<PAGE>
RULE NO. 424(b)(1)
REGISTRATION NO. 333-21329
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION AND IS EFFECTIVE. THESE SECURITIES MAY NOT +
+BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED WITHOUT THE DELIVERY OF A FINAL +
+PROSPECTUS SUPPLEMENT AND PROSPECTUS. THIS PRELIMINARY PROSPECTUS SHALL NOT +
+CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL +
+THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, +
+SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION +
+UNDER THE SECURITIES LAWS OF ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED MARCH 10, 1997
PROSPECTUS SUPPLEMENT (TO PROSPECTUS DATED FEBRUARY 28, 1997)
$200,000,000
============================
PREFERRED CREDIT CORPORATION
============================
(Seller)
Credit Suisse First Boston Mortgage Securities Corp.
(Depositor)
Preferred Credit Asset-Backed Certificates, Series 1997-1
$47,800,000 % Class A-1 Certificates
$29,500,000 % Class A-2 Certificates
$23,200,000 % Class A-3 Certificates
$50,600,000 % Class A-4 Certificates
$11,500,000 % Class A-5 Certificates
$37,400,000 % Class A-6 Certificates
(Principal and interest payable on the twenty-fifth day of each month,
beginning in April 1997).
----------
The Preferred Credit Asset-Backed Certificates, Series 1997-1 (the
"Certificates") will represent beneficial interests in a trust, the assets of
which will consist primarily of a pool of fixed rate, closed-end no or low
equity loans secured by subordinate lien mortgages on residential one- to
four-family properties (the "Mortgage Loans" and together with all other
assets of the trust fund, including any funds on deposit in the
Capitalized Interest Account (as defined herein) and the Pre-Funding
Account (as defined herein), the "Trust Fund") originated or purchased
by Preferred Credit Corporation (the "Seller"), in the ordinary course
of its business and conveyed, together with certain related property
described herein, by the Seller to Credit Suisse First Boston
Mortgage Securities Corp. (the "Depositor") and then conveyed by
the Depositor to the Trust Fund. The Trust Fund will be created
and the Certificates will be issued pursuant to a Pooling and
Servicing Agreement (the "Pooling and Servicing Agreement")
among the Depositor, the Seller, Advanta Mortgage Corp. USA, as
Servicer and Bankers Trust Company, as Trustee. See
"Description of the Certificates" herein.
The Depositor has caused MBIA Insurance Corporation (the "Certificate
Insurer") to issue a certificate guaranty insurance policy (the
"Certificate Insurance Policy") for the benefit of the Class A
Certificateholders pursuant to which it will guarantee certain
payments to the Class A Certificateholders as described herein.
(Continued on following page)
MBIA
PROSPECTIVE INVESTORS SHOULD CONSIDER THE INFORMATION SET FORTH UNDER "RISK
FACTORS" HEREIN ON PAGE S-17 AND PAGE 19 OF THE ACCOMPANYING PROSPECTUS.
THE CLASS A CERTIFICATES WILL NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF
THE DEPOSITOR, THE TRUSTEE, THE SELLER, THE SERVICER, THE UNDERWRITER OR
ANY OF THEIR RESPECTIVE AFFILIATES. THE CLASS A CERTIFICATES WILL
NOT BE INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY OR
INSTRUMENTALITY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR
THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO THE
PUBLIC(1)(2) DISCOUNT DEPOSITOR(2)(3)
------------ ------------ ---------------
<S> <C> <C> <C>
Class A-1 Certificates................ % % %
Class A-2 Certificates................ % % %
Class A-3 Certificates................ % % %
Class A-4 Certificates................ % % %
Class A-5 Certificates................ % % %
Class A-6 Certificates................ % % %
Total................................. $ $ $
</TABLE>
(1) The aggregate initial principal amount of the Certificates may be increased
or decreased by up to 5%. Any such increase or decrease may be allocated
disproportionately among the different Classes of Class A Certificates.
(2) Plus accrued interest, if any, at the applicable Pass-Through Rate from
March 1, 1997.
(3) Before deducting expenses payable by the Depositor, estimated to be
$580,000.
The Class A Certificates are offered by Credit Suisse First Boston
Corporation (the "Underwriter") when, as and if issued by the Trust Fund,
delivered to and accepted by the Underwriter and subject to its right to reject
orders in whole or in part. It is expected that delivery of the Class A
Certificates in book entry form will be made in the United States through the
facilities of The Depository Trust Company against payment in same day funds or
Cedel Bank, societe anonyme and the Euroclear System in Europe on or about
March , 1997.
CREDIT SUISSE FIRST BOSTON
The date of this Prospectus Supplement is March , 1997.
<PAGE>
(Continued from the cover page)
The Seller considers the underwriting policy under which the Mortgage Loans
have been underwritten and originated to be analogous to credit lending,
rather than equity lending, since its underwriting decisions are based
primarily on the borrower's credit history and capacity to repay rather than
the potential value upon foreclosure of the Mortgaged Property pledged as
collateral for the related Mortgage Loan. See "Risk Factors--Underwriting
Standards and Potential Delinquencies" in this Prospectus Supplement (the
"Prospectus Supplement") and "Risk Factors--Risks of the Trust Assets" and
"The Trust Fund--Underwriting Standards" in the Prospectus. Approximately
38.23% of the Initial Mortgage Loans (as defined herein) by aggregate
principal balance as of the Statistical Calculation Date (as defined herein)
are secured by Mortgaged Properties located in California. See "Risk Factors--
Geographic Concentration" in this Prospectus Supplement.
Additional mortgage loans (the "Subsequent Mortgage Loans") may be purchased
by the Trust Fund from time to time on or before June , 1997 from funds on
deposit in the pre-funding account (the "Pre-Funding Account"). On the Closing
Date aggregate cash amounts of approximately $50,000,000 and approximately
$ , respectively, from the proceeds of the sale of the Class A Certificates
will be deposited with the Trustee in the Pre-Funding Account and the
Capitalized Interest Account (as defined herein), respectively.
The Certificates will consist of six classes of senior Certificates
(respectively, the "Class A-1 Certificates," the "Class A-2 Certificates," the
"Class A-3 Certificates," the "Class A-4 Certificates," the "Class A-5
Certificates" and the "Class A-6 Certificates" and, collectively, the "Class A
Certificates"), and one or more classes of subordinate Certificates
(collectively, the "Subordinate Certificates", which term includes any REMIC
"residual interests" (a "Residual Certificate")). Only the Class A
Certificates are being offered hereby. The Class A Certificates will have an
initial aggregate principal balance of $200,000,000, and the Subordinate
Certificates will have an initial aggregate principal balance of approximately
$ . The Class A Certificates will initially evidence a % undivided
interest in the principal of the Mortgage Loans and a 100% undivided interest
in the Pre-Funding Account. The Subordinate Certificates will initially
evidence a % interest in the principal of the Initial Mortgage Loans. The
Subordinate Certificates will also evidence the right to receive distributions
of certain excess interest.
Distributions in respect of interest and principal will be made on the 25th
day of each month or, if the 25th day is not a Business Day, on the next
succeeding Business Day, commencing on April 25, 1997 (each, a "Distribution
Date"), to the holders of the Class A Certificates to the extent described
herein. On each Distribution Date, the amount of interest distributable in
respect of the Class A Certificates will equal the interest accrued on the
Certificate Principal Balance (as defined herein) of the Class A Certificates
immediately prior to such Distribution Date at the applicable Class A Pass-
Through Rate during the calendar month immediately preceding the month in
which such Distribution Date occurs and will be calculated on the basis of a
360-day year consisting of twelve 30-day months.
One or more real estate mortgage investment conduit ("REMIC") elections will
be made with respect to certain assets of the Trust Fund for federal income
tax purposes. As described more fully herein, the Class A Certificates and
Subordinate Certificates (other than the Residual Certificates) will
constitute "regular interests" in a REMIC and the Residual Certificates will
constitute a "residual interest" in a REMIC. See "Summary--Certain Federal
Income Tax Consequences" and "Certain Federal Income Tax Consequences" herein.
------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE SECURITIES
OFFERED HEREBY, INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE
SHORT COVERING TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
The Certificates will be part of a separate series of ABS Mortgage and
Manufactured Housing Pass-Through Certificates being offered by the Depositor
from time to time pursuant to a Prospectus dated February 28, 1997 (the
"Prospectus"), of which this Prospectus Supplement is a part and which
accompanies this Prospectus Supplement. The Prospectus contains important
information about the offering of the Class A Certificates that is not
contained herein, and prospective investors are urged to read both this
Prospectus Supplement and the Prospectus in full. Sales of the Class A
Certificates may not be consummated unless the purchaser has received both
this Prospectus Supplement and the Prospectus.
S-2
<PAGE>
SUMMARY
This summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus Supplement and in the
accompanying Prospectus. Capitalized terms used herein that are not otherwise
defined shall have the meanings ascribed thereto elsewhere in this Prospectus
Supplement or in the Prospectus. See the Index of Principal Terms for the
location herein of certain principal terms.
Securities Issued........... Preferred Credit Asset-Backed Certificates,
Series 1997-1 (the "Certificates") will be issued
pursuant to a pooling and servicing agreement, to
be dated as of March 1, 1996 (the "Pooling and
Servicing Agreement"), among Credit Suisse First
Boston Mortgage Securities Corp., as depositor
(the "Depositor"), Preferred Credit Corporation,
formerly known as T.A.R. Preferred Mortgage
Corporation (in its capacity as the seller of the
Mortgage Loans to the Depositor, the "Seller"),
Advanta Mortgage Corp. USA ("Advanta", or in its
capacity as servicer, the "Servicer") and Bankers
Trust Company, a New York banking corporation
(the "Trustee").
The Certificates will consist of six classes
(each, a "Class") of senior Certificates
(respectively, the "Class A-1 Certificates", the
"Class A-2 Certificates," the "Class A-3
Certificates," the "Class A-4 Certificates," the
"Class A-5 Certificates," and the "Class A-6
Certificates," (collectively, the "Class A
Certificates")) and one or more Classes of
subordinate Certificates (the "Subordinate
Certificates", which term includes any REMIC
"residual interests" (a "Residual Certificate")).
The Certificates will be issued in the amounts
(with respect to each Class, the "Initial
Certificate Principal Balance") and bear the
pass-through rates (with respect to each Class,
the "Pass-Through Rate") set forth below:
<TABLE>
<CAPTION>
INITIAL
CERTIFICATE PASS-
PRINCIPAL THROUGH
CLASS BALANCE(1) RATE
----- ----------- -------
<S> <C> <C>
Class A-1 Certificates.................. $47,800,000 %
Class A-2 Certificates.................. $29,500,000 %
Class A-3 Certificates.................. $23,200,000 %
Class A-4 Certificates.................. $50,600,000 %
Class A-5 Certificates.................. $11,500,000 %
Class A-6 Certificates.................. $37,400,000 %
</TABLE>
--------
(1) The aggregate initial principal amount of the
Certificates may be increased or decreased by
up to 5%. Any such increase or decrease may
be allocated disproportionately among the
different Classes of Class A Certificates.
Securities Offered.......... The Class A Certificates are the only
Certificates being offered hereby. The Class A
Certificates will be issued in book-entry form in
minimum denominations of $1,000 and integral
multiples of $1 in excess thereof. The Class A
Certificates initially will be represented by
certificates registered in the name of Cede &
Co., as the nominee of The Depository Trust
Company ("DTC").
Certificates representing the Class A
Certificates will be issued in definitive form
only under the limited circumstances described
herein. All references herein to "holders" or
"holders of the Class A Certificates" shall
reflect the rights of beneficial owners of
S-3
<PAGE>
Class A Certificates issued in book-entry form
("Certificate Owners") as they may indirectly
exercise such rights through DTC in the United
States, or Cedel Bank, societe anonyme ("Cedel")
or the Euroclear System ("Euroclear") in Europe,
and participating members thereof, except as
otherwise specified herein. See "Risk Factors--
Book-Entry Registration" and "Description of the
Certificates--Registration of the Class A
Certificates" herein and "Risk Factors--
Limitation on Rights Due to Book Entry
Registration" in the Prospectus.
The Class A Certificates will evidence undivided
interests in the Mortgage Loans together with all
other assets of the trust fund, including any
funds on deposit in the Capitalized Interest
Account (as defined herein) and the Pre-Funding
Account (as defined herein) (collectively, the
"Trust Fund"). The undivided percentage interest
(the "Percentage Interest") of a Class A-1, Class
A-2, Class A-3, Class A-4, Class A-5 and Class A-
6 Certificate in distributions of principal and
interest on the related Class of Certificates
will equal the percentage obtained by dividing
the denomination of such Certificate by the
Initial Class A-1, Initial Class A-2, Initial
Class A-3, Initial Class A-4, Initial Class A-5
or Initial Class A-6 Certificate Principal
Balance, as the case may be.
The Class A Certificates will not represent
interests in or obligations of the Depositor, the
Seller, the Servicer, the Trustee or any of their
respective affiliates. Neither the Class A
Certificates nor the underlying Mortgage Loans
will be insured or guaranteed by any governmental
agency or instrumentality.
Cut-Off Date................ The opening of business on March 1, 1997.
Statistical Calculation The close of business on February 21, 1997.
Date........................
Closing Date................ On or about March , 1997 (the "Closing Date").
Distributions............... Distributions to the holders of the Certificates
of a Class on each Distribution Date will be made
in an amount equal to their respective Percentage
Interests multiplied by the aggregate amount
distributed on such Class of Certificates on such
Distribution Date. So long as the Class A
Certificates are registered in the name of Cede &
Co., as nominee of DTC, distributions on each
Distribution Date will be made to the holders of
record of the related Class A Certificates (the
"Certificateholders") as of the close of business
on the last Business Day of the month immediately
preceding the month in which such Distribution
Date occurs (each, a "Record Date"). As more
fully described herein under "Description of the
Certificates--Payment of Available Funds,"
distributions to Certificateholders will be
applied first to the payment of interest and
interest shortfalls, second to any unpaid
principal and third, if any principal is then
distributable, to the payment of principal of the
related Class of Certificates. Distributions on
the Certificates will be made on the 25th day of
each month (or, if such 25th day is not a
Business Day, on the next succeeding Business
Day) (each, a
S-4
<PAGE>
"Distribution Date"). "Business Day" shall mean
any day other than (i) a Saturday or Sunday, or
(ii) any day on which the Certificate Insurer or
banking institutions located in the States of New
York or California are authorized or obligated by
law or executive order to close.
Description of General. The Certificates will represent the
Certificates................ entire beneficial ownership interest in the Trust
Fund. The assets of the Trust Fund will consist
primarily of a pool of fixed rate, closed end no
or low equity loans (the "Mortgage Loans")
secured by subordinate lien mortgages or deeds of
trust on residential one-to four-family
properties, including townhouses and individual
units in condominiums and planned unit
developments (such properties, the "Mortgaged
Properties" and such pool, the "Mortgage Pool").
See "Description of the Mortgage Loans" in this
Prospectus Supplement. In addition, the Depositor
has caused MBIA Insurance Corporation (the
"Certificate Insurer") to issue a certificate
guaranty insurance policy (the "Certificate
Insurance Policy") relating to the Class A
Certificates for the benefit of the Class A
Certificateholders, pursuant to which it will
guarantee certain payments to the Trustee for the
benefit of the Class A Certificateholders, as
described herein. The Trust Fund will be formed
and the Certificates will be issued pursuant to
the Pooling and Servicing Agreement.
The Subordinate Certificates will have an
original principal balance of approximately
$ , but such amount will increase by an amount
equal to % of the principal balance of the
Subsequent Mortgage Loans, if any.
The Subordinate Certificates are not being
offered hereby, and any information contained
herein with respect to the Subordinate
Certificates is provided only to permit a better
understanding of the cash flow mechanics and
subordination provisions of the Trust Fund,
insofar as such mechanics and provisions are
relevant to the Class A Certificates.
The Mortgage Pool........... The statistical information presented in this
Prospectus Supplement concerning the pool of
Initial Mortgage Loans is based on the pool as of
the close of business on February 21, 1997 (such
date, the "Statistical Calculation Date"). The
pool aggregated $130,964,630.72, as of the
Statistical Calculation Date. The Seller expects
that the actual pool as of the Closing Date will
represent approximately $ in Initial
Mortgage Loans. Initial Mortgage Loans will
represent Mortgage Loans originated, acquired or
to be originated or acquired by the Seller on or
prior to the Closing Date. In addition, with
respect to the pool as of the Statistical
Calculation Date as to which statistical
information is presented herein, some
amortization of the pool will occur prior to the
Closing Date. Moreover, certain loans included in
the pool as of the Statistical Calculation Date
may prepay in full, or may be determined not to
meet the eligibility requirements for the final
pool,
S-5
<PAGE>
and may not be included in the final pool. As a
result of the foregoing, the characteristics as
of the Closing Date for the final Initial
Mortgage Loan pool will vary somewhat from such
characteristics as of the Statistical Calculation
Date as presented in this Prospectus Supplement,
although such variance will not be material.
Unless otherwise noted, all statistical
percentages in this Prospectus Supplement are
measured by the aggregate principal balance of
the Mortgage Pool as of the Statistical
Calculation Date.
The Mortgage Loans to be included in the Trust
Fund will be closed-end, fixed rate no or low
equity loans secured by subordinate lien
mortgages or deeds of trust on one-to four-family
residential properties, 38.23% of which, as of
the Statistical Calculation Date, are located in
the State of California, and all of which have
original terms to stated maturity of
approximately five through thirty years. The
Monthly Payments for each Mortgage Loan are due
on the dates of the month specified in the
related Mortgage Note (as defined herein) (each,
a "Due Date"). See "Description of the Mortgage
Loans" herein. The Mortgage Loans were
underwritten in accordance with the underwriting
standards of the Seller. See "Risk Factors--
Underwriting Standards and Potential
Delinquencies" and "--Geographic Concentration"
in this Prospectus Supplement.
The proceeds of the Mortgage Loans are generally
used by the related borrower to finance (i) debt
consolidation, (ii) property improvements, (iii)
the acquisition of personal property such as home
appliances or furnishings, (iv) the purchase or
refinancing of residential one- to four-family
properties, and (v) a combination of debt
consolidation, property improvements and other
consumer purposes.
In addition to the Mortgage Loans acquired by the
Trust Fund on the Closing Date (such Mortgage
Loans, the "Initial Mortgage Loans"), the Trust
Fund may acquire up to approximately $ in
additional Mortgage Loans (the "Subsequent
Mortgage Loans") during the three-month period
commencing on the Closing Date. The Subsequent
Mortgage Loans, if available, will be originated
or acquired by the Seller, sold by the Seller to
the Depositor and then sold by the Depositor to
the Trust Fund. The Subsequent Mortgage Loans, as
well as all Mortgage Loans, must conform to
certain specified characteristics established by
the Certificate Insurer. See "Pre-Funding
Feature" below.
Credit Quality of Mortgage The Seller's underwriting standards allow loans
Loans....................... to be approved with Combined Loan-to-Value Ratios
(as defined herein) of up to approximately 125%.
The Seller expects that substantially all of the
Mortgage Loans will have Combined Loan-to-Value
Ratios in excess of 100%. The Seller considers
the underwriting policy under which the Mortgage
Loans have been underwritten and originated to be
analogous to credit lending, rather than equity
lending, since its underwriting decisions are
based primarily on the borrower's credit
S-6
<PAGE>
history and capacity to repay rather than on the
potential value upon foreclosure of the Mortgaged
Property pledged as collateral for the related
Mortgage Loan. Loan decisions are based primarily
on an analysis of the prospective borrower's
documented income and credit history and
supplemented by a collateral evaluation. The
Mortgage Loans originated or acquired by the
Seller will have been made to borrowers that
typically have limited access to traditional home
equity mortgage financing for a variety of
reasons, such as insufficient home equity value,
high level of debt-to-income ratios, past credit
experience or a limited credit history. See "Risk
Factors--Underwriting Standards and Potential
Delinquencies" and "Description of the Mortgage
Loans" herein.
Prepayment and Yield In general, the Mortgage Loans may be prepaid at
Considerations.............. any time without penalty and, accordingly, the
rate of principal payments thereon is likely to
vary from time to time. The Class A Certificates
may be sold at a discount to their principal
amounts. A slower than anticipated rate of
principal payments on the Mortgage Loans is
likely to result in a lower than anticipated
effective yield on Certificates purchased at a
discount. See "Prepayment and Yield
Considerations" herein and "Yield Considerations"
and "Maturity and Prepayment Considerations" in
the Prospectus.
Pre-Funding Feature......... On the Closing Date, approximately $50,000,000
(the "Original Pre-Funded Amount") will be
deposited with the Trustee in the Pre-Funding
Account and used by the Trust Fund to purchase
the Subsequent Mortgage Loans during the three-
month period after the Closing Date.
The Trust Fund will be obligated, subject to the
satisfaction of certain conditions described
herein, to purchase from the Depositor the
Subsequent Mortgage Loans from time to time
during the Pre-Funding Period defined below,
subject to the availability thereof. The
Depositor will acquire the Subsequent Mortgage
Loans only from the Seller. In connection with
each purchase of Subsequent Mortgage Loans, the
Trust Fund will be required to pay to the
Depositor a cash purchase price of % of the
principal amount thereof from the Pre-Funding
Account; the remaining % will be evidenced by an
increase in the Subordinate Certificate Principal
Balance; as a result of the foregoing, the Trust
Fund may acquire up to approximately $ in
aggregate principal balance of Subsequent
Mortgage Loans, based on the original cash
deposit of approximately $50,000,000 to the
Pre-Funding Account. The Depositor will designate
as a cut-off date (each, a "Subsequent Cut-Off
Date") (i) the last day of the month preceding
the month in which Subsequent Mortgage Loans will
be conveyed by the Depositor to the Trust Fund or
(ii) the date of origination, if any such
Subsequent Mortgage Loan is originated in the
month of conveyance by the Depositor to the Trust
Fund occurring during the Pre-Funding Period (as
defined herein). The date of any such transfer of
Subsequent Mortgage Loans is referred to herein
as the "Subsequent Transfer Date." The Trust Fund
may purchase
S-7
<PAGE>
Subsequent Mortgage Loans only from the Depositor
and not from any other person. See "Description
of the Mortgage Loans."
The "Pre-Funding Period" is the period from the
Closing Date until the earliest of (i) the date
on which the amount on deposit in the Pre-Funding
Account is less than $50,000, (ii) the date on
which an Event of Default occurs under the
Pooling and Servicing Agreement or (iii) June ,
1997. The amount on deposit in the Pre-Funding
Account will be reduced during the Pre-Funding
Period by the amount thereof used to purchase
Subsequent Mortgage Loans. Any amount remaining
in the Pre-Funding Account at the end of the Pre-
Funding Period will be distributed to the Class A
Certificates as an additional distribution of
principal on the Distribution Date which follows
the end of the Pre-Funding Period.
Capitalized Interest On the Closing Date, the Trustee, from amounts
Account..................... received from the Depositor, will be required to
deposit a portion of the proceeds of the sale of
the Class A Certificates in an account (the
"Capitalized Interest Account") in the name of
the Trustee on behalf of the Trust Fund. The
amount deposited therein will be used, as
necessary, by the Trustee during the Pre-Funding
Period to fund the negative arbitrage on the
funds on deposit in the Pre-Funding Account. Any
amounts remaining in the Capitalized Interest
Account on the Distribution Date which follows
the end of the Pre-Funding Period and not used
for such purpose on such Distribution Date will
be paid directly to the holders of the
Subordinate Certificates on such Distribution
Date.
Mortgage Interest Rate...... The "Mortgage Interest Rate" of each Mortgage
Loan is the per annum interest rate required to
be paid by the mortgagor under the terms of the
related mortgage note (the "Mortgage Note"). The
Mortgage Interest Rate borne by each Mortgage
Loan is not adjustable during the term of the
related Mortgage Loan.
Interest Distributions...... On each Distribution Date, the holders of the
Class A Certificates will be entitled to receive,
to the extent of amounts available for
distribution as described herein, interest
distributions in an amount equal to the sum of
(i) interest accrued for the related Accrual
Period (as defined herein) on the related Class A
Principal Balance immediately prior to such
Distribution Date at the applicable Class A Pass-
Through Rate and (ii) the portion of the related
Class A Carry-Forward Amount (as defined herein)
allocable to interest (the "Class A Interest
Distribution Amount").
Interest on the Class A Certificates will accrue
at the applicable Class A Pass-Through Rate
during the calendar month immediately preceding
the month in which such Distribution Date occurs
(each, an "Accrual Period"). See "Description of
the Certificates" in this Prospectus Supplement.
Principal Distributions..... The "Class A Principal Balance" represents the
maximum specified dollar amount of principal to
which the Holders of the Class A Certificates are
entitled on the assets in the Trust Fund. The
"Class
S-8
<PAGE>
A Principal Balance" at any time is equal to the
Class A Principal Balance as of the Closing Date
(the "Original Class A Principal Balance") minus
the aggregate, cumulative amounts actually
distributed as principal to the Class A
Certificateholders. See "Description of the
Certificates--Payment of Available Funds" and
"The Certificate Insurance Policy and The
Certificate Insurer" in this Prospectus
Supplement.
For purposes of receiving distributions with
respect to principal, the Class A Certificates
have been divided into six "sequential paying"
classes. On each Distribution Date, the Holders
of the outstanding Class A Certificates with the
lowest numerical designation will be entitled to
receive 100% of the distribution with respect to
the Class A Principal Distribution Amount on such
Distribution Date until the related Class
Principal Balance has been reduced to zero; any
remaining Class A Principal Distribution amount
on a Distribution Date, and the Class A Principal
Distribution Amount for each succeeding
Distribution Date, will be paid to the Class A
Certificates with the next lowest numerical
designation, until each Class A Certificate has
been paid in full. See "Description of the
Certificates--Payment of Available Funds."
Holders of the Class A Certificates will be
entitled to receive on each Distribution Date, to
the extent of amounts available for distribution
(as described herein) remaining after interest on
the Class A Certificates is distributed, the
"Senior Principal Distribution Amount", which
will generally reflect principal collections on
the Mortgage Loans with respect to the prior
calendar month (the "Collection Period"),
together with an amount (which may not, on any
particular Distribution Date, be the full
necessary amount) necessary to increase the
actual Overcollateralization Amount to its
Required Overcollateralization Level, and minus
an amount intended to reduce any excess
Overcollateralization Amount.
Specifically, the "Class A Principal Distribution
Amount" for a Distribution Date will equal:
(a) the sum, without duplication, of:
(i) the portion of the Class A Carry-
Forward Amount which relates to a
shortfall in a distribution of a related
Overcollateralization Deficit,
(ii) all scheduled and unscheduled amounts
relating to principal with respect to the
Mortgage Loans received by the Servicer
during the prior Collection Period to the
extent actually received by the Trustee,
(iii) the Principal Balance (as defined
herein) of each Mortgage Loan that either
was repurchased by the Seller or by the
Depositor on the related Servicer
Remittance Date to the extent such
Principal Balances are actually received
by the Trustee,
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(iv) any Substitution Adjustments (as
defined herein) delivered by the Depositor
or the Seller on the related Servicer
Remittance Date in connection with a
substitution of a Mortgage Loan, to the
extent such Substitution Adjustments are
actually received by the Trustee,
(v) the Net Liquidation Proceeds (as
defined herein) collected by the Servicer
of all the Mortgage Loans during the prior
calendar month (to the extent such Net
Liquidation Proceeds are related to
principal) to the extent actually received
by the Trustee,
(vi) any monies released from the Pre-
Funding Account as a prepayment of Class A
Certificates on the Distribution Date
which immediately follows the end of the
Pre-Funding Period,
(vii) the proceeds received by the Trustee
of any termination of the Trust Fund (to
the extent such proceeds related to
principal),
(viii) the amount of any
Overcollateralization Deficit (as defined
herein) for such Distribution Date,
(ix) without duplication of amounts
described under clause (viii) above, the
amount of any related
Overcollateralization Increase Amount (as
defined herein) for such Distribution
Date;
minus
(b) the amount of any Overcollateralization
Reduction Amount (as defined herein) for such
Distribution Date.
In no event will the Class A Principal
Distribution Amount with respect to any
Distribution Date be less than zero or greater
than the Class A Principal Balance of the Class A
Certificates immediately prior to such
Distribution Date.
The Class A Interest Distribution Amount and the
Class A Principal Distribution Amount distributed
with respect to the Class A Certificates on any
Distribution Date is the "Class A Distribution
Amount" for such Distribution Date.
Upon the earlier of (a) the date on which any
payment due or portion thereof with respect to a
Mortgage Loan has become Delinquent (as defined
herein) for a period of 180 days on a consecutive
basis (irrespective of grace periods), (b) the
time at which a Mortgage Loan becomes a
Liquidated Loan or (c) the date on which the
Holder of the Subordinate Certificates
repurchases such Mortgage Loan as described under
"Servicing of the Mortgage Loans--Realization
Upon a Sale of Defaulted Mortgage Loans," such
Mortgage Loan will become a "Charged-off Loan".
Once a Mortgage Loan becomes a Charged-off Loan,
its Principal Balance, for purposes of the Trust
Fund, will thereafter be considered to be zero.
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<PAGE>
A "Liquidated Loan" is a Mortgage Loan as to
which the Servicer, in its reasonable, good faith
business judgment in accordance with Accepted
Servicing Practices (as defined herein), has
determined that all amounts which will be
recovered with respect to such Mortgage Loan have
been so recovered (exclusive of any possibility
of a deficiency judgment).
"Net Liquidation Proceeds" means, as to any
Liquidated Loan, Liquidation Proceeds net of
Liquidation Expenses and net of any unreimbursed
Delinquency Interest Advances or Servicing
Advances made by the Servicer with respect to the
related Mortgage Loan. For all purposes of the
Pooling and Servicing Agreement, Net Liquidation
Proceeds shall be allocated first to accrued and
unpaid interest on the related Mortgage Loan and
then to the unpaid principal balance thereof.
An amount to cover any loss on a Charged-off Loan
may or may not be distributed to the Holders of
the Class A Certificates on the Distribution Date
which immediately follows such Mortgage Loan
becoming a Charged-off Loan. However, the Holders
of the Class A Certificates are entitled to
receive, no later than the Distribution Date
occurring after cumulative losses on Charged-off
Loans result in an Overcollateralization Deficit,
the amount of such Overcollateralization Deficit.
Credit Enhancement.......... The credit enhancement provided for the benefit
of the Class A Certificateholders consists of (a)
the overcollateralization provided by the
Subordinate Certificate Principal Balance, as
thereafter augmented by the acceleration feature
described below, which together with the
subordination mechanics utilize the internal cash
flows of the Mortgage Loans, and (b) the
Certificate Insurance Policy. See "Description of
the Certificates--Overcollateralization,
Subordination Provisions and Support Features."
Overcollateralization. The overcollateralization
feature of the Trust Fund is a result of the
aggregate debt service requirements of the Class
A Certificates being less than the Trust Fund's
aggregate expected interest revenues, such
revenues being the expected collections and
recoveries of interest on the Mortgage Loans. The
overcollateralization is evidenced by the
Subordinate Certificates, which represent the
right to receive excess principal (which
initially equals the Overcollateralization Amount
(as defined below) on the Cut-Off Date) and
excess interest (the excess of interest
collections on the Mortgage Loans over Class A
Certificate interest, plus fees).
The Pooling and Servicing Agreement defines the
"Overcollateralization Amount" to be, as of the
end of the related Collection Period, the excess
of (a) the sum of (i) the amount then on deposit
in the Pre-Funding Account and (ii) the then
outstanding aggregate Principal Balance of the
Mortgage Loans over (b) the then outstanding
Class A Principal Balance. Following the Closing
Date, the overcollateralization provisions will
result in a limited acceleration of the Class A
Certificates relative to the amortization
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of the Mortgage Loans in the early months of the
transaction. The accelerated amortization is
achieved by the application of 100% of principal
payments on the Mortgage Loans and certain excess
interest (i.e., the cash flows otherwise payable
to the Subordinate Certificates) to the payment
of the Class A Principal Balance until the
Overcollateralization Amount reaches a target
level (the "Required Overcollateralization
Level") mandated by the Certificate Insurer. Once
the Required Overcollateralization Level is
reached, and subject to the provisions described
in the next paragraph, the acceleration feature
will cease, unless necessary to maintain the
actual Overcollateralization Amount at the
Required Overcollateralization Level in effect at
that time.
The Pooling and Servicing Agreement provides
that, subject to certain trigger tests, the
Required Overcollateralization Level may increase
or decrease over time. An increase would result
in a temporary period of accelerated amortization
of the related Class A Certificates to increase
the actual Overcollateralization Amount to the
Required Overcollateralization Level; a decrease
would result in a temporary period of decelerated
amortization to reduce the actual
Overcollateralization Amount to the Required
Overcollateralization Level.
Subordination. The rights of the holders of the
Subordinate Certificates to receive distributions
with respect to the Mortgage Loans in the Trust
Fund will be subordinated, to the extent
described herein, to such rights of the holders
of the Class A Certificates. This subordination
is intended to enhance the likelihood of regular
receipt by the holders of the Class A
Certificates of the full amount of their Class A
Principal Distribution Amount and Class A
Interest Distribution Amount and to afford such
holders protection against losses on the Mortgage
Loans.
The protection afforded to the holders of the
Class A Certificates by means of the
subordination of the Subordinate Certificates
will be accomplished by the preferential right of
the Class A Certificateholders to receive, prior
to any distribution being made on a Distribution
Date in respect of the Subordinate Certificates,
the amounts of interest and principal due them on
each Distribution Date out of the Available Funds
on such date in the Certificate Account and, if
necessary, by the right of such Class A
Certificateholders to receive future
distributions of Available Funds that would
otherwise be payable to the holders of the
Subordinate Certificates.
See "Description of the Certificates--
Overcollateralization, Subordination Provisions
and Support Features."
The Certificate Insurance Policy
The Certificate Insurer will issue a certificate
guaranty insurance policy (the "Certificate
Insurance Policy") with respect to the Class
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A Certificates, pursuant to which it will
irrevocably and unconditionally guarantee payment
to the Trustee for the benefit of the Holders of
the Class A Certificates as further described
herein, an amount that will insure that the full
amount of the Insured Distribution Amount is
available for distribution by the Trustee to the
Class A Certificateholders on such Distribution
Date. The "Insured Distribution Amount" for a
Distribution Date equals the sum of (i) the Class
A Interest Distribution Amount and (ii) the
Overcollateralization Deficit. The Certificate
Insurance Policy does not guarantee the Class A
Certificates any specified rate of prepayments or
the payment of the amount of any loss on a
Charged-Off Loan on the Distribution Date which
immediately follows the Mortgage Loan becoming a
Charged-Off Loan unless and to the extent such
loss results in an Overcollateralization Deficit.
A payment by the Certificate Insurer under the
Certificate Insurance Policy is referred to
herein as an "Insured Payment." The Certificate
Insurer will be entitled to reimbursement for all
Insured Payments together with interest thereon.
See "The Certificate Insurance Policy and The
Certificate Insurer" in this Prospectus
Supplement.
Mandatory Prepayment of
Class A Certificates........ The Original Pre-Funded Amount may be used to
acquire Subsequent Mortgage Loans. If by the end
of the Pre-Funding Period, not all of the
Original Pre-Funded Amount has been used to
acquire Subsequent Mortgage Loans, then the Class
A Certificates will be prepaid in part on the
Distribution Date which follows the end of the
Pre-Funding Period, from and to the extent of
such remaining funds.
The Certificate Insurer..... MBIA Insurance Corporation (the "Certificate
Insurer"). See "The Certificate Insurance Policy
and The Certificate Insurer" herein.
Servicing of the Mortgage The Servicer has agreed to service the Mortgage
Loans....................... Loans in accordance with the Pooling and
Servicing Agreement with the same care as it
customarily employs in servicing and
administering mortgage loans of the same type for
its own account in accordance with accepted
mortgage servicing practices of prudent lending
institutions.
Delinquency Interest
Advances and Compensating The Servicer will be obligated to make
Interest.................... Delinquency Interest Advances (as defined below)
on a Mortgage Loan unless it determines in
accordance with Accepted Servicing Practices (as
defined herein) that the amount of such
Delinquency Interest Advance will ultimately not
be recoverable from payments to be made by the
borrower of such Mortgage Loan (exclusive of any
possibility of a deficiency judgment).
