
(1) in the case of an acquisition in connection with the
initial issuance of any Series of Certificates, at least 50% of each
Class of Certificates in which Plans have invested is acquired by
persons independent of the Restricted Group and at least 50% of the
aggregate interest in the Trust is acquired by persons independent of
the Restricted Group;
(2) the Plan's investment in any Class of Certificates does
not exceed 25% of the outstanding Certificates of that Class at the
time of acquisition;
(3) immediately after such acquisition, no more than 25% of
the Plan assets with respect to which the investing fiduciary has
discretionary authority or renders investment advice are invested in
Certificates evidencing interest in trusts sponsored or containing
assets sold or serviced by the same entity; and
(4) the Plan is not sponsored by the Depositor, any
Underwriter, the Trustee, any Servicer, any Pool, Special Hazard or
Primary Mortgage Insurer or the obligor under any other credit support
mechanism, a Mortgagor or Obligor with respect to obligations
constituting more than 5% of the aggregate unamortized principal
balance of the Trust Assets on the date of the initial issuance of
Certificates, or any of their affiliates (the "Restricted Group").
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On July 21, 1997, the DOL published in the Federal Register a final
amendment to the Underwriter's PTE which extends exemptive relief to certain
mortgage-backed and asset-backed securities transactions using pre-funding
accounts for trusts issuing pass-through certificates. With respect to the
Certificates, the amendment generally allows a portion of the mortgages or
receivables ("Loans") supporting payments to Certificateholders and having a
principal amount equal to no more than 25% of the total principal amount of the
Certificates to be transferred to the Trust within a 90-day or three-month
period following the Closing Date ("Pre-Funding Period"), instead of requiring
that all such Loans be either identified or transferred on or before the Closing
Date. The relief, is effective for transactions occurring on or after May 23,
1997, provided that the following conditions are met:
(1) the ratio of the amount allocated to the Pre-Funding
Account to the total principal amount of the Certificates being offered
("Pre-Funding Limit") must not exceed 25%;
(2) all Loans transferred after the Closing Date ("Additional
Loans") must meet the same terms and conditions for eligibility as the
original Loans used to create the Trust, which terms and conditions
have been approved by the Rating Agency;
(3) the transfer of such Additional Loans to the Trust during
the Pre-Funding Period must not result in the Certificates receiving a
lower credit rating from the Rating Agency upon termination of the
Pre-Funding Period than the rating that was obtained at the time of the
initial issuance of the Certificates by the Trust;
(4) solely as a result of the use of pre-funding, the weighted
average annual percentage interest rate (the "average interest rate")
for all of the Loans in the Trust at the end of the Pre-Funding Period
must not be more than 100 basis points lower than the average interest
rate for the Loans which were transferred to the Trust on the Closing
Date;
(5) in order to ensure that the characteristics of the
Additional Loans are substantially similar to the original obligations
which were transferred to the Trust, either: (i) the characteristics of
the Additional Loans must be monitored by an insurer or other credit
support provider which is independent of the Depositor or (ii) an
independent accountant retained by the Depositor must provide the
Depositor with a letter (with copies provided to the Rating Agency, the
Underwriter and the Trustee) stating whether or not the characteristics
of the Additional Loans conform to the characteristics described in the
Prospectus, Prospectus Supplement, Private Placement Memorandum
("Offering Documents") and/or Pooling and Servicing Agreement ("Pooling
Agreement"); in preparing such letter, the independent accountant must
use the same type of procedures as were applicable to the Loans which
were transferred as of the Closing Date;
(6) the Pre-Funding Period must end no later than three months
or 90 days after the Closing Date or earlier, in certain circumstances,
if the amount on deposit in the Pre-Funding Account is reduced below
the minimum level specified in the Pooling Agreement or an event of
default occurs under the Pooling Agreement;
(7) amounts transferred to any Pre-Funding Account and/or
Capitalized Interest Account used in connection with the pre-funding
may be invested only in certain permitted investments;
(8) the Offering Documents must describe: (i) any Pre-Funding
Account and/or Capitalized Interest Account used in connection with a
Pre-Funding Account; (ii) the duration of the Pre-Funding Period; (iii)
the percentage and/or dollar amount of the Pre-Funding Limit for the
Trust; and (iv) that the amounts remaining in the Pre-Funding Account
at the end of the Pre-Funding Period will be remitted to
Certificateholders as repayments of principal; and
137
<PAGE>
(9) the Pooling and Servicing Agreement must describe the
permitted investments for the Pre-Funding Account and Capitalized
Interest Account and, if not disclosed in the Offering Documents, the
terms and conditions for eligibility of the Additional Loans.
Whether the conditions in the Underwriter's PTE (in addition to, and
including those, relating to pre-funding) will be satisfied as to Certificates
or any particular Class will depend upon the relevant facts and circumstances
existing at the time the Plan acquires Certificates of that Class. Any Plan
investor who proposes to use "plan assets" of a Plan to acquire Certificates in
reliance upon the Underwriter's PTE should determine whether the Plan satisfies
all of the applicable conditions and consult with its counsel regarding other
factors that may affect the applicability of the Underwriter's PTE.
GENERAL ERISA CONSIDERATIONS RELATING TO CERTIFICATES
Any member of the Restricted Group, a Mortgagor or Obligor, or any of
their affiliates might be considered or might become a Party in Interest with
respect to a Plan. In that event, the acquisition or holding of Certificates of
the applicable Series or Class by, on behalf of or with "plan assets" of such
Plan might be viewed as giving rise to a prohibited transaction under ERISA and
Section 4975 of the Code, unless PTCE 83-1, the Underwriter's PTE or another
exemption is available. Accordingly, before a Plan investor makes the investment
decision to purchase, to commit to purchase or to hold Certificates of any
Series or Class, the Plan investor should determine (a) whether the conditions
(described briefly above) of PTCE 83-1 have been satisfied; (b) whether the
Underwriter's PTE is applicable; (c) whether any other prohibited transaction
exemption (if required) is available under ERISA and Section 4975 of the Code;
or (d) whether an exemption from "plan asset" treatment is available to the
applicable Trust Fund. The Plan investor should also consult the ERISA
discussion, if any, in the applicable Prospectus Supplement for further
information regarding the application of ERISA to any Series or Class of
Certificates.
If for any reason neither PTCE 83-1 nor the Underwriter's PTE provides
an exemption for a particular Plan investor, one of five other prohibited
transaction class exemptions issued by the DOL might apply, i.e., PTCE 91-38
(Class Exemption for Certain Transactions Involving Bank Collective Investment
Funds), PTCE 90-1 (Class Exemption for Certain Transactions Involving Insurance
Company Pooled Separate Accounts), PTCE 84-14 (Class Exemption for Plan Asset
Transactions Determined by Independent Qualified Professional Asset Managers),
PTCE 95-60 (Class Exemption for Certain Transactions Involving Insurance Company
General Accounts) or PTCE 96-23 (Class Exemption for Plan Asset Transactions
Performed by In-house Asset Managers) (collectively, the "Investor Based
Exemptions"). There can be no assurance that any of these Investor Based
Exemptions will apply with respect to any particular Plan investor or, even if
it were to apply, that such exemption would apply to all transactions involving
the applicable Trust Fund. Any person who is a fiduciary by reason of his or her
authority to invest "plan assets" of any Plan and who is considering the use of
"plan assets" of any Plan to purchase the offered Certificates should consult
with its counsel with respect to the potential applicability of ERISA and the
Code to such investments, and should determine on its own whether PTCE 83-1, the
Underwriter's PTE or another exemption would be applicable (and whether all
conditions have been satisfied with respect to any such exemptions), and whether
the offered Certificates are an appropriate investment for a Plan. Moreover,
each Plan fiduciary should determine whether, under the general fiduciary
standards of investment prudence and diversification, an investment in the
offered 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.