Delinquency Interest Advances may be funded by
the Servicer from subsequent collections on the
Mortgage Loans generally, and are reimbursable
from (i) future collections and (ii) Net
Liquidation Proceeds, in each case with respect
to the related Mortgage Loan. "Delinquency
Interest Advances" are amounts deposited in the
Certificate
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<PAGE>
Account by the Servicer equal to the sum of the
interest portions (net of the Servicing Fees) of
Monthly Payments (as defined herein) due but not
collected with respect to delinquent Mortgage
Loans during the related Collection Period.
Notwithstanding the Servicer's determination at
the time such Delinquency Interest Advance was
made that it would not be a Nonrecoverable
Advance, in the event such Delinquency Interest
Advance becomes a Nonrecoverable Advance, the
Servicer will be entitled to reimbursement
therefor from the Trust Fund. Upon an Event of
Default (as described herein), the Trustee, as
successor servicer, will be obligated to make any
such Delinquency Interest Advance if the Servicer
fails in its obligation to do so, to the extent
provided in the Pooling and Servicing Agreement.
See "Prepayment and Yield Considerations" herein.
In addition, the Servicer will also be required
to deposit Compensating Interest in the
Certificate Account with respect to any full
Prepayment received on a Mortgage Loan during the
related Collection Period out of its own funds
without any right of reimbursement therefor.
"Compensating Interest" is an amount equal to the
difference between (x) 30 days' interest at the
Mortgage Interest Rate (net of the rate at which
the Servicing Fee is calculated) on the Principal
Balance of such Mortgage Loan as of the first day
of the related Collection Period and (y) to the
extent not previously advanced, the interest paid
by the Mortgagor with respect to the Mortgage
Loan during such Collection Period. The Servicer
will not be required to pay Compensating Interest
with respect to any Collection Period in an
amount in excess of the aggregate Servicing Fee
received by the Servicer for such Collection
Period. See "Description of the Certificates-
Payments on the Mortgage Loans" in this
Prospectus Supplement.
Servicing Advances.......... Subject to the Servicer's good faith
determination that such action would not
constitute a Nonrecoverable Advance and that a
prudent mortgage lender would make a like advance
if it or an affiliate owned the related Mortgage
Loan, the Servicer is required to advance amounts
with respect to the Mortgage Loans ("Servicing
Advances") constituting "out-of-pocket" costs and
expenses relating to (a) the preservation and
restoration of the Mortgaged Property, (b)
enforcement proceedings, including foreclosures,
(c) expenditures relating to the purchase or
maintenance of a senior lien not included in the
Trust Fund on the Mortgaged Property, and (d)
certain other customary amounts described in the
Pooling and Servicing Agreement. Such Servicing
Advances by the Servicer are reimbursable to the
Servicer subject to certain conditions and
restrictions. In the event that, notwithstanding
the Servicer's good faith determination at the
time such Servicing Advance was made, that it
would not be a Nonrecoverable Advance, in the
event such Servicing Advance becomes a
Nonrecoverable Advance, the Servicer will be
entitled to reimbursement therefor from the Trust
Fund. See "Prepayment and Yield Considerations"
herein.
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<PAGE>
Servicing Fee............... The Servicer is entitled to a servicing fee of
0.65% per annum of the Principal Balance of each
Mortgage Loan (the "Servicing Fee"), calculated
and payable monthly. The Servicer is entitled to
other compensation to the extent described
herein.
Optional Termination........ The Holders of the Residual Certificates or
Servicer may, at their option (and if neither
option is exercised, the Certificate Insurer may,
at its option) terminate the Trust Fund on any
date on which the aggregate Principal Balances of
the Mortgage Loans is less than 10% (if the
Holders of the Residual Certificates are
exercising their option) or is less than 5% (if
the Servicer (or the Certificate Insurer, if the
Servicer fails to exercise its option) is
exercising its option) of the sum of (a) the
aggregate Principal Balances of the Initial
Mortgage Loans as of the Cut-Off Date plus (b)
the aggregate Principal Balance of the Subsequent
Mortgage Loans as of the related Subsequent Cut-
Off Date (such sum, the "Maximum Collateral
Amount"), by purchasing from the Trust Fund, on
the next succeeding Distribution Date, all of the
property of such Trust Fund at a price equal to
the sum of (a) the greater of (i) 100% of the
Principal Balance of each outstanding Mortgage
Loan and each REO Property and (ii) the fair
market value (disregarding accrued interest) of
the Mortgage Loans and such REO Properties,
determined as the average of three written bids
(copies of which are to be delivered to the
Trustee and the Certificate Insurer by the
Servicer and the reasonable cost of which may be
deducted from the final purchase price so long as
such deduction would not result in a draw on the
Certificate Insurance Policy) made by nationally-
recognized dealers reasonably acceptable to the
Certificate Insurer and based on a valuation
process which would be used to value comparable
mortgage loans and REO properties, plus (b) the
greater of (x) the aggregate amount of accrued
and unpaid interest on the Mortgage Loans through
the related Collection Period and (y) 30 days'
accrued interest thereon computed at a rate equal
to the related Mortgage Interest Rate, (c) in the
event the Holders of the Residual Certificates or
the Certificate Insurer exercise such option,
plus any unpaid and accrued Servicing Fee or in
the event the Servicer exercises such option, net
of the Servicing Fee, and (d) any unreimbursed
amounts due to the Certificate Insurer under the
Pooling and Servicing Agreement and any accrued
and unpaid Insured Payments, plus interest
thereon. The first date on which the Holders of
the Residual Certificates may exercise their
option is the "Clean-Up Call Date". See
"Servicing of the Mortgage Loans--Termination;
Purchase of Mortgage Loans" herein.
Trustee..................... Bankers Trust Company, a New York banking
corporation with offices located at Four Albany
Street, New York, New York. See "The Trustee" in
this Prospectus Supplement.
ERISA Considerations........ The Class A Certificates may not be purchased by
Plans (as defined below) until the earlier of the
(i) the end of the Pre-Funding Period
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<PAGE>
or (ii) the date on which the U.S. Department of
Labor (the "DOL") amends the exemption (as
defined below) to permit the use thereunder of
pre-funding accounts as described herein. On or
after the earlier to occur of such dates, a
fiduciary of any Plan should carefully review
with its legal advisors whether the purchase or
holding of Class A Certificates could give rise
to a transaction prohibited or not otherwise
permissible under ERISA or the Code. The U.S.
Department of Labor has issued an individual
exemption, Prohibited Transaction Exemption 89-90
to the Underwriter (the "Exemption"), which
generally exempts from the application of certain
of the prohibited transaction provisions of
ERISA, and the excise taxes imposed on such
prohibited transactions by Section 4975(a) and
(b) of the Code and Section 502(i) of ERISA,
transactions relating to the purchase, sale and
holding of pass-through certificates such as the
Class A Certificates and the servicing and
operation of asset pools such as the Trust Fund,
provided that certain conditions are satisfied.
See "ERISA Considerations" in this Prospectus
Supplement.
Legal Investment............ The Class A Certificates will not constitute
"mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of
1984. See "Legal Investment" in this Prospectus
Supplement.
Certain Federal Income Tax
Consequences................ For federal income tax purposes, one or more
elections will be made to treat certain assets of
the Trust Fund as a "real estate mortgage
investment conduit" (a "REMIC"). The Class A
Certificates will be designated as "regular
interests" issued by a REMIC and will be treated
as debt instruments issued by a REMIC for federal
income tax purposes. Holders of Class A
Certificates, including Holders that generally
report income on the cash method of accounting,
will be required to include interest on the Class
A Certificates in income in accordance with the
accrual method of accounting. It is not
anticipated that the Class A Certificates will be
issued with original issue discount. See "Certain
Federal Income Tax Consequences" herein and in
the accompanying Prospectus.
Certificate Ratings......... It is a condition to the issuance of the Class A
Certificates that the Class A Certificates shall
have been rated not lower than AAA by Standard &
Poor's Ratings Group ("Standard & Poor's") and
Aaa by Moody's Investors Service ("Moody's"). A
security rating is not a recommendation to buy,
sell or hold securities and may be subject to
revision or withdrawal at any time by the
assigning rating organization. The ratings do not
address the possibility that Class A
Certificateholders may suffer a lower than
anticipated yield. See "Ratings" and "Prepayment
and Yield Considerations" in this Prospectus
Supplement.
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<PAGE>
RISK FACTORS
Prospective investors in the Class A Certificates should consider among
other things the following risk factors in connection with the purchase of the
Class A Certificates.
LIMITED LIQUIDITY
The Underwriter intends to make a secondary market in the Class A
Certificates, but will have no obligation to do so. There can be no assurance
that a secondary market for any Class of Class A Certificates will develop, or
if one does develop, that it will continue or provide sufficient liquidity of
investment or that it will remain for the term of the related Class of Class A
Certificates. See "Legal Investment Considerations" herein and "Risk Factors--
Limited Liquidity" in the Prospectus.
LIMITED OBLIGATIONS
The Class A Certificates will not represent an interest in or obligation of
the Depositor, the Trustee, the Underwriter, the Seller, the Servicer or any
of their respective affiliates. Neither the Mortgage Loans nor the Class A
Certificates will be insured or guaranteed by any governmental agency or
instrumentality, the Depositor, the Underwriter, the Servicer, the Seller, the
Trustee or any of their respective affiliates and will be payable only from
amounts held in the Trust Fund or paid pursuant to the Certificate Insurance
Policy. See "Risk Factors--Limited Obligations" in the Prospectus.
The Depositor will not be obligated in any way in respect of the
Certificates. The obligations of the Servicer with respect to the Certificates
will be limited to its contractual servicing obligations. The Seller will,
however, make certain representations and warranties in its capacity as Seller
relating to the Mortgage Loans. In the event of an uncured breach of any such
representation or warranty that materially adversely affects the interests of
the Certificateholders or the Certificate Insurer, the Seller may, under
certain circumstances, be obligated to repurchase such Mortgage Loan, as
described under "Description of the Certificates--Assignment of Mortgage
Loans" herein.
UNDERWRITING STANDARDS AND POTENTIAL DELINQUENCIES
The Seller was incorporated as a California corporation in January, 1992
under the name T.A.R. Preferred Mortgage Corporation, and has been originating
subordinate lien mortgage loans since August, 1994. The Seller began
originating no or low equity mortgage loans comparable to the Mortgage Loans
during the late summer and early fall of 1996. Accordingly, the Seller has
insufficient historical delinquency, bankruptcy, foreclosure or default
experience that may be referred to for purposes of estimating the future
delinquency and loss experience of mortgage loans similar to the Mortgage
Loans being sold to the Trust Fund.
The Seller's underwriting standards generally are less stringent than those
of FNMA or FHLMC with respect to a borrower's capacity, collateral and in
certain other respects. The Mortgage Loans originated or acquired by the
Seller will have been made to borrowers that typically have limited access to
traditional mortgage financing for a variety of reasons, such as insufficient
home equity value, high level of debt-to-income ratios, past credit experience
or a limited credit history. As a result of this approach to underwriting, the
Mortgage Loans in the Trust Fund are likely to experience higher rates of
delinquencies, defaults and foreclosures than home equity mortgage loans
underwritten in a more traditional manner.
The Seller considers the underwriting policy under which the Mortgage Loans
are underwritten to be analogous to credit lending, rather than equity
lending, since its underwriting decisions are based primarily on the
borrower's credit history and capacity to repay rather than on the potential
value of the collateral upon foreclosure. Accordingly, the Seller's
underwriting standards allow loans to be approved with Combined Loan-to-Value
Ratios of up to approximately 125%. In addition, substantially all of the
Mortgage Loans are secured by subordinate liens on the related Mortgaged
Properties. The rights of the Trust Fund (and therefore
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<PAGE>
Certificateholders), as mortgagee under a subordinate mortgage, are
subordinate to those of the mortgagee under the senior mortgage (See "Certain
Legal Aspects of the Mortgage Loans"). Because of the relatively high Combined
Loan-to-Value Ratios of the Mortgage Loans and the fact that the Mortgage
Loans are secured by subordinate liens, the Seller does not anticipate that
any Net Liquidation Proceeds will be available to Certificateholders with
respect to defaulted Mortgage Loans. Any such Charged-off Loan Losses will be
covered by the overcollateralization feature described herein, or, if
necessary, by amounts paid under the Certificate Insurance Policy to the
extent of any Overcollateralization Deficit. Such Charged-Off Loan Losses may
affect the rate and timing of principal amortization of the Class A
Certificates.
GEOGRAPHIC CONCENTRATION
As of the Statistical Calculation Date, approximately 38.23% of the Initial
Mortgage Loans are secured by Mortgaged Properties located in the State of
California. Because of the relative geographic concentration of the Mortgage
Loans within California, losses on the Mortgage Loans may be higher than would
be the case if the Mortgage Loans were more geographically diversified. For
example, certain of the Mortgaged Properties may be more susceptible to
certain types of special hazards, such as earthquakes, floods, hurricanes and
other natural disasters and major civil disturbances, than residential
properties located in other parts of the country. In addition, the regional
economies of the areas in which the Mortgage Loans are located may be
adversely affected to a greater degree than the economies of other areas of
the country by certain regional developments. In recent years, property values
of residential real estate generally have declined in California. If the
relevant California residential real estate markets experience an overall
decline in property values after the dates of origination of the respective
Mortgage Loans, then the rates of delinquencies, foreclosures and losses on
the Mortgage Loans may be expected to increase and such increase may be
substantial. Further, the State of California is an "election of remedies"
state, which generally means that in the event of default on Mortgage Loans in
that state, the lender, in this case the Servicer, in the name of and on
behalf of the Trustee, must elect either to sue on the debt or pursue its
remedies against the property. If the Servicer chooses to pursue its remedies
against the borrower, then generally it will not be able to foreclose against
the Mortgaged Property. Any such losses will be covered by the
overcollateralization feature described herein, or, if necessary, by amounts
paid under the Certificate Insurance Policy to the extent of any
Overcollateralization Deficit. Such losses may affect the rate and timing of
principal amortization of the Class A Certificates.
DECLINE IN REAL ESTATE VALUES
No assurance can be given that the values of the Mortgaged Properties have
remained or will remain at their levels as of the dates of origination of the
related Mortgage Loans. If the residential real estate market should
experience an overall decline in property values such that the outstanding
balances of the Mortgage Loans (together with amounts secured by any senior
lien instruments) become equal to or greater than the value of the Mortgaged
Properties, the actual rates of delinquencies, foreclosures and losses on
these Mortgaged Properties could be higher than losses now generally
experienced in the mortgage lending industry and these may result in an
Overcollateralization Deficit that would effect the rate and timing of
principal amortization of the Class A Certificates.
THE SUBSEQUENT MORTGAGE LOANS AND THE PRE-FUNDING ACCOUNT
There is no assurance that the Seller will have sufficient Mortgage Loans to
sell to the Depositor for sale to the Trust Fund during the Pre-Funding Period
so as to account for the entire Original Pre-Funded Amount; if the Depositor
does not have sufficient Mortgage Loans, a partial prepayment of principal to
Holders of Class A Certificates will result, as described below. See "Social,
Economic and Other Factors" below. In addition, any conveyance of Subsequent
Mortgage Loans is subject to the following conditions, among others: (i) each
such Subsequent Mortgage Loan must satisfy certain specified representations
and warranties; (ii) the Depositor will not select such Subsequent Mortgage
Loans in a manner that it believes is adverse to the interests of the Holders
of the Class A Certificates or the Certificate Insurer; (iii) the Depositor
will deliver certain opinions of counsel
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<PAGE>
with respect to the validity of the conveyance of such Subsequent Mortgage
Loans; and (iv) as of the Subsequent Cut-Off Date, the Mortgage Loans at that
time, including the Subsequent Mortgage Loans to be conveyed by the Depositor
as of such Subsequent Cut-Off Date, will satisfy the criteria set forth in the
Pooling and Servicing Agreement, as described herein under "Description of the
Mortgage Loans--Conveyance of Subsequent Mortgage Loans."
To the extent that amounts on deposit in the Pre-Funding Account have not
been fully applied to the purchase of Subsequent Mortgage Loans by the end of
the Pre-Funding Period, such remaining amount will be applied as a prepayment
of principal paid to the Holders of the Class A Certificates on the
Distribution Date following the end of the Pre-Funding Period (in no event
later than the June 25, 1997 Distribution Date). The amount of any such
prepayment will be applied to the Class A Certificates. Although no assurances
can be given, it is anticipated by the Seller that the principal amount of
Subsequent Mortgage Loans sold to the Trust Fund will require the application
of substantially all amounts on deposit in the Pre-Funding Account and that
there will be no material principal prepayment to the Holders of the Class A
Certificates.
Subsequent Mortgage Loans may have characteristics different from those of
the related Initial Mortgage Loans. However, each Subsequent Mortgage Loan
must satisfy the eligibility criteria referred to above at the time of its
addition and be underwritten in accordance with the Seller's underwriting
criteria. See "Description of the Mortgage Loans--Conveyance of Subsequent
Mortgage Loans" herein.
SOCIAL, ECONOMIC AND OTHER FACTORS
The ability of the Trust Fund to invest in Subsequent Mortgage Loans is
largely dependent upon whether the mortgagors thereunder perform their payment
and other obligations required by such Subsequent Mortgage Loans in order that
such Subsequent Mortgage Loans meet the specified requirements for transfer on
a Subsequent Transfer Date. The performance by such mortgagors may be affected
as a result of a variety of social and economic factors. Economic factors
include interest rates, unemployment levels, the rate of inflation and
consumer perception of economic conditions generally. However, the Seller is
unable to determine and has no basis to predict whether or to what extent
economic or social factors will affect the performance by such mortgagors and
the availability of Subsequent Mortgage Loans.
CERTAIN OTHER LEGAL CONSIDERATIONS REGARDING THE MORTGAGE LOANS
Applicable state laws generally regulate interest rates and other charges
and require certain disclosures. 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 Mortgage Loans. In California,
for example, a mortgage lender is subject to the California Collection
Practices Act which regulates practices used to effect collections on consumer
loans. Depending on the provisions of the applicable law and the specific
facts and circumstances involved, violations of these laws, policies and
principles may limit the ability of the Servicer to collect all or part of the
principal of or interest on the Mortgage Loans, may entitle the borrower to a
refund of amounts previously paid and, in addition, could subject the owner of
the Mortgage Loan to damages and administrative enforcement. Additionally,
some states require that for a specified period (the "Redemption Period")
after foreclosure of a Mortgaged Property, the related borrower can repay the
defaulted Mortgage Loan and regain title to such Mortgaged Property; in such
jurisdictions, the Seller's ability to liquidate the related foreclosed
property during the applicable Redemption Period is limited. In the event of a
default by a borrower, these restrictions, among other things, may impede the
ability of the Servicer to foreclose on or sell the Mortgaged Property or to
obtain liquidation proceeds (net of expenses) sufficient to repay all amounts
due on the related Mortgage Loan.
The Mortgage Loans are also subject to Federal laws, including:
(i) the Federal Truth in Lending Act and Regulation Z promulgated
thereunder, which require certain disclosures to the borrowers regarding
the terms of the Mortgage Loans;
S-19
<PAGE>
(ii) the Equal Credit Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age, race, color,
sex, religion, marital status, national origin, receipt of public
assistance or the exercise of any right under the Consumer Credit
Protection Act, in the extension of credit; and
(iii) the Fair Credit Reporting Act, which regulates the use and
reporting of information related to the borrower's credit experience.
Violations of certain provisions of these Federal laws may limit the ability
of the Servicer to collect all or part of the principal of or interest on the
Mortgage Loans and in addition could subject the Trust Fund to damages and
administrative enforcement. The Mortgage Loans may be subject to the Home
Ownership and Equity Protection Act of 1994 (the "Act") which amended the
Truth in Lending Act as it applies to mortgages subject to the Act. The Act
requires certain additional disclosures, specifies the timing of such
disclosures and limits or prohibits inclusion of certain provisions in
mortgages subject to the Act. The Act also provides that any purchaser or
assignee of a mortgage covered by the Act is subject to all of the claims and
defenses which the borrower could assert against the original lender. The
maximum damages that may be recovered under the Act from an assignee is the
remaining amount of indebtedness plus the total amount paid by the borrower in
connection with the Mortgage Loan. If the Trust Fund owns Mortgage Loans
subject to the Act, it will be subject to all of the claims and defenses which
the borrower could assert against the Seller. Any violation of the Act which
would result in such liability would be a breach of the Seller's
representations and warranties, and the Seller would be obligated to cure,
repurchase or, if permitted by the Agreement, substitute for the Mortgage Loan
in question. See "Certain Legal Aspects of the Mortgage Loans" herein.
BOOK-ENTRY REGISTRATION
Since transactions in the Class A Certificates can be effected only through
DTC, Cedel, Euroclear, participating organizations, indirect participants and
certain banks, the ability of a Certificate Owner of Class A Certificates to
pledge a Class A Certificate to persons or entities that do not participate in
the DTC, Cedel or Euroclear system, or otherwise to take action in respect of
such Class A Certificate, may be limited due to lack of a physical certificate
representing such Class A Certificate.
Certificate Owners of Class A Certificates may experience some delay in
their receipt of distributions of interest and principal on the Class A
Certificates since such distributions will be forwarded by the Trustee to DTC
and DTC will credit such distributions to the accounts of its Participants,
which will thereafter credit them to the accounts of such Certificate Owners
either directly or indirectly through indirect participants. See "Description
of the Certificates--Registration of the Class A Certificates" herein and
"Risk Factors--Limitation on Exercise of Rights Due to Book-Entry
Registration" in the Prospectus.
S-20
<PAGE>
DESCRIPTION OF THE MORTGAGE LOANS
GENERAL
The statistical information regarding the Mortgage Loans (the "Initial
Mortgage Loans") which is presented in this Prospectus Supplement is based
upon the characteristics of the Mortgage Pool as of the close of business on
February 21, 1997 (the "Statistical Calculation Date"). The Initial Mortgage
Loans transferred to the Trust Fund on the Closing Date will include certain
other Initial Mortgage Loans, some of which may be originated or purchased by
the Seller after the Statistical Calculation Date but on or prior to the
Closing Date. While the statistical distribution of the final characteristics
of all Initial Mortgage Loans transferred to the Trust Fund on the Closing
Date will vary from the statistical information presented in this Prospectus
Supplement, the Seller does not believe that the characteristics of the
Initial Mortgage Loans as of the Cut-Off Date will vary materially from the
information presented herein with respect to the pool of Initial Mortgage
Loans as of the Statistical Calculation Date. Unless otherwise indicated, all
percentages set forth in this Prospectus Supplement are based upon the
aggregate Principal Balances of the Initial Mortgage Loans as of the
Statistical Calculation Date, which was $130,964,630.72.
The Mortgage Loans to be included in the Trust Fund are evidenced by
mortgage notes (each, a "Mortgage Note") secured by in substantially all
cases, subordinate lien mortgages or deeds of trust (the "Mortgages") on one-
to four-family residential properties, including townhouses, individual units
in condominiums and planned unit developments (the "Mortgaged Properties") and
have the additional characteristics described below. Since the Mortgage Loans
are substantially all subordinate liens which are subordinate to the rights of
the mortgagee under the senior mortgage or mortgages encumbering the related
Mortgaged Property ("Senior Liens"), the proceeds from any foreclosure,
liquidation, insurance or condemnation proceedings will be available to
satisfy the outstanding balance of such subordinate mortgage only to the
extent that the claims of the mortgagees under such Senior Liens have been
satisfied in full, including any related foreclosure costs. In addition, a
subordinate mortgagee may not foreclose on the Mortgaged Property securing a
subordinate mortgage unless it forecloses subject to the Senior Liens, in
which case it must either pay the entire amount due on the Senior Liens to the
mortgagees thereof at or prior to the foreclosure sale or undertake the
obligation to make payments on the Senior Liens in the event the mortgagor is
in default thereunder. The Trust Fund will not have any source of funds to
satisfy the Senior Liens or make payments due to the mortgagees thereof.
The Mortgage Loans have original terms to stated maturity of five through
thirty years. Typically, the original term to stated maturity is 15 years. The
loan application for each Mortgage Loan was approved in the ordinary course of
the Seller's fixed rate closed-end no or low equity loan program. As of the
Statistical Calculation Date, the average principal balance of the Initial
Mortgage Loans was approximately $37,027.04. As of the Statistical Calculation
Date, the weighted average Mortgage Interest Rate was approximately 14.04%. As
of the Statistical Calculation Date, the weighted average remaining term to
stated maturity was 183.68 months and the latest scheduled maturity of any
Initial Mortgage Loan is June, 2025; however the actual date on which any
Mortgage Loan is paid in full may be earlier than the stated maturity date due
to unscheduled payments of principal.
Each of the Mortgage Loans is subject to a due-on-sale clause. See "Certain
Legal Aspects of the Mortgage Loans" herein.
The Monthly Payments for each Mortgage Loan are due on the dates of the
month specified in the related Mortgage Note (each a "Due Date"). Each
Mortgage Loan requires the related Mortgagor to make current principal and
interest payments during the life of the Mortgage Loan.
"Monthly Payment" generally means, as to any Mortgage Loan and any Due Date,
the scheduled payment of principal and interest due thereon by such Due Date
(after adjustment for any Curtailments and certain other adjustments described
in the Pooling and Servicing Agreement occurring prior to such Due Date).
S-21
<PAGE>
Based on information supplied by the mortgagors in connection with their
loan applications at origination, the Mortgaged Properties will be owner
occupied primary residences.
Mortgages originated with an original term to maturity of 179 months,
representing 3.10% of the Initial Mortgage Loans by aggregate principal
balance as of the Statistical Calculation Date, have two Monthly Payments in
the month of maturity of the related Mortgage Loan.
102 Initial Mortgage Loans, representing 2.75% of the Initial Mortgage Loans
by aggregate principal balance, are one payment contractually delinquent as of
the Statistical Calculation Date.
UNDERWRITING STANDARDS
General. The Mortgage Loans originated or acquired by the Seller will have
been made to borrowers that typically have limited access to traditional home
equity mortgage financing for a variety of reasons, such as insufficient home
equity value, high levels of debt-to-income ratios, unfavorable past credit
experience or a limited credit history. The Seller considers the underwriting
policy under which the Mortgage Loans are underwritten to be analogous to
credit lending, rather than equity lending, since its underwriting decisions
are based primarily on the borrower's credit history and capacity to repay
rather than on the potential value upon foreclosure of the Mortgaged Property
pledged as collateral to secure the related Mortgage Loan. Loan decisions are
based primarily on an analysis of the prospective borrower's documented cash
flow and credit history and supplemented by a collateral evaluation. The
proceeds of the Mortgage Loans are generally used by the related borrowers to
finance (i) debt consolidation, (ii) property improvements, (iii) the
acquisition of personal property such as home appliances or furnishings, (iv)
the purchase or refinancing of residential one- to four-family properties, and
(v) a combination of debt consolidation, property improvements and other
consumer purposes. According to information provided by borrowers in surveys
conducted by the Seller, substantially all of the proceeds of Mortgage Loans
with combined loan-to-value ratios in excess of a specified percentage,
calculated in accordance with the Treasury regulation pertaining to REMICs,
are used to finance property improvements with respect to the related
Mortgaged Property.
Underwriting Process. Each prospective mortgagor completes a mortgage loan
application that includes information with respect to the applicant's
liabilities, income, credit history, employment history and personal
information. The application is subject to a direct credit investigation by
the Seller or the Seller's approved correspondent prior to the extension of
credit. The Seller's underwriting investigation generally includes (i)
verification of employment, which normally includes, for salaried borrowers,
two of the most recent consecutive pay stubs showing year-to-date earnings and
the previous year's W-2 form and for self-employed borrowers, a minimum of two
years of tax returns or other written or telephone verification with
employers, (ii) verifying ownership of the property and any senior mortgage
balance, (iii) verifying payment history of the senior lien, which may be
obtained from credit bureau information or in writing or by telephone from the
holder of any senior lien, and (iv) obtaining and reviewing an independent
credit bureau report from one of three national credit repositories, TRW,
TransUnion and Equifax. 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, bankruptcies,
repossessions or judgments.
In evaluating the credit quality of borrowers, the Seller utilizes credit
bureau risk scores (the "Credit Bureau Risk Score"), a statistical ranking of
likely future credit performance developed by Fair, Isaac & Company ("Fair,
Isaac") and the three national credit repositories--Equifax, Trans Union and
TRW. The Credit Bureau Risk Scores available from the three national credit
repositories are calculated by the assignment of weightings to the most
predictive data collected by the credit repositories and range from the 400s
to the 800s. Such Credit Bureau Risk Scores have been calibrated to indicate
the same level of credit risk regardless of which credit repository is used.
Such Credit Bureau Risk Scores are based solely on the information at the
particular credit repository. The Credit Bureau Risk Score is obtained from
one of the three national credit repositories stated above and is used by the
Seller to provide a means of analysis to assist in underwriting to estimate
the probability
S-22
<PAGE>
that the proposed mortgage loan will be paid in accordance with its terms,
however, the final decision whether to approve a Mortgage Loan rests with the
Seller. Credit Bureau Risk Scores are not necessarily indicative of ultimate
performance of loans, but serve as a measure, based on historical origination
and statistical data, of the creditworthiness of borrowers.
The Maximum Loan Amount ("MLA") a borrower can obtain is generally
determined by a combination of considerations, including the Credit Bureau
Risk Score of the primary wage earner and the combined debt-to-income ratio
(the "DTI") of joint borrowers. Provided a mortgage loan generally meets the
Seller's other underwriting guidelines, borrowers with applicable Credit
Bureau Risk Scores and DTIs may generally be granted Maximum Loan Amounts of
up to $65,000 and a DTI of up to 50%. Exceptions to these guidelines,
including exceptions for Maximum Loan Amounts greater than $65,000, Credit
Bureau Risk Scores below 620 and DTI's above 50%, may be approved at the
Seller's discretion.
The Seller generally requires one of the following to be obtained for each
Mortgage Loan: (i) a Uniform Residential Appraisal Report in compliance with
FNMA or FHLMC guidelines, (ii) a Second Mortgage Property Value Analysis
Report, typically referred to as a "Drive-By Appraisal Report" which consists
exclusively of an exterior inspection of the property without examination of
interior, or (iii) a comparable sale analysis report referred to as a "Desk-
Top Appraisal Report" which generally consists of an analysis of historical
comparable sale information on similar type properties through the use of
public record information or other on-line real estate sale information
services and does not consist of an exterior or interior inspection of the
property. All appraisals are analyzed on an "as is" valuation. Substantially
all of the appraisals on the Mortgage Loans are drive-by appraisals and such
appraisals are only considered to a limited extent by the Seller in its
mortgage loan underwriting decisions. There can be no assurance that the
values determined by appraisers at the time of loan origination will be
achieved in the event of foreclosure sale or that a different appraiser (or an
appraisal which included an interior review) would have arrived at the same
opinion of value.
ORIGINATION PROCESS
The Seller originates its mortgage loans through retail, wholesale and
correspondent channels. Retail loans are generated through the Seller's own
retail divisions using advertising, direct mail and telemarketing. Wholesale
and correspondent loans are generated through approved mortgage originators
including mortgage brokers, credit unions, banks and other approved financial
institutions.
CHARACTERISTICS OF THE INITIAL MORTGAGE LOANS
Set forth below is a description of certain additional characteristics of
the Initial Mortgage Loans as of the Statistical Calculation Date (except as
otherwise indicated). Dollar amounts and percentages may not add up to totals
due to rounding.
The statistical information presented in this Prospectus Supplement
concerning the pool of Initial Mortgage Loans is based on the pool as of the
close of business on February 21, 1997 (such date, the "Statistical
Calculation Date"). The pool aggregated $130,964,630.72 as of the Statistical
Calculation Date. The Seller expects that the actual pool as of the Closing
Date will represent approximately $ in Initial Mortgage Loans.
Initial Mortgage Loans will represent Mortgage Loans acquired or to be
acquired by the Seller on or prior to the Closing Date. In addition, with
respect to the pool as of the Statistical Calculation Date as to which
statistical information is presented herein, some amortization of the pool
will occur prior to the Closing Date. Moreover, certain loans included in the
pool as of the Statistical Calculation Date may prepay in full, or may be
determined not to meet the eligibility requirements for the final pool, and
may not be included in the final pool. As a result of the foregoing, the
statistical distribution of characteristics as of the Closing Date for the
final Initial Mortgage Loan pool will vary somewhat from the statistical
distribution of such characteristics as of the Statistical Calculation Date as
presented in this Prospectus Supplement, although such variance will not be
material. Unless otherwise noted, all statistical percentages in this
Prospectus Supplement are measured by the aggregate principal balance of the
Mortgage Loan pool as of the Statistical Calculation Date. Following the end
S-23
<PAGE>
of the Pre-Funding Period, a current report on Form 8-K containing a
description of the Mortgage Loans acquired by the Trust Fund as of their
respective Cut-Off Date or Subsequent Cut-Off Date will be filed with the
Commission.
The sum of the percentage columns set forth in the following tables may not
equal 100% due to rounding.
MORTGAGE INTEREST RATES
<TABLE>
<CAPTION>
PERCENTAGE OF
STATISTICAL CALCULATION STATISTICAL CALCULATION
NUMBER OF DATE AGGREGATE DATE AGGREGATE
INITIAL MORTGAGE UNPAID UNPAID
MORTGAGE INTEREST RATES LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------- ---------------- ----------------------- -----------------------
<S> <C> <C> <C>
10.000-10.249%.......... 1 $ 21,000.00 0.02%
10.250-10.499........... 3 126,505.78 0.10
10.500-10.749........... 2 104,907.84 0.08
10.750-10.999........... 11 469,447.67 0.36
11.000-11.249........... 6 218,459.26 0.17
11.250-11.499........... 9 395,507.00 0.30
11.500-11.749........... 6 227,248.74 0.17
11.750-11.999........... 97 3,990,512.31 3.05
12.000-12.249........... 18 629,787.45 0.48
12.250-12.499........... 68 2,805,426.69 2.14
12.500-12.749........... 166 6,370,108.76 4.86
12.750-12.999........... 239 9,516,296.24 7.27
13.000-13.249........... 95 3,932,204.51 3.00
13.250-13.499........... 203 8,131,914.35 6.21
13.500-13.749........... 300 12,100,647.95 9.24
13.750-13.999........... 730 26,370,973.33 20.14
14.000-14.249........... 87 3,417,173.38 2.61
14.250-14.499........... 263 9,829,452.13 7.51
14.500-14.749........... 191 6,933,033.92 5.29
14.750-14.999........... 348 12,245,019.61 9.35
15.000-15.249........... 58 2,237,828.37 1.71
15.250-15.499........... 158 5,262,809.26 4.02
15.500-15.749........... 86 2,674,154.77 2.04
15.750-15.999........... 211 7,131,111.67 5.45
16.000-16.249........... 31 975,799.38 0.75
16.250-16.499........... 32 1,104,139.37 0.84
16.500-16.749........... 37 1,248,860.32 0.95
16.750-16.999........... 37 1,169,005.37 0.89
17.000-17.249........... 13 421,018.58 0.32
17.250-17.499........... 5 140,899.97 0.11
17.500-17.749........... 18 541,200.89 0.41
17.750-17.999........... 7 197,402.10 0.15
18.250-18.499........... 1 24,773.75 0.02
----- --------------- ------
TOTAL................. 3,537 $130,964,630.72 100.00%
</TABLE>
The weighted average Mortgage Interest Rate of the Initial Mortgage Loans as
of the Statistical Calculation Date is approximately 14.04% per annum. The
Seller expects that as of the Cut-Off Date the weighted average Mortgage
Interest Rate of the Initial Mortgage Loans transferred to the Trust Fund on
the Closing Date will be approximately 14.06% per annum.