ERISA CONSIDERATIONS RELATING TO THE NOTES
Under the Plan Assets Regulation, the assets of the Trust would be
treated as plan assets of a Plan for the purposes of ERISA and the Code only if
the Plan acquires an "Equity Interest" in the Trust and none
138
<PAGE>
of the exceptions contained in the Plan Assets Regulation is applicable. An
equity interest is defined under the Plan Assets Regulation as an interest other
than an instrument which is treated as indebtedness under applicable local law
and which has no substantial equity features. Assuming that a Class of Notes is
treated as indebtedness without substantial equity features for purposes of the
Plan Assets Regulation, then such Class of Notes will be eligible for purchase
by Plans. However, without regard to whether a Class of Notes is treated as an
"equity interest" for such purposes, the acquisition or holding of Notes by or
on behalf of a Plan could be considered to give rise to a prohibited transaction
if the Trust or any of its affiliates is or becomes a party in interest or
disqualified person with respect to such Plan, or in the event that a Note is
purchased in the secondary market and such purchase constitutes a sale or
exchange between a Plan and a party in interest or disqualified person with
respect to such Plan. There can be no assurance that the Trust or any of its
affiliates will not be or become a party in interest or a disqualified person
with respect to a Plan that acquires Notes. However, one or more of the Investor
Based Exemptions described above may apply to any potential prohibited
transactions arising as a consequence of the acquisition, holding and transfer
of the Notes.
ANY PLAN INVESTOR WHO PROPOSES TO USE "PLAN ASSETS" OF ANY PLAN TO
PURCHASE SECURITIES OF ANY SERIES OR CLASS SHOULD CONSULT WITH ITS COUNSEL WITH
RESPECT TO THE POTENTIAL CONSEQUENCES UNDER ERISA AND SECTION 4975 OF THE CODE
OF THE ACQUISITION AND OWNERSHIP OF SUCH SECURITIES.
LEGAL INVESTMENT
The applicable Prospectus Supplement for a Series of Securities will
specify whether a Class or Subclass of such Securities, as long as it is rated
in one of the two highest rating categories by one or more nationally recognized
statistical rating organizations, will constitute a "mortgage related security"
for purposes of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA").
Such Class or Subclass, if any, constituting a "mortgage related security" will
be a legal investment for persons, trusts, corporations, partnerships,
associations, business trusts and business entities (including depository
institutions, insurance companies, 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 prior
to the October 3, 1991 cutoff 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
Securities qualifying as "mortgage related securities" 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 in
mortgage related securities without limitation as to the percentage of their
assets represented thereby, federal credit unions may invest in such securities,
and national banks may purchase such securities for their own account without
regard to the limitations generally applicable to investment securities set
forth in 12 U.S.C. 24 (Seventh), subject in each case to such regulations as the
applicable federal regulatory authority may prescribe. In this connection,
federal credit unions should review 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, codified as
139
<PAGE>
12 C.F.R. Section 703.5(f)-(k), which prohibit federal credit unions from
investing in certain mortgage related securities (including securities such as
certain Series, Classes or Subclasses of Securities), except under limited
circumstances.
All depository institutions considering an investment in the Securities
should review the "Supervisory Policy Statement on Securities Activities" dated
January 28, 1992, as revised April 15, 1994 (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 Office of the Comptroller of the Currency,
the FDIC and the Office of Thrift Supervision and by the NCUA (with certain
modifications), prohibits depository institutions from investing in certain
"high-risk Mortgage Certificates" (including securities such as certain Series,
Classes or Subclasses of the Securities), 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 any Securities,
as certain Series, Classes or Subclasses 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 investment in securities which are not "interest
bearing" or "income paying," and, with regard to any Securities issued in
book-entry form, provisions which may restrict or prohibit investments in
securities which are issued in book-entry form.
Except as to the status of certain Classes of Securities as "mortgage
related securities," no representation is made as to the proper characterization
of the Securities for legal investment purposes, financial institution
regulatory purposes, or other purposes, or as to the ability of particular
investors to purchase Securities under applicable legal investment restrictions.
The uncertainties described above (and any unfavorable future determinations
concerning legal investment or financial institution regulatory characteristics
of the Securities) may adversely affect the liquidity of the Securities.
Investors should consult their own legal advisers in determining
whether and to what extent such Securities constitute legal investments for such
investors.
PLAN OF DISTRIBUTION
Each Series of Securities offered hereby and by means of the related
Prospectus Supplements may be sold directly by the Depositor or may be offered
through Credit Suisse First Boston Corporation, an affiliate of the Depositor,
or underwriting syndicates represented by Credit Suisse First Boston Corporation
(the "Underwriters"). The Prospectus Supplement with respect to each such Series
of Securities will set forth the terms of the offering of such Series or Class
of Securities and each Subclass within such Series, including the name or names
of the Underwriters, the proceeds to the Depositor, and either the initial
public offering price, the discounts and commissions to the Underwriters and any
discounts or concessions allowed or reallowed to certain dealers, or the method
by which the price at which the Underwriters will sell such Securities will be
determined.
140
<PAGE>
Unless otherwise specified in the Prospectus Supplement, the
Underwriters will be obligated to purchase all of the Securities of a Series
described in the Prospectus Supplement with respect to such Series if any such
Securities are purchased. The Securities may 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 a fixed public offering
price or at varying prices determined at the time of sale.
If so indicated in the Prospectus Supplement, the Depositor will
authorize the Underwriters or other persons acting as the Depositor's agents to
solicit offers by certain institutions to purchase the Securities from the
Depositor pursuant to contracts providing for payment and delivery on a future
date. Institutions with which such contracts may be made include commercial and
savings banks, insurance companies, pension funds, investment companies,
educational and charitable institutions and others, but in all cases such
institutions must be approved by the Depositor. The obligation of any purchaser
under any such contract will be subject to the condition that the purchase of
the offered Securities shall not at the time of delivery be prohibited under the
laws of the jurisdiction to which such purchaser is subject. The Underwriters
and such other agents will not have any responsibility in respect of the
validity or performance of such contracts.
The Depositor may also sell the Securities offered hereby and by means
of the related Prospectus Supplements from time to time in negotiated
transactions or otherwise, at prices determined at the time of sale. The
Depositor may effect such transactions by selling Securities to or through
dealers, and such dealers may receive compensation in the form of underwriting
discounts, concessions or commissions from the Depositor and any purchasers of
Securities for whom they may act as agents.
The place and time of delivery for each Series of Securities offered
hereby and by means of the related Prospectus Supplement will be set forth in
the Prospectus Supplement with respect to such Series.
If and to the extent required by applicable law or regulation, this
Prospectus and the attached Prospectus Supplement will also be used by the
Underwriters after the completion of the offering in connection with offers and
sales related to market-making transactions in the offered Securities in which
the Underwriters act as principal. Sales will be made at negotiated prices
determined at the time of sales.
LEGAL MATTERS
Certain legal matters in connection with the Securities offered hereby,
including material federal income tax consequences, will be passed upon for the
Depositor and for the Underwriters by Stroock & Stroock & Lavan LLP, New York,
New York, Brown & Wood LLP, San Francisco, California or such other counsel
specified in the related Prospectus Supplement.