S-24
<PAGE>
REMAINING MONTHS TO STATED MATURITY
<TABLE>
<CAPTION>
PERCENTAGE OF
STATISTICAL CALCULATION STATISTICAL CALCULATION
NUMBER OF DATE AGGREGATE DATE AGGREGATE
REMAINING MONTHS TO INITIAL MORTGAGE UNPAID UNPAID
STATED MATURITY LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------- ---------------- ----------------------- -----------------------
<S> <C> <C> <C>
57..................... 1 $ 23,515.20 0.02%
58..................... 1 9,775.84 0.01
59..................... 1 19,754.17 0.02
80..................... 1 24,359.39 0.02
84..................... 1 23,000.00 0.02
117..................... 4 119,829.01 0.09
118..................... 4 127,788.53 0.10
119..................... 5 116,776.46 0.09
120..................... 7 184,326.69 0.14
144..................... 1 45,000.00 0.03
167..................... 2 68,184.45 0.05
168..................... 1 79,243.73 0.06
173..................... 1 49,424.58 0.04
174..................... 2 69,334.38 0.05
175..................... 3 72,231.07 0.06
176..................... 25 1,010,854.31 0.77
177..................... 155 6,141,567.71 4.69
178..................... 502 19,865,762.17 15.17
179..................... 663 24,473,495.55 18.69
180..................... 1,897 67,768,023.67 51.75
181..................... 8 348,500.00 0.27
235..................... 1 33,554.05 0.03
236..................... 2 78,762.78 0.06
237..................... 7 284,528.54 0.22
238..................... 14 583,337.76 0.45
239..................... 39 1,545,947.28 1.18
240..................... 186 7,682,938.12 5.87
241..................... 2 89,964.58 0.07
340..................... 1 24,850.70 0.02
----- --------------- ------
TOTAL................. 3,537 $130,964,630.72 100.00%
</TABLE>
The weighted average remaining term to stated maturity of the Initial
Mortgage Loans as of the Statistical Calculation Date is approximately 183.68
months. The latest scheduled maturity of the Initial Mortgage Loans is June,
2025. The Seller expects that as of the Cut-Off Date the weighted average
remaining term to stated maturity of the Initial Mortgage Loans transferred to
the Trust Fund on the Closing Date will be approximately 183.62 months.
S-25
<PAGE>
ORIGINAL MONTHS TO STATED MATURITY
<TABLE>
<CAPTION>
PERCENTAGE OF
STATISTICAL CALCULATION STATISTICAL CALCULATION
NUMBER OF DATE AGGREGATE DATE AGGREGATE
ORIGINAL MONTHS TO INITIAL MORTGAGE UNPAID UNPAID
STATED MATURITY LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------ ---------------- ----------------------- -----------------------
<S> <C> <C> <C>
60..................... 3 $ 53,045.21 0.04%
84..................... 2 47,359.39 0.04
119..................... 2 69,878.53 0.05
120..................... 17 460,975.78 0.35
121..................... 1 17,866.38 0.01
144..................... 1 45,000.00 0.03
179..................... 105 4,056,993.48 3.10
180..................... 3,140 115,288,902.10 88.03
181..................... 14 600,726.04 0.46
239..................... 16 725,823.00 0.55
240..................... 233 9,483,245.53 7.24
241..................... 2 89,964.58 0.07
360..................... 1 24,850.70 0.02
----- --------------- ------
TOTAL................. 3,537 $130,964,630.72 100.00%
</TABLE>
ORIGINATION MONTH
<TABLE>
<CAPTION>
PERCENTAGE OF
STATISTICAL CALCULATION STATISTICAL CALCULATION
NUMBER OF DATE AGGREGATE DATE AGGREGATE
INITIAL MORTGAGE UNPAID UNPAID
ORIGINATION MONTH LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------- ---------------- ----------------------- -----------------------
<S> <C> <C> <C>
June 1995............... 1 $ 24,850.70 0.02%
December 1995........... 1 34,044.24 0.03
January 1996............ 2 113,383.94 0.09
June 1996............... 1 49,424.58 0.04
August 1996............. 4 141,189.27 0.11
September 1996.......... 4 121,070.76 0.09
October 1996............ 88 3,452,755.28 2.64
November 1996........... 564 22,285,828.52 17.02
December 1996........... 1,125 41,097,299.26 31.38
January 1997............ 1,147 42,073,942.17 32.13
February 1997........... 600 21,570,842.00 16.47
----- --------------- ------
TOTAL................. 3,537 $130,964,630.72 100.00%
</TABLE>
S-26
<PAGE>
ORIGINAL MORTGAGE LOAN PRINCIPAL BALANCES
<TABLE>
<CAPTION>
PERCENTAGE OF
STATISTICAL CALCULATION STATISTICAL CALCULATION
ORIGINAL MORTGAGE LOAN NUMBER OF DATE AGGREGATE DATE AGGREGATE
PRINCIPAL BALANCE OF THE INITIAL MORTGAGE UNPAID UNPAID
INITIAL MORTGAGE LOANS LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------ ---------------- ----------------------- -----------------------
<S> <C> <C> <C>
$10,000-14,999.......... 38 $ 485,611.70 0.37%
15,000-19,999.......... 158 2,710,957.91 2.07
20,000-24,999.......... 308 6,743,680.29 5.15
25,000-29,999.......... 457 12,230,228.53 9.34
30,000-34,999.......... 481 15,251,882.97 11.65
35,000-39,999.......... 507 18,466,829.28 14.10
40,000-44,999.......... 586 24,124,477.11 18.42
45,000-49,999.......... 427 19,635,978.29 14.99
50,000-54,999.......... 315 15,908,124.49 12.15
55,000-59,999.......... 136 7,529,034.01 5.75
60,000-64,999.......... 61 3,726,975.53 2.85
65,000-69,999.......... 59 3,834,027.53 2.93
70,000-74,999.......... 1 70,000.00 0.05
80,000-84,999.......... 2 158,823.08 0.12
85,000-89,999.......... 1 88,000.00 0.07
----- --------------- ------
TOTAL................... 3,537 $130,964,630.72 100.00%
</TABLE>
As of the Statistical Calculation Date, the average original principal
balance of the Initial Mortgage Loans is approximately $37,079.93. As of the
Statistical Calculation Date the largest original principal balance of the
Initial Mortgage Loans is $88,000.
S-27
<PAGE>
LOAN UNPAID PRINCIPAL BALANCES
<TABLE>
<CAPTION>
PERCENTAGE OF
STATISTICAL CALCULATION STATISTICAL CALCULATION
RANGE OF NUMBER OF DATE AGGREGATE DATE AGGREGATE
PRINCIPAL UNPAID INITIAL MORTGAGE UNPAID UNPAID
BALANCE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
---------------- ---------------- ----------------------- -----------------------
<S> <C> <C> <C>
$ 5,000- 9,999......... 3 $ 29,636.30 0.02%
10,000- 14,999.......... 44 590,673.60 0.45
15,000- 19,999.......... 185 3,293,011.02 2.51
20,000- 24,999.......... 321 7,246,817.29 5.53
25,000- 29,999.......... 463 12,655,692.92 9.66
30,000- 34,999.......... 503 16,292,924.57 12.44
35,000- 39,999.......... 561 21,003,752.76 16.04
40,000- 44,999.......... 560 23,611,498.46 18.03
45,000- 49,999.......... 437 20,654,162.08 15.77
50,000- 54,999.......... 252 13,026,356.24 9.95
55,000- 59,999.......... 98 5,518,354.27 4.21
60,000- 64,999.......... 71 4,446,351.09 3.40
65,000- 69,999.......... 35 2,278,577.04 1.74
70,000- 74,999.......... 1 70,000.00 0.05
75,000- 79,999.......... 2 158,823.08 0.12
85,000- 89,999.......... 1 88,000.00 0.07
----- --------------- ------
TOTAL................... 3,537 $130,964,630.72 100.00%
</TABLE>
As of the Statistical Calculation Date, the average remaining loan unpaid
Principal Balance of the Initial Mortgage Loans is approximately $37,027.04.
MORTGAGED PROPERTY TYPES
<TABLE>
<CAPTION>
PERCENTAGE OF
STATISTICAL CALCULATION STATISTICAL CALCULATION
NUMBER OF DATE AGGREGATE DATE AGGREGATE
INITIAL MORTGAGE UNPAID UNPAID
PROPERTY TYPES LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
-------------- ---------------- ----------------------- -----------------------
<S> <C> <C> <C>
Single Family........... 3,382 $125,475,928.94 95.81%
Low-rise Condo.......... 117 4,021,463.09 3.07
High-rise Condo......... 6 245,062.00 0.19
PUD..................... 22 844,292.02 0.64
2-Unit.................. 7 235,000.00 0.18
3-Unit.................. 3 142,884.67 0.11
----- --------------- ------
TOTAL................. 3,537 $130,964,630.72 100.00%
</TABLE>
S-28
<PAGE>
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
PERCENTAGE OF
STATISTICAL CALCULATION STATISTICAL CALCULATION
NUMBER OF DATE AGGREGATE DATE AGGREGATE
INITIAL MORTGAGE UNPAID UNPAID
STATE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----- ---------------- ----------------------- -----------------------
<S> <C> <C> <C>
Alabama................. 2 $ 64,625.00 0.05%
Alaska.................. 28 1,251,322.43 0.96
Arizona................. 127 4,847,204.56 3.70
California.............. 1,257 50,066,711.58 38.23
Colorado................ 142 5,358,470.13 4.09
Delaware................ 2 80,944.27 0.06
Florida................. 80 2,622,290.81 2.00
Georgia................. 94 3,210,922.38 2.45
Hawaii.................. 3 134,850.70 0.10
Idaho................... 108 3,947,080.88 3.01
Illinois................ 15 595,149.53 0.45
Indiana................. 87 2,827,379.56 2.16
Iowa.................... 165 5,834,868.24 4.46
Kansas.................. 103 3,314,107.45 2.53
Kentucky................ 17 585,962.24 0.45
Louisiana............... 75 2,511,173.66 1.92
Maryland................ 39 1,546,592.00 1.18
Michigan................ 4 153,184.00 0.12
Minnesota............... 75 2,579,823.14 1.97
Mississippi............. 4 101,291.28 0.08
Missouri................ 50 1,476,344.29 1.13
Montana................. 56 2,162,754.25 1.65
Nebraska................ 101 3,557,228.33 2.72
Nevada.................. 30 986,692.49 0.75
New Mexico.............. 10 313,680.43 0.24
New York................ 1 40,000.00 0.03
North Carolina.......... 114 4,001,614.61 3.06
Ohio.................... 176 6,688,533.85 5.11
Oklahoma................ 90 2,738,220.63 2.09
Oregon.................. 50 1,819,289.16 1.39
South Carolina.......... 62 2,101,771.17 1.60
South Dakota............ 39 1,353,388.36 1.03
Tennessee............... 38 1,236,385.54 0.94
Utah.................... 13 512,258.44 0.39
Virginia................ 47 1,767,764.32 1.35
Washington.............. 155 5,745,193.77 4.39
Wisconsin............... 19 573,485.98 0.44
Wyoming................. 59 2,256,071.26 1.72
----- --------------- ------
TOTAL................. 3,537 $130,964,630.72 100.00%
</TABLE>
No more than approximately 0.42% of the Initial Mortgage Loans are secured
by Mortgaged Properties located in any one zip code. The Seller expects that
as of the Cut-Off Date no more than approximately 37.52% of the Initial
Mortgage Loans to be transferred to the Trust Fund on the Closing Date will be
secured by Mortgaged Properties located in the State of California.
S-29
<PAGE>
SAMPLE MORTGAGE POOL
Certain information necessary to calculate the Combined Loan-to-Value Ratios
(as defined below) and to determine the Credit Bureau Risk Scores of the
Mortgage Loans as of the Statistical Calculation Date were not readily
available from the Seller as of the date of this Prospectus Supplement. As a
result, in order to compile the data in the following tables, 149 Mortgage
Loans were randomly selected from an initial pool of 3,548 mortgage loans.
After a review of such pool of mortgage loans, the number of Initial Mortgage
Loans included as of the Statistical Calculation Date was reduced by eleven
mortgage loans, one of which was included in the initial sample of 149
Mortgage Loans. The information set forth below was manually collected from
the 148 remaining Mortgage Loans, all of which are included in the pool of
Initial Mortgage Loans as of the Statistical Calculation Date. All amounts set
forth in the following tables have been calculated based upon such 148
Mortgage Loans, which have an aggregate unpaid principal balance of $5,421,181
as of the Statistical Calculation Date (the "Sample Mortgage Loans"). Certain
of the Sample Mortgage Loans may not be included in the Initial Mortgage Loans
because they may prepay in full, or may be determined not to meet the
eligibility requirements for the Initial Mortgage Loans as of the Cut-Off
Date.
No assurance can be given that the characteristics of the Sample Mortgage
Loans are representative of the Initial Mortgage Loans as of the Statistical
Calculation Date or will be representative of the Initial Mortgage Loans as of
the Cut-Off Date. The current report on Form 8-K described under "--
Characteristics of the Initial Mortgage Loans" above will contain, among other
things, Combined Loan-to-Value Ratios and Credit Bureau Risk Scores regarding
all of the Mortgage Loans.
COMBINED LOAN-TO-VALUE RATIOS
<TABLE>
<CAPTION>
PERCENTAGE OF
STATISTICAL CALCULATION STATISTICAL CALCULATION
COMBINED NUMBER OF DATE AGGREGATE DATE AGGREGATE
LOAN-TO-VALUE SAMPLE MORTGAGE UNPAID UNPAID
RATIOS LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------- --------------- ----------------------- -----------------------
<S> <C> <C> <C>
90- 94........ 1 $ 29,500.00 0.54%
95- 99........ 3 104,400.00 1.93
100-104........ 6 178,363.77 3.29
105-109........ 5 172,141.06 3.18
110-114........ 19 735,615.34 13.57
115-119........ 34 1,226,843.70 22.63
120-124........ 75 2,770,034.19 51.10
125............ 5 204,282.59 3.77
--- ------------- ------
TOTAL........ 148 $5,421,180.65 100.00%
</TABLE>
The minimum and maximum Combined Loan-to-Value Ratios of the Sample Mortgage
Loans as of the Statistical Calculation Date are approximately 93% and 125%,
respectively, and the weighted average Combined Loan-to-Value Ratio as of the
Statistical Calculation Date of the Sample Mortgage Loans is approximately
119%. The "Combined Loan-to-Value Ratio" of a Mortgage Loan is the ratio,
expressed as a percentage, equal to the sum of any outstanding senior liens
mortgage balance plus the original balance of the Mortgage Loan divided by the
appraised value of the Mortgaged Property. In the instance where more than one
appraisal was performed on the subject property, the lesser of the two values
was used to determine the Combined Loan-to-Value Ratio.
S-30
<PAGE>
CREDIT BUREAU RISK SCORES
<TABLE>
<CAPTION>
PERCENTAGE OF
STATISTICAL CALCULATION STATISTICAL CALCULATION
NUMBER OF DATE AGGREGATE DATE AGGREGATE
CREDIT BUREAU SAMPLE MORTGAGE UNPAID UNPAID
RISK SCORES LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------- --------------- ----------------------- -----------------------
<S> <C> <C> <C>
610-619........ 1 $ 25,300.00 0.47%
620-629........ 10 300,596.90 5.54
630-639........ 18 623,292.99 11.50
640-649........ 20 685,472.27 12.64
650-659........ 17 609,662.47 11.25
660-669........ 17 633,068.45 11.68
670-679........ 12 506,032.29 9.33
680-689........ 13 575,526.61 10.62
690-699........ 8 310,520.96 5.73
700-709........ 10 374,484.10 6.91
710-719........ 7 269,144.37 4.96
720-729........ 7 229,615.01 4.24
730-739........ 0 0.00 0.00
740-749........ 3 118,464.23 2.19
750-759........ 3 101,000.00 1.86
760-769........ 2 59,000.00 1.09
--- ------------- ------
TOTAL........ 148 $5,421,180.65 100.00%
</TABLE>
As of the Statistical Calculation Date, the weighted average Credit Bureau
Risk Score of the Sample Mortgage Loans is 672.
The information set forth in the preceding section "Description of the
Mortgage Loans" has been based upon information provided by the Seller and
tabulated by the Depositor. None of the Depositor, the Trustee, the Servicer,
the Underwriter or the Certificate Insurer make any representation as to the
accuracy or completeness of such information.
CONVEYANCE OF SUBSEQUENT MORTGAGE LOANS
The Pooling and Servicing Agreement permits the Trust Fund to acquire
approximately $ aggregate principal balance of Subsequent Mortgage Loans.
Accordingly, the statistical characteristics of the Mortgage Loans will vary
as of any Subsequent Cut-Off Date upon the acquisition of Subsequent Mortgage
Loans.
The obligation of the Trust Fund to purchase the Subsequent Mortgage Loans
on a Subsequent Transfer Date is subject to the following requirements among
others: (i) such Subsequent Mortgage Loan may not be more than 30 days
contractually delinquent as of the related Subsequent Cut-Off Date; (ii) the
remaining term to maturity of such Subsequent Mortgage Loan may not exceed 20
years; (iii) such Subsequent Mortgage Loan has a Mortgage Interest Rate of at
least 10%; (iv) the Subsequent Mortgage Loans in the aggregate have a weighted
average Combined Loan-to-Value Ratio (based on the original appraisal) not
materially greater than that of the Initial Mortgage Loans as of the Cut-Off
Date; (v) such Subsequent Mortgage Loan is a fully amortizing loan with level
payments generally over 15 years; (vi) such Subsequent Mortgage Loan is
secured by a residential dwelling; (vii) the related Trustee's Mortgage File
with respect to such Subsequent Mortgage Loan shall have been delivered to the
Trustee; (viii) no such Subsequent Mortgage Loan is secured by an investor
property or associated with the purchase of a home; and (ix) following the
purchase of such Subsequent Mortgage Loans by the Trust Fund, the Mortgage
Loans (including the Subsequent Mortgage Loans) (a) will have a weighted
average Mortgage Interest Rate of at least 13.90%; (b) will have a weighted
average Combined Loan-to-Value Ratio (based on the original appraisal) not
materially greater than that of the Initial Mortgage Loans as of the Cut-Off
S-31
<PAGE>
Date; (c) will have no Mortgage Loan with a Principal Balance in excess of
$75,000; (d) will not have any non-owner occupied properties; (e) will have a
weighted average subordinate mortgage ratio not materially greater than that
of the Initial Mortgage Loans as of the Cut-Off Date; (f) will not have a
concentration in a single zip code in excess of 2% by aggregate Principal
Balance; (g) will not have a concentration in Los Angeles County, California
in excess of 10% by aggregate Principal Balance; (h) will not have a
concentration in any other county in excess of 8% by aggregate Principal
Balance; (i) will not have a concentration of Credit Bureau Risk Scores under
620 that is by percentage of aggregate Principal Balance not materially
greater than that of the Initial Mortgage Loans as of the Cut-Off Date; (j)
will not have a concentration of Mortgage Loans with self employed mortgagors
in excess of 4% by aggregate Principal Balance; (k) will have a weighted
average Credit Bureau Risk Score not materially less than that of the Initial
Mortgage Loans as of the Cut-Off Date and a weighted average DTI not
materially greater than that of the Initial Mortgage Loans as of the Cut-Off
Date and (l) will have a concentration of Mortgage Loans secured by single
family residences of at least 92% by aggregate Principal Balance. The Pooling
and Servicing Agreement will provide that any of such requirements may be
waived or modified in any respect upon prior written consent of the
Certificate Insurer and certain other parties.
MANDATORY REPURCHASE OR SUBSTITUTION OF MORTGAGE LOANS
The Seller is required, with respect to Mortgage Loans that are found by the
Trustee to have defective documentation, or in respect of which the Seller has
breached a representation or warranty, to repurchase such Mortgage Loans or
substitute such Mortgage Loan with a Qualified Substitute Mortgage Loan. See
"Prepayment and Yield Considerations" and "Description of the Certificates--
Assignment of Mortgage Loans and --Representations and Warranties of the
Seller" herein.
THE SELLER
GENERAL
Preferred Credit Corporation (the "Seller") is a California corporation with
its principal offices located in Irvine, California. The Seller has 5 offices
located in California along with offices located in Aurora, Colorado, Phoenix,
Arizona, Lake Oswego, Oregon, Boca Raton, Florida and employs in excess of 200
people. Founded in 1989 as a sole proprietorship mortgage broker, it was
subsequently incorporated in January 1992 under the name T.A.R. Preferred
Mortgage Corporation and began originating subordinate mortgage loans in 1994.
The Seller changed its name to Preferred Credit Corporation in December 1996.
The Seller originates both first and subordinate lien mortgage loans secured
by one- to four-family residences. The Seller is approved as a non-supervised
lender by the U.S. Department of Housing and Urban Development ("HUD").
Additionally, the Seller is licensed by the State of California as a
residential mortgage lender and is licensed or otherwise permitted to lend in
excess of 40 other states. As of December 31, 1996, the Seller had over $126
million in assets.
The Seller will sell the Mortgage Loans to the Depositor pursuant to the
Sale and Purchase Agreement. On the Closing Date, the Depositor will acquire
the Mortgage Loans from the Seller and simultaneously therewith transfer the
Mortgage Loans to the Trust Fund.
S-32
<PAGE>
DESCRIPTION OF THE SALE AND PURCHASE AGREEMENT
The Mortgage Loans to be transferred to the Trust Fund by the Depositor will
be purchased by the Depositor from the Seller pursuant to the Sale and
Purchase Agreement to be entered into between the Depositor, as purchaser (the
"Purchaser") of the Mortgage Loans, and the Seller, as unaffiliated seller of
the Mortgage Loans. Under the Sale and Purchase Agreement, the Seller will
agree to transfer the Initial Mortgage Loans to the Depositor and the
Subsequent Mortgage Loans to the Trust Fund, as assignee of the Purchaser
under the Sale and Purchase Agreement. Pursuant to the Pooling and Servicing
Agreement, the Mortgage Loans will be immediately transferred by the Depositor
to the Trust Fund, and the Depositor will assign its rights in, to and under
the Sale and Purchase Agreement to the Trust Fund. In the Sale and Purchase
Agreement, the Seller will make representations and warranties with respect to
the Mortgage Loans. In the event of a breach of any such representations and
warranties which has a material adverse effect on the interest of the
Certificateholders or the Certificate Insurer, the Seller will repurchase or
substitute for the Mortgage Loans as described in the Pooling and Servicing
Agreement.
The Seller has also agreed to indemnify the Depositor and the Trust Fund
from and against certain losses, liabilities and expenses (including
reasonable attorneys' fees) suffered or sustained pursuant to the Sale and
Purchase Agreement.
ASSIGNMENT TO THE TRUST FUND
The Seller expressly acknowledges and consents to the Depositor's transfer
of its rights relating to the Mortgage Loans under the Sale and Purchase
Agreement to the Trust Fund. The Seller also agrees to perform its obligations
under the Sale and Purchase Agreement for the benefit of the Trust Fund.
TERMINATION
The Sale and Purchase Agreement will terminate upon the termination of the
Trust Fund except that any indemnity provided thereunder shall survive such
termination.
S-33
<PAGE>
THE SERVICER
Advanta Mortgage Corp. USA (in its capacity as servicer, the "Servicer")
will act as servicer for the Mortgage Loans pursuant to the Pooling and
Servicing Agreement. The Servicer is an indirect subsidiary of Advanta Corp.,
a Delaware corporation ("Advanta Parent"), a publicly-traded company based in
Horsham, Pennsylvania with assets as of December 31, 1996 of approximately
$5.6 billion. Advanta Parent, through its subsidiaries (including the
Servicer) managed assets (including mortgage loans) in excess of $19.2 billion
as of December 31, 1996.
As of December 31, 1996, the Servicer and its subsidiaries were servicing
approximately 43,300 Mortgage Loans in the "Owned and Managed Servicing
Portfolio" representing an aggregate outstanding principal balance of
approximately $2.6 billion, and approximately 62,800 mortgage loans in the
"Third-Party Servicing Portfolio" representing an aggregate outstanding
principal balance of approximately $3.7 billion.
The Servicer's "Owned and Managed Servicing Portfolio" consists of the
Servicer's servicing portfolio of fixed and variable rate mortgage loans
excluding certain loans serviced by the Servicer that were not originated or
purchased and reunderwritten by the Servicer or any affiliate thereof. The
Servicer's "Third-Party Servicing Portfolio" consists of mortgage loans being
serviced for third parties, including the Seller, on a contract servicing
basis. Historical loss and delinquency data of the Servicer's "Owned and
Managed Servicing Portfolio" have not been included herein because loans
similar to the mortgage loans originated by the Seller do not represent a
significant portion of such portfolio. Historical loss and delinquency data of
the Servicer's "Third-Party Servicing Portfolio" have not been included herein
because such information is not available.
In addition to the rights of the Trustee with respect to the Servicer, the
Certificate Insurer will have certain rights, described in the Pooling and
Servicing Agreement, with respect to the removal or resignation of the
Servicer, the ability of the Servicer to assign any of its obligations under
the Pooling and Servicing Agreement and the appointment of a successor
Servicer.
The Certificates will not represent an interest in or obligation of, nor are
the Mortgage Loans guaranteed by the Servicer or Advanta Parent, nor will they
be insured or guaranteed by the Federal Deposit Insurance Corporation (the
"FDIC") or any other governmental agency or instrumentality.
S-34
<PAGE>
PREPAYMENT AND YIELD CONSIDERATIONS
The weighted average life of, and, if purchased at other than par, the yield
to maturity on, a Class A Certificate will be directly related to the rate of
payment of principal of the Mortgage Loans, including for this purpose
voluntary payment in full of Mortgage Loans prior to stated maturity,
liquidations due to defaults, casualties and condemnations, repurchases of or
substitutions for Mortgage Loans by the Seller as required or permitted under
the Pooling and Servicing Agreement and the number, if any, of Subsequent
Mortgage Loans purchased.
The actual rate of principal prepayments on pools of mortgage loans is
influenced by a variety of economic, tax, geographic, demographic, social,
legal and other factors and has fluctuated considerably in recent years. In
addition, the rate of principal prepayments may differ among pools of mortgage
loans at any time because of specific factors relating to the mortgage loans
in the particular pool, including, among other things, the age of the mortgage
loans, the geographic locations of the properties securing the loans and the
extent of the mortgagors' equity in such properties, and changes in the
mortgagors' housing needs, job transfers and employment.
The rate of prepayment on the Mortgage Loans cannot be predicted.
Subordinate lien mortgage loans similar to the Mortgage Loans as described
herein have been originated in significant volume only during the past few
years and the Seller is not aware of any publicly available studies or
statistics on the rate of prepayment of such Mortgage Loans. Generally, the
Mortgage Loans are not viewed by borrowers as permanent financing.
Accordingly, the Mortgage Loans may experience a higher rate of prepayment
than traditional first mortgage loans. Another factor affecting prepayment
experience is that the principal balance of the average Mortgage Loan is
smaller than that of the average conventional first-lien mortgage loan. A
smaller principal balance may be easier for a borrower to prepay than a larger
balance and, therefore, a higher prepayment rate may result for the pool of
Mortgage Loans than for a pool of first-lien mortgage loans, irrespective of
the relative average interest rates and the general interest rate environment.
In addition, in order to refinance a first-lien mortgage loan, the borrower
must generally repay any junior liens. However, a small principal balance may
make refinancing a Mortgage Loan at a lower interest rate less attractive to
the borrower as the perceived impact to the borrower of lower interest rates
on the size of the monthly payment may not be significant. Other factors that
might be expected to affect the prepayment rate of the pool of Mortgage Loans
include general economic conditions, the amounts of and interest rates on the
underlying senior mortgage loans, and the tendency of borrowers to use real
property mortgage loans as long-term financing for home purchase and junior
liens as shorter-term financing for a variety of purposes, which may include
the direct or indirect financing of home improvement, education expenses, debt
consolidation, purchases of consumer durables such as automobiles, appliances
and furnishings and other consumer purposes. Furthermore, because at
origination the majority of the Mortgage Loans had Combined Loan-to-Value
Ratios that exceeded 100%, the related borrowers for these Mortgage Loans will
generally have significantly less opportunity to refinance the indebtedness
secured by the related Mortgaged Properties, and, therefore, a lower
prepayment rate may result from the pool of Mortgage Loans than for a pool of
mortgage loans (including first or junior lien) that have Combined Loan-to-
Value Ratios less than 100%. Given these characteristics, the Mortgage Loans
may experience a higher or lower rate of prepayment than first-lien mortgage
loans.
Other factors influencing the prepayment experience of the Trust Fund with
respect to the Mortgage Loans may include homeowner mobility and changes
affecting the deductibility for Federal income tax purposes of interest
payments on the Mortgage Loans. Generally, the Mortgage Loans are prepayable
by the related Mortgagors without penalty. All of the Mortgage Loans contain
"due-on-sale" provisions, and the Servicer is required by the Agreement to
enforce such provisions, unless such enforcement is not permitted by
applicable law. The enforcement of a "due-on-sale" provision will have the
same effect as a prepayment of the related Mortgage Loan. See "Certain Legal
Aspects of the Mortgage Loans--Due-on-Sale Clauses in Mortgage Loans" herein.
No assurance can be given as to the level of prepayments that will be
experienced by the Trust Fund and it can be expected that a portion of
borrowers will not prepay their Mortgage Loans to any significant degree.
S-35
<PAGE>
The effective yield to the holders of the Class A Certificates will be lower
than the yield otherwise produced by the applicable Pass-Through Rate, because
the distribution of the interest accrued during each Due Period (a calendar
month consisting of thirty days) will not be made until the Distribution Date
occurring in the month following such Due Period. See "Description of the
Certificates--Class A Interest Distribution Amounts" herein. This delay will
result in funds being passed through to the holders of the Class A
Certificates approximately 25 days after the end of the monthly accrual
period, during which 25-day period no interest will accrue on such funds. As
discussed in greater detail below, greater than anticipated distributions of
principal can also affect the yield on Class A Certificates purchased at a
price greater or less than par.
The rate of prepayments with respect to conventional mortgage loans has
fluctuated significantly in recent years. In general, if prevailing interest
rates fall significantly below the interest rates at the time of origination,
mortgage loans may be subject to higher prepayment rates than if prevailing
rates remain at or above those at the time such mortgage loans were
originated. Conversely, if prevailing interest rates rise appreciably above
the interest rates at the time of origination, mortgage loans may experience a
lower prepayment rate than if prevailing rates remain at or below those at the
time such mortgage loans were originated. However, there can be no assurance
that the Mortgage Loans will conform to the prepayment experience of
conventional mortgage loans or to any past prepayment experience or any
published prepayment forecast. No assurance can be given as to the level of
prepayments on Mortgage Loans that the Trust Fund will experience.
As indicated above, if purchased at other than par, the yield to maturity on
a Class A Certificate will be affected by the rate of the payment of principal
of the Mortgage Loans. If the actual rate of payments on the Mortgage Loans is
slower than the rate anticipated by an investor who purchases a Class A
Certificate at a discount, the actual yield to such investor will be lower
than such investor's anticipated yield. If the actual rate of payments on the
Mortgage Loans is faster than the rate anticipated by an investor who
purchases a Class A Certificate at a premium, the actual yield to such
investor will be lower than such investor's anticipated yield.
For purposes of receiving distributions with respect to principal, the Class
A Certificates have been divided into six "sequential paying" classes. On each
Distribution Date, the Holders of the outstanding Class A Certificates with
the lowest numerical designation will be entitled to receive 100% of the
distribution with respect to the Class A Principal Distribution Amount on such
Distribution Date, until the related Class Principal Balance has been reduced
to zero; any remaining Class A Principal Distribution Amount on a Distribution
Date, and the Class A Principal Distribution Amount for each succeeding
Distribution Date, will be paid to the Class A Certificates with the next
lowest numerical designation, until each Class A Certificate has been paid in
full.
EXCESS CASHFLOW AND OVERCOLLATERALIZATION REDUCTION AMOUNT DISTRIBUTIONS
An overcollateralization feature has been designed to accelerate the
principal amortization of the Class A Certificates relative to the principal
amortization of the Mortgage Loans. If on any Distribution Date, the Required
Overcollateralization Level exceeds the Overcollateralization Amount, any
Excess Cashflow will be distributed sequentially to the holders of each Class
of Class A Certificates until the principal of each Class has been paid in
full. Once the Overcollateralization Amount equals the Required
Overcollateralization Level for such Distribution Date (i.e., the Excess
Overcollateralization Amount equals or exceeds zero), distributions of Excess
Cashflow otherwise distributable to the holders of the Class A Certificates as
described above will instead be distributed to the holders of the Subordinate
Certificates, thereby reducing the rate of and under certain circumstances
delaying the principal amortization with respect to the Class A Certificates,
until the Excess Overcollateralization Amount is reduced to zero. If purchased
at a premium or a discount, the yield to maturity on a Class A Certificate
will be affected by the extent to which any Excess Cashflow is distributed (a)
as principal to the holders of the Class A Certificates or (b) to the holders
of the Subordinate Certificates in lieu of distribution of principal to the
holders of the Class A Certificates. If the actual rate of such Excess
Cashflow distributions on the Class A Certificates is slower than the rate
anticipated by an investor who purchases a Class A Certificate at a discount,
the actual yield to such investor will be lower than such investor's
anticipated yield. If the actual rate of Excess Cashflow distributions is
faster than the rate anticipated by an investor who purchases a Class A
Certificate at a premium, the actual yield to such investor will be lower than
such investor's anticipated yield.
S-36
<PAGE>
The amount of Excess Cashflow on any Distribution Date will be affected by the
actual amount of interest received, collected or recovered in respect of the
Mortgage Loans during the related Collection Period.
An additional overcollateralization feature has been designed to limit the
accelerated amortization of the Class A Certificates as described in the
preceding paragraph. On each Distribution Date on which the Required
Overcollateralization Level is permitted to decrease or "step down", and as to
which the Excess Overcollateralization Amount is, or, after taking into
account all other distributions to be made on such Distribution Date would be,
greater than zero, amounts which would otherwise be distributed as principal
to the holders of the Class A Certificates on such Distribution Date shall
instead be distributed to the holders of the Subordinate Certificates, thereby
reducing the rate of and under certain circumstances delaying the principal
amortization with respect to the Class A Certificates, until the Excess
Overcollateralization Amount is reduced to zero. Again, if purchased at a
premium or a discount, the yield to maturity on a Class A Certificate will be
affected by the extent to which any Overcollateralization Reduction Amount is
paid to the holders of the Subordinate Certificates in lieu of payment of
principal to the holders of the Class A Certificates. If the actual
distributions of any Overcollateralization Reduction Amount to the holders of
the Subordinate Certificates occurs sooner than anticipated by an investor who
purchases a Class A Certificate at a discount, the actual yield to such
investor may be lower than such investor's anticipated yield. If the actual
distributions of any Overcollateralization Reduction Amount to the holders of
the Subordinate Certificates occurs later than anticipated by an investor who
purchases a Class A Certificate at a premium, the actual yield to such
investor may be lower than such investor's anticipated yield. The amount of
the Overcollateralization Reduction Amount, if any, distributable on any
Distribution Date will be affected by the Required Overcollateralization
Level, which is affected by the actual default and delinquency experience of
the pool of Mortgage Loans and the principal amortization of the pool of
Mortgage Loans.
Because the Seller does not expect any Net Liquidation Proceeds to be
realized on the Mortgage Loans, if a Delinquency Interest Advance or Servicer
Advance is made by the Servicer, it is likely that any such Advance will
become a Nonrecoverable Advance. The Servicer is entitled to reimbursement for
Nonrecoverable Advances from funds available on all the Mortgage Loans in the
Trust Fund. To the extent the Servicer recovers a Nonrecoverable Advance from
collections or proceeds from other Mortgage Loans, it will have the effect of
decreasing Excess Cashflow, which will result in less funds being available to
create or maintain the Overcollateralization Amount, thereby reducing the rate
at which the Class A Certificates amortize. However, should Excess Cashflow be
reduced to zero and an Overcollateralization Deficit arise, a corresponding
prepayment of the Class A Certificates will occur.
REINVESTMENT RISK
The reinvestment risk with respect to an investment in the Class A
Certificates will be affected by the rate and timing of principal payments
(including prepayments) in relation to the prevailing interest rates at the
time of receipt of such principal payments. For example, during periods of
falling interest rates, holders of the Class A Certificates are likely to
receive an increased amount of principal payments from the Mortgage Loans at a
time when such holders may be unable to reinvest such payments in investments
having a yield and rating comparable to the Class A Certificates. Conversely,
during periods of rising interest rates, holders of the Class A Certificates
are likely to receive a decreased amount of principal prepayments from the
Mortgage Loans at a time when such holders may have an opportunity to reinvest
such payments in investments having a higher yield than, and a comparable
rating to, the Class A Certificates.
MODELING ASSUMPTIONS
The tables below were prepared on the basis of the assumptions in the
following paragraphs; there are discrepancies between the characteristics of
the actual Mortgage Loans and the characteristics of the Mortgage Loans
assumed in preparing the tables. Any such discrepancy may have an effect upon
the weighted average lives of the Class A Certificates set forth in the
tables. In addition, since the actual Mortgage Loans have characteristics
which differ from those assumed in preparing the tables set forth below, the
distributions of principal on the Class A Certificates may be made earlier or
later than as indicated in the tables. For the
S-37
<PAGE>
purpose of this table, the Final Scheduled Maturity Date for the Class A
Certificates is expected to be , , which is 12 months after the latest
possible final stated maturity date of any Mortgage Loan. The weighted average
life of the Class A Certificates is likely to be shorter than would be the
case if payments actually made on the Mortgage Loans conformed to the
foregoing assumption, and the final Distribution Date with respect to any
Class of the Class A Certificates could occur significantly earlier than the
Final Scheduled Maturity Date, because (i) Excess Cashflow will be used to
make accelerated payments of principal (i.e., Overcollateralization Increase
Amounts) to the Class A Certificates, which payments will have the effect of
shortening the weighted average lives of the Class A Certificates, (ii)
prepayments (including, for this purpose, prepayments attributable to
foreclosure, liquidation, repurchase and the like) on Mortgage Loans are
likely to occur, (iii) twelve months have been added to obtain the Final
Scheduled Maturity Date above, (iv) collections of principal in respect of the
Overcollateralization Amount will be distributed to the Class A Certificates,
and (v) the Seller or the Servicer (or if the Servicer fails to do so, the
Certificate Insurer) may cause a liquidation of the Trust Fund when the
aggregate outstanding Principal Balance of the Mortgage Loans is with respect
to the Seller less than 10% and with respect to the Servicer (or if the
Servicer fails to do so, the Certificate Insurer) less than 5% of the Maximum
Collateral Amount.
"Weighted average life" refers to the average amount of time that will
elapse from the date of issuance of a security until each dollar of principal
of such security is scheduled to be repaid to an investor. The weighted
average life of the Class A Certificates will be influenced by the rate at
which principal of the Mortgage Loans is paid, which may be in the form of
scheduled amortization or prepayments (for this purpose, the term "prepayment"
includes liquidations due to default), the rate at which Excess Cashflow is
distributed to holders of the Class A Certificates as described herein, and
the extent to which Overcollateralization Reduction Amount is paid to the
Holders of the Subordinate Certificates. Prepayments on mortgage loans are
commonly measured relative to a prepayment standard or model. The model used
in this Prospectus Supplement is the prepayment assumption (the "Prepayment
Assumption") which represents an assumed rate of prepayment each month
relative to the then outstanding principal balance of a pool of mortgage loans
for the life of such mortgage loans. 100% Prepayment Assumption assumes
conditional prepayment rates of 4% per annum of the then outstanding principal
balance of the Mortgage Loans in the first month of the life of the mortgage
loans and an additional .909% per annum in each month thereafter until the
twelfth month. Beginning in the twelfth month and in each month thereafter
during the life of the mortgage loans, a 100% Prepayment Assumption assumes a
conditional prepayment rate of 14% per annum each month. As used in the table
below, 0% Prepayment Assumption assumes prepayment rates equal to 0% of the
Prepayment Assumption i.e., no prepayments. Correspondingly, 100% Prepayment
Assumption assumes prepayment rates equal to 100% of the Prepayment
Assumption, and so forth. The Prepayment Assumption does not purport to be a
historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of mortgage loans, including the
Mortgage Loans. The Depositor believes that no existing statistics of which it
is aware provide a reliable basis for holders of Class A Certificates to
predict the amount or the timing of receipt of prepayments on the Mortgage
Loans.
The following table regarding the Class A Certificates has been prepared
assuming that (i) all calculations are done on the basis of a 360-day year
consisting of twelve 30-day months and the interest rate is fixed for the
remaining term to maturity at the weighted average Mortgage Interest Rate
noted in (xvi); (ii) payment dates on each Mortgage Loan are the 1st day of
the month; (iii) all scheduled monthly payments on the Mortgage Loans are made
in a timely fashion and there are no delinquencies; (iv) all prepayments
represent prepayments in full and there are no Prepayment Interest Shortfalls;
(v) distributions on the Class A Certificates are made on the 25th day of each
month regardless of the day on which the Distribution Date actually occurs,
commencing on April 25, 1997; (vi) the Closing Date is March 18, 1997; (vii)
the Mortgage Loans will prepay at the indicated Prepayment Assumptions set
forth below, (viii) each Mortgage Loan is a fully amortizing loan with level
payments, (ix) none of the Holders of the Class R Certificates, the Servicer
or the Certificate Insurer exercise their right of optional termination, (x)
2.50% (by Principal Balance) of interest losses per annum occur on the
synthetic Mortgage Loans described below, (xi) fees are deducted for the
Servicer, the Certificate Insurer and the Trustee, (xii) the initial Class A
Principal Balance is equal to $200,000,000, (xiii) the Capitalized Interest
Account has sufficient funds on deposit to cover shortfalls in interest of the
Class A Certificates during the Pre-
S-38
<PAGE>
Funding Period attributable to the pre-funding feature; (xiv) the initial
Overcollateralization Amount is $6,185,567; (xv) the Required
Overcollateralization Level is the amount specified by the Certificate
Insurer; and (xvi) the Mortgage Pool consists of seven synthetic mortgages
having the following characteristics:
<TABLE>
<CAPTION>
INITIAL MORTGAGE LOANS
WEIGHTED
AVERAGE
WEIGHTED AVERAGE REMAINING
ORIGINAL TERM TO TERM TO
AGGREGATE WEIGHTED AVERAGE MATURITY MATURITY
PRINCIPAL BALANCE MORTGAGE INTEREST RATE (IN MONTHS) (IN MONTHS)
----------------- ---------------------- ---------------- -----------
<S> <C> <C> <C>
$ 950,312.43............. 14.95% 132.56 128.98
27,090,415.26............. 14.01 179.91 177.69
92,241,519.22............. 14.02 179.98 179.73
10,672,383.81............. 14.19 238.29 237.94
23,674,545.30............. 14.25 183.00 183.00
</TABLE>
SUBSEQUENT MORTGAGE LOANS (ASSUMED TO BE ACQUIRED BY THE TRUST FUND IN APRIL
1997 AND
MAY 1997, RESPECTIVELY).
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
WEIGHTED AVERAGE REMAINING
ORIGINAL TERM TO TERM TO
AGGREGATE WEIGHTED AVERAGE MATURITY MATURITY
PRINCIPAL BALANCE MORTGAGE INTEREST RATE (IN MONTHS) (IN MONTHS)
----------------- ---------------------- ---------------- -----------
<S> <C> <C> <C>
$25,773,196................ 14.04% 183.00 183.00
25,773,196................ 14.04 183.00 183.00
</TABLE>
The following table indicates the weighted average life of each Class of
Class A Certificates, and sets forth the percentages of the Original Principal
Balance of each such Class of Class A Certificates that would be outstanding
after each of the dates shown at various percentages of the Prepayment
Assumption, based on the assumptions described above.
S-39
<PAGE>
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING AT THE FOLLOWING
PERCENTAGES OF THE PREPAYMENT ASSUMPTION
<TABLE>
<CAPTION>
CLASS A-1 CLASS A-2 CLASS A-3
-------------------------------- -------------------------------- --------------------------------
PAYMENT DATE 0% 75% 100% 125% 150% 200% 0% 75% 100% 125% 150% 200% 0% 75% 100% 125% 150% 200%
------------ --- --- ---- ---- ---- ---- --- --- ---- ---- ---- ---- --- --- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage.. 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
March 25, 1997...... 76 49 39 30 21 2 100 100 100 100 100 100 100 100 100 100 100 100
March 25, 1998...... 53 0 0 0 0 0 100 76 41 8 0 0 100 100 100 100 68 0
March 25, 1999...... 41 0 0 0 0 0 100 3 0 0 0 0 100 100 43 0 0 0
March 25, 2000...... 28 0 0 0 0 0 100 0 0 0 0 0 100 21 0 0 0 0
March 25, 2001...... 13 0 0 0 0 0 100 0 0 0 0 0 100 0 0 0 0 0
March 25, 2002...... 0 0 0 0 0 0 93 0 0 0 0 0 100 0 0 0 0 0
March 25, 2003...... 0 0 0 0 0 0 60 0 0 0 0 0 100 0 0 0 0 0
March 25, 2004...... 0 0 0 0 0 0 22 0 0 0 0 0 100 0 0 0 0 0
March 25, 2005...... 0 0 0 0 0 0 0 0 0 0 0 0 73 0 0 0 0 0
March 25, 2006...... 0 0 0 0 0 0 0 0 0 0 0 0 10 0 0 0 0 0
March 25, 2007...... 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
March 25, 2008...... 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
March 25, 2009...... 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
March 25, 2010...... 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
March 25, 2011...... 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
March 25, 2012...... 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
March 25, 2013...... 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
March 25, 2014...... 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
March 25, 2015...... 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
March 25, 2016...... 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average
Life In Years(1).... 2.7 1.0 0.9 0.8 0.8 0.7 7.3 2.4 2.0 1.7 1.6 1.3 9.4 3.7 3.0 2.5 2.2 1.8
</TABLE>
- ----
(1) The weighted average life of each of the Class A Certificates is
determined by (a) multiplying the amount of each principal payment by the
number of years from the Closing Date to the related Distribution Date;
(b) adding the results; and (c) dividing the sum by the original Class A
Principal Balance of each Class of Class A Certificates.
S-40
<PAGE>
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING AT THE FOLLOWING
PERCENTAGES OF THE PREPAYMENT ASSUMPTION
<TABLE>
<CAPTION>
CLASS A-4 CLASS A-5 CLASS A-6
--------------------------------- --------------------------------- ----------------------------------
PAYMENT DATE 0% 75% 100% 125% 150% 200% 0% 75% 100% 125% 150% 200% 0% 75% 100% 125% 150% 200%
------------ ---- --- ---- ---- ---- ---- ---- --- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage.. 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
March 25, 1997...... 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100
March 25, 1998...... 100 100 100 100 100 96 100 100 100 100 100 100 100 100 100 100 100 100
March 25, 1999...... 100 100 100 94 69 34 100 100 100 100 100 100 100 100 100 100 100 100
March 25, 2000...... 100 100 77 51 30 0 100 100 100 100 100 75 100 100 100 100 100 100
March 25, 2001...... 100 75 45 21 0 0 100 100 100 100 98 0 100 100 100 100 100 85
March 25, 2002...... 100 49 20 0 0 0 100 100 100 80 0 0 100 100 100 100 98 58
March 25, 2003...... 100 26 0 0 0 0 100 100 90 0 0 0 100 100 100 97 73 40
March 25, 2004...... 100 6 0 0 0 0 100 100 7 0 0 0 100 100 100 74 54 27
March 25, 2005...... 100 0 0 0 0 0 100 43 0 0 0 0 100 100 80 56 39 17
March 25, 2006...... 100 0 0 0 0 0 100 0 0 0 0 0 100 90 62 41 27 11
March 25, 2007...... 71 0 0 0 0 0 100 0 0 0 0 0 100 70 46 29 19 6
March 25, 2008...... 40 0 0 0 0 0 100 0 0 0 0 0 100 51 32 20 12 2
March 25, 2009...... 5 0 0 0 0 0 100 0 0 0 0 0 100 34 20 12 6 0
March 25, 2010...... 0 0 0 0 0 0 0 0 0 0 0 0 82 18 10 5 2 0
March 25, 2011...... 0 0 0 0 0 0 0 0 0 0 0 0 21 2 0 0 0 0
March 25, 2012...... 0 0 0 0 0 0 0 0 0 0 0 0 10 0 0 0 0 0
March 25, 2013...... 0 0 0 0 0 0 0 0 0 0 0 0 7 0 0 0 0 0
March 25, 2014...... 0 0 0 0 0 0 0 0 0 0 0 0 4 0 0 0 0 0
March 25, 2015...... 0 0 0 0 0 0 0 0 0 0 0 0 1 0 0 0 0 0
March 25, 2016...... 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average
Life In Years(1).... 11.7 6.1 5.0 4.2 3.6 2.8 13.5 9.0 7.5 6.4 5.5 4.2 14.8 12.2 11.1 9.9 8.8 7.0
</TABLE>
- ----
(1) The weighted average life of each of the Class A Certificates is
determined by (a) multiplying the amount of each principal payment by the
number of years from the Closing Date to the related Distribution Date;
(b) adding the results; and (c) dividing the sum by the original Class A
Principal Balance of each Class of Class A Certificates.
S-41
<PAGE>
There is no assurance that prepayments will occur or, if they do occur, that
they will occur at any percentage of the Prepayment Assumption.
The Pooling and Servicing Agreement provides that none of the Certificate
Insurer, the Trust Fund, the Trustee, the Depositor or the Servicer will be
liable to any Certificateholder or Holder for any loss or damage incurred by
such Certificateholder or Holder as a result of any difference in the rate of
return received by such Certificateholder or Holder as compared to the
applicable Pass-Through Rate, with respect to any Holder of Class A
Certificates upon reinvestment of the funds received in connection with any
premature repayment of principal on the Certificates, including any such
repayment resulting from any prepayment by the Mortgagor, any liquidation of
such Mortgage Loan, or any repurchase of or substitution for any Mortgage Loan
by the Seller.
MANDATORY PREPAYMENT
The Original Pre-Funded Amount, funded from the proceeds of the sale of the
Class A Certificates may be used to acquire Subsequent Mortgage Loans. Any
amount remaining in the Pre-Funding Account at the end of the Pre-Funding
Period will be used to prepay in part the Class A Certificates on the
Distribution Date which follows the end of the Pre-Funding Period, which in no
event will be later than the June 1997 Distribution Date.
Although no assurances can be given, it is anticipated by the Seller that
the principal amount of Subsequent Mortgage Loans sold to the Trust Fund will
require the application of substantially all the amount on deposit in the Pre-
Funding Account and that there should be no material amount of principal
prepaid to the holders of the Class A Certificates.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Class A Certificates will be issued by and represent interests in
certain segregated assets of the Trust Fund. In addition to the Class A
Certificates, the Trust Fund will also issue the Subordinate Certificates. The
Subordinate Certificates are not being offered hereby.
Each Class A Certificate represents a certain fractional undivided ownership
interest in the Trust Fund created and held pursuant to the Pooling and
Servicing Agreement described below, subject to the limits and the priority of
distribution described therein. The Trust Fund consists of, without
duplication, (a) the Mortgage Loans, together with (i) all collections thereon
and proceeds thereof collected on and after the Cut-Off Date or Subsequent
Cut-off Date, as applicable (other than Monthly Payments due on each Mortgage
Loan up to and including any Due Date occurring prior to the Cut-Off Date or
related Subsequent Cut-off Date), and (ii) all mortgage files relating
thereto, (b) REO Properties and collections thereon and proceeds thereof, (c)
amounts (including Permitted Investments as may be held from time to time,
except as otherwise provided herein) on deposit in the Collection Account and
the Certificate Account, (d) the Trustee's rights with respect to the Mortgage
Loans under all insurance policies required to be maintained pursuant to the
Pooling and Servicing Agreement and any insurance proceeds, (e) Liquidation
Proceeds, (f) released mortgaged property proceeds, (g) amounts (including
Permitted Investments as may be held from time to time) on deposit in the
Capitalized Interest Account and the Pre-Funding Account and (h) all of the
income, payments and proceeds of each of the foregoing. The Trust Fund owns
all the Accounts and all collections with respect thereto. In addition, the
Depositor has caused the Certificate Insurer to issue the Certificate
Insurance Policy under which it will guarantee payments to the Class A
Certificateholders as described herein.
ASSIGNMENT OF MORTGAGE LOANS
Pursuant to the Sale and Purchase Agreement, the Seller will sell, transfer,
assign, set over and otherwise convey the Mortgage Loans without recourse to
the Depositor on the Closing Date. Pursuant to the Pooling and Servicing
Agreement, the Depositor will sell, transfer, assign, set over and otherwise
convey without recourse to
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<PAGE>
the Trustee in trust for the benefit of the Certificateholders and the
Certificate Insurer all right, title and interest in and to each Mortgage
Loan. Each such transfer will convey all right, title and interest in and to
the principal due and interest accruing, on the Mortgage Loans on and after
the Cut-Off Date.
In connection with such transfer and assignment, the Depositor will cause to
be delivered to the Trustee on the Closing Date the following documents
(collectively, with respect to each Mortgage Loan, the "Trustee's Mortgage
File") with respect to each Mortgage Loan:
(a) The original Mortgage Note, bearing all intervening endorsements
showing a complete chain of endorsements from the originator of such
Mortgage Loan to the Seller endorsed by the Seller without recourse in the
following form: "Pay to the order of Bankers Trust Company, as Trustee for
the benefit of the Certificateholders and the Certificate Insurer for
Preferred Credit Asset-Backed Certificates, Series 1997-1, without
recourse" and signed in the name of the Seller by an authorized officer;
(b) The original Mortgage with evidence of recording indicated thereon or
if such Mortgage has not been returned from the applicable recording
office, a copy of the Mortgage certified by an authorized officer of the
Seller;
(c) An original assignment of the original Mortgage, in suitable form for
recordation in the jurisdiction in which the related Mortgaged Property is
located, in the name of the Seller signed by an authorized officer (with
evidence of submission for recordation of such assignment in the
appropriate real estate recording office for such Mortgaged Property);
provided, however, that assignments of mortgages shall not be required to
be submitted for recording with respect to any Mortgage Loan which relates
to the Trustee's Mortgage File if the Trustee, each of the Rating Agencies
and the Certificate Insurer shall have received an opinion, or other
documentation acceptable to the Trustee, of counsel at the expense of the
Seller satisfactory to the Trustee, each of the Rating Agencies and the
Certificate Insurer stating that, in such counsel's opinion, the failure to
record such assignment shall not have a materially adverse effect on the
security interest of the Trustee in the Mortgage; or if the related
Mortgage has not been returned from the applicable recording office, then a
copy of such assignment certified by an authorized officer of the Seller
shall be delivered;
(d) The original of any intervening assignments of the Mortgage with
evidence of recording thereon showing a complete chain of assignment from
the originator of such Mortgage Loan to the Seller;
(e) The original of any assumption, modification, consolidation or
extension agreements with evidence of recording thereon; and
(f) The title report or policy of title insurance (or a commitment for
title insurance if the policy is being held by the title insurance company
pending recordation of the Mortgage) issued with respect to such Mortgage
Loan.
Pursuant to the Pooling and Servicing Agreement, the Trustee agrees to
execute and deliver on or prior to the Closing Date an acknowledgment of
receipt of the Certificate Insurance Policy and, for each Mortgage Loan, the
original Mortgage Note, item (a) above, with respect to the Mortgage Loans
(with any exceptions noted). The Trustee agrees, for the benefit of the
Certificateholders and the Certificate Insurer, to review (or cause to be
reviewed) each Trustee's Mortgage File within 30 days after the Closing Date
(or, with respect to any Qualified Substitute Mortgage Loan, within 30 days
after the receipt by the Trustee thereof) and to deliver a certification
generally to the effect that, as to each Mortgage Loan listed in the Mortgage
Loan Schedule, (a) all documents required to be delivered to it pursuant to
the Pooling and Servicing Agreement are in its possession and (b) each such
document has been reviewed by it and has not been mutilated, damaged, torn or
otherwise physically altered, appears regular on its face and relates to such
Mortgage Loan.
If the Trustee or the Certificate Insurer during the process of reviewing
the Trustee's Mortgage Files finds any document constituting a part of a
Trustee's Mortgage File which is not executed, has not been received or is
unrelated to the Mortgage Loans, or that any Mortgage Loan does not conform to
the requirements above or to the description thereof as set forth in the
Mortgage Loan Schedule, the Trustee or the Certificate Insurer, as applicable,
shall promptly so notify the Trustee, the Servicer, the Seller and the
Certificate Insurer. The Seller
S-43
<PAGE>
agrees to use reasonable efforts to cause to be remedied any material defect
in a document constituting part of a Trustee's Mortgage File of which it is so
notified by the Trustee. If, however, within 60 days after the Trustee's
notice to it respecting such defect the Seller has not caused to be remedied
the defect and the defect materially and adversely affects the interest of the
Holders in the Mortgage Loan or the interests of the Certificate Insurer, the
Seller will either (i) substitute in lieu of such Mortgage Loan a Qualified
Substitute Mortgage Loan and, if the then outstanding principal balance of
such Qualified Substitute Mortgage Loan is less than the applicable Principal
Balance of such Mortgage Loan as of the date of such substitution plus accrued
and unpaid interest thereon, deliver to the Servicer as part of the related
monthly remittance remitted by the Servicer the amount of any such shortfall
(the "Substitution Adjustment") or (ii) purchase such Mortgage Loan at a price
equal to the outstanding Principal Balance of such Mortgage Loan as of the
date of purchase, plus the greater of (x) all accrued and unpaid interest
thereon or (y) 30 days' interest thereon, computed at the related Mortgage
Interest Rate, plus the amount of any unreimbursed Delinquency Interest
Advances and Servicing Advances made by the Servicer in respect of such
Mortgage Loan, which purchase price shall be deposited in the Collection
Account on the next succeeding Servicer Remittence Date after deducting
therefrom any amounts received in respect of such repurchased Mortgage Loan or
Loans and being held in the Collection Account for future distribution to the
extent such amounts have not yet been applied to principal or interest on such
Mortgage Loan (see "--Payment of Available Funds" below); provided, however,
that the Seller may not purchase the Principal Balance of any Mortgage Loan
that is not in default or as to which no default is imminent pursuant to
clause (ii) preceding unless the Seller has theretofore caused to be delivered
to the Trustee and the Certificate Insurer an opinion of counsel knowledgeable
in federal income tax matters which states that such a purchase would not
constitute a prohibited transaction under the Code.
A "Qualified Substitute Mortgage Loan" is defined in the Pooling and
Servicing Agreement as any mortgage loan or mortgage loans which (i) has or
have the same or greater interest rate, (ii) relates or relate to a detached
one-family residence or to the same type of residential dwelling as the
deleted Mortgage Loan and in each case has or have the same or a better lien
priority as the deleted Mortgage Loan with a Borrower having the same or
better traditionally ranked credit status and is an owner-occupied Mortgaged
Property, (iii) matures or mature no later than (and not more than one year
earlier than) the deleted Mortgage Loan, (iv) has or have a Loan-to-Value
Ratio or Combined Loan-to-Value Ratio at the time of such substitution no
higher than the Loan-to-Value Ratio or the Combined Loan-to-Value Ratio, as
applicable, of the deleted Mortgage Loan, (v) has or have a principal balance
or principal balances (after application of all payments received on or prior
to the date of substitution) (which shall be the Principal Balance or
Principal Balances thereof) not substantially less and not more than the
Principal Balance of the deleted Mortgage Loan as of such date, (vi) satisfies
or satisfy the criteria set forth from time to time in the definition of
"qualified replacement mortgage" in Section 860G(a)(4) of the Code (or any
successor statute thereto) and (vii) complies or comply as of the date of
substitution with each representation and warranty set forth in the Pooling
and Servicing Agreement.
REPRESENTATIONS AND WARRANTIES OF THE SELLER
The Seller will make certain representations and warranties with respect to
each Mortgage Loan, as of the Closing Date or the Subsequent Transfer Date, as
applicable.
Pursuant to the Pooling and Servicing Agreement, upon the discovery by any
of the Certificateholders, the Servicer, the Seller, the Certificate Insurer
or the Trustee that any of the representations and warranties contained in the
Pooling and Servicing Agreement have been breached in any material respect as
of the Closing Date, with respect to the Initial Mortgage Loans, and as of the
related Subsequent Transfer Date, with respect to the Subsequent Mortgage
Loans, with the result that the interests of the Certificateholders in the
related Mortgage Loan or the interests of the Certificate Insurer were
materially and adversely affected (notwithstanding that such representation
and warranty was made to the Seller's best knowledge), the party discovering
such breach is required to give prompt written notice to the other parties and
to the Certificate Insurer. Subject to certain provisions of the Pooling and
Servicing Agreement, within 60 days of the earlier to occur of the Seller's
discovery or its receipt of written notice of any such breach, the Seller will
(a) promptly cure such breach in all material respects, (b) remove each
Mortgage Loan which has given rise to the requirement for action by the
S-44
<PAGE>
Seller, substitute one or more Qualified Substitute Mortgage Loans and, if the
outstanding principal amount of such Qualified Substitute Mortgage Loans as of
the date of such substitution is less than the outstanding Principal Balance,
plus accrued and unpaid interest thereon of the deleted Mortgage Loans as of
the date of substitution deliver to the Trust Fund as part of the amounts
remitted by the Servicer on such Distribution Date the amount of such
Substitution Adjustment, or (c) purchase such Mortgage Loan at a price (the
"Loan Repurchase Price") equal to the Principal Balance of such Mortgage Loan
as of the date of purchase plus the greater of (i) all accrued and unpaid
interest thereon and (ii) 30 days' interest thereon computed at the Mortgage
Interest Rate, plus the amount of any unreimbursed Delinquency Interest
Advances and Servicing Advances made by the Servicer in respect of such
Mortgage Loans, and deposit such purchase price into the Collection Account on
the next succeeding Servicer Remittance Date after deducting therefrom any
amounts received in respect of such repurchased Mortgage Loan or Loans and
being held in the Collection Account or the Certificate Account for future
distribution to the extent such amounts have not yet been applied to principal
or interest on such Mortgage Loan; provided, however, that any substitution of
one or more Qualified Substitute Mortgage Loans pursuant to clause (b)
preceding must be effected not later than two years after the Closing Date
unless the Trustee and the Certificate Insurer receive an opinion of counsel
that such substitution would not constitute a prohibited transaction for
purposes of the REMIC provisions of the Code and, provided further, that the
Seller may not purchase such Mortgage Loan that is not in default or as to
which no default is imminent pursuant to clause (c) preceding unless the
Seller has theretofore caused to be delivered to the Trustee and to the
Certificate Insurer an opinion of counsel knowledgeable in Federal income tax
matters in form and substance satisfactory to the Trustee and to the
Certificate Insurer to the effect that such a purchase would not constitute a
prohibited transaction for purposes of the REMIC provisions of the Code or
cause the Trust Fund to fail to qualify as a REMIC at any time any
Certificates are outstanding. The obligation of the Seller to cure such breach
or to substitute or purchase any Mortgage Loan constitutes the sole remedy
respecting a material breach of any such representation or warranty to the
Certificateholders, the Trustee and the Certificate Insurer.
PAYMENTS ON THE MORTGAGE LOANS
The Pooling and Servicing Agreement provides that the Servicer, for the
benefit of the Certificateholders and the Certificate Insurer, shall establish
and maintain a collection account (the "Collection Account"), and that such
Collection Account will generally be a trust account maintained with a
depository institution acceptable to each Rating Agency and the Certificate
Insurer (any such account, an "Eligible Account"). The Servicer shall have the
right to choose and relocate the Collection Account at any time, provided each
Collection Account shall otherwise comply with the requirements of the
preceding sentence and that there shall be a Collection Account. The Pooling
and Servicing Agreement permits the Servicer to direct any depository
institution maintaining the Collection Account to invest the funds in such
Collection Account in one or more Permitted Investments, as defined below,
that mature, unless payable on demand, no later than the Business Day
preceding the date on which the Servicer is required to transfer any amounts
included in such funds from such Collection Account to the Certificate Account
as described below.
The Servicer is obligated to deposit or cause to be deposited in the
Collection Account within two days of receipt amounts representing the
following payments received and collections on and after the Cut-Off Date
(other than in respect of Monthly Payments on the Mortgage Loans due on each
Mortgage Loan up to and including any Due Date occurring prior to the Cut-Off
Date or applicable Subsequent Cut-off Date): (i) all payments on account of
principal, including Principal Prepayments and Curtailments; (ii) all payments
on account of interest on the Mortgage Loans, (iii) all Liquidation Proceeds,
Net REO Proceeds and all Insurance Proceeds to the extent such proceeds are
not to be applied to the restoration of the related Mortgaged Property or
released to the related borrower in accordance with the express requirements
of law or in accordance with prudent and customary servicing practices; (iv)
all net revenues with respect to a Mortgaged Property held by the Trust Fund;
(v) all other amounts required to be deposited in the Collection Account
pursuant to the Pooling and Servicing Agreement; and (vi) any amounts required
to be deposited in connection with net losses realized on investments of funds
in the Collection Account.
S-45
<PAGE>
"Principal Prepayment" means any payment or other recovery of principal on a
Mortgage Loan equal to the outstanding principal balance thereof, received in
advance of the final scheduled Due Date which is not intended as an advance
payment of a scheduled Monthly Payment.
"Curtailment" means, with respect to a Mortgage Loan, any payment of
principal received during a Collection Period as part of a payment that is in
excess of the amount of the Monthly Payment due for such Collection Period and
which is neither intended to satisfy the Mortgage Loan in full, nor intended
as an advance payment of an amount due in a subsequent Collection Period, nor
intended to cure a delinquency.
"Net REO Proceeds" means, as to any REO Mortgage Loan, REO Proceeds net of
any related expenses or advances of the Servicer.
"Insurance Proceeds" means proceeds paid by any insurer pursuant to any
insurance policy covering a Mortgage Loan to the extent such proceeds are not
applied to the restoration of the related Mortgaged Property or released to
the related Mortgagor in accordance with Accepted Servicing Practices or
pursuant to applicable law plus amounts required to be paid by the Servicer
pursuant to the Pooling and Servicing Agreement, and not including Insured
Payments.
The Trustee for the benefit of the Certificateholders and the Certificate
Insurer will be obligated to establish and maintain an account (the
"Certificate Account"), which is required to be an Eligible Account, into
which the Servicer will deposit or cause to be deposited the Servicer
Remittance Amount in immediately available funds on the 18th day of each month
(the "Servicer Remittance Date") or if such 18th day is not a Business Day,
the Business Day immediately preceding such 18th day.
The "Servicer Remittance Amount" for a Servicer Remittance Date is equal to
the sum of (i) all scheduled and unscheduled collections of principal on the
Mortgage Loans (including Principal Prepayments, Curtailments, Net REO
Proceeds and Net Liquidation Proceeds, if any) collected by the Servicer
during the related Collection Period and all interest due during such
Collection Period and received on or prior to the fifteenth day of the month
in which such Servicer Remittance Date occurs, (ii) all Delinquency Interest
Advances made by the Servicer with respect to interest payments due to be
received on the Mortgage Loans during the related Collection Period, (iii) the
amount of Compensating Interest due with respect to the related Collection
Period, and (iv) any other amounts which the Pooling and Servicing Agreement
requires the Servicer to deposit in the Collection Account, but excluding the
following:
(a) amounts received as late payments of principal or interest and
respecting which the Servicer has previously made any unreimbursed
Delinquency Interest Advances or Servicing Advances;
(b) the portion of Liquidation Proceeds used to reimburse any
unreimbursed Delinquency Interest Advances or Servicing Advances by the
Servicer;
(c) the Servicing Fee;
(d) that portion of Liquidation Proceeds and REO Proceeds which
represents any unpaid Servicing Fee;
(e) all income from Permitted Investments that is held in the Collection
Account for the account of the Servicer;
(f) all amounts in respect of late fees, assumption fees, prepayment fees
and similar fees;
(g) certain other amounts which are reimbursable to the Servicer, as
provided in the Pooling and Servicing Agreement; and
(h) that portion of Net Foreclosure Profits otherwise due to the Servicer
as provided in the Pooling and Servicing Agreement.
SERVICING FEES AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
As compensation for its activities as Servicer under the Pooling and
Servicing Agreement, the Servicer shall be entitled to the Servicing Fee,
which shall be payable monthly from amounts on deposit in the Collection
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Account. The "Servicing Fee" shall be an amount equal to one-twelfth of the
Servicing Fee Rate times the aggregate Principal Balance of Mortgage Loans at
the beginning of the applicable Collection Period. The "Servicing Fee Rate"
will be 0.65% per annum. In addition, the Servicer shall be entitled to
receive as additional servicing compensation, to the extent permitted by
applicable law and the related Mortgage Notes, any late payment charges,
assumption fees or similar items. The Servicer shall also be entitled to
withdraw from the Collection Account any interest or other income earned on
deposits therein. The Servicer shall pay all expenses incurred by it in
connection with its servicing activities under the Pooling and Servicing
Agreement and shall not be entitled to reimbursement therefor except as
specifically provided in the Pooling and Servicing Agreement.
The Servicer may recover Delinquency Interest Advances and Servicing
Advances from the Collection Account or the Certificate Account to the extent
permitted by the Pooling and Servicing Agreement and by the terms of the
Mortgage Loans or, if not recovered from the Mortgagor on whose behalf such
Delinquency Interest Advance or Servicing Advance was made, from late
collections, including liquidation proceeds, released mortgaged property
proceeds, insurance proceeds and such other amounts as may be collected by the
Servicer, or, in the case of Delinquency Interest Advances, from late
collections of interest on any Mortgage Loan. In the event a Delinquency
Interest Advance or a Servicing Advance becomes a Nonrecoverable Advance, the
Servicer may be reimbursed for such advance from collections on all Mortgage
Loans in the Collection Account.
The Servicer shall not be required to make any Delinquency Interest Advance
or Servicing Advance which it determines would be a nonrecoverable Delinquency
Interest Advance or nonrecoverable Servicing Advance (a "Nonrecoverable
Advance"). A Delinquency Interest Advance or Servicing Advance is
"nonrecoverable" with respect to a Mortgage Loan if in the good faith business
judgment of the Servicer such Delinquency Interest Advance or Servicing
Advance is not ultimately recoverable from the related Mortgaged Property.
DELINQUENCY INTEREST ADVANCES AND COMPENSATING INTEREST
The Servicer shall be required, not later than each Servicer Remittance
Date, to deposit into the Certificate Account an amount equal to the sum of
the interest (net of the Servicing Fees) due, but not collected, with respect
to delinquent Mortgage Loans during the prior Collection Period unless the
Servicer determines in accordance with Accepted Servicing Practices that there
shall be no further recovery from the related Mortgage Loan (exclusive of any
possibility of a deficiency judgment). Such amounts are "Delinquency Interest
Advances." The Servicer will be permitted to fund its payment of Delinquency
Interest Advances from amounts deposited to the Collection Account
representing collections on the Mortgage Loans relating to any Collection
Period subsequent to the related Collection Period and will be required to
deposit into the Collection Account with respect thereto (i) collections and
(ii) Net Liquidation Proceeds to the extent of the amount of aggregate
Delinquency Interest Advances.
A Mortgage Loan is delinquent ("Delinquent") if any payment due thereon is
not made by the close of business on the Due Date. A Mortgage Loan is "30 days
delinquent" if such payment has not been received by the close of business on
the corresponding day of the month immediately succeeding the month in which
such payment was due, or, if there is no such corresponding day (e.g., as when
a 30-day month follows a 31-day month in which a payment was due on the 31st
day of such month) then on the close of business on the last day of such
immediately succeeding month. Similarly for "60 days delinquent," "90 days
delinquent" and so on.
In addition, the Servicer will also be required to deposit Compensating
Interest in the Certificate Account with respect to any full Prepayment
received on a Mortgage Loan during the related Collection Period out of its
own funds without any right of reimbursement therefor. "Compensating Interest"
is an amount equal to the difference between (x) 30 days' interest at the
Mortgage Interest Rate (net of the rate at which the Servicing Fee is
calculated) on the Principal Balance of such Mortgage Loan as of the first day
of the related Collection Period and (y) to the extent not previously
advanced, the interest paid by the Mortgagor with respect to the Mortgage Loan
in connection with such prepayment. The Servicer will not be required to pay
Compensating Interest with respect to any Collection Period in an amount in
excess of the aggregate Servicing Fee received by the Servicer for such
Collection Period.
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Upon an Event of Default (as described herein), the Trustee, as successor
servicer, will be obligated to make any Delinquency Interest Advances and
deposit Compensating Interest, if the Servicer fails in its obligation to do
so, to the extent provided in the Pooling and Servicing Agreement.