141
<PAGE>
INDEX OF TERMS
10 percent shareholder.....................................................127
1986 Act...................................................................101
1988 Act...................................................................106
1996 Contingent Debt Regulations...........................................100
1997 Act...................................................................106
accredited investor........................................................136
Accrual Distribution Amount.................................................39
Additional Loans...........................................................137
adjusted issue price.........................................98, 104, 109, 117
AFR........................................................................104
Agreement...............................................................24, 35
Alternative Credit Support..................................................10
applicable amount.....................................................114, 119
applicable federal rate....................................................104
appraised value.............................................................31
Approved Sale...............................................................78
APRs........................................................................29
ARM Loans...................................................................21
Asset Value.................................................................37
Assets......................................................................94
average interest rate......................................................137
backup.....................................................................133
backup withholding tax.....................................................110
benefit plan investors.....................................................134
Bond Premium Amortization Limit............................................102
Bond Premium Amortization Regulations......................................101
Buy-Down Fund...........................................................14, 22
Buy-Down Loans..............................................................22
Cede........................................................................19
Certificate Account.........................................................47
Certificate Distribution Account............................................47
Certificate Principal Balance................................................4
142
<PAGE>
Certificate Register........................................................40
Certificateholder..........................................................125
Certificateholders..........................................................24
Certificates..........................................................1, 4, 93
chattel paper...............................................................88
Class.....................................................................1, 4
Cleanup Costs...............................................................88
Closed Loans................................................................25
Closed-End Loans.........................................................5, 20
Closing Date................................................................96
Code........................................................................15
coinsurance.................................................................76
Collection Account..........................................................47
commercially reasonable.....................................................84
Commission...................................................................2
Contract Loan-to-Value Ratio.................................................8
Contract Pool.............................................................1, 5
Contract Schedule...........................................................43
Contracts.................................................................1, 5
controlled foreign corporation.............................................127
conversion transaction................................................107, 120
Converted Mortgage Loan.....................................................21
Cooperative..................................................................5
Cooperative Dwelling.........................................................5
cooperative housing corporation.............................................83
Cooperative Loans............................................................5
Credit Suisse First Boston Corporation's PTE...............................135
Credit Support..............................................................55
current value...............................................................97
Custodial Account...........................................................47
Custodial Agreement.........................................................29
Custodian...................................................................29
Cut-off Date................................................................19
daily accruals.............................................................104
daily portions..............................................................98
Deferred Interest...........................................................21
Deficiency Event............................................................63
Definitive Securities.......................................................19
Deleted Contract............................................................30
Deleted Mortgage Certificates...............................................40
Deleted Mortgage Loans......................................................42
Depositor....................................................................1
Description of Insurance....................................................36
Determination Date..........................................................51
Discount Securities.........................................................35
143
<PAGE>
Discount Security............................................................9
disqualified organizations............................................106, 107
Distribution Date............................................................6
DOL........................................................................133
domestic building and loan association................................112, 113
DTC.........................................................................19
Due Date....................................................................20
Due Period..................................................................39
due-on-sale.................................................................33
effectively connected......................................................124
effectively connected earnings and profits.................................128
electing large partnership............................................114, 119
electing large partnerships................................................108
Eligible Investment.........................................................45
Equity Interest............................................................138
equivalent..................................................................99
ERISA..................................................................15, 133
ERISA Plans................................................................133
Escrow Account..............................................................54
evidence of indebtedness....................................................95
excess inclusions..........................................................104
FHA......................................................................1, 22
FHA Experience..............................................................32
FHA Loans...................................................................20
Final Withholding Regulations.........................................111, 121
First Boston...............................................................135
fixture filing..............................................................89
foreign person.............................................................127
foreign trust..............................................................110
Garn-St Germain Act.........................................................87