OVERCOLLATERALIZATION, SUBORDINATION PROVISIONS AND SUPPORT FEATURES
Overcollateralization Resulting from Cash Flow Structure. The
overcollateralization feature of the Trust Fund is a result of the aggregate
debt service requirements of the Class A Certificates being less than the
Trust Fund's aggregate expected revenues, such revenues being the expected
collections and recoveries of interest on the Mortgage Loans. The
overcollateralization is evidenced by the Subordinate Certificates, which
represent the right to receive excess principal (which initially equals the
Overcollateralization Amount on the Cut-off Date) and excess interest (the
excess of interest collections on the Mortgage Loans over Class A Certificate
interest, plus fees).
The Pooling and Servicing Agreement requires that, on each Distribution
Date, the Excess Cashflow, if any, be applied on such Distribution Date as an
accelerated payment of principal on the Class A Certificates, but only to the
limited extent hereafter described. The "Excess Cashflow" for any Distribution
Date is equal to (x) the amount on deposit in the Certificate Account on such
Distribution Date with respect to the Mortgage Loans (such amount, other than
the related Insured Payments and the Trustee's Fee and Certificate Insurer
Premium Amount payable on such Distribution Date, being the related "Available
Funds" for such Distribution Date) minus (y) the sum of (i) the sum of the
Class A Interest Distribution Amount and the Class A Principal Distribution
Amount (calculated for this purpose without regard to any
Overcollateralization Increase Amount or portion thereof included therein) and
(ii) any related Reimbursement Amount (as defined herein) owed to the
Certificate Insurer. This application has the effect of accelerating the
amortization of the Class A Certificates relative to the amortization of the
Mortgage Loans.
The Pooling and Servicing Agreement requires that the Excess Cashflows will
be applied as an accelerated payment of principal on the Class A Certificates
until the Overcollateralization Amount has increased to the level equal to the
Required Overcollateralization Level for such Distribution Date. Any amount of
the Excess Cashflow actually applied as an accelerated payment of principal is
an "Overcollateralization Increase Amount." The required level of the
Overcollateralization Amount with respect to a Distribution Date is the
"Required Overcollateralization Level" with respect to such Distribution Date.
Initially, the Required Overcollateralization Level will be set at an amount
equal to a percentage, specified in the Pooling and Servicing Agreement, of
the Maximum Collateral Amount. The Pooling and Servicing Agreement generally
provides that the Required Overcollateralization Level may, over time,
decrease or increase, subject to certain floors, caps and triggers.
In the event that the required level of the Required Overcollateralization
Level is permitted to decrease or "step down" on a Distribution Date in the
future, the Pooling and Servicing Agreement provides that a portion of the
principal which would otherwise be distributed to the Holders of the Class A
Certificates on such Distribution Date shall be distributed to the Holders of
the Subordinate Certificates on such Distribution Date. This has the effect of
decelerating the amortization of the Class A Certificates relative to the
amortization of the Mortgage Loans and of reducing the actual
Overcollateralization Amount. With respect to any Distribution Date, the
difference, if any, between (a) the actual Overcollateralization Amount that
would apply on such Distribution Date after taking into account all
distributions to be made on such Distribution Date (exclusive of any
reductions thereto attributable to Overcollateralization Reduction Amounts (as
described below) on such Distribution Date) and (b) the Required
Overcollateralization Level for such Distribution Date is the related "Excess
Overcollateralization Amount" with respect to such Distribution Date. With
respect to any Distribution Date, an amount equal to the lesser of (a) the
Excess Overcollateralization Amount and (b) the principal collections received
by the Servicer with respect to the prior Collection Period is the related
"Overcollateralization Reduction Amount." In addition, due to the cash flow
structure of the Trust Fund as described below, Overcollateralization
Reduction Amounts may result even prior to the occurrence of any decrease or
"step down" in the Required Overcollateralization Level. This is because the
Holders of the Class A Certificates will generally be entitled to receive 100%
of collected principal, even though the Class A Principal Balance will,
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following the accelerated amortization resulting from the application of the
Excess Cashflow, represent less than 100% of the Mortgage Loan's principal
balance. In the absence of the provisions relating to Overcollateralization
Reduction Amounts, the foregoing may otherwise increase the
Overcollateralization Amounts above their Required Overcollateralization Level
requirements even without the application of any Excess Cashflow.
In the event that any Mortgage Loan becomes a Charged-off Loan during a
Collection Period, and the Net Liquidation Proceeds related thereto and
allocated to principal are less than the Principal Balance of the related
Mortgage Loan; the amount of any such insufficiency is a "Charged-off Loan
Loss." The Pooling and Servicing Agreement provides that the principal balance
of any Mortgage Loan after it becomes a Charged-off Loan shall equal zero. The
Pooling and Servicing Agreement does not contain any requirement that the
amount of any Charged-Off Loan Loss be distributed to the Holders of the Class
A Certificates on the Distribution Date which immediately follows the event of
loss, i.e., the Pooling and Servicing Agreement does not require the current
recovery of losses. However, the realization of a Charged-Off Loan Loss will
reduce the Overcollateralization Amount, which, to the extent that such
reduction causes the Overcollateralization Amount to be less than the Required
Overcollateralization Level applicable to the related Distribution Date, will
require the payment of an Overcollateralization Increase Amount on such
Distribution Date (or, if insufficient funds are available on such
Distribution Date, on subsequent Distribution Dates, until the
Overcollateralization Amount equals the Required Overcollateralization Level).
The effect of the foregoing is to allocate losses to the Holders of the
Subordinate Certificates by reducing, or eliminating entirely, payments of
Excess Cashflow and of Overcollateralization Reduction Amounts which such
Holders would otherwise receive.
Overcollateralization and the Certificate Insurance Policy. The Pooling and
Servicing Agreement defines an "Overcollateralization Deficit" with respect to
a Distribution Date to be the amount, if any, by which (x) the aggregate
Certificate Principal Balance of the Class A Certificates as of such
Distribution Date, following the making of all distributions to be made on
such Distribution Date (except for any payment to be made as to principal from
proceeds of the Certificate Insurance Policy), exceeds (y) the aggregate
Principal Balances of the Mortgage Loans as of the close of business on the
last day of the immediately preceding Collection Period, plus the amount on
deposit, if any, in the Pre-Funding Account as of the close of business on the
last day of the immediately preceding Collection Period. The Pooling and
Servicing Agreement requires the Trustee to make a claim for an Insured
Payment under the Certificate Insurance Policy not later than the third
Business Day prior to any Distribution Date as to which the Trustee has
determined that an Overcollateralization Deficit will occur for the purpose of
applying the proceeds of such Insured Payment as a payment of principal to the
Holders of the Class A Certificates on such Distribution Date. Investors in
the Class A Certificates should realize that, under extreme loss or
delinquency scenarios, they may temporarily receive no distributions of
principal.
Subordination. The rights of the holders of the Subordinate Certificates to
receive distributions with respect to the Mortgage Loans in the Trust Fund
will be subordinated, to the extent described herein, to such rights of the
holders of the Class A Certificates. This subordination is intended to enhance
the likelihood of regular receipt by the holders of the Class A Certificates
of the full amount of their Class A Principal Distribution Amount and Class A
Interest Distribution Amount, and to afford such holders protection against
losses on the Mortgage Loans.
The protection afforded to the holders of the Class A Certificates by means
of the subordination of the Subordinate Certificates will be accomplished by
the preferential right of the Class A Certificateholders to receive, prior to
any distribution being made on a Distribution Date in respect of the
Subordinate Certificates, the amounts due them on such Distribution Date out
of the Available Funds on such date in the Certificate Account and, if
necessary, by the right of such Class A Certificateholders to receive future
distributions of Available Funds that would otherwise be payable to the
holders of the Subordinate Certificates.
CLASS A INTEREST DISTRIBUTION AMOUNTS
On each Distribution Date, holders of the Class A Certificates will be
entitled to receive interest distributions in an amount equal to the sum of
(a) interest accrued for the Accrual Period (as defined below) on the
applicable
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Class A Principal Balance thereof immediately prior to such Distribution Date
at the related Class A Pass-Through Rate and (b) the portion of the related
Class A Carry-Forward Amount allocable to interest. The Class A Interest
Distribution Amount with respect to the Class A Certificates is calculated on
the basis of a 360-day year and a 30-day month.
With respect to any Distribution Date and the Class A Certificates, the sum
of the Class A Interest Distribution Amount and the amount of the
Overcollateralization Deficit, if any, with respect to such Distribution Date
is the "Insured Distribution Amount" for such Distribution Date.
For each Distribution Date, with respect to the Class A Certificates, the
"Accrual Period" is the calendar month immediately preceding the month in
which such Distribution Date occurs.
With respect to the Class A Certificates, the "Class A Carry-Forward Amount"
as of any Distribution Date equals the sum of (a) the amount, if any, by which
(i) the Insured Distribution Amount for the immediately preceding Distribution
Date exceeded (ii) the amount actually distributed to the Holders of the Class
A Certificates on such Distribution Date in respect thereof (including,
without limitation, amounts paid under a Certificate Insurance Policy) and (b)
30 days' interest on such amount at the Pass-Through Rate applicable to the
Class A Certificates for such Distribution Date.
The Pass-Through Rate on each of the Class A Certificates is fixed and set
forth on the cover hereof.
As described herein, the Class A Interest Distribution Amount allocable to
the Class A Certificates is based on the Certificate Principal Balances
thereof immediately prior to the related Distribution Date. The Certificate
Principal Balance of any Class A Certificate as of any date of determination
is equal to the initial Certificate Principal Balance thereof, reduced as
described herein with respect to such Certificate.
On any Distribution Date, the amount of the premium (the "Certificate
Insurer Premium Amount") payable to the Certificate Insurer is equal to one-
twelfth of the product of a percentage specified in the Pooling and Servicing
Agreement and the Certificate Principal Balance of the Class A Certificates.
CLASS A PRINCIPAL DISTRIBUTION AMOUNT
Holders of the Class A Certificates will be entitled to receive on each
Distribution Date, to the extent of the portion of the amounts remaining for
distribution after payments under clauses (a) through (d) under "--Payment of
Available Funds" below, an amount (the "Class A Principal Distribution
Amount"), in reduction of the Certificate Principal Balance thereof as
described below, which equals the sum, without duplication, of (i) the portion
of any Class A Carry-Forward Amount which relates to a shortfall in a
distribution of an Overcollateralization Deficit, (ii) all scheduled and
unscheduled amounts relating to principal with respect to the Mortgage Loans
received by the Servicer during the related Collection Period to the extent
actually received by the Trustee, (iii) the Principal Balance of each Mortgage
Loan that either was repurchased by the Seller or by the Depositor on the
related Servicer Remittance Date, to the extent actually received by the
Trustee, (iv) any Substitution Adjustments delivered by the Seller or the
Depositor on the related Servicer Remittance Date in connection with a
substitution of a Mortgage Loan, to the extent actually received by the
Trustee, (v) the net Liquidation Proceeds collected by the Servicer of all
Mortgage Loans during the prior calendar month (to the extent such net
Liquidation Proceeds are related to principal) to the extent actually received
by the Trustee, (vi) the amount of any Overcollateralization Deficit for such
Distribution Date, (vii) the proceeds received by the Trustee of any
termination of the Trust Fund (to the extent such proceeds are related to
principal), (viii) the amount of any Overcollateralization Increase Amount for
such Distribution Date; (ix) any monies released from the Pre-Funding Account
as a prepayment of Class A Certificates on the Distribution Date which
immediately follows the end of the Pre-Funding Period, minus (x) the amount of
any Overcollateralization Reduction Amount for such Distribution Date.
In no event will the Class A Principal Distribution Amount with respect to
any Distribution Date be (x) less than zero or (y) greater than the then
outstanding Certificate Principal Balance of the Class A Certificates.
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Distributions of the Class A Principal Distribution Amount with respect to
the Class A Certificates will be allocated to the Class A Certificates in
reduction of the Certificate Principal Balance thereof, until such Certificate
Principal Balance has been reduced to zero.
The "Principal Balance" of any Mortgage Loan (or related REO Property) means
initially the outstanding principal balance of such Mortgage Loan as of the
Cut-Off Date or the related Subsequent Cut-Off Date, as applicable, and
thereafter, as of any Distribution Date such balance as of the last day of the
Collection Period related to such Distribution Date after giving effect to
Principal Prepayments received and payments of principal collected during such
Collection Period and any Curtailments applied by the Servicer in reduction of
the unpaid principal balance of such Mortgage Loan as of such Due Date. The
Principal Balance of a Mortgage Loan which becomes a Charged-off Loan (as
defined herein) on or prior to such Due Date shall be zero.
For purposes of receiving distributions with respect to principal, the Class
A Certificates have been divided into six "sequential paying" classes. On each
Distribution Date the Holders of the outstanding Class A Certificates with the
lowest numerical designation will be entitled to receive 100% of the
distribution with respect to the Class A Principal Distribution Amount on such
Distribution Date until the related Class Principal Balance has been reduced
to zero; any remaining Class A Principal Distribution Amount on a Distribution
Date, and the Class A Principal Distribution Amount for each succeeding
Distribution Date, will be paid to the Class A Certificates with the next
lowest numerical designation, until each Class A Certificate has been paid in
full.
PAYMENT OF AVAILABLE FUNDS
On each Distribution Date, the Trustee shall distribute the funds on deposit
in the Certificate Account, together with the amount of any Insured Payments,
as follows:
(a) to the Certificate Insurer, the Certificate Insurer Premium Amount;
(b) to the Trustee, an amount equal to the Trustee's Fees then due to it;
(c) from the Available Funds, to the Certificate Insurer the lesser of
(x) the excess of (i) such Available Funds over (ii) the amount of the
Insured Distribution Amount for such Distribution Date and (y) the amount
of all Insured Payments and other payments made by the Certificate Insurer
pursuant to the Certificate Insurance Policy which have not been previously
repaid together with interest thereon at the rate set forth in the
Insurance Agreement (the "Reimbursement Amount") as of such Distribution
Date;
(d) from amounts then on deposit in the Certificate Account (including
any Insured Payments), to each of the Class A Certificateholders an amount
equal to the related Class A Interest Distribution Amount (as described
above);
(e) from amounts then on deposit in the Certificate Account (including
any Insured Payments), to each of the Class A Certificateholders an amount
equal to the related Class A Principal Distribution Amount (as described
above) as follows:
(1) first, to the Class A-1 Certificateholders until the Class A-1
Certificate Principal Balance has been reduced to zero;
(2) second, to the Class A-2 Certificateholders until the Class A-2
Certificate Principal Balance has been reduced to zero;
(3) third, to the Class A-3 Certificateholders until the Class A-3
Certificate Principal Balance has been reduced to zero;
(4) fourth, to the Class A-4 Certificateholders until the Class A-4
Certificate Principal Balance has been reduced to zero;
(5) fifth, to the Class A-5 Certificateholders until the Class A-5
Certificate Principal Balance has been reduced to zero; and
(6) sixth, to the Class A-6 Certificateholders until the Class A-6
Certificate Principal Balance has been reduced to zero;
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(f) following the making by the Trustee of all allocations, transfers and
disbursements described above, from amounts then on deposit in the
Certificate Account, the Trustee shall distribute to the Holders of the
Subordinate Certificates the amount remaining in the Certificate Account on
such Distribution Date, if any.
Notwithstanding the foregoing, the aggregate amount on all Distribution Dates
to the Holders of each of the Class A Certificates on account of principal
shall not exceed the Original Class A Principal Balance.
REPORT TO CERTIFICATEHOLDERS
Pursuant to the Pooling and Servicing Agreement, on each Distribution Date
the Trustee will deliver to the Certificate Insurer, each Certificateholder
and the Depositor a written report containing information, including, without
limitation, the amount of the distribution on such Distribution Date, the
amount of such distribution allocable to principal and allocable to interest,
the aggregate outstanding principal balance of each of the Class A
Certificates as of such Distribution Date, the amount of any Insured Payment
included in such distributions on such Distribution Date and other such
information as required by the Pooling and Servicing Agreement.
REGISTRATION OF THE CLASS A CERTIFICATES
The Class A Certificates will be book-entry Certificates (the "Book-Entry
Certificates"). Certificate Owners will hold their Class A Certificates
through the DTC in the United States, or Cedel or Euroclear (in Europe) if
they are participants of such systems, or indirectly through organizations
which are participants in such systems. The Book-Entry Certificates will be
issued in one or more certificates which equal the aggregate principal balance
of the Class A Certificates and will initially be registered in the name of
Cede & Co., the nominee of DTC. Cedel and Euroclear will hold omnibus
positions on behalf of their participants through customer's securities
accounts in Cedel's and Euroclear's names on the books of their respective
depositaries which in turn will hold such positions in customer's securities
accounts in the depositaries' names on the books of DTC. Citibank will act as
depositary for Cedel and the Chase Manhattan Bank will act as depositary for
Euroclear (in such capacities, individually the "Relevant Depositary" and
collectively the "European Depositaries"). Investors may hold such beneficial
interests in the Book-Entry Certificates in minimum denominations of $50,000.
Except as described below, no person acquiring a Book-Entry Certificate will
be entitled to receive a physical certificate representing such Certificate (a
"Definitive Certificate"). Unless and until Definitive Certificates are
issued, it is anticipated that the only "Certificateholder" of the Class A
Certificates will be Cede & Co., as nominee of DTC. Certificate Owners will
not be Certificateholders as that term is used in the Pooling and Servicing
Agreement. Certificate Owners will be permitted to exercise their rights only
indirectly through Participants and DTC.
A Certificate Owner's ownership of a Book-Entry Certificate will be recorded
on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each a "Financial Intermediary") that maintains the
beneficial owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Certificate will be recorded on
the records of DTC (or of a participating firm that acts as agent for the
Financial Intermediary, whose interest will in turn be recorded on the records
of DTC, if the Certificate Owner's Financial Intermediary is not a DTC
participant and on the records of Cedel or Euroclear, as appropriate).
Certificate Owners will receive all distributions of principal of and
interest on the Class A Certificates from the Trustee through DTC and DTC
participants. While the Class A Certificates are outstanding (except under the
circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the "Rules"), DTC is required
to make book-entry transfers among Participants on whose behalf it acts with
respect to the Class A Certificates and is required to receive and transmit
distributions of principal of, and interest on, the Class A Certificates.
Participants and indirect participants make book-entry transfers and receive
and transmit such distributions on behalf of their respective Certificate
Owners. Accordingly, although Certificate Owners will not possess certificates
representing their respective interests in the Class A Certificates, the Rules
provide a mechanism by which Certificate Owners will receive distributions and
will be able to transfer their interest.
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Certificateholders will not receive or be entitled to receive certificates
representing their respective interests in the Class A Certificates, except
under the limited circumstances described below. Unless and until Definitive
Certificates are issued, Certificateholders who are not Participants may
transfer ownership of Class A Certificates only through Participants and
indirect participants by instructing such Participants and indirect
participants to transfer Class A Certificates, by book-entry transfer, through
DTC for the account of the purchasers of such Class A Certificates, which
account is maintained with their respective Participants. Under the Rules and
in accordance with DTC's normal procedures, transfers of Ownership of Class A
Certificates will be executed through DTC and the accounts of the respective
Participants at DTC will be debited and credited. Similarly, the Participants
and indirect participants will make debits or credits, as the case may be, on
their records on behalf of the selling and purchasing Certificateholders.
Because of time zone differences, credits of securities received in Cedel or
Euroclear as a result of a transaction with a Participant will be made during
subsequent securities settlement processing and dated the business day
following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear or Cedel Participants on such business day. Cash received in Cedel
or Euroclear as a result of sales of securities by or through a Cedel
Participant (as defined below) or Euroclear Participant (as defined below) to
a DTC Participant will be received with value on the DTC settlement date but
will be available in the relevant Cedel or Euroclear cash account only as of
the business day following settlement in DTC. For information with respect to
tax documentation procedures relating to the Certificates, see "Certain
Federal Income Tax Consequences--REMIC Trust Funds--Foreign Investors in REMIC
Certificates" and "--Backup Withholding with Respect to REMIC Certificates" in
the Prospectus and "Global Clearance, Settlement and Tax Documentation
Procedures--Certain U.S. Federal Income Tax Documentation Requirements" in
Annex I hereto.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between Cedel Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly through DTC, on the
one hand, and directly or indirectly through Cedel Participants or Euroclear
Participants, on the other, will be effected in DTC in accordance with DTC
rules on behalf of the relevant European international clearing system by 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. Cedel
Participants and Euroclear Participants may not deliver instructions directly
to the European Depositaries.
DTC, which is a New York-chartered limited purpose trust company, performs
services for its participants, some of which (and/or their representatives)
own DTC. In accordance with its normal procedures, DTC is expected to record
the positions held by each DTC participant in the Book-Entry Certificates,
whether held for its own account or as a nominee for another person. In
general, beneficial ownership of Book-Entry Certificates will be subject to
the Rules, as in effect from time to time.
Cedel Bank, societe anonyme, 67 Bd Grande-Duchesse Charlotte, L-1331
Luxembourg, was incorporated in 1970 as a limited company under Luxembourg
law. Cedel is owned by banks, securities dealers and financial institutions,
and currently has about 100 shareholders, including U.S. financial
institutions or their subsidiaries. No single entity may own more than five
percent of Cedel's stock.
Cedel is registered as a bank in Luxembourg, and as such is subject to
regulation by the Institute Monetaire Luxembourgeois, "IML", the Luxembourg
Monetary Authority, which supervises Luxembourg banks.
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Cedel holds securities for its customers ("Cedel Participants") and
facilitates the clearance and settlement of securities transactions by
electronic book-entry transfers between their accounts. Cedel provides various
services, including safekeeping, administration, clearance and settlement of
internationally traded securities and securities lending and borrowing. Cedel
also deals with domestic securities markets in several countries through
established depository and custodial relationships. Cedel has established an
electronic bridge with Morgan Guaranty Trust as the Euroclear Operator in
Brussels to facilitate settlement of trades between systems. Cedel currently
accepts over 70,000 securities issues on its books.
Cedel's customers are world-wide financial institutions including
underwriters, securities brokers and dealers, banks, trust companies and
clearing corporations. Cedel's United States customers are limited to
securities brokers and dealers and banks. Currently, Cedel has approximately
3,000 customers located in over 60 countries, including all major European
countries, Canada, and the United States. Indirect access to Cedel is
available to other institutions which clear through or maintain a custodial
relationship with an account holder of Cedel.
Euroclear was created in 1968 to hold securities for its participants
("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 be settled in any of 29 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 on Book-Entry Certificates will be made on each Distribution
Date by the Trustee to DTC. DTC will be responsible for crediting the amount
of such payments to the accounts of the applicable DTC participants in
accordance with DTC's normal procedures. Each DTC participant will be
responsible for disbursing such payments to the beneficial owners of the Book-
Entry Certificates that it represents and to each Financial Intermediary for
which it acts as agent. Each such Financial Intermediary will be responsible
for disbursing funds to the beneficial owners of the Book-Entry Certificates
that it represents.
Under a book-entry format, beneficial owners of the Book-Entry Certificates
may experience some delay in their receipt of payments, since such payments
will be forwarded by the Trustee to Cede. Distributions with respect to
Certificates held through Cedel or Euroclear will be credited to the cash
accounts of Cedel Participants or Euroclear Participants in accordance with
the relevant system's rules and procedures, to the extent received
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by the Relevant Depositary. Such distributions will be subject to tax
reporting in accordance with relevant United States tax laws and regulations.
See "Certain Federal Income Tax Consequences REMIC Trust Funds--Foreign
Investors in REMIC Certificates" and "--Backup Withholding with Respect to
REMIC Certificates" in the Prospectus. Because DTC can only act on behalf of
Financial Intermediaries, the ability of a beneficial owner to pledge Book-
Entry Certificates to persons or entities that do not participate in the
Depository system, or otherwise take actions in respect of such Book-Entry
Certificates, may be limited due to the lack of physical certificates for such
Book-Entry Certificates. In addition, issuance of the Book-Entry Certificates
in book-entry form may reduce the liquidity of such Certificates in the
secondary market since certain potential investors may be unwilling to
purchase Certificates for which they cannot obtain physical certificates. See
"Risk Factors--Limited Liquidity" herein.
Monthly and annual reports on the Trust Fund will be provided to Cede, as
nominee of DTC, and may be made available by Cede to Certificate Owners upon
request in accordance with the rules, regulations and procedures creating and
affecting the Depository, and to the Financial Intermediaries to whose DTC
accounts the Book-Entry Certificates of such Certificate Owners are credited.
DTC has advised the Trustee that, unless and until Definitive Certificates
are issued, DTC will take any action permitted to be taken by the holders of
the Book-Entry Certificates under the Pooling and Servicing Agreement only at
the direction of one or more Financial Intermediaries to whose DTC accounts
the Book-Entry Certificates are credited, to the extent that such actions are
taken on behalf of Financial Intermediaries whose holdings include such Book-
Entry Certificates. Cedel or the Euroclear Operator, as the case may be, will
take any other action permitted to be taken by a Certificateholder under the
Pooling and Servicing Agreement on behalf of a Cedel Participant or Euroclear
Participant only in accordance with its relevant rules and procedures and
subject to the ability of the Relevant Depositary to effect such actions on
its behalf through DTC. DTC may take actions, at the direction of the related
Participants, with respect to some Class A Certificates which conflict with
actions taken with respect to other Class A Certificates.
Definitive Certificates will be issued to beneficial owners of the Book-
Entry Certificates, or their nominees, rather than to DTC, only if (a) DTC or
the Depositor advises the Trustee and the Certificate Insurer in writing that
DTC is no longer willing, qualified or able to discharge properly its
responsibilities as nominee and depository with respect to the Book-Entry
Certificates and the Depositor or the Trustee is unable to locate a qualified
successor, (b) the Depositor, at its sole option, with the consent of the
Trustee, elects to terminate a book-entry system through DTC or (c) after the
occurrence of an Event of Default, Certificate Owners having Percentage
Interests aggregating not less than 51% of the Book-Entry Certificates advise
the Trustee and the Certificate Insurer and DTC through the Financial
Intermediaries and the DTC participants in writing that the continuation of a
book-entry system through DTC (or a successor thereto) is no longer in the
best interests of Certificate Owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all Certificate
Owners of the occurrence of such event and the availability through DTC of
Definitive Certificates. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Certificates and instructions for re-
registration, the Trustee will issue Definitive Certificates, and thereafter
the Trustee will recognize the holders of such Definitive Certificates as
Certificateholders under the Agreement.
Although DTC, Cedel and Euroclear have agreed to the foregoing procedures in
order to facilitate transfers of Class A Certificates among participants of
DTC, Cedel and Euroclear, they are under no obligation to perform or continue
to perform such procedures and such procedures may be discontinued at any
time.
Neither the Depositor, the Servicer, the Certificate Insurer nor the Trustee
will have any responsibility for any aspect of the records relating to or
payments made on account of beneficial ownership interests of the Book-Entry
Certificates held by Cede & Co., as nominee for DTC, or for maintaining,
supervising or reviewing any records relating to such beneficial ownership
interests.
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SERVICING OF THE MORTGAGE LOANS
THE SERVICER
Advanta will act as the Servicer of the Trust Fund. See "The Servicer."
COLLECTION AND OTHER SERVICING PROCEDURES; MORTGAGE LOAN MODIFICATIONS
The Servicer will be obligated under the Pooling and Servicing Agreement to
service and administer the Mortgage Loans, on behalf of the Trust Fund, solely
in the best interests of and for the benefit of the Certificateholders and the
Certificate Insurer in accordance with the terms of the Pooling and Servicing
Agreement, and will have full power and authority to do any and all things in
connection with such servicing and administration which it may deem necessary
or desirable in accordance with the terms of the Pooling and Servicing
Agreement.
The Servicer may perform any of its obligations under the Pooling and
Servicing Agreement through one or more subservicers. Notwithstanding any such
subservicing arrangement, the Servicer will remain liable for its servicing
duties and obligations under the Pooling and Servicing Agreement as if the
Servicer alone were servicing the Mortgage Loans. The Servicer will be
obligated under the Pooling and Servicing Agreement to make reasonable efforts
to collect all payments called for under the terms and provisions of the
Mortgage Notes and will be obligated, consistent with the other terms of the
Pooling and Servicing Agreement, to follow such collection procedures as it
would normally follow with respect to mortgage loans comparable to the
Mortgage Loans and which are required to generally conform to the mortgage
servicing practices of prudent mortgage lending institutions which service
mortgage loans of the same type as the Mortgage Loans for their own account in
the jurisdictions in which the related Mortgaged Properties are located and
will give due consideration to the Certificate Insurer's and the
Certificateholders' reliance on the Servicer ("Accepted Servicing Practices").
Pursuant to the Pooling and Servicing Agreement, the Servicer will be required
to make reasonable efforts to collect all payments called for under the terms
of the related Mortgage Loan.
REALIZATION UPON OR SALE OF DEFAULTED MORTGAGE LOANS
In an effort to collect upon delinquent Mortgage Loans, the Servicer will
attempt to contact the borrower to determine both ability and intent to pay.
In accordance with the policies and procedures of the Servicer and in
accordance with Accepted Servicing Practices and the REMIC provisions,
appropriate action may be taken at the discretion of the Servicer, including
but not limited to, extended payment arrangements, forbearance and referral
for legal actions.
Upon the earlier of (a) the date on which any payment due or portion thereof
with respect to a Mortgage Loan has become Delinquent for a period of 180 days
on a consecutive basis (irrespective of grace periods), (b) the time at which
a Mortgage Loan becomes a Liquidated Loan or (c) the date on which the Holder
of the Subordinate Certificates repurchases such Mortgage Loan pursuant to the
second succeeding paragraph, such Mortgage Loan will become a "Charged-off
Loan". Once a Mortgage Loan becomes a Charged-off Loan, its Principal Balance,
for purposes of the Trust Fund, will thereafter be considered to be zero.
A "Liquidated Loan" is a Mortgage Loan as to which the Servicer, in its
reasonable, good faith business judgment, in accordance with Accepted
Servicing Practices has determined that all amounts which will be recovered
with respect to such Mortgage Loan have been so recovered (exclusive of any
possibility of a deficiency judgment).
The Holder of the Subordinate Certificates may have the right to repurchase
(up to 10% of the Maximum Collateral Amount) from the Trust Fund any Charged-
Off Loan (or any Mortgage Loan which will imminently become a Charged-Off
Loan) by depositing an amount equal to the related Loan Repurchase Price in
the Certificate Account.
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Except as described below, the Servicer may foreclose upon or otherwise
comparably convert the ownership of properties securing such of the 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 will be required to
follow such procedures as it follows with respect to similar mortgage loans
held in its own portfolio. However, the Servicer shall not be required to
expend its own funds in connection with any foreclosure or to restore any
damaged property unless it shall determine that (i) such foreclosure and/or
restoration will increase the proceeds of liquidation of the Mortgage Loan to
Certificateholders after reimbursement to itself for such expenses in
accordance with the Pooling and Servicing Agreement and (ii) such expenses
shall be recoverable to it through Liquidation Proceeds (respecting which it
shall reimburse itself for such expense prior to the deposit in the Collection
Account of such proceeds).
The Servicer will be permitted to foreclose against the Mortgaged Property
securing a defaulted Mortgage Loan either by foreclosure, by sale or by strict
foreclosure, and in the event a deficiency judgment is available against the
Mortgagor or any other person, may proceed for the deficiency.
In the event that title to any Mortgaged Property is acquired in foreclosure
or by deed in lieu of foreclosure, the deed or certificate of sale will be
required to be issued to the Trustee, or to the Servicer in the name of the
Trustee on behalf of the Trustee, the Certificateholders and the Certificate
Insurer. Notwithstanding any such acquisition of title and cancellation of the
related Mortgage Loan, such Mortgage Loan is required to be considered to be a
Mortgage Loan held in the Trust Fund until such time as the related Mortgaged
Property is sold and such Mortgage Loan becomes a Liquidated Loan. Consistent
with the foregoing, for purposes of all calculations under the Pooling and
Servicing Agreement, so long as such Mortgage Loan is an outstanding Mortgage
Loan:
(i) It will be assumed that, notwithstanding that the indebtedness
evidenced by the related Mortgage Note shall have been discharged, such
Mortgage Note and the related amortization schedule in effect at the time
of any such acquisition of title (after giving effect to any previous
partial prepayments and before any adjustment thereto by reason of any
bankruptcy or similar proceeding or any moratorium or similar waiver or
grace period) remain in effect, except that such schedule shall be adjusted
to reflect the application of proceeds received in any month pursuant to
the succeeding clause.
(ii) Net REO Proceeds from such property received in any month shall be
deemed to have been received first in payment of the accrued interest that
remained unpaid on the date that title to the related Mortgaged Property
was acquired by the Trust Fund, with the excess thereof, if any, being
deemed to have been received in respect of the delinquent principal
installments that remained unpaid on such date. Thereafter, Net REO
Proceeds from such property received in any month shall be applied to the
payment of installments of principal and accrued interest on such Mortgage
Loan deemed to be due and payable in accordance with the terms of such
Mortgage Note and such amortization schedule. If such Net REO Proceeds
exceed the then unpaid REO amortization, the excess shall be treated as a
Curtailment received in respect of such Mortgage Loan.
In the event that the Trust Fund acquires any Mortgaged Property as
aforesaid or otherwise in connection with a default or imminent default on a
Mortgage Loan, such Mortgaged Property will be required to be disposed of by
or on behalf of the Trust Fund within two years after its acquisition by the
Trust Fund unless (a) the Trustee and the Certificate Insurer shall have
received an opinion of counsel to the effect that the holding by the Trust
Fund of such Mortgaged Property subsequent to two years after its acquisition
(and specifying the period beyond such two-year period for which the Mortgaged
Property may be held) will not cause the Trust Fund to be subject to the tax
on prohibited transactions imposed by Code Section 860F(a)(1), otherwise
subject the Trust Fund to tax or cause the Trust Fund to fail to qualify as a
REMIC at any time that any Certificates are outstanding, or (b) the Trustee
(at the Servicer's expense) or the Servicer shall have applied for, prior to
the expiration of such two-year period, an extension of such two-year period
in the manner contemplated by Code Section 856(e)(3), in which case the two-
year period shall be extended by the applicable period. The Servicer will also
be required to ensure that the Mortgaged Property is administered so that it
constitutes "foreclosure property" within the
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meaning of Code Section 860G(a)(8) at all times, that the sale of such
property does not result in the receipt by the Trust Fund of any income from
non-permitted assets as described in Code Section 860F(a)(2)(B), and that the
Trust Fund does not derive any "net income from foreclosure property" within
the meaning of Code Section 860G(c)(2), with respect to such property.
If the Servicer is aware that any Mortgaged Property may contain hazardous
wastes, the Servicer may not institute a foreclosure proceeding or accept a
deed in lieu of foreclosure without first obtaining the prior consent of the
Certificate Insurer.
In lieu of foreclosing upon any defaulted Mortgage Loan, the Servicer may,
in its discretion, permit the assumption of such Mortgage Loan if, in the
Servicer's reasonable judgment, such default is unlikely to be cured. In
connection with any such assumption, the Mortgage Interest Rate of the related
Mortgage Note and the payment terms will not be permitted to be changed. Any
fee collected by the Servicer for entering into an assumption agreement will
be retained by the Servicer as servicing compensation.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
In addition to the Servicing Fee, the Servicer is entitled under the Pooling
and Servicing Agreement to retain additional servicing compensation in the
form of assumption and other administrative fees, release fees, bad check
charges, any other servicing-related fees, Net Liquidation Proceeds not
otherwise required to be deposited in the Certificate Account pursuant to the
Pooling and Servicing Agreement, earnings paid on Permitted Investments and
amounts held on deposit as investment earnings on a Collection Account shall
be retained by or remitted to the Servicer to the extent not required to be
remitted to the Trustee for deposit in the Certificate Account. The Servicer
shall be required to pay all expenses incurred by it in connection with its
servicing activities under the Pooling and Servicing Agreement and shall not
be entitled to reimbursement therefor except as specifically provided for
therein.
ENFORCEMENT OF DUE-ON-SALE CLAUSES
When a Mortgaged Property has been or is about to be conveyed by the
Mortgagor, the Servicer shall, to the extent it has knowledge of such
conveyance or prospective conveyance, exercise its rights to accelerate the
maturity of the related Mortgage Loan under any "due-on-sale" clause contained
in the related Mortgage or Mortgage Note; provided, however, that the Servicer
shall not exercise any such right if the "due-on-sale" clause in the
reasonable belief of the Servicer, is not enforceable under applicable law. In
such event, the Servicer may enter into an assumption and modification
agreement with the person to whom such property has been or is about to be
conveyed, pursuant to which such person becomes liable under the Mortgage Note
and, unless prohibited by applicable law or the Mortgage or Mortgage Note, the
Mortgagor remains liable thereon. The Servicer is also authorized, with the
prior approval of the Certificate Insurer, to enter into a substitution of
liability agreement with such 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.
MAINTENANCE OF INSURANCE POLICIES AND ERRORS AND OMISSIONS AND FIDELITY
COVERAGE
The Servicer is required to cause to be maintained for each Mortgage Loan a
fire and hazard insurance policy with extended coverage on the related
Mortgaged Property in an amount which is not less than (a) the full
replacement cost of the Mortgaged Property securing such Mortgage Loan or (b)
the unpaid principal balance of such Mortgage Loan, whichever is less. The
Servicer will also be required to maintain or cause to be maintained fire and
hazard insurance with extended coverage on each property acquired by the Trust
Fund by foreclosure or by deed in lieu of foreclosure in an amount which is at
least equal to the lesser of (i) the full insurable value of the improvements
which are a part of such property and (ii) the principal balance owing on such
Mortgage Loan at the time of such foreclosure or grant in lieu of foreclosure;
provided, however, that such insurance may not be less than the minimum amount
required to fully compensate for any loss or damage on a replacement cost
basis. Any cost incurred by the Servicer in maintaining any such insurance
shall not, for the purpose of calculating
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distributions to Certificateholders, be added to the unpaid principal balance
of the related Mortgage Loan, notwithstanding that the terms of such Mortgage
Loan so permit. No earthquake or other additional insurance other than flood
insurance is, under the Pooling and Servicing Agreement, to be required of any
Mortgagor or to be maintained by the Servicer other than pursuant to the terms
of the related Mortgage Note or Mortgage and pursuant to such applicable laws
and regulations as shall at any time be in force and as shall require such
additional insurance.
If the Mortgaged Property was located at the time of origination in a
federally designated special flood hazard area, the Servicer will be obligated
to cause to be maintained flood insurance in respect thereof to the extent
available. Such flood insurance shall be in an amount equal to the lesser of
(i) the unpaid principal balance of the related Mortgage Loan, (ii) the full
insurable value of the Mortgaged Property and (iii) the maximum amount of
insurance available for the related property under the Flood Disaster
Protection Act of 1973.
Alternatively, the Servicer may obtain, at its own expense, a blanket
insurance policy with an insurer insuring against flood, fire and hazard
losses on all of the Mortgage Loans, which policy may contain a deductible
clause, in which case the Servicer shall, in the event that (i) there shall
not have been maintained on the related Mortgaged Property a policy otherwise
complying with the provisions described above, and (ii) there shall have been
one or more losses which would have been covered by such a policy had it been
maintained, deposit into the Certificate Account from its own funds the amount
not otherwise payable under the blanket policy because of such deductible
clause.
The Servicer will also be required under the Pooling and Servicing Agreement
to maintain in force (i) a policy or policies of insurance covering errors and
omissions in the performance of its obligations as Servicer and (ii) a
fidelity bond in respect of its officers, employees or agents. Each such
policy or policies and bond will, together, be substantially comparable to a
policy or policies and bond otherwise complying with the requirements of FNMA
for persons performing servicing for mortgage loans purchased by FNMA.
No pool insurance policy, special hazard insurance policy, bankruptcy bond
or repurchase bond will be maintained with respect to the Mortgage Loans, nor
will any Mortgage Loan be insured by any government or government agency.
SERVICER REPORTS
The Servicer is required to deliver to the Certificate Insurer, the Trustee
and the Rating Agencies, not later than the last day of the fifth month
following the end of the Servicer's fiscal year an Officers' Certificate
stating that (i) a review of the activities of the Servicer during the
preceding fiscal year and of performance under the Pooling and Servicing
Agreement has been made under such officers' supervision and (ii) to the best
of such officers' knowledge, based on such review, the Servicer has fulfilled
all its obligations under the Pooling and Servicing Agreement for such year,
or, if there has been a default in the fulfillment of any such obligation,
specifying each such default known to such officers and the nature and status
thereof including the steps being taken by the Servicer to remedy such
default. The first such Officer's Certificate shall be delivered by the
Servicer in 1998.
Not later than the last day of the fifth month following the end of the
Servicer's fiscal year, the Servicer, at its expense, is required to cause to
be delivered to the Certificate Insurer, the Trustee and the Rating Agencies
from a firm of independent certified public accountants (who may also render
other services to the Servicer) a statement to the effect that such firm has
examined certain documents and records relating to the servicing of the
Mortgage Loans during the preceding calendar year (or such longer period from
the Closing Date to the end of the following calendar year) and that, on the
basis of such examination conducted substantially in compliance with generally
accepted auditing standards and the requirements of the Uniform Single
Attestation Program for Mortgage Bankers or the Attestation Program for
Mortgages serviced for FHLMC, such servicing has been conducted in compliance
with the Pooling and Servicing Agreement except for such significant
exceptions or errors in records that, in the opinion of such firm, generally
accepted auditing standards and the Uniform Single Attestation Program for
Mortgage Bankers or the Attestation Program for Mortgages serviced for FHLMC
require it to report, in which case such exceptions and errors shall be so
reported.
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EVENTS OF DEFAULT
The Trustee, only at the direction of the Certificate Insurer or the
majority Certificateholders, with the consent of the Certificate Insurer (in
the case of any direction of the majority Certificateholders), may remove the
Servicer upon the occurrence and continuation beyond the applicable cure
period of an event described below (each an "Event of Default"):
(a) any failure by the Servicer to remit to the Trustee any payment
required to be made by the Servicer under the terms of the Pooling and
Servicing Agreement which continues unremedied for 2 days;
(b) the failure by the Servicer to make any required Servicing Advance
which failure continues unremedied for a period of 30 days after the date
on which written notice of such failure, requiring the same to be remedied,
shall have been given to the Servicer by the Trustee or to the Servicer and
the Trustee by any Certificateholder or the Certificate Insurer;
(c) any failure on the part of the Servicer duly to observe or perform in
any material respect any other of the covenants or agreements on the part
of the Servicer contained in the Pooling and Servicing Agreement, or the
failure of any representation and warranty set forth in the Pooling and
Servicing Agreement, which continues unremedied for a period of 30 days
after the date on which written notice of such failure, requiring the same
to be remedied, shall have been given to the Servicer by the Depositor or
the Trustee, or to the Servicer and the Trustee by any Certificateholder or
the Certificate Insurer;
(d) a decree or order of a court or agency or supervisory authority
having jurisdiction in an involuntary case under any present or future
federal or state bankruptcy, insolvency or similar law or for the
appointment of a conservator or receiver or liquidator in any insolvency,
readjustment of debt, marshalling of assets and liabilities or similar
proceedings, or for the winding-up or liquidation of its affairs, shall
have been entered against the Servicer and such decree or order shall have
remained in force, undischarged or unstayed for a period of 60 days;
(e) the Servicer shall consent to the appointment of a conservator or
receiver or liquidator in any insolvency, readjustment of debt, marshalling
of assets and liabilities or similar proceedings of or relating to the
Servicer or of or relating to all or substantially all of the Servicer's
property;
(f) the Servicer shall admit in writing its inability to pay its debts as
they become due, file a petition to take advantage of any applicable
insolvency or reorganization statute, make an assignment for the benefit of
its creditors, or voluntarily suspend payment of its obligations; or
(g) the delinquency or loss experience of the Mortgage Loan pool exceeds
certain levels specified in the Pooling and Servicing Agreement.
REMOVAL AND RESIGNATION OF SERVICER
The Servicer may not assign its obligations under the Pooling and Servicing
Agreement nor resign from the obligations and duties thereby imposed on it
except by mutual consent of the Servicer, the Seller, the Depositor, the
Certificate Insurer and the Trustee, or upon the determination that the
Servicer's duties thereunder are no longer permissible under applicable law
and such incapacity cannot be cured by the Servicer without the incurrence, in
the reasonable judgment of the Certificate Insurer, of unreasonable expense.
No such resignation shall become effective until a successor has assumed the
Servicer's responsibilities and obligations in accordance with the Pooling and
Servicing Agreement.
Upon removal or resignation of the Servicer, the Trustee has agreed to be
the Successor Servicer (the "Successor Servicer"). The Trustee, as Successor
Servicer, will be obligated to make Delinquency Interest Advances and
Servicing Advances and certain other advances unless it determines reasonably
and in good faith that such advances would not be recoverable. If, however,
the Trustee is unwilling or unable to act as Successor Servicer, or if the
majority Certificateholders (with the consent of the Certificate Insurer) or
the Certificate Insurer so requests, the Trustee shall appoint, or petition a
court of competent jurisdiction to appoint, in accordance with the provisions
of the Pooling and Servicing Agreement and subject to the approval of the
Certificate Insurer any
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established mortgage loan servicing institution acceptable to the Certificate
Insurer having a net worth of not less than $15,000,000 as the Successor
Servicer in the assumption of all or any part of the responsibilities, duties
or liabilities of the Servicer.
The Trustee and any other Successor Servicer in such capacity is entitled to
the same reimbursement for advances and no more than the same servicing
compensation as the Servicer. See "--Servicing and Other Compensation and
Payment of Expenses" above.
TERMINATION; PURCHASE OF MORTGAGE LOANS
The Trust Fund will terminate upon notice to the Trustee and the Certificate
Insurer of either: (a) the later of the distribution to Certificateholders of
the final payment or collection with respect to the last Mortgage Loan (or
Delinquency Interest Advances of same by the Servicer), or the disposition of
all funds with respect to the last Mortgage Loan and the remittance of all
funds due under the Pooling and Servicing Agreement and the payment of all
amounts due and payable to the Certificate Insurer and the Trustee or (b)
mutual consent of the Servicer, the Certificate Insurer and all
Certificateholders in writing.
Subject to provisions in the Pooling and Servicing Agreement concerning
adopting a plan of complete liquidation, the Holders of the Residual
Certificates or Servicer may, at their respective option and at their
respective sole cost and expense (and if such option is not exercised by the
Holders of the Residual Certificates or the Servicer, the Certificate Insurer
may, in accordance with the provisions of the Pooling and Servicing Agreement,
at its option and at its sole cost and expense), terminate the Trust Fund on
any date on which the aggregate Principal Balance of the Mortgage Loans is
less than 10% of the Maximum Collateral Amount (with respect to such option of
the Holders of the Residual Certificates) and with respect to the Servicer and
the Certificate Insurer less than 5% of the Maximum Collateral Amount by
purchasing, on the next succeeding Distribution Date, all of the property of
the Trust Fund at a price equal to the sum of (a) the greater of (i) 100% of
the aggregate Principal Balance of each outstanding Mortgage Loan and each REO
Property and (ii) the fair market value (disregarding accrued interest) of the
Mortgage Loans and REO Properties, determined as the average of three written
bids (copies of which are to be delivered to the Trustee and the Certificate
Insurer by the Servicer and the reasonable cost of which may be deducted from
the final purchase price provided that such deduction does not result in a
draw on the Certificate Insurance Policy) made by nationally recognized
dealers acceptable to the Certificate Insurer and based on a valuation process
which would be used to value comparable mortgage loans and REO property, plus
(b) the greater of (x) the aggregate amount of accrued and unpaid interest on
the Mortgage Loans through the related Collection Period and (y) 30 days'
accrued interest thereon computed at a rate equal to the related Mortgage
Interest Rate, (c) in the event the Holders of the Residual Certificates or
the Certificate Insurer exercise such option, plus any unpaid and accrued
Servicing Fee or in the event the Servicer exercises such option, net of the
Servicing Fee, and (d) any unreimbursed amounts (including, without
limitation, Delinquency Interest Advances and Servicing Advances) due to the
Servicer and the Certificate Insurer under the Pooling and Servicing Agreement
or the Insurance Agreement. No such termination is permitted without the prior
written consent of the Certificate Insurer if it would result in a draw on the
Certificate Insurance Policy and the Certificate Insurer shall have received
an opinion of counsel reasonably satisfactory to it stating that no amounts
paid under the Pooling and Servicing Agreement are subject to recapture as
preferential transfers under the United States Bankruptcy Code, 11 U.S.C.
(S)(S) 101 et seq., as amended.
The first date on which the Holders of the Residual Certificates may
exercise their option is the "Clean-Up Call Date."
AMENDMENT
The Pooling and Servicing Agreement may be amended from time to time by the
Depositor, the Servicer and the Trustee by written agreement, upon the prior
written consent of the Certificate Insurer (which consent shall not be
withheld if, in the opinion of counsel addressed to the Trustee and the
Certificate Insurer, failure to amend would adversely affect the interests of
the Certificateholders unless such consent would adversely affect
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the interests of the Certificate Insurer), without notice to, or consent of,
the Certificateholders, to cure any ambiguity, to correct or supplement any
provisions therein, to comply with any changes in the Code, or to make any
other provisions with respect to matters or questions arising under the
Pooling and Servicing Agreement which shall not be inconsistent with the
provisions of the Pooling and Servicing Agreement, provided that such action
shall not, as evidenced by an opinion of counsel delivered to the Trustee and
the Certificate Insurer, but not obtained at the expense of the Trustee or the
Certificate Insurer, adversely affect in any material respect the interests of
any Certificateholder; and provided, further, that no such amendment shall
reduce in any manner the amount of, or delay the timing of, payments received
on Mortgage Loans which are required to be distributed on any Certificate
without the consent of the Holder of such Certificate, or change the rights or
obligations of any other party to the Pooling and Servicing Agreement without
the consent of such party.
The Pooling and Servicing Agreement may be amended from time to time by the
Depositor, the Servicer and the Trustee with the consent of the Certificate
Insurer (which consent shall not be withheld if, in the opinion of counsel
addressed to the Trustee and the Certificate Insurer, failure to amend would
adversely affect the interests of the Certificateholders unless such consent
would adversely affect the interests of the Certificate Insurer), and the
Holders of the majority of the Percentage Interest in the Class A Certificates
for the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of the Pooling and Servicing Agreement or of
modifying in any manner the rights of the Holders; provided, however, that no
such amendment shall be made unless the Trustee and the Certificate Insurer
receives an opinion of counsel, at the expense of the party requesting the
change, that such change will not adversely affect the status of the Trust
Fund as a REMIC or cause a tax to be imposed on the Trust Fund; and provided,
further, that no such amendment shall reduce in any manner the amount of or
delay the timing of, payments received on Mortgage Loans which are required to
be distributed on any Certificate without the consent of the Holder of such
Certificate or reduce the percentage for each Class the Holders of which are
required to consent to any such amendment without the consent of the Holders
of 100% of each Class of Certificates affected thereby.
The rights of the Certificateholders of the Trust Fund will be determined
pursuant to the Pooling and Servicing Agreement.
THE TRUSTEE
Bankers Trust Company, a New York banking corporation, has been named
Trustee pursuant to the Pooling and Servicing Agreement. The Trustee will
serve initially as the custodian of the Trustee's Mortgage Files. The Pooling
and Servicing Agreement provides that the Trustee shall be entitled to a fee
(the "Trustee Fee") in respect of its services as Trustee.
The Trustee shall at all times be a banking association or corporation
organized and doing business under the laws of any State or the United States
of America subject to suspension or examination by federal or state authority,
authorized under such laws to exercise corporate trust powers, having a
combined capital and surplus of at least $50,000,000, whose short-term debt
rating is rated "A-1+" by Standard & Poor's and "P-1" by Moody's and whose
long-term deposits, if any, are rated at least "BBB" by Standard & Poor's and
Baa2 by Moody's, or such lower rating as may be reasonably approved in writing
by the Certificate Insurer. If at any time the Trustee shall cease to be
eligible in accordance with the provisions described in this paragraph, it
shall resign immediately in the manner and with the effect specified in the
Pooling and Servicing Agreement.
Any resignation or removal of the Trustee and appointment of a successor
trustee shall become effective upon the acceptance of appointment by a
successor trustee.
The Trustee, or any trustee or trustees hereafter appointed, may resign at
any time in the manner set forth in the Pooling and Servicing Agreement. Upon
receiving notice of resignation, the Certificate Insurer may and if the
Certificate Insurer fails to, the Servicer shall promptly appoint a successor
trustee or trustees acceptable to the Certificate Insurer and meeting the
eligibility requirements set forth above in the manner set forth in the
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Pooling and Servicing Agreement. The Servicer will deliver a copy of the
instrument used to appoint a successor trustee to the Certificateholders, the
Certificate Insurer and the Depositor, and upon acceptance of appointment by a
successor trustee in the manner provided in the Pooling and Servicing
Agreement, the Servicer will give notice thereof to the Certificateholders. If
no successor trustee shall have been appointed and have accepted appointment
within 30 days after the giving of such notice of resignation, the resigning
trustee may petition any court of competent jurisdiction for the appointment
of a successor trustee. Such court may thereupon, after such notice, if any,
as it may deem proper and prescribe, appoint a successor trustee.
If the Trustee fails to perform in accordance with the terms of the Pooling
and Servicing Agreement, the Certificate Insurer or the majority of
Certificateholders with the consent of the Certificate Insurer, may remove the
Trustee under the conditions set forth in the Pooling and Servicing Agreement
and appoint a successor trustee in the manner set forth therein.
At any time, for the purpose of meeting any legal requirements of any
jurisdiction in which any part of the Trust Fund or property securing the same
may at the time be located, the Servicer and the Trustee acting jointly shall
have the power and shall execute and deliver all instruments to appoint one or
more persons approved by the Trustee to act as co-trustee or co-trustees,
jointly with the Trustee, or separate trustee or separate trustees, of all or
any part of the Trust Fund and to vest in such person or persons, in such
capacity, such title to the Trust Fund, or any part thereof, and, subject to
the provisions of the Pooling and Servicing Agreement, such powers, duties,
obligations, rights and trusts as the Servicer and the Trustee may consider
necessary or desirable.
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CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS
The following discussion contains summaries of certain legal aspects of
mortgage loans which are general in nature. Because certain of such legal
aspects are governed by applicable state law (which laws may differ
substantially), the summaries do not purport to be complete, do not reflect
the laws of any particular state and do not encompass the laws of all states
in which the properties securing the Mortgage Loans are situated. The
summaries are qualified in their entirety by reference to the applicable
federal and state laws governing the Mortgage Loans.
MORTGAGES
The Mortgage Loans will be secured by either mortgages or deeds of trust or
deeds to secure debt, depending upon the prevailing practice in the state in
which the property subject to a Mortgage Loan is located. In California, for
example, Mortgage Loans are secured by deeds of trust. 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. Such liens are not prior to the lien for real estate taxes
and assessments or other charges imposed under governmental police powers and
may also be subject to other liens pursuant to the laws of the jurisdiction in
which the Mortgaged Property is located. 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/property owner or the land trustee (as
described below), and the mortgagee, who is the lender. Under the mortgage
instrument, the mortgagor delivers to the mortgagee a note or bond and the
mortgage. In the case of a land trust, there are three parties because title
to the property is held by a land trustee under a land trust agreement of
which the borrower/property owner is the beneficiary; at origination of a
mortgage loan, the borrower executes a separate undertaking to make payments
on the mortgage note. A deed of trust transaction normally has three parties,
the trustor, who is the borrower/property owner; the beneficiary, who is the
lender, and the trustee, a third-party grantee. Under a deed of trust, the
trustor grants the property, irrevocably until the debt is paid, in trust,
generally with a power of sale, to the trustee to secure payment of the
obligation. The mortgagee's authority under a mortgage and the trustee's
authority under a deed of trust are governed by the law of the state in which
the real property is located, the express provisions of the mortgage or deed
of trust, and, in some cases, in deed of trust transactions, the directions of
the beneficiary.
FORECLOSURE ON MORTGAGES
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. When the mortgagee's right to foreclosure is
contested, the legal proceedings necessary to resolve the issue can be time-
consuming and expensive. 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.
Foreclosure of a deed of trust is generally accomplished by a non-judicial
trustee's sale under a specific provision in the deed of trust which
authorizes the trustee to sell the property upon any default by the borrower
under the terms of the note or deed of trust. In certain states, such
foreclosure also may be accomplished by judicial action in the manner provided
for foreclosure of mortgages. 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 in some states must provide notice to any other
individual having an interest in the real property, including any subordinate
lienholders. The trustor, borrower, or any person having a subordinate
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
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obligation. Generally, state law controls the amount of foreclosure expenses
and costs, including attorney's fees, which may be recovered by a lender. If
the deed of trust is not reinstated, a notice of sale must be posted in a
public place and, in most states, published for a 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, recorded and sent to all parties
having an interest in the real property.
An action to foreclose a mortgage is an action to recover the mortgage debt
by enforcing the mortgagee's rights under the mortgage. It is regulated by
statutes and rules and subject throughout to the court's equitable powers. A
foreclosure action is subject to most of the delays and expenses of other
lawsuits if defenses or counterclaims are interposed, sometimes requiring up
to several years to complete. Generally, a mortgagor is bound by the terms of
the related mortgage note and the mortgage as made and cannot be relieved from
his default if the mortgagee has exposed his rights in a commercially
reasonable manner. However, since a foreclosure action historically was
equitable in nature, the court may exercise equitable powers to relieve a
mortgagor of a default and deny the mortgagee foreclosure on proof that either
the mortgagor's default was neither willful nor in bad faith or the
mortgagee's action established a waiver, fraud, bad faith, or oppressive or
unconscionable conduct such as to warrant a court of equity to refuse
affirmative relief to the mortgagee. Under certain circumstances a court of
equity may relieve the mortgagor from an entirely technical default where such
default was not willful.
In the case of foreclosure under either a mortgage or a deed of trust, the
sale by the referee or other designated officer or by the trustee is a public
sale. However, because of the difficulty potential third party purchasers at
the sale have in determining the exact status of title and because the
physical condition of the property may have deteriorated during the
foreclosure proceedings, it is uncommon for a third party to purchase the
property at a foreclosure sale. Rather, it is common for the lender to
purchase the property from the trustee or referee for an amount which may be
equal to the unpaid principal amount of the mortgage note secured by the
mortgage or deed of trust plus accrued and unpaid interest and the expenses of
foreclosure, in which event the mortgagor's debt will be extinguished or the
lender may purchase for a lesser amount in order to preserve its right against
a borrower to seek a deficiency judgment in states where such a judgment is
available. 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, paying taxes and
making such repairs at its own expense as are necessary to render the property
suitable for sale. The lender will commonly obtain the services of a real
estate broker and pay the broker's commission in connection with the sale of
the property. Depending upon market conditions, the ultimate proceeds of the
sale of the property may not equal the lender's investment in the property.
In some states, the borrower has the right to reinstate the loan at any time
following default until shortly before the trustee's sale. In general, in such
states, the borrower, or any other person having a junior encumbrance on the
real estate, may, during a reinstatement period, cure the default by paying
the entire amount in arrears plus the costs and expenses incurred in enforcing
the obligation. Some states require that for a specified Redemption Period,
the borrower can repay the defaulted mortgage loan and regain title to the
related mortgaged property. In such jurisdictions, the lenders' ability to
liquidate the foreclosed property before the applicable Redemption Period has
expired is limited.
RIGHTS OF REDEMPTION
In some states, after sale pursuant to a deed of trust or foreclosure of a
mortgage, the trustor or mortgagor and foreclosed subordinate lienors are
given a statutory period in which to redeem the property from the foreclosure
sale. The right of redemption should be distinguished from the equity of
redemption, which is a non-statutory right that must be exercised prior to the
foreclosure sale. In some states, redemption may occur only upon payment of
the entire principal balance of the loan, accrued interest and expenses of
foreclosure. In other states, redemption may be authorized if the former
borrower pays only a portion of the sums due. The effect of a statutory right
of redemption is to diminish the ability of the lender to sell the foreclosed
property. The exercise of a right of redemption would defeat the title of any
purchaser at a foreclosure sale, or of any purchaser from
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the lender subsequent to foreclosure or sale under a deed of trust.
Consequently the practical effect of a right of redemption is to force the
lender to retain the property and pay the expenses of ownership until the
redemption period has run. In some states, such as California, there is no
right to redeem property after a trustee's sale under a deed of trust.
SUBORDINATE MORTGAGES; RIGHTS OF SENIOR MORTGAGES
The Mortgage Loans are primarily subordinate mortgages. The rights of the
Trust Fund (and therefor the Certificateholders), as mortgagee under a
subordinate mortgage, are subordinate to those of the mortgagee under the
senior mortgage, including the prior rights of the senior mortgagee to receive
hazard insurance and condemnation proceeds and to cause the property securing
the Mortgage Loan to be sold upon default of the mortgagor, thereby
extinguishing the subordinate mortgagee's lien unless the subordinate
mortgagee asserts its subordinate interest in the property in foreclosure
litigation and, possibly, satisfies the defaulted senior mortgage. A
subordinate mortgagee may satisfy a defaulted senior loan in full and, in some
states, may cure such default and bring the senior loan current, in either
event adding the amounts expended to the balance due on the subordinate loan.
In most states, absent a provision in the mortgage or deed of trust, no notice
of default is required to be given to a subordinate mortgagee.
The standard form of the mortgage used by most institutional lenders and the
standard form of deed of trust used by most institutional lenders in
California confer on the mortgagee or beneficiary the right both to receive
all proceeds collected under any hazard insurance policy and all awards made
in connection with condemnation proceedings, and to apply such proceeds and
awards to any indebtedness secured by the mortgage or deed of trust, in such
order as the mortgagee may determine; provided, however, that the beneficiary
is prohibited (under California law) from applying insurance and condemnation
proceeds to the indebtedness secured by the deed of trust unless the
beneficiary's security interest has been impaired by the casualty or
condemnation, and, if such security interest has been impaired, permits such
proceeds to be so applied only to the extent of such impairment. Thus, in the
event improvements on the property are damaged or destroyed by fire or other
casualty, or in the event the property is taken by condemnation, the mortgagee
or beneficiary under underlying senior mortgages will have the prior right to
collect any insurance proceeds payable under a hazard insurance policy and any
award of damages in connection with the condemnation and to apply the same to
the indebtedness secured by the senior mortgages. Proceeds in excess of the
amount of senior mortgage indebtedness, in most cases, may be applied to the
indebtedness of a subordinate mortgage.
Another provision sometimes found in the form of the mortgage or deed of
trust used by institutional lenders (and by most institutional lenders in
California) obligates the mortgagor or trustor to pay before delinquency all
taxes and assessments on the property and, when due, all encumbrances, charges
and liens on the property which appear prior to the mortgage or deed of trust,
to provide and maintain fire insurance on the property, to maintain and repair
the property and not to commit or permit any waste thereof, and to appear in
and defend any action or proceeding purporting to affect the property or the
rights of the mortgagee or beneficiary under the mortgage or deed of trust.
Upon a failure of the mortgagor or trustor to perform any of these
obligations, the mortgagee is given the right under certain mortgages to
perform the obligation itself, at its election, with the mortgagor or trustor
agreeing to reimburse the mortgagee for any sums expended by the mortgagee on
behalf of the mortgagor. All sums so expended by the mortgagee or beneficiary
become part of the indebtedness secured by the mortgage or deed of trust.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states (including California) have imposed statutory prohibitions
which limit the remedies of a beneficiary under a deed of trust or a mortgagee
under a mortgage. In some states (including California), statutes limit the
right of the beneficiary or mortgagee to obtain a deficiency judgment against
the borrower following foreclosure or sale under a deed of trust. A deficiency
judgment is a personal judgment against the former borrower equal in most
cases to the difference between the net amount realized upon the public sale
of the real property and the amount due to the lender. Other statutes require
the beneficiary or mortgagee to exhaust the
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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 election requirement, when applicable, is that
lenders will usually proceed first against the security rather than bringing a
personal action against the borrower. Finally, other statutory provisions
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 the public sale. The purpose of these
statutes is generally to prevent a beneficiary or a mortgagee from obtaining a
large deficiency judgment against the former borrower as a result of low or no
bids at the foreclosure sale.
In addition to laws limiting or prohibiting deficiency judgments, numerous
other statutory provisions, including the federal bankruptcy laws, the
Soldiers' and Sailors' Civil Relief Act of 1940, and state laws affording
relief to debtors, may interfere with or affect the ability of the secured
lender to realize upon collateral and/or enforce a deficiency judgment. For
example, with respect to federal bankruptcy law, the filing of a petition acts
as a stay against the enforcement of remedies for collection of a debt.
Moreover, a court with federal bankruptcy jurisdiction may permit a debtor
through a Chapter 13 Bankruptcy Code rehabilitation plan to cure a monetary
default with respect to a loan on a debtor's residence by paying arrearages
within a reasonable time period and reinstating the original loan payment
schedule even though the lender accelerated the loan and the lender has taken
all steps to realize upon his security (provided no sale of the property has
yet occurred) prior to the filing of the debtor's Chapter 13 petition. Some
courts with federal bankruptcy jurisdiction have approved plans, based on the
particular facts of the reorganization case, that effected the curing of a
loan default by permitting the obliger to pay arrearages over a number of
years.
Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a mortgage loan may be modified if the borrower has filed a petition
under Chapter 13. These courts have suggested that such modifications may
include reducing the amount of each monthly payment, changing the rate of
interest, altering the repayment schedule and reducing the lender's security
interest to the value of the residence, thus leaving the lender a general
unsecured creditor for the difference between the value of the residence and
the outstanding balance of the loan. Federal bankruptcy law and limited case
law indicate that the foregoing modifications could not be applied to the
terms of a loan secured by property that is the principal residence of the
debtor. In all cases, the secured creditor is entitled to the value of its
security plus post-petition interest, attorney's fees and costs to the extent
the value of the security exceeds the debt.
In a Chapter 11 case under the Bankruptcy Code, the lender is precluded from
foreclosing without authorization from the bankruptcy court. The lenders lien
may be transferred to other collateral and/or be limited in amount to the
value of the lender's interest in the collateral as of the date of the
bankruptcy. The loan term may be extended, the interest rate may be adjusted
to market rates and the priority of the loan may be subordinated to bankruptcy
court-approved financing. The bankruptcy court can, in effect, invalidate due-
on-sale clauses through confirmed Chapter 11 plans of reorganization.
The Bankruptcy Code provides priority to certain tax liens over the lender's
security. This may delay or interfere with the enforcement of rights in
respect of a defaulted Mortgage Loan. In addition, substantive requirements
are imposed upon lenders in connection with the organization and the servicing
of mortgage loans by numerous federal and some state consumer protection laws.
The 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
impose specific statutory liabilities upon lenders who originate loans and who
fail to comply with the provisions of the law. In some cases, this liability
may affect assignees of the loans.
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DUE-ON-SALE CLAUSES IN MORTGAGE LOANS
Due-on-sale clauses permit the lender to accelerate the maturity of the loan
if the borrower sells or transfers, whether voluntarily or involuntarily, all
or part of the real property securing the loan without the lender's prior
written consent. The enforceability of these clauses has been the subject of
legislation or litigation in many states, and in some cases, typically
involving single family residential mortgage transactions, their
enforceability has been limited or denied. In any event, 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 exceptions. As a result, due-on-sale
clauses have become generally enforceable except in those states whose
legislatures exercised their authority to regulate the enforceability of such
clauses with respect to mortgage loans that were (i) originated or assumed
during the "window period" under the Garn-St. Germain Act which ended in all
cases not later than October 15, 1982, and (ii) originated by lenders other
than national banks, federal savings institutions and federal credit unions.
FHLMC has taken the position in its published mortgage servicing standards
that, out of a total of eleven "window period" states, five states (Arizona,
Michigan, Minnesota, New Mexico and Utah) have enacted statutes extending, on
various terms and for varying periods, the prohibition on enforcement of due-
on-sale clauses with respect to certain categories of window period loans.
Also, 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.
In addition, under federal bankruptcy law, due-on-sale clauses may not be
enforceable in bankruptcy proceedings and may, under certain circumstances, be
eliminated in any modified mortgage resulting from such bankruptcy proceeding.
ENFORCEABILITY OF PREPAYMENT AND LATE PAYMENT FEES
Forms of notes, mortgages and deeds of trust used by lenders may 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 the late charges which a lender
may collect from a borrower for delinquent payments. Certain states also limit
the amounts that a lender may collect from a borrower as an additional charge
if the loan is prepaid. Late charges and prepayment fees are typically
retained by servicers as additional servicing compensation.
EQUITABLE LIMITATIONS ON REMEDIES
In connection with lenders' attempts to realize upon their security, courts,
including California courts, have invoked general equitable principles. The
equitable principles are generally designed to relieve the borrower from the
legal effect of his defaults under the loan documents. Examples of judicial
remedies that have been fashioned include judicial requirements that the
lender undertake affirmative and expensive actions to determine the causes of
the borrower's default and the likelihood that the borrower will be able to
reinstate the loan. In some cases, including cases in California, courts have
substituted their judgment for the lender's judgment and have required that
lenders reinstate loans or recast payment schedules in order to accommodate
borrowers who are suffering from temporary financial disability. In other
cases, courts have limited the right of a lender to realize upon its security
if the default under the security agreement is not monetary, such as the
borrower's failure to adequately maintain the property or the borrower's
execution of secondary financing affecting the property. Finally, some courts
have been faced with the issue of whether or not federal or state
constitutional provisions reflecting due process concerns for adequate notice
require that borrowers under security agreements receive notices in addition
to the statutorily-prescribed minimums. For the most part, these cases have
upheld the notice provisions as being reasonable or have found that, in cases
involving the sale by a trustee under a deed of trust or by a mortgagee under
a mortgage having a power of sale, there is insufficient state action to
afford constitutional protections to the borrower.
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Most conventional single-family mortgage loans may be prepaid in full or in
part without penalty. The regulations of the Office of Thrift Supervision (the
"OTS") prohibit the imposition of a prepayment penalty or equivalent fee for
or in connection with the acceleration of a loan by exercise of a due-on-sale
clause. A mortgagee to whom a prepayment in full has been tendered may be
compelled to give either a release of the mortgage or an instrument assigning
the existing mortgage. The absence of a restraint on prepayment, particularly
with respect to Mortgage Loans having higher mortgage rates, may increase the
likelihood of refinancing or other early retirements of the Mortgage Loans.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control Act
of 1980, enacted in March 1980 ("Title V"), provides that state usury
limitations shall not apply to certain types of residential first mortgage
loans originated by certain lenders after March 31, 1980. Similar federal
statutes were in effect with respect to mortgage loans made during the first
three months of 1980. The OTS, as successor to the Federal Home Loan Bank
Board, is authorized to issue rules and regulations and to publish
interpretations governing implementation of Title V. Title V authorized any
state to reimpose interest rate limits by adopting, before April 1, 1983, a
state law, or by certifying that the voters of such state have voted in favor
of any provision, constitutional or otherwise, which expressly rejects an
application of the federal law. Fifteen states adopted such a law prior to the
April 1, 1983 deadline. In addition, even where Title V is not so rejected,
any state is authorized by the law to adopt a provision limiting discount
points or other charges on mortgage loans covered by Title V.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the Soldiers' and Sailors' Civil Relief Act of 1940 (the "Relief
Act"), members of all branches of the military on active duty, including
draftees and reservists in military service, (i) are entitled to have interest
rates reduced and capped at 6% per annum, on obligations (including Mortgage
Loans) incurred prior to the commencement of military service for the duration
of military service, (ii) may be entitled to a stay of proceedings on any kind
of foreclosure or repossession action in the case of defaults on such
obligations entered into prior to military service for the duration of
military service and (iii) may have the maturity of such obligations incurred
prior to military service extended, the payments lowered and the payment
schedule readjusted for a period of time after the completion of military
service. However, the benefits of (i), (ii), or (iii) above are subject to
challenge by creditors and if, in the opinion of the court, the ability of a
person to comply with such obligations is not materially impaired by military
service, the court may apply equitable principles accordingly. If a borrower's
obligation to repay amounts otherwise due on a Mortgage Loan included in the
Trust Fund is relieved pursuant to the Soldiers' and Sailors' Civil Relief Act
of 1940, none of the Trust Fund, the Servicer, the Seller or the Trustee will
be required to advance such amounts but any resulting shortfall will be
covered by the Certificate Insurance Policy.
THE CERTIFICATE INSURANCE POLICY AND THE CERTIFICATE INSURER
The following information has been supplied by the Certificate Insurer for
inclusion in this Prospectus Supplement.