GPM Fund................................................................14, 22
GPM Loans...................................................................22
guaranteed governmental mortgage pool certificates.........................135
Holder-in-Due-Course........................................................91
Home Equity Loans........................................................5, 20
Indenture.............................................................1, 5, 35
Indenture Trustee.....................................................1, 5, 35
Initial Deposit.............................................................13
Insurance Proceeds..........................................................48
Insured.....................................................................57
Insured Series.............................................................135
interest bearing...........................................................140
Interest Coupon............................................................118
Interest Distribution.......................................................38
Interest Rate................................................................4
144
<PAGE>
Interest Weighted Class......................................................4
Interest Weighted Subclass...................................................4
Investor Based Exemptions..................................................138
IRS.........................................................................96
Issuer....................................................................1, 5
L/C Bank................................................................11, 67
L/C Percentage..........................................................11, 67
Letter of Credit............................................................10
limited documentation.......................................................26
Liquidating Loan............................................................11
Liquidation Proceeds........................................................48
Loans......................................................................136
Loan-to-Value Ratio..........................................................7
Loss........................................................................73
Manufactured Home........................................................8, 29
market discount............................................................127
Mortgage Certificates.................................................1, 5, 28
Mortgage Loans............................................................1, 5
Mortgage Notes..............................................................20
Mortgage Pool.............................................................1, 5
Mortgage Rates...............................................................7
mortgage related securities...........................................139, 140
mortgage related security..............................................15, 139
Mortgaged Property...........................................................7
Mortgagor....................................................................7
Mortgagor Bankruptcy Bond...................................................10
Multi-Class Securities.......................................................4
Multifamily Property.........................................................5
Multiple Variable Rate......................................................99
net income from foreclosure property.......................................109
noneconomic................................................................105
Nonexempt Assets...........................................................134
non-U.S. Person............................................................110
Note Distribution Account...................................................47
Note Register...............................................................40
Noteholders.................................................................24
Notes.....................................................................1, 4
objective rate..............................................................97
Obligor.....................................................................34
Offering Documents.........................................................137
OID Regulations.............................................................93
original issue discount................................................96, 115
Original Value...........................................................7, 21
Originator..................................................................25
Other Pools................................................................135
145
<PAGE>
Parties in Interest........................................................133
pass-through entity........................................................107
payment deficiencies........................................................69
peaceful....................................................................91
Percentage Interest......................................................1, 19
Performance Bond............................................................30
permitted investments.......................................................94
plan asset............................................................133, 134
plan assets...........................................................133, 134
Plan Assets Regulation.....................................................133
Plans......................................................................133
Policy Statement...........................................................139
Pool Insurance Policy.......................................................10
Pool Insurer................................................................12
Pooling Agreement..........................................................137
Pooling and Servicing Agreement.......................................1, 5, 35
portfolio interest....................................................127, 132
Pre-Funded Amount........................................................9, 44
Pre-Funding Account......................................................9, 44
Pre-Funding Limit..........................................................137
Pre-Funding Period..................................................9, 44, 137
Premium Securities..........................................................35
Premium Security.............................................................9
Prepayment Assumption.......................................................96
Primary Insurer.............................................................49
Primary Mortgage Insurance Policy...........................................12
Primary Mortgage Insurer....................................................57
Principal Distribution......................................................38
Principal Prepayments.......................................................13
Principal Weighted Class.....................................................4
Principal Weighted Subclass..................................................4
prohibited transactions....................................................108
prudent investor...........................................................140
PTCE 83-1..................................................................134
Purchase Price..............................................................44
qualified floating rate.....................................................97
qualified inverse floating rate.............................................99
Qualified Mortgage.........................................................113
qualified mortgages....................................................94, 112
qualified stated interest...................................................97
qualifying liquidation..................................................33, 67
Rating Agency.............................................................1, 5
real estate asset...........................................................95
real estate assets............................................94, 95, 112, 113
Record Date.................................................................38
146
<PAGE>
Reference Agreement.........................................................35