The Certificate Insurer, in consideration of the payment of the premium and
subject to the terms of the Certificate Insurance Policy, thereby
unconditionally and irrevocably guarantees to any Owner (as defined below)
that an amount equal to each full and complete Insured Payment will be
received by the Trustee, or its successor, as trustee for the Owners (the
"Trustee") on behalf of the Owners from the Certificate Insurer, for
distribution by the Trustee to each Owner of each Owner's proportionate share
of the Insured Payment. The Certificate Insurer's obligation under the
Certificate Insurance Policy with respect to a particular Insured Payment
shall be discharged to the extent funds equal to the applicable Insured
Payment are received by the Trustee, whether or not such funds are properly
applied by the Trustee. Insured Payments shall be made only at the time set
forth in
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<PAGE>
the Certificate Insurance Policy and no accelerated Insured Payments shall be
made regardless of any acceleration of the Class A Certificates, unless such
acceleration is at the sole option of the Certificate Insurer.
Notwithstanding the foregoing paragraph, the Certificate Insurance Policy
does not cover shortfalls, if any, attributable to the liability of the Trust
Fund, any REMIC or the Trustee for withholding taxes, if any (including
interest and penalties in respect of any such liability).
The Certificate Insurer will pay any Insured Payment that is a Preference
Amount (as described below) on the Business Day following receipt on a
Business Day by the Fiscal Agent (as described below) of (i) a certified copy
of the order requiring the return of a preference payment, (ii) an opinion of
counsel satisfactory to the Certificate Insurer that such order is final and
not subject to appeal, (iii) an assignment in such form as is reasonably
required by the Certificate Insurer, irrevocably assigning to the Certificate
Insurer all rights and claims of the Owner relating to or arising under the
Class A Certificates against the debtor which made such preference payment or
otherwise with respect to such preference payment and (iv) appropriate
instruments to effect the appointment of the Certificate Insurer as agent for
such Owner in any legal proceeding related to such preference payment, such
instruments being in a form satisfactory to the Certificate Insurer, provided
that if such documents are received after 12:00 noon New York City time on
such Business Day, they will be deemed to be received on the following
Business Day. Such payments shall be disbursed to the receiver or trustee in
bankruptcy named in the final order of the court exercising jurisdiction on
behalf of the Owner and not to any Owner directly unless such Owner has
returned principal or interest paid on the Class A Certificates to such
receiver or trustee in bankruptcy, in which case such payment shall be
disbursed to such Owner.
The Certificate Insurer will pay any other amount payable under the
Certificate Insurance Policy no later than 12:00 noon New York City time on
the later of the Distribution Date on which the related Deficiency Amount is
due or the third Business Day following receipt in New York, New York on a
Business Day by State Street Bank and Trust Company, N.A., as Fiscal Agent for
the Certificate Insurer or any successor fiscal agent appointed by the
Certificate Insurer (the "Fiscal Agent") of a Notice (as described below);
provided that if such Notice is received after 12:00 noon New York City time
on such Business Day, it will be deemed to be received on the following
Business Day. If any such Notice received by the Fiscal Agent is not in proper
form or is otherwise insufficient for the purpose of making a claim under the
Certificate Insurance Policy it shall be deemed not to have been received by
the Fiscal Agent for purposes of this paragraph, and the Certificate Insurer
or the Fiscal Agent, as the case may be, shall promptly so advise the Trustee
and the Trustee may submit an amended Notice.
Insured Payments due under the Certificate Insurance Policy unless otherwise
stated in the Certificate Insurance Policy will be disbursed by the Fiscal
Agent to the Trustee on behalf of the Owners by wire transfer of immediately
available funds in the amount of the Insured Payment less, in respect of
Insured Payments related to Preference Amounts, any amount held by the Trustee
for the payment of such Insured Payment and legally available therefor.
The Fiscal Agent is the agent of the Certificate Insurer only and the Fiscal
Agent shall in no event be liable to Owners for any acts of the Fiscal Agent
or any failure of the Certificate Insurer to deposit, or cause to be
deposited, sufficient funds to make payments due under the Certificate
Insurance Policy.
As used in the Certificate Insurance Policy, the following terms shall have
the following meanings:
"Agreement" means the Pooling and Servicing Agreement, without regard to
any amendment or supplement, unless the Certificate Insurer shall have
consented thereto.
"Business Day" means any day other than a Saturday, a Sunday or a day on
which the Certificate Insurer or banking institutions in New York City or
in the city in which the corporate trust office of the Trustee under the
Agreement is located are authorized or obligated by law or executive order
to close.
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<PAGE>
"Deficiency Amount" means, as of each Distribution Date an amount equal
to the sum of (a) the excess, if any, of the Class A Interest Distribution
Amount over Available Funds for such Distribution Date and (b) the
Overcollateralization Deficit.
"Insured Payment" means (i) as of each Distribution Date, the Deficiency
Amount and (ii) any Preference Amount.
"Notice" means the telephonic or telegraphic notice, promptly confirmed
in writing by telecopy substantially in the form of Exhibit A attached to
the Certificate Insurance Policy, the original of which is subsequently
delivered by registered or certified mail, from the Trustee specifying the
Insured Payment which shall be due and owing on the applicable Distribution
Date.
"Owner" means each Class A Certificateholder (as defined in the
Agreement) who, on the applicable Distribution Date. is entitled under the
terms of the applicable Class A Certificate to payment thereunder.
"Preference Amount" means any amount previously distributed to an Owner
on the Class A Certificates that is recoverable and sought to be recovered
as a voidable preference by a trustee in bankruptcy pursuant to the United
States Bankruptcy Code (11 U.S.C.), as amended from time to time, in
accordance with a final nonappealable order of a court having competent
jurisdiction.
Capitalized terms used in the Certificate Insurance Policy and not otherwise
defined therein shall have the respective meanings set forth in the Agreement
as of the date of execution of the Certificate Insurance Policy, without
giving effect to any subsequent amendment or modification to the Agreement
unless such amendment or modification has been approved in writing by the
Certificate Insurer.
Any notice under the Certificate Insurance Policy or service of process on
the Fiscal Agent may be made at the address listed below for the Fiscal Agent
or such other address as the Certificate Insurer shall specify in writing to
the Trustee.
The notice address of the Fiscal Agent is 15th Floor, 61 Broadway, New York,
New York 10006 Attention: Municipal Registrar and Paying Agency.
The Certificate Insurance Policy is being issued under and pursuant to, and
shall be construed under, the laws of the State of New York, without giving
effect to the conflict of laws principles thereof.
The insurance provided by the Certificate Insurance Policy is not covered by
the Property/Casualty Insurance Security Fund specified in Article 76 of the
New York Insurance Law.
The Certificate Insurance Policy is not cancelable for any reason. The
premium on the Certificate Insurance Policy is not refundable for any reason
including payment, or provision being made for payment, prior to the maturity
of the Class A Certificates.
The Certificate Insurer is the principal operating subsidiary of MBIA Inc.,
a New York Stock Exchange listed company. MBIA Inc. is not obligated to pay
the debts of or claims against the Certificate Insurer. The Certificate
Insurer is domiciled in the State of New York and licensed to do business in
and is subject to regulation under the laws of all 50 states, the District of
Columbia, the Commonwealth of Puerto Rico, the Commonwealth of the Northern
Mariana Islands, the Virgin Islands of the United States and the Territory of
Guam. The Certificate Insurer has two European branches, one in the Republic
of France and the other in the Kingdom of Spain. New York has laws prescribing
minimum capital requirements, limiting classes and concentrations of
investments and requiring the approval of policy rates and forms. State laws
also regulate the amount of both the aggregate and individual risks that may
be insured, the payments of dividends by the Certificate Insurer, changes in
control and transactions among affiliates. Additionally, the Certificate
Insurer is required to maintain contingency reserves on its liabilities in
certain amounts and for certain periods of time.
The consolidated financial statements of the Certificate Insurer, a wholly
owned subsidiary of MBIA Inc., and its subsidiaries as of December 31, 1995
and December 31, 1994 and for the three years ended December
S-71
<PAGE>
31, 1995, prepared in accordance with generally accepted accounting
principles, included in the Annual Report on Form 10-K of MBIA Inc. for the
year ended December 31, 1995, and the consolidated financial statements of the
Certificate Insurer and its subsidiaries for the nine months ended September
30, 1996 and for the periods ending September 30, 1996 and September 30, 1995
included in the Quarterly Report on Form 10-Q of MBIA Inc. for the period
ending September 30, 1996, are hereby incorporated by reference into this
Prospectus Supplement and shall be deemed to be a part hereof. Any statement
contained in a document incorporated by reference herein shall be modified or
superseded for purposes of this Prospectus Supplement to the extent that a
statement contained herein, or in any other subsequently filed document which
also is incorporated by reference herein, modifies or supersedes such
statement. Any statement so modified or superseded shall not be deemed, except
as so modified or superseded, to constitute a part of this Prospectus
Supplement.
All financial statements of the Certificate Insurer and its subsidiaries
included in the documents filed by MBIA Inc. pursuant to Section 13(a), 13(c),
14 or 15(d) of the Securities Exchange Act of 1934, as amended, subsequent to
the date of this Prospectus Supplement and prior to the termination of the
offering of the Class A Certificates shall be deemed to be incorporated by
reference into this Prospectus Supplement and to be a part hereof from the
respective dates of filing such documents.
The tables below present selected financial information of the Certificate
Insurer determined in accordance with statutory accounting practices
prescribed or permitted by insurance regulatory authorities ("SAP") as well as
generally accepted accounting principles ("GAAP"):
<TABLE>
<CAPTION>
SAP
------------------------------------
DECEMBER 31, 1995 SEPTEMBER 30, 1996
(AUDITED) (UNAUDITED)
----------------- ------------------
(IN MILLIONS)
<S> <C> <C>
Admitted Assets......................... $3,814 4,348
Liabilities............................. 2,540 2,911
Capital and Surplus..................... 1,274 1,437
<CAPTION>
GAAP
------------------------------------
DECEMBER 31, 1995 SEPTEMBER 30, 1996
(AUDITED) (UNAUDITED)
----------------- ------------------
(IN MILLIONS)
<S> <C> <C>
Assets.................................. $4,463 4,861
Liabilities............................. 1,937 2,161
Shareholder's Equity.................... 2,526 2,700
</TABLE>
Copies of the financial statements of the Certificate Insurer incorporated
by reference herein and copies of the Certificate Insurer's 1995 year-end
audited financial statements prepared in accordance with statutory accounting
practices are available, without charge, from the Certificate Insurer. The
address of the Certificate Insurer is 113 King Street, Armonk, New York 10504.
The telephone number of the Certificate Insurer is (914) 273-4545.
The Certificate Insurer does not accept any responsibility for the accuracy
or completeness of this Prospectus Supplement or any information or disclosure
contained herein, or omitted herefrom, other than with respect to the accuracy
of the information regarding the Certificate Insurance Policy and Certificate
Insurer set forth under the heading "The Certificate Insurance Policy and the
Certificate Insurer." Additionally, the Certificate Insurer makes no
representation regarding the Certificates or the advisability of investing in
the Certificates.
Moody's Investors Service Inc. ("Moody's") rates the claims paying ability
of the Certificate Insurer "Aaa."
Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies,
Inc. ("Standard & Poor's"), rates the claims paying ability of the Certificate
Insurer "AAA."
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<PAGE>
Fitch Investors Service, L.P. rates the claims paying ability of the
Certificate Insurer "AAA."
Each rating of the Certificate Insurer should be evaluated independently.
The ratings reflect the respective rating agency's current assessment of the
creditworthiness of the Certificate Insurer and its ability to pay claims on
its policies of insurance. Any further explanation as to the significance of
the above ratings may be obtained only from the applicable rating agency.
The above ratings are not recommendations to buy, sell or hold the Class A
Certificates, and such ratings may be subject to revision or withdrawal at any
time by the rating agencies. Any downward revision or withdrawal of any of the
above ratings may have an adverse effect on the market price of the Class A
Certificates. The Certificate Insurer does not guarantee the market price of
the Class A Certificates nor does it guarantee that the ratings on the Class A
Certificates will not be reversed or withdrawn.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
For federal income tax purposes, one or more elections will be made to treat
certain assets of the Trust Fund as a REMIC. The Class A Certificates will be
treated as "regular interests" in a REMIC. For federal income tax purposes,
regular interests in a REMIC are generally treated as debt instruments issued
by the REMIC on the date on which those interests are created, and not as
ownership interests in the REMIC or its assets. Holders of Class A
Certificates that otherwise report income under a cash method of accounting
will be required to report income with respect to such Class A Certificates
under an accrual method. It is not anticipated that the Class A Certificates
will be issued with original issue discount.
In general, as a result of being regular interests in a REMIC, (i) Class A
Certificates held by a thrift institution taxed as a "domestic building and
loan association" will constitute "assets" within the meaning of Section
7701(a)(19)(C) of the Code; and (ii) Class A Certificates held by a real
estate investment trust will constitute "real estate assets" within the
meaning of Section 856(c)(5)(A) of the Code. If less than 95% of the assets
comprising the REMIC are assets qualifying under any of the foregoing sections
of the Code, then the Class A Certificates will be qualifying assets only to
the extent that the assets comprising the REMIC are qualifying assets.
Interest on the Class A Certificates will be interest described in Section
856(c)(3)(B) of the Code to the extent that the Class A Certificates are
treated as "real estate assets" within the meaning of Section 856(c)(5)(A) of
the Code.
All holders of Class A Certificates should see "Certain Federal Income Tax
Consequences" in the accompanying Prospectus for a general discussion of the
material anticipated federal income tax consequences of the purchase,
ownership and disposition of regular interests in a REMIC.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and the Code impose certain restrictions on (a) employee benefit plans (as
defined in Section 3(3) of ERISA), (b) plans described in section 4975(e)(1)
of the Code, including individual retirement accounts or Keogh plans, (c) any
entities whose underlying assets include plan assets by reason of a plan's
investment in such entities (each a "Plan") and (d) persons who have certain
specified relationships to such Plans ("Parties-in-Interest" under ERISA and
"Disqualified Persons" under the Code). Moreover, based on the reasoning of
the United States Supreme Court in John Hancock Life Ins. Co. v. Harris Trust
and Sav. Bank, 114 S. Ct. 517 (1993), an insurance company's general account
may be deemed to include assets of the Plans investing in the general account
(e.g., through the purchase of an annuity contract). ERISA also imposes
certain duties on persons who are fiduciaries of Plans subject to ERISA and
prohibits certain transactions between a Plan and Parties-in-Interest or
Disqualified Persons with respect to such Plans.
The DOL has granted an administrative exemption to Credit Suisse First
Boston Corporation (Prohibited Transaction Exemption 89-90, the "Exemption")
which generally exempts from the application of the prohibited
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<PAGE>
transaction provisions of Section 406(a), Section 406(b)(1), Section 406(b)(2)
and Section 407(a) of ERISA and the excise taxes imposed pursuant to Sections
4975(a) and (b) of the Code, certain transactions relating to the servicing
and operation of asset pools and the purchase, sale and holding of asset-
backed pass-through certificates, including pass-through certificates
evidencing interests in certain secured receivables, secured loans and other
secured obligations, provided that certain conditions set forth in the
Exemption are satisfied. Among the conditions that must be satisfied for the
Exemption to apply are the following:
1. The Acquisition of the Class A Certificates by a Plan is on terms
(including the price for the Class A Certificates) that are at least as
favorable to the Plan as they would be in an arm's length transaction with
an unrelated party;
2. The rights and interests evidenced by the Class A Certificates
acquired by the Plan are not subordinated to the rights and interests
evidenced by other certificates of the Trust Fund;
3. The Class A Certificates acquired by the Plan have received a rating
at the time of such acquisition that is in one of the three highest generic
rating categories from either Standard & Poor's, Moody's, Duff & Phelps
Inc. ("D&P") or Fitch Investor Service, Inc. ("Fitch");
4. The sum of all payments made to the Underwriter in connection with the
distribution of the Class A Certificates represents not more than
reasonable compensation for the placement of the Class A Certificates. The
sum of all payments made to and retained by the Servicer represents not
more than reasonable compensation for the Servicer's services under the
Pooling and Servicing Agreement and reimbursement of the Servicer's
reasonable expenses in connection therewith;
5. The Trustee is not an affiliate of any other member of the Restricted
Group (as defined below); and
6. The Plan investing in the Class A Certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the Securities
and Exchange Commission under the Securities Act of 1933.
The Trust Fund also must meet the following requirements:
a. The corpus of the Trust Fund must consist solely of assets of the type
which have been included in other investment pools;
b. certificates in such other investment pools must have been rated in
one of the three highest rating categories of S&P, Moody's, D&P or Fitch
for at least one year prior to the Plan's acquisition of certificates; and
c. certificates evidencing interests in such other investment pools must
have been purchased by investors other than Plans for at least one year
prior to any Plan's acquisition of Class A Certificates.
In order for the Exemption to apply to certain self-dealing/conflict of
interest prohibited transactions that may occur when a Plan fiduciary causes
the Plan to acquire Class A Certificates, the Exemption requires, among other
matters, that: (i) in the case of an acquisition in connection with the
initial issuance of Certificates, at least fifty percent of each class of
certificates in which Plans have invested is acquired by persons independent
of the Restricted Group and at least fifty percent of the aggregate interest
in the Trust Fund is acquired by persons independent of the Restricted Group
(as defined below); (ii) such fiduciary (or its affiliate) is an obligor with
respect to 5 percent or less of the fair market value of the obligations
contained in the Trust Fund; (iii) the Plan's investment in Class A
Certificates does not exceed twenty-five percent (25%) of all of the
certificates outstanding at the time of the acquisition and (iv) immediately
after the acquisition, no more than twenty-five percent (25%) of the assets of
the Plan are invested in certificates representing an interest in one or more
trusts containing assets sold or serviced by the same entity.
The Exemption does not apply to certain prohibited transactions in the case
of Plans sponsored by the Underwriter, the Trustee, the Servicer, any obligor
with respect to the Mortgage Loans included in the Trust Fund constituting
more than five percent of the aggregate unamortized principal balance of
assets in the Trust Fund, any entity deemed to be a "sponsor" of the Trust
Fund as such term is defined in the exemption, or any affiliate of any such
party (the "Restricted Group").
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<PAGE>
Prior to the earlier of (i) the date on which the Pre-Funding Period expires
and (ii) the date on which the DOL amends the Exemption to permit the use
thereunder of pre-funding accounts as described herein, Plans will not be
permitted to purchase the Class A Certificates. On or after the earlier to
occur of such dates, the Exemption may be available for the purchase of Class
A Certificates by Plans. Before purchasing a Class A Certificate, a fiduciary
of an ERISA Plan should make its own determination as to the availability of
the exemptive relief provided in the Exemption and whether the conditions of
any such exemption will be applicable to the Class A Certificates. Any
fiduciary of an ERISA Plan considering whether to purchase a Class A
Certificate should also carefully review with its own legal advisors the
applicability of the fiduciary duty and prohibited transaction provisions of
ERISA and the Code to such investment.
A governmental plan as defined in Section 3(32) of ERISA is not subject to
ERISA, or Code Section 4975. However, such a governmental plan may be subject
to a federal, state, or local law, which is, to a material extent, similar to
the provisions of ERISA or Code Section 4975 ("Similar Law"). A fiduciary of a
governmental plan should make its own determination as to the need for and the
availability of any exemptive relief under Similar Law.
The sale of Certificates to an ERISA Plan is in no respect a representation
by the Depositor or the Placement Agent that this investment meets all
relevant legal requirements with respect to investments by ERISA Plans
generally or any particular ERISA Plan, or that this investment is appropriate
for ERISA Plans generally or any particular ERISA Plan.
LEGAL INVESTMENT
The Class A Certificates will not constitute "mortgage related securities"
for purposes of the Secondary Mortgage Market Enhancement Act of 1984
("SMMEA").
Additionally, institutions subject to the jurisdiction of the Office of the
Comptroller of the Currency, the Board of Governors of the Federal Reserve
System, the Federal Deposit Insurance Corporation, the Office of Thrift
Supervision, the National Credit Union Administration or state banking or
insurance authorities should review applicable rules, supervisory policies and
guidelines of these agencies before purchasing any of the Class A
Certificates, since such Class A Certificates may be deemed to be unsuitable
investments under one or more of these rules, policies and guidelines and
certain restrictions may apply to such investments. It should also be noted
that certain states have enacted legislation limiting to varying extents the
ability of certain entities (in particular, insurance companies) to invest in
mortgage related securities. Investors should consult with their own legal
advisors in determining whether and to what extent the Class A Certificates
constitute legal investments for such investors. See "Legal Investment" in the
Prospectus Supplement.
UNDERWRITING
The Underwriter has agreed, subject to the terms and conditions of the
Underwriting Agreement, to purchase from the Depositor all of the Class A
Certificates. In the event of default by the Underwriter, the Underwriting
Agreement provides that, in certain circumstances, the Underwriting Agreement
may be terminated.
The Depositor has been advised by the Underwriter that it proposes initially
to offer each Class of Class A Certificates to the public at the related price
set forth on the cover hereof, and to certain dealers at such price less the
initial concession not in excess of, based on Initial Certificate Principal
Balances, % of the Class A-1 Certificates, % of the Class A-2
Certificates, % of the Class A-3 Certificates, % of the Class A-4
Certificates, % of the Class A-5 Certificates, and % of the Class A-6
Certificates. The Underwriter may allow and such dealers may reallow a
concession not in excess of, based on Initial Certificate Principal Balances,
% of the Class A-1 Certificates, % of the Class A-2 Certificates, % of
the Class A-3 Certificates, % of the Class A-4 Certificates, % of the
Class A-5 Certificates, and % of the Class A-6 Certificates, to certain
other dealers. After the initial public offering of each Class of Class A
Certificates, the public offering price and such concessions for such Class
may be changed.
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<PAGE>
The Underwriting Agreement provides that the Seller and the Depositor will
indemnify the Underwriter against certain liabilities, including liabilities
under the Securities Act of 1933, as amended, or contribute to payments the
Underwriter may be required to make in respect thereof.
The Underwriter may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation
M under the Securities Exchange Act of 1934, as amended (the "Exchange Act").
Over-allotment involves syndicate sales in excess of the offering size, which
creates a syndicate short position. Stabilizing transactions permit bids to
purchase the underlying security so long as the stabilizing bids do not exceed
a specified maximum. Syndicate covering transactions involve purchases of the
Class A Certificates in the open market after the distribution has been
completed in order to cover syndicate short positions. Penalty bids permit the
Underwriter to reclaim a selling concession from a syndicate member when the
Class A Certificates originally sold by such syndicate member are purchased in
a syndicate covering transaction to cover syndicate short positions. Such
stabilizing transactions syndicate covering transactions and penalty bids may
cause the price of the Class A Certificates to be higher than it would
otherwise be in the absence of such transactions.
REPORT OF EXPERTS
The consolidated financial statements of the Certificate Insurer as of
December 31, 1995 and December 31, 1994 and for the three years ended December
31, 1995 incorporated by reference into this Prospectus Supplement have been
audited by Coopers & Lybrand, L.L.P., independent accountants, as set forth in
their report thereon, incorporated by reference herein in reliance upon the
authority of such firm as experts in accounting and auditing.
RATINGS
The Class A Certificates will be rated at their initial issuance "AAA" by
S&P and "Aaa" by Moody's (the "Rating Agencies").
The Rating Agencies' rating on mortgage loan asset-backed certificates
address the likelihood of the receipt by the Certificateholders of payments
required under the Pooling and the Servicing Agreement. The Rating Agencies'
ratings take into consideration the claims paying ability of the Certificate
Insurer.
The Depositor has not requested a rating on the Class A Certificates by any
rating agency other than the Rating Agencies. However, there can be no
assurance as to whether any other rating agency will rate the Class A
Certificates, or, if it does, what rating would be assigned by any such other
rating agency. A rating on the Class A Certificates by another rating agency,
if assigned at all, may be lower than the ratings assigned to the Class A
Certificates by the Rating Agencies.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning
rating organization. Each security rating should be evaluated independently of
any other security rating. In the event that the rating initially assigned to
any of the Class A Certificates is subsequently lowered for any reason, no
person or entity is obligated to provide any additional support or credit
enhancement with respect to such Class A Certificates.
LEGAL MATTERS
Certain legal matters in connection with the issuance of the Class A
Certificates will be passed upon by Stroock & Stroock & Lavan LLP, New York,
New York. Andrews & Kurth L.L.P., Washington, D.C., will act as counsel to the
Underwriter. Certain legal matters relating to the Certificate Insurer and the
Certificate Insurance Policy will be passed upon for the Certificate Insurer
by Kutak Rock, Omaha Nebraska.
S-76
<PAGE>
INDEX OF SIGNIFICANT PROSPECTUS SUPPLEMENT DEFINITIONS
<TABLE>
<CAPTION>
TERM PAGE
- ---- ----
<S> <C>
Accepted Servicing Practices............................................... S-56
Accrual Period............................................................. S-8
Act........................................................................ S-20
Advanta.................................................................... S-3
Advanta Parent............................................................. S-34
Agreement.................................................................. S-70
Available Funds............................................................ S-48
Book Entry Certificates.................................................... S-52
Business Day............................................................... S-5
Capitalized Interest Account............................................... S-8
Cedel...................................................................... S-4
Cedel Participants......................................................... S-54
Certificate Account........................................................ S-46
Certificate Insurance Policy............................................... S-5
Certificate Insurer........................................................ S-5
Certificate Insurer Premium Amount......................................... S-50
Certificate Owners......................................................... S-4
Certificateholders......................................................... S-4
Certificates............................................................... S-1
Charged-off Loan........................................................... S-10
Charged-off Loan Loss...................................................... S-49
Class...................................................................... S-3
Class A Carry-Forward Amount............................................... S-50
Class A Distribution Amount................................................ S-10
Class A Interest Distribution Amount....................................... S-8
Class A Principal Balance.................................................. S-8
Class A Principal Distribution Amount...................................... S-9
Class A Certificates....................................................... S-3
Class A-1 Certificates..................................................... S-3
Class A-2 Certificates..................................................... S-3
Class A-3 Certificates..................................................... S-3
Class A-4 Certificates..................................................... S-3
Class A-5 Certificates..................................................... S-3
Class A-6 Certificates..................................................... S-3
Class B Certificates....................................................... S-3
Clean-Up Call Date......................................................... S-61
Closing Date............................................................... S-4
Collection Account......................................................... S-45
Collection Period.......................................................... S-9
Combined Loan-to-Value Ratio............................................... S-30
Compensating Interest...................................................... S-14
Cooperative................................................................ S-54
Credit Bureau Risk Score................................................... S-22
Curtailment................................................................ S-46
Cut-Off Date............................................................... S-4
D&P........................................................................ S-74
Deficiency Amount.......................................................... S-71
Definitive Certificate..................................................... S-52
Delinquency Interest Advances.............................................. S-13
Delinquent................................................................. S-47
Depositor.................................................................. S-3
Disqualified Persons....................................................... S-73
Distribution Date.......................................................... S-5
DOL........................................................................ S-16
DTC........................................................................ S-3
DTI........................................................................ S-23
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
TERM PAGE
- ---- ----
<S> <C>
Due Date................................................................... S-6
Due-on-sale................................................................ S-58
Eligible Account........................................................... S-45
ERISA...................................................................... S-73
Euroclear.................................................................. S-4
Euroclear Operator......................................................... S-54
Euroclear Participants..................................................... S-54
European Depositories...................................................... S-52
Event of Default........................................................... S-60
Excess Cashflow............................................................ S-48
Excess Overcollateralization Amount........................................ S-48
Exchange Act............................................................... S-76
Exemption.................................................................. S-16
Fair, Isaac................................................................ S-22
FDIC....................................................................... S-34
Financial Intermediary..................................................... S-52
Fiscal Agent............................................................... S-70
Fitch...................................................................... S-74
GAAP....................................................................... S-72
Garn-St Germain Act........................................................ S-68
HUD........................................................................ S-32
Initial Certificate Principal Balance...................................... S-3
Initial Mortgage Loans..................................................... S-6
Insurance Proceeds......................................................... S-46
Insured Distribution Amount................................................ S-13
Insured Payment............................................................ S-13
Liquidated Loan............................................................ S-11
Loan Repurchase Price...................................................... S-45
Maximum Collateral Amount.................................................. S-15
MLA........................................................................ S-24
Monthly Payment............................................................ S-21
Moody's.................................................................... S-16
Mortgage Interest Rate..................................................... S-8
Mortgage Loans............................................................. S-5
Mortgage Note.............................................................. S-8
Mortgage Pool.............................................................. S-5
Mortgaged Properties....................................................... S-5
Mortgages.................................................................. S-21
Net Liquidation Proceeds................................................... S-11
Net REO Proceeds........................................................... S-46
Nonrecoverable Advance..................................................... S-47
Notice..................................................................... S-71
Original Class A Principal Balance......................................... S-9
Original Pre-Funded Amount................................................. S-7
OTS........................................................................ S-69
Overcollateralization Amount............................................... S-11
Overcollateralization Deficit.............................................. S-49
Overcollateralization Increase Amount...................................... S-48
Overcollateralization Reduction Amount..................................... S-48
Owner...................................................................... S-71
Parties-in-Interest........................................................ S-73
Pass through Rate.......................................................... S-3
Percentage Interest........................................................ S-4
Plan....................................................................... S-73
Pooling and Servicing Agreement............................................ S-3
Preference Amount.......................................................... S-71
Pre-Funding Account........................................................ S-2
Pre-Funding Period......................................................... S-8
Prepayment Assumption...................................................... S-38
</TABLE>
S-78
<PAGE>
<TABLE>
<CAPTION>
TERM PAGE
- ---- ----
<S> <C>
Principal Balance.......................................................... S-51
Principal Prepayment....................................................... S-46
Prospectus................................................................. S-2
Prospectus Supplement...................................................... S-2
Purchaser.................................................................. S-33
Qualified Substitute Mortgage Loan......................................... S-44
Rating Agencies............................................................ S-76
Record Date................................................................ S-4
Redemption Period.......................................................... S-19
Reimbursement Amount....................................................... S-51
Relevant Depositary........................................................ S-52
Relief Act................................................................. S-69
REMIC...................................................................... S-16
Required Overcollateralization Level....................................... S-12
Residual Certificate....................................................... S-3
Restricted Group........................................................... S-74
Rules...................................................................... S-52
Sample Mortgage Loans...................................................... S-30
SAP........................................................................ S-72
Seller..................................................................... S-3
Senior Liens............................................................... S-22
Senior Principal Distribution Amount....................................... S-9
Servicer................................................................... S-3
Servicer Remittance Amount................................................. S-46
Servicer Remittance Date................................................... S-46
Servicing Advances......................................................... S-14
Servicing Fee.............................................................. S-15
Servicing Fee Rate......................................................... S-47
Similar Law................................................................ S-75
SMMEA...................................................................... S-75
Standard & Poor's.......................................................... S-16
Statistical Calculation Date............................................... S-4
Subordinate Certificates................................................... S-3
Subsequent Cut-Off Date.................................................... S-7
Subsequent Mortgage Loans.................................................. S-6
Subsequent Transfer Date................................................... S-7
Substitution Adjustment.................................................... S-44
Successor Servicer......................................................... S-60
Terms and Conditions....................................................... S-54
Title V.................................................................... S-69
Trust Fund................................................................. S-4
Trustee.................................................................... S-3
Trustee Fee................................................................ S-62
Trustee's Mortgage File.................................................... S-43
Underwriter................................................................ S-1
Weighted Average Life...................................................... S-38
</TABLE>
S-79
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Preferred
Mortgage Asset-Backed Certificates, Series 1996-2 (the "Global Securities")
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"), Cedel or Euroclear. The Global Securities will be tradeable as home
market instruments in both the European and U.S. domestic markets. Initial
settlement and all secondary trades will settle in same-day funds.
Secondary market trading between investors holding Global Securities through
Cedel 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 Cedel or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-
payment basis through the respective Depositaries of Cedel 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, Cedel 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 Cedel or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to
the securities custody accounts on the settlement date against payment in
same-day funds.
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
manufactured housing contract pass-through certificates issues in same-day
funds.
Trading between Cedel and/or Euroclear Participants. Secondary market
trading between Cedel Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
I-1
<PAGE>
Trading between DTC seller and Cedel or Euroclear purchaser. When Global
Securities are to be transferred from the account of a DTC Participant to the
account of a Cedel Participant or a Euroclear Participant, the purchaser will
send instructions to Cedel or Euroclear through a Cedel Participant or
Euroclear Participant at least one business day prior to settlement. Cedel or
Euroclear will instruct the 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 the actual number
of days in such accrual period and a year assumed to consist of 360 days. For
transactions settling on the 31st of the month, payment will include interest
accrued to and excluding the first day of the following month. Payment will
then be made by the 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 Cedel Participant's or Euroclear Participant's account. The securities
credit will appear the next day (European time) and the cash debt will be
back-valued to, and the interest on the Global Securities will accrue from,
the value date (which would be the preceding day when settlement occurred in
New York). If settlement is not completed on the intended value date (i.e.,
the trade fails), the Cedel or Euroclear cash debt will be valued instead as
of the actual settlement date.
Cedel Participants and Euroclear Participants will need to make available to
the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to preposition funds for
settlement, either from cash on hand or existing lines of credit, as they
would for any settlement occurring within Cedel or Euroclear. Under this
approach, they may take on credit exposure to Cedel or Euroclear until the
Global Securities are credited to their accounts one day later.
As an alternative, if Cedel or Euroclear has extended a line of credit to
them, Cedel Participants or Euroclear Participants can elect not to
preposition funds and allow that credit line to be drawn upon the finance
settlement. Under this procedure, Cedel Participants or Euroclear Participants
purchasing Global Securities would incur overdraft charges for one day,
assuming they cleared the overdraft when the Global Securities were credited
to their accounts. However, interest on the Global Securities would accrue
from the value date. Therefore, in many cases the investment income on the
Global Securities earned during that one day period may substantially reduce
or offset the amount of such overdraft charges, although this result will
depend on each Cedel Participant's or Euroclear Participant's particular cost
of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Global Securities
to the respective European Depositary for the benefit of Cedel Participants or
Euroclear Participants. The sale proceeds will be available to the DTC seller
on the settlement date. Thus, to DTC Participants, a cross-market transaction
will settle no differently than a trade between two DTC Participants.
Trading between Cedel or Euroclear Seller and DTC Purchaser. Due to time
zone differences in their favor, Cedel Participants and Euroclear Participants
may employ their customary procedures for transactions in which Global
Securities are to be transferred by the respective clearing system, through
the respective Depositary, to a DTC Participant. The seller will send
instructions to Cedel or Euroclear through a Cedel Participant or Euroclear
Participant at least one business day prior to settlement. In these cases
Cedel or Euroclear will instruct the respective Depositary, as appropriate, to
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 the actual number of days in such accrual period and a year
assumed to consist of 360 days. For transactions settling on the 31st of the
month, payment will include interest accrued to and excluding the first day of
the following month. The payment will then be reflected in the account of the
Cedel Participant or Euroclear Participant the following month. The payment
will then be reflected in the account of the Cedel Participant or Euroclear
Participant the following day, and receipt of the cash proceeds in the Cedel
Participant's or Euroclear Participant's account would be back-valued to the
value date (which would be the preceding day, when settlement occurred in New
York). Should the Cedel Participant or Euroclear Participant have a line of
credit with its respective clearing system and elect
I-2
<PAGE>
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 Cedel Participant's or
Euroclear Participant's account would instead be valued as of the actual
settlement date.
Finally, day traders that use Cedel or Euroclear and that purchase Global
Securities from DTC Participants for delivery to Cedel Participants or
Euroclear Participants should note that these trades would automatically fail
on the sale side unless affirmative action were taken. At least three
techniques should be readily available to eliminate this potential problem:
(a) borrowing through Cedel or Euroclear for one day (until the purchase
side of the day trade is reflected in their Cedel 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 Cedel 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 Cedel Participant or
Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through Cedel or
Euroclear (or through DTC if the holder has an address outside the U.S.) will
be subject to the 30% U.S. 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). Beneficial owners of Global
Securities that are non-U.S. Persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status).
If the information shown on Form W-8 changes, a new Form W-8 must be filed
within 30 days of such change.
Exemption for non-U.S. Persons with effectively connected income (Form
4224). 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).