regular interests...........................................................36
REIT........................................................................94
related person.............................................................127
REMIC................................................................1, 15, 93
REMIC Certificateholders....................................................94
REMIC Certificates..........................................................93
REMIC Mortgage Pool.........................................................93
REMIC Provisions............................................................93
REMIC Regular Certificate...................................................93
REMIC Regulations...........................................................93
REMIC Residual Certificate..................................................93
reportable payments........................................................125
Required Distribution.......................................................71
Required Reserve........................................................13, 68
Reserve Fund................................................................10
Residual Certificates........................................................4
residual interest...........................................................36
Residual Owner.............................................................102
Restricted Group...........................................................136
Retained Yield.............................................................114
Revolving Credit Line Loans..............................................5, 20
Sale and Servicing Agreement.............................................1, 35
SBJPA of 1996..............................................................104
Securities................................................................1, 4
Securities Act..............................................................37
Security Guarantee Insurance................................................14
Securityholders.........................................................19, 24
self-help...................................................................91
Senior Class.................................................................4
Senior Prepayment Percentage................................................69
Senior Securities...........................................................10
Senior Subclass..............................................................4
Series....................................................................1, 4
Servicemen's Readjustment Act...............................................22
Servicer....................................................................24
Servicing Account...........................................................47
Servicing Agreement.........................................................24
Short-Term Certificate.....................................................122
significant value..........................................................104
Single Family Property.......................................................5
single family residence.....................................................95
Single Variable Rate........................................................97
single-class REMIC.........................................................108
SMMEA..................................................................15, 139
147
<PAGE>
SPA.........................................................................32
Special Distributions....................................................7, 52
Special Hazard Insurance Policy.............................................14
Special Tax Counsel.........................................................93
Standard Hazard Insurance Policy............................................55
Standard Terms..............................................................35
startup day................................................................109
Stated Principal Balance.....................................................4
Stated Principal Distribution Amount........................................39
stripped bond..............................................................115
Stripped Bond Rules........................................................115
stripped bonds.............................................................114
stripped coupons...........................................................114
Stripped Interest..........................................................119
Stripped Mortgage Loan.....................................................114
Subclass..................................................................1, 4
Subordinated Amount.........................................................10
Subordinated Class...........................................................4
Subordinated Pool...........................................................13
Subordinated Securities.....................................................10
Subordinated Subclass........................................................4
Substitute Contract.........................................................30
Substitute Mortgage Certificates............................................40
Substitute Mortgage Loans...................................................42
Supervisory Policy Statement on Securities Activities......................139
tax avoidance potential....................................................111
tax matters person.........................................................109
taxable mortgage pool.................................................124, 126
taxable mortgage pools.....................................................126
teaser......................................................................98
Technical and Miscellaneous Revenue Act of 1988............................106
tenant-stockholder..........................................................83
thrift institutions........................................................104
Tiered REMICs...............................................................95
Title V.....................................................................92
Trust.....................................................................1, 5
Trust Agreement...........................................................1, 5
Trust Assets.............................................................6, 29
Trust Certificates..........................................................93
Trust Fractional Certificate................................................93
Trust Fractional Certificateholder.........................................113
Trust Fund................................................................1, 5
Trust Interest Certificate..................................................93
Trust Interest Certificateholder...........................................118
Trustee...................................................................1, 5
148
<PAGE>
U.S. Person................................................................110
UCC.........................................................................84
Unaffiliated Sellers........................................................25
Underwriter's PTE..........................................................135
Underwriters...............................................................140
unrelated business taxable income.....................................106, 129
Unstripped Mortgage Loans..................................................116
VA.......................................................................1, 20
VA Loans....................................................................20
voidable preference.........................................................72
Warranty and Servicing Agreement............................................35
149
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
$1,490,624,000
(APPROXIMATE)
ASSET BACKED SECURITIES CORPORATION
LONG BEACH HOME EQUITY LOAN TRUST 2000-LB1
HOME EQUITY LOAN PASS-THROUGH CERTIFICATES,
SERIES 2000-LB1
ASSET BACKED SECURITIES CORPORATION
Depositor
[LONG BEACH MORTGAGE COMPANY LOGO]
SELLER AND MASTER SERVICER
(A SUBSIDIARY OF WASHINGTON MUTUAL, INC.)
---------------------
PROSPECTUS SUPPLEMENT
DATED AUGUST 28, 2000
---------------------
CREDIT SUISSE FIRST BOSTON
LEHMAN BROTHERS
MORGAN STANLEY DEAN WITTER
PRUDENTIAL SECURITIES
SALOMON SMITH BARNEY