Exemption or reduced rate for non-U.S. Persons resident in treaty countries
(Form 1001). 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 treaty terms) by filing Form 1001
(Ownership, Exemption or Reduced Rate Certificate). If the treaty provides
only for a reduced rate, withholding tax will be imposed at that rate unless
the filer alternatively files Form W-8. Form 1001 may be filed by the
Certificate Owner or his agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The 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
I-3
<PAGE>
whom it holds (the clearing agency, in the case of persons holding directly on
the books of the clearing agency). Form W-8 and Form 1001 are effective for
three calendar years and Form 4224 is effective for one calendar year.
The term "U.S. Person" means (i) a citizen or resident of the United States,
(ii) a corporation or partnership organized in or under the laws of the United
States or any political subdivision thereof; (iii) an estate the income of
which is includible in gross income for United States tax purposes, regardless
of its source; and (iv) a trust other than a "foreign trust" as defined in
Section 7701(a)(31) of the Code. 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.
I-4
<PAGE>
P R O S P E C T U S
Credit Suisse First Boston Mortgage Securities Corp.
Depositor
ABS Mortgage and Manufactured Housing Contract
Pass-Through Certificates (Issuable in Series)
----------------
The ABS Mortgage and Manufactured Housing Contract Pass-Through Certificates
(the "Certificates") offered hereby and by the related Prospectus Supplements
will be offered from time to time in series (each, a "Series") in one or more
separate classes (each, a "Class"), which may be divided into one or more
subclasses (each, a "Subclass"), that represent interests in specified
percentages of principal and interest (a "Percentage Interest") with respect
to the related Mortgage Pool or the Contract Pool (each, as defined below),
or that 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 Credit Suisse First Boston Mortgage
Securities Corp. (the "Depositor") from time to time. The trust property of
each trust (the "Trust Fund") will consist of a pool containing one- to
four-family residential mortgage loans, 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 Certificates (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 (the "Mortgage Certificates") and related property (the
"Mortgage Pool") or a pool of manufactured housing 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"), or
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 Certificates of one or more
Classes or Subclasses 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 Certificates
of one or more Classes or Subclasses 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
the Prospectus is being delivered, together with specific
information regarding the Certificates of such Series.
The Certificates do not represent an obligation of or interest in the
Depositor or any affiliate thereof. Neither the Certificates, 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 19 HEREIN FOR A DISCUSSION OF
CERTAIN FACTORS THAT POTENTIAL INVESTORS SHOULD CONSIDER IN
DETERMINING WHETHER TO INVEST IN THE CERTIFICATES OF A
SERIES IN RESPECT OF WHICH THIS PROSPECTUS IS BEING DELIVERED.
<PAGE>
Offers of the Certificates may be made through one or more different methods,
including offerings through underwriters, which may include Credit Suisse
First Boston Corporation, an affiliate of the Depositor, as more fully
described under "Plan of Distribution" and in the related Prospectus
Supplement. Certain offerings of the Certificates, as specified in the
related Prospectus Supplement, may be made in one or more transactions
exempt from the registration requirements of the Securities Act of
1933. Such offerings are not being made pursuant to the Registration
Statement of which this Prospectus forms a part.
There will have been no public market for the Certificates 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 Certificates as one or more Real Estate
Mortgage Investment Conduits (each, a "REMIC"). See "Certain
Federal Income Tax Consequences."
If so specified in the Prospectus Supplement relating to a Series of
Certificates, 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 Certificates
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 February , 1997.
2
<PAGE>
PROSPECTUS SUPPLEMENT
The Prospectus Supplement with respect to each Series of Certificates will,
among other things, set forth with respect to such Series of Certificates: (i)
the identity of each Class or Subclass within such Series; (ii) the undivided
interest, Percentage Interest, Stated Principal Balance or notional amount of
each Class or Subclass of Certificates; (iii) the Pass-Through Rate, Interest
Rate or Annual Rate borne by each Class or Subclass 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
Certificates within such Series; (vi) the identity of each Class or Subclass
of Compound Interest Certificates, if any, within such Series; (vii) the
method used to calculate the amount to be distributed with respect to each
Class or Subclass of Certificates; (viii) the order of application of
distributions to each of the Classes or Subclasses 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 Certificates 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
Certificates 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 pursuant to which a Series of
Certificates is issued 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, Credit Suisse First Boston Mortgage Securities
Corp., 11 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 Certificates offered hereby. The Depositor will
provide or cause to
3
<PAGE>
be provided without charge to each person to whom this Prospectus is delivered
in connection with the offering of one or more Classes of Certificates, 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 Certificates, 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: Credit
Suisse First Boston Mortgage Securities Corp., 11 Madison Avenue, New York,
New York 10010, telephone number (212) 325-2000.
IF AND TO THE EXTENT REQUIRED BY APPLICABLE LAW OF REGULATIONS, THIS
PROSPECTUS AND THE ATTACHED PROSPECTUS SUPPLEMENT WILL ALSO BE SUED 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.
4
<PAGE>
SUMMARY OF TERMS
The following 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 Certificates 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
Pass-Through Certificates (the "Certificates"),
issuable in series (each, a "Series"). The
Certificates 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 another Class or Subclass 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 or more 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
Certificates") 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
such Classes or Subclasses may receive unequal
amounts of the distributions of principal 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, which
proportions may change over time subject to
certain
5
<PAGE>
conditions. Payments may be applied to any one or
more Class or Subclass 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 to be
created by the Depositor from time to time. 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 home equity 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
Certificates 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
conditional sales contracts and installment loan
agreements (the "Contracts") or participation
certificates representing 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
Certificates will be offered in fully registered
form only, in one or more Classes, which may be
divided into one or more Subclasses evidencing
the right to receive a share of principal
6
<PAGE>
payments and the percentages of interest payments
on the underlying Mortgage Loans, Mortgage
Certificates or Contracts at the Pass-Through
Rate for the related Mortgage Pool or Contract
Pool. If so specified in the related Prospectus
Supplement, Multi-Class Certificates of a Series
may be issued with the Stated Principal Balances
and the Interest Rates therein specified. At the
time of issuance, each Certificate 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...................
Credit Suisse First Boston Mortgage Securities
Corp., 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 Certificates."
Interest.................... Interest will be distributed on the days
specified in the Prospectus Supplement with
respect to 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 within such Series,
commencing on the day specified in such
Prospectus Supplement, in the manner specified in
such Prospectus Supplement. See "Yield
Considerations" and "Description of the
Certificates--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 Certificates will be
distributed on each Distribution Date, commencing
on the date specified in the related Prospectus
Supplement in the priority and manner specified
in such Prospectus Supplement. If so specified in
the Prospectus Supplement with respect to a
Series that includes Multi-Class Certificates,
distributions on such Multi-Class Certificates
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 Certificates
(before taking into account the amount of
interest accrued and added to the Stated
Principal Balance of any Class or of Compound
Interest Certificates) 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 and Prepayment
Considerations"
7
<PAGE>
and "Description of the Certificates--Payments on
Mortgage Loans" and "--Payments on Contracts." If
so specified in the Prospectus Supplement
relating to a Series, the Multi-Class
Certificates 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 Pooling and Servicing Agreement, 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 Certificates--Special
Distributions."
The Mortgage Pools.......... If so specified in the related Prospectus
Supplement, the Certificates of a Series will
represent the interest specified in such
Prospectus Supplement in 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 Pools may be
formed from time to time in varying sizes.
Fixed Pass-Through Rate
Mortgage Pools.............. Unless otherwise specified in the related
Prospectus Supplement, with respect to each
Mortgage Pool included in the Trust Fund with
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<PAGE>
respect to a Series bearing a fixed Pass-Through
Rate, the Depositor will be obligated to deliver
Mortgage Loans that (i) have interest rates (the
"Mortgage Rates") at least 3/8 of 1% over the
interest rate (the "Pass-Through Rate") for such
Series, (ii) conform to the eligibility
requirements for such Series set forth in the
related Prospectus Supplement, and (iii) have an
aggregate principal balance equal to the amount
specified in such Prospectus Supplement, subject
to a permitted variance of up to 10%.
Variable Pass-through Rate
Mortgage Pools.............. If so specified in the related Prospectus
Supplement, the Depositor may establish one or
more Mortgage Pools, each of which will have a
variable as opposed to a fixed Pass-Through Rate.
Unless otherwise provided in the applicable
Prospectus Supplement, the variable Pass-Through
Rate will equal the weighted average of the
Mortgage Rates of all of the Mortgage Loans in
the Mortgage Pool minus the fixed percentage
servicing fee for each Mortgage Loan set forth in
the related Prospectus Supplement or in a Current
Report on Form 8-K. A Mortgage Pool with a
variable Pass-Through Rate may be composed of
Mortgage Loans that have fluctuating Mortgage
Rates. The characteristics of a variable Pass-
Through Rate and its effect on the yield to
Certificateholders as well as the servicing
compensation payable to the related Servicer and
the Master Servicer and the amounts, if any, with
respect to such Mortgage Loans payable to the
Depositor or to the person or entity specified in
the related Prospectus Supplement will be more
fully described in such Prospectus Supplement.
Mortgage Certificates....... If so specified in the related Prospectus
Supplement, the Trust Fund for a Series of
Certificates 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 Certificates of a Series will
represent the interest specified in such
Prospectus Supplement in 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 conditional
sales contracts and
9
<PAGE>
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 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 Certificates of a Series.
The yield on any Class of Certificates, the
purchase price of which is greater than the
aggregate amount of the Principal Distributions
to be made to such Class (a "Premium
Certificate"), 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 Certificate
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
Certificates not only to suffer 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
Certificates that are Premium Certificates) will
likely result in a lower than anticipated yield
to Holders of Certificates 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
Certificate"). The Prospectus Supplement for each
Series of Certificates 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.
10
<PAGE>
The yield to Certificateholders 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 "Yield Considerations."
Pre-Funding................. If so specified in the related Prospectus
Supplement, a portion of the issuance proceeds of
the Certificates 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 or Contracts 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 or Contracts, 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 Certificates-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 or Contracts 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
Certificates 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 or Contracts to be
acquired during the Pre-Funding Period will be
subject to the same representations and
warranties as the Mortgage Loans or Contracts
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 Certificates issued
pursuant to a particular offering.
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<PAGE>
Credit Support.............. Neither the Certificates nor the Trust Assets are
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 or in
addition to the foregoing credit support
arrangements if so specified in the related
Prospectus Supplement, the Certificates of a
Series may be issued in one or more Classes or
Subclasses. Payments on the Certificates of one
or more Classes or Subclasses (the "Senior
Certificates") may be supported by a prior right
to receive distributions attributable or
otherwise payable to another Class or Subclass
(the "Subordinated Certificates") 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
Certificates may be subordinated to another Class
or Subclass of Subordinated Certificates 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
the Certificates. 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").
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 or Pooling 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
12
<PAGE>
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 Certificates of the Series
evidencing interests in such Mortgage Pool or
Contract Pool, 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
Pooling and Servicing 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 Certificates 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
Certificates may, in addition to or in lieu of
the foregoing, provide coverage with respect to
the unpaid principal or notional amount of the
Certificates 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
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 such 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
13
<PAGE>
Certificateholders. See "Description of the
Certificates--Presentation of Claims."
C. Mortgagor Bankruptcy If so specified in the related Prospectus
Bond........................ Supplement, the Master Servicer, if any, or the
Depositor or the applicable Servicer will obtain
and use its best reasonable efforts to maintain a
Mortgagor Bankruptcy Bond for 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 If so specified in the related Prospectus
Certificates................ Supplement, the rights of holders of the
Certificates 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
Certificates of one or more Classes or Subclasses
of such Series to receive such distributions to
the extent described in the related Prospectus
Supplement, and 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 Certificates of the full
amount of scheduled payments of principal and
interest due them and to reduce the likelihood
that the holders of such Senior Certificates will
experience losses. See "Credit Support--
Subordinated Certificates."
E. Shifting Interest........ If so specified in the applicable Prospectus
Supplement, the protection afforded to holders of
Senior Certificates of a Series by the
subordination of certain rights of holders of
Subordinated Certificates 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 Certificates
to receive, prior to any distribution being made
in respect of the holders of the related
Subordinated Certificates, 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 Certificates 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 Certificates will have the effect of
accelerating the amortization of the Senior
Certificates while increasing the respective
interest in the Trust Fund
14
<PAGE>
evidenced by the Subordinated Certificates.
Increasing the respective interest of the
Subordinated Certificates relative to that of the
Senior Certificates is intended to preserve the
availability of the benefits of the subordination
provided by the Subordinated Certificates. See
"Description of the Certificates--Distributions
of Principal and Interest" and "--Distributions
on Certificates" and "Credit Support--Shifting
Interest."
F. Reserve Fund............. If so specified in the related Prospectus
Supplement, a Reserve Fund may be established for
such 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 manufactured housing
conditional sales contracts and installment loan
agreements (the "Subordinated Pool"), with the
aggregate principal balance specified in the
related Prospectus Supplement, or by the deposit
of cash in the amount specified in the related
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 manufactured housing conditional sales
contracts and installment loan agreements in the
Subordinated Pool, until the Reserve Fund
(without taking into account the amount of any
Initial Deposit) 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 manufactured housing
conditional sales contracts and installment loan
agreements in the Subordinated Pool, will be
retained to the extent necessary to maintain such
Reserve Fund (without taking into account the
amount of the Initial Deposit, if any) at the
related Required Reserve. 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 Certificates 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 such
Series may be funded at a lesser amount or in
another manner acceptable to the Rating Agency
rating such Series. See "Credit Support--
Subordinated Certificates" and "--Reserve Fund."
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
Certificates by the Depositor with the Trustee on
the related Delivery Date if such assets are
required to make timely
15
<PAGE>
distributions in respect of principal of, and
interest on, the Certificates of such Series, are
otherwise required as a condition to the rating
of such Certificates 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 Certificates 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 Pooling and Servicing
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 Certificates, the Trust
will enter into or obtain an assignment of a swap
agreement or 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. See
"Credit Support--Swap Agreement."
I. Certificate Guarantee If so specified in the related Prospectus
Insurance................... Supplement, credit enhancement for a Series may
be provided by an insurance policy (the
"Certificate Guarantee Insurance") issued by one
or more insurance companies. Such Certificate
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 Certificateholders 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 Policies on Mortgage Loans," "--
Standard Hazard Insurance Policies on the
Manufactured Homes" and "--Special Hazard
Insurance Policies."
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If so specified in the Prospectus Supplement
Substitution of Trust relating to a Series of Certificates, within the
Assets...................... period following the date of issuance of such
Certificates 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 Pooling and Servicing
Agreement. See "Description of the Certificates--
Assignment of Mortgage Loans," "--Assignment of
Contracts" and "--Assignment of Mortgage
Certificates."
Advances.................... 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 and
interest on the Mortgage Loans and Contracts (the
"Advances") under certain circumstances. See
"Description of the Certificates--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 a 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
that Series. See "Maturity and Prepayment
Considerations" and "Description of the
Certificates--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
Certificates could give rise to a transaction
prohibited or otherwise impermissible under ERISA
or Section 4975 of the Code. See "ERISA
Considerations."
Tax Status.................. See "Certain Federal Income Tax Consequences."
Legal Investment............ If so specified in the related Prospectus
Supplement relating to a Series of Certificates,
a Class or Subclass of such certificates 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 one of the two highest rating categories by at
least one nationally recognized statistical
rating organization.
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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 Certificates. If so
specified in the related Prospectus Supplement,
the purchase of the Trust Assets for a Series may
be effected by an exchange of Certificates by the
Depositor with the seller of such Trust Assets.
See "Use of Proceeds."
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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 Certificates, prospective investors should
carefully consider the following risk factors before investing in any Class or
Classes of Certificates of any such Series.
LIMITED LIQUIDITY
There can be no assurance that a secondary market for the Certificates of
any Series will develop or, if it does develop, that it will provide
Certificateholders with liquidity of investment or that it will continue for
the life of the Certificates of any Series. The Prospectus Supplement for any
Series of Certificates may indicate that an underwriter specified therein
intends to establish a secondary market in such Certificates; however, no
underwriter will be obligated to do so. The Certificates 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 Certificates of a
Series. The Certificates 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 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 Certificates
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 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 Certificates, 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 Certificates, 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 other Classes of
Certificates of the same Series; a Reserve Fund; and any combination thereof.
See "Credit Support" herein. 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 Certificates 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 Certificates of any Series which
generally represent interests in mortgage loans or manufactured housing
conditional sales contracts and installment loan agreements ("contracts"), as
the case may be, may be affected by, among other things, a decline in real
estate values and changes in the mortgagor's or obligor's 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
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Contracts, as the case may be, underlying any Series of Certificates have
remained or will remain at their levels on the dates of origination of the
related Mortgage Loans, mortgage loans 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 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 "Yield Considerations" and "Maturity and
Prepayment Considerations" herein. To the extent that such losses are not
covered by the applicable credit support, holders of Certificates of the
Series evidencing interests in 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 and
unpaid interest on the defaulted Mortgage Loans or Contracts. In addition to
the foregoing, certain geographic regions on 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 Certificates 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;--Underwriting
Standards;--The Contract Pools; and --Underwriting Policies".
PREPAYMENT AND YIELD CONSIDERATIONS
The rate and timing of principal payments on the Certificates 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 Certificates are 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 Certificates 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 Certificates will also depend on the Pass-Through
Rate and the purchase price for such Certificates. The yield to investors on
any Class of Certificates 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 Certificates 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
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assumed at the time of purchase. Conversely, if a Class of Certificates 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 and principal on one or more Classes of Certificates
of a Series may be subordinated in priority of payment to interest and
principal due on one or more other Classes of Certificates 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 Certificates 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 the applicable
Prospectus Supplement, and will not be registered in the names of the holders
of the Certificates of such Series or their nominees. Because of this, unless
and until Certificates in fully registered, certificated form ("Definitive
Certificates") for such Series are issued, holders of such Certificates will
not be recognized by the applicable Trustee as "Certificateholders" (as such
terms are used herein or in the related Pooling and Servicing Agreement or the
related Deposit Trust Agreement, as applicable). Hence, until Definitive
Certificates are issued, holders of such Certificates will be able to exercise
the rights of Certificateholders 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 (hereinafter defined) for a Series of Certificates 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 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
and interest on the Mortgage Loans 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 Certificates of a Series to the rights of the holders of
the Senior Certificates, which, if so specified in the related Prospectus
Supplement, may include Certificates of a Subordinated Class or Subclass and
the establishment of a Reserve, by the right of one or more Classes or
Subclasses of Certificates to receive a disproportionate amount of certain
distributions of principal, by Certificate Guarantee Insurance or another form
or forms of Alternative Credit Support acceptable to the Rating Agency rating
the Certificates 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 home equity 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
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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 certificates evidencing participation interests in such
loans that are acceptable to the nationally recognized Rating Agency rating
the Certificates 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 manufactured housing
conditional sales contracts and installment loan agreements or participation
certificates 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 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 type 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 (as
hereinafter described) 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 in excess of
$150,000 through $200,000, 85% on any Mortgage Loan with an original principal
balance in excess of $200,000 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 the applicable Prospectus Supplement) a 30-year term at
origination and a mortgage interest rate 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. The Loan-to-Value Ratio is the
ratio, expressed as a percentage, of the principal amount of the Mortgage Loan
at the date of determination
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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) of such Mortgage
Loan may not exceed 80% and the original principal balance of the Mortgage
Loan 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 on the Mortgage Loan, thus increasing
or decreasing the rate at which the Mortgage Loan is repaid. See "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 Pooling
and Servicing 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 Certificateholders 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.
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 the related 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 Certificates--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 cash deposit, the
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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 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.
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 Certificates 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
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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 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 Certificates of the Series evidencing
interests in 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 involve 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 lending.
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"). 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, as described herein, among the
Master Servicer, if any, the Depositor and the Trustee (the "Pooling and
Servicing Agreement") and will receive a fee for such services. See "--
Mortgage Loan Program" and "Description of the Certificates." 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 Seller's Warranty
and Servicing Agreement between the Servicer and the Depositor (a "Servicing
Agreement") 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 Pooling and Servicing 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 Certificates--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 Pooling and 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--Representations by Unaffiliated Sellers; Repurchases" and
"Description of the Certificates--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
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amounts described herein under "Description of the Certificates--Advances."
Unless otherwise specified in the related Prospectus Supplement, such 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 Certificates--Advances," "Credit Support"
and "Description of Insurance."
Unless otherwise specified in the applicable Prospectus Supplement, each
Mortgage Pool included in the related Trust Fund will be composed of Mortgage
Loans evidencing interests in Mortgage Loans that bear interest at annual
rates that will exceed by at least 3/8 of 1% the fixed or variable Pass-
Through Rate established for the Mortgage Pool. To the extent and in the
manner specified in the related Prospectus Supplement, Certificateholders of a
Series will be entitled to receive distributions based on the payments of
principal on the underlying Mortgage Loans, plus interest on the principal
balance thereof at the Pass-Through Rate. The difference between a Mortgage
Rate and the related Pass-Through Rate (less any servicing compensation
payable to the Servicers of such Mortgage Loans and the amount, if any,
payable to the Depositor or the person or entity specified in the applicable
Prospectus Supplement) may be retained by the Master Servicer as servicing
compensation to it. See "Description of the Certificates--Servicing
Compensation and Payment of Expenses."
MORTGAGE LOAN PROGRAM
The Mortgage Loans will have been purchased by the Depositor either directly
or through affiliates, 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
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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 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 Subsidiary 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 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.
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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 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 Pooling and Servicing 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 Certificates evidencing an interest in
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 Certificates 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 Certificates 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
Certificates--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 Certificateholders 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 Certificates as to which the Depositor has elected to
treat the related Trust Fund as a REMIC, as defined in the Code, 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 Pass-Through Rate for the related Mortgage Pool, 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 Certificateholders,
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 Certificateholders 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
Certificates--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 (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 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 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 Certificates 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, the aggregate outstanding principal balance and the pass-
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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 Certificates is conditioned upon their characteristics
being in form and substance satisfactory to the Rating Agency rating the
related Series of Certificates. 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 conditional sales contracts and installment loan
agreements (the "Contracts") 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 a fixed annual percentage rate ("APR").
The Manufactured Homes securing the Contracts consist of manufactured homes
within the meaning of 42 United States Code, Section 5402(6), which defines a
"manufactured home" as "a structure, transportable in one 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 to the Trustee named in the related Prospectus Supplement for the
benefit of the related Certificateholder. The Master Servicer specified in the
related Prospectus Supplement will service the Contracts, either by itself or
through other Servicers, pursuant to the Pooling and Servicing Agreement. See
"Description of the Certificates--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 a Custodial Agreement (the "Custodial Agreement") among
the Depositor, the Trustee and the Custodian.
Unless otherwise specified in the related Prospectus Supplement, each
Contract Pool will be composed of Contracts bearing interest at the annual
fixed APRs specified in the Prospectus Supplement. Each registered holder of a
Certificate 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 on the underlying Contracts or interest on the
principal balance thereof at the Pass-Through Rate, or both. Unless otherwise
stated in the related Prospectus Supplement, the difference between the APR on
a Contract and the related Pass-Through Rate (less sub-servicing
compensation), will be retained by the Master Servicer as servicing
compensation to it. See "Description of the Certificates--Payments on
Contracts."
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.
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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
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 Certificateholder 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 Certificateholders or the Trustee for a breach of 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 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
Certificateholders 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, 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 or
agencies rating the Certificates, 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 constitutes the sole remedy
available to the Certificateholders or the Trustee for a breach of the Master
Servicer's or seller's insurability representation.
Unless otherwise 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 Certificates, the Depositor may remove such Contract
from the Trust Fund ("Deleted Contract"), rather than repurchase the Contract
as provided above, and substitute in its place another Contract ("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 Certificateholders 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 Pass-Through Rate equal to the Pass-Through Rate of the
Deleted Contract, (iv) have a remaining term to maturity not greater than (and
not more than one year less than) that of the Deleted Contract and (v) comply
with all the representations and warranties set forth in the Pooling and
Servicing Agreement as of the date of substitution. This repurchase or
substitution obligation constitutes the sole remedy available to the
Certificateholders 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.
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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 is 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, as a wholly-owned subsidiary of First Boston Securities Corporation, the
name of which was subsequently changed to Credit Suisse First Boston
Securities Corporation ("FBSC"). FBSC 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
11 Madison Avenue, New York, N.Y. 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 Certificates of any Series.
Trust Assets will be acquired by the Depositor directly or through one or
more affiliates.
USE OF PROCEEDS
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 Certificates. If so specified in the related
Prospectus Supplement, Certificates may be exchanged by the Depositor for
Trust Assets. Unless otherwise specified in the related Prospectus Supplement,
the Trust Assets for each Series of Certificates 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.
YIELD CONSIDERATIONS
Each monthly payment on a Mortgage Loan is calculated as one-twelfth of the
applicable Mortgage Rate multiplied by the unpaid principal balance of such
Mortgage Loan. Unless otherwise specified in the related Prospectus
Supplement, the amount of such interest payment distributed monthly to
Certificateholders with respect to each Mortgage Loan will be similarly
calculated based on the applicable Pass-Through Rate for the related Mortgage
Pool. The Pass-Through Rate for a Mortgage Pool will be either fixed or
variable, as specified in the related Prospectus Supplement.
Each monthly accrual of interest on a Contract is calculated as one-twelfth
of the product of the APR and the principal balance outstanding on the
scheduled payment date for such Contract in the preceding month. Unless
otherwise specified in the related Prospectus Supplement, the Pass-Through
Rate with respect to each Contract will be calculated on a Contract-by-
Contract basis and the Servicing Fee applicable to each Contract from the
applicable APR.
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With respect to a Mortgage Pool or a Contract Pool bearing a fixed Pass-
Through Rate, each Mortgage Loan or Contract will have a Mortgage Rate or APR
that exceeds the Pass-Through Rate by at least 3/8 of 1% unless otherwise
specified in the related Prospectus Supplement. The difference between a
Mortgage Rate or APR and the related fixed Pass-Through Rate for the Mortgage
Pool or Contract Pool (less any servicing compensation payable to the related
Servicers and the amounts, if any, payable to the Depositor or the person or
entity specified in the related Prospectus Supplement) will be retained by the
Master Servicer as servicing compensation to it. See "Description of the
Certificates--Servicing Compensation and Payment of Expenses." Although
Mortgage Rates and APRs in a fixed Pass-Through Rate Mortgage Pool or Contract
Pool, respectively, may vary, unless otherwise specified in the related
Prospectus Supplement, disproportionate principal prepayments among Mortgage
Loans bearing different Mortgage Rates or APRs will not affect the return to
Certificateholders since, as set forth above, the Pass-Through Rate may not
exceed any Mortgage Rate or APR.
With respect to Mortgage Pools having a variable Pass-Through Rate, the
Pass-Through Rate will equal the weighted average of the Mortgage Rates on all
the Mortgage Loans in the Mortgage Pool, minus the servicing compensation
payable to the Master Servicer and the Servicer of such Mortgage Loans and the
amounts, if any, retained by the Depositor or an Unaffiliated Seller or paid
to the person or entity specified in the related Prospectus Supplement. The
servicing fee and such other amounts will be fixed as to each Mortgage Loan at
a rate per annum, and may vary among Mortgage Loans. Because the Mortgage
Rates in such a Mortgage Pool will differ and the aggregate servicing
compensation and such other amounts to be retained or distributed with respect
to each Mortgage Loan will be fixed, it is likely that the weighted average of
the Mortgage Rates, and the corresponding variable Pass-Through Rate, will
change as the Mortgage Loans amortize and as a result of prepayments.
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
certificates 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 Pass-
Through 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 Pass-Through Rate for the related Mortgage Pool or Contract
Pool 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
Certificateholders on the next succeeding Distribution Date in the manner
specified in the related Prospectus Supplement. See "Maturity and Prepayment
Considerations."
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Generally, the effective yield to holders of Certificates having a monthly
Distribution Date will be lower than the yield otherwise produced by the Pass-
Through Rate with respect to a Mortgage Pool or Contract Pool or the pass-
through rate borne by a Mortgage Certificate 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 Certificates 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 Certificates succeeds such 25th day. With
respect to the Multi-Class Certificates 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 Certificates 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 indicate the manner in which the yield to
Certificateholders 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 Certificates that are offered
at a premium to their principal or notional amount ("Premium Certificates") 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 Certificateholders of Premium
Certificates 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 Certificates that are
Premium Certificates) will likely result in a lower than anticipated yield to
holders of Certificates that are offered at a discount to their principal
amount ("Discount Certificates"). If so specified in the applicable Prospectus
Supplement, a disproportionately large amount of Principal Prepayments may be
distributed to the holders of the Senior Certificates at the times and under
the circumstances described therein.
In the event that the Certificates of a Series include one or more Classes
or Subclasses of Multi-Class Certificates, 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.
MATURITY AND PREPAYMENT 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 be prepaid in full or in
part at any time. Unless otherwise specified in the applicable Prospectus
Supplement, no such 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 Mortgaged Property,
Cooperative Dwelling or Manufactured Home.
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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 (a)
on a pool of 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) on
a pool of 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 Certificates, 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 prepayment, as applicable, will be set forth in the
Prospectus Supplement with respect to a Series of Certificates. There is,
however, no assurance that prepayment of the Mortgage Loans underlying a
Series of Certificates 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 Pooling and 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 that would impair or threaten to impair any recovery under
any related Insurance Policy will not be required or permitted. See
"Description of the Certificates--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 Pooling and Servicing 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.
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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 facts, 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 Certificates evidencing interests in 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 Subordination Amount, if any, Letters of Credit, applicable
Insurance Policies, if any, or by any Alternative Credit Support, holders of
the Certificates of a Series evidencing interests in 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 and unpaid interest of 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, 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 Contract. 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 Properties 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 Loan. 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 Certificates 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 Internal Revenue Code of 1986, as amended
(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. 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--Representations by Unaffiliated Sellers;
Repurchases," "Description of the Certificates--Assignment of Mortgage Loans,"
"--Assignment of Mortgage Certificates," "--Assignment of Contracts" and "--
Termination."
DESCRIPTION OF THE CERTIFICATES
Each Series of Certificates will be issued pursuant to an agreement
consisting of either (a) a Pooling and Servicing Agreement or (b) 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 as the "Pooling and Servicing Agreement")
among the Depositor, the Master Servicer, if any, and the Trustee named in the
applicable Prospectus Supplement or a deposit trust agreement between the
Depositor and the Trustee (the "Deposit Trust Agreement," together with the
Pooling and Servicing Agreement, the
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"Agreement"). Forms of the Pooling and Servicing Agreement and the Deposit
Trust Agreement have been filed as exhibits to the Registration Statement of
which this Prospectus is a part. The following summaries describe certain
provisions common to each Pooling and Servicing Agreement and Deposit Trust
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
Pooling and Servicing Agreement or Deposit Trust Agreement for the applicable
Series and the related Prospectus Supplement. Wherever defined terms of the
Pooling and Servicing Agreement or Deposit Trust 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 Certificate offered hereby and by means of the related Prospectus
Supplement will be issued in fully registered form and will represent the
undivided interest or beneficial interest attributable to such Class or
Subclass in 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 Certificate Guarantee
Insurance, if any, with respect to such Series; (xi) the Depositor's rights
under the Warranty and 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
Certificates, 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 Residual Certificates. Distributions of principal and
interest with respect to Multi-Class Certificates 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 Certificates.
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 Certificates of such Series will constitute "regular
interests" in the related REMIC, as defined in the Code. If so specified in
the related Prospectus Supplement, such Residual Certificates may be offered
hereby and by means of such Prospectus Supplement. See "Certain Federal Income
Tax Consequences."
If so specified in the Prospectus Supplement for a Series which includes
Multi-Class Certificates, 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
Certificates of such Series that, based upon certain assumptions,
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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 Certificates 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
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 Certificates of a Series may be subordinated to the right of the
holders of Certificates of one or more Classes or Subclasses within such
Series to receive distributions with respect to the Mortgage Loans 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 Certificates 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 Certificates of a Series will evidence the right to receive
distributions with respect to a specific pool of Mortgage Loans or Contracts,
which right will be subordinated to the right of the holders of the Senior
Certificates of such Series to receive distributions with respect to such
specific pool of Mortgage Loans or Contracts, as more fully set forth in such
Prospectus Supplement. If so specified in the related Prospectus Supplement,
the holders of the Senior Certificates 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, the Depositor may sell
certain Classes or Subclasses of the Certificates 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 Certificates
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 Certificates 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 Certificates,
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.
DISTRIBUTIONS OF PRINCIPAL AND INTEREST
Beginning on the date specified in the related Prospectus Supplement,
distributions of principal and interest on the Certificates 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
Certificates 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 Certificates 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 on the
Certificates 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
Certificates, 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 to the
related Pass-Through Rate) on or with
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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 Certificates of a Series may be based on the Percentage
Interest evidenced by a Certificate of such Class or Subclass in the
distributions (including any Advances thereof) of principal (the "Principal
Distribution") and interest (adjusted to the Pass-Through Rate for the related
Mortgage Pool or Contract Pool) (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 Certificate of such Class or Subclass an amount equal to the
product of the Percentage Interest evidenced by such Certificate and the
interest of such Class or Subclass in the Principal Distribution and the
Interest Distribution. A Certificate 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 Certificates may have the right to receive a percentage of Principal
Prepayments that is greater than the percentage of regularly scheduled payment
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 Certificates that includes Multi-Class Certificates, 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 Certificates, distributions of interest on each Class or Subclass of
Compound Interest Certificates of such Series will be made on each
Distribution Date after the Stated Principal Balance of all Certificates of
such Series having a Final Scheduled Distribution Date prior to that of such
Class or Subclass of Compound Interest Certificates has been reduced to zero.
Prior to such time, interest on such Class or Subclass of Compound Interest
Certificates 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 Certificates that includes Multi-Class Certificates, distributions in
reduction of the Stated Principal Balance of such Certificates will be made as
described herein. Distributions in reduction of the Stated Principal Balance
of such Certificates will be made on each Distribution Date for such Series to
the holders of the Certificates of the Class or Subclass then entitled to
receive such distributions until the aggregate amount of such distributions
have reduced the Stated Principal Balance of such Certificates to zero.
Allocation of distributions in reduction of Stated Principal Balance will be
made to each Class or Subclass of such Certificates 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 Certificate of a Class or Subclass then entitled to receive
such distributions will be made pro rata among the Certificates of such Class
or Subclass.
Unless otherwise specified in the Prospectus Supplement relating to a Series
of Certificates that includes Multi-Class Certificates, the maximum amount
which will be distributed in reduction of Stated Principal Balance to holders
of Certificates 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 Certificates 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.
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Unless otherwise specified in the Prospectus Supplement relating to a Series
of Certificates that includes Multi-Class Certificates, 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 Certificates of
such Series (before taking into account the amount of interest accrued on any
Class of Compound Interest Certificates 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 Certificates 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 Certificates that includes Multi-Class Certificates, Excess Cash Flow
represents the excess of (i) the interest evidenced by such Multi-Class
Certificates 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 Certificates),
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 Certificates 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 Certificates 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.
Distributions (other than the final distribution in retirement of the
Certificates) will be made by check mailed to the address of the person
entitled thereto as it appears on the Certificate Register, except that, with
respect to any holder of a Certificate meeting the requirements specified in
the applicable 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 Certificates will be made only upon presentation and surrender
of the Certificates at the office or agency designated by the Master Servicer
for such purpose, as specified in the final distribution notice to
Certificateholders.
ASSIGNMENT OF MORTGAGE CERTIFICATES
Pursuant to the applicable Agreement for a Series of Certificates 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 Certificates
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.
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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 Certificateholders 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
Certificateholders 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 Certificates, 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, deliver the Certificates to
the Depositor in exchange for the Mortgage Loans. Each Mortgage Loan will be
identified in a schedule appearing as an exhibit to the related Pooling and
Servicing 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 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 Certificateholders. 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
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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 Pass-Through 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--Representations by Unaffiliated Sellers; Repurchases." Unless
otherwise specified in the applicable Prospectus Supplement, this purchase
obligation constitutes the sole remedy available to the Certificateholders 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 Certificates, no Mortgage Loan is more than 30
days delinquent as to 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 Certificateholders, 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 Certificateholders or
the Trustee for a breach of representation or warranty by the Depositor.
Within the period specified in the related Prospectus Supplement, following
the date of issuance of a Series of Certificates, 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 Certificateholders. 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
Pooling and Servicing Agreement relating to a Series of Certificates, the
Master Servicer may make certain representations and warranties to the Trustee
in such Pooling and Servicing 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
Certificateholders 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 Certificates to support, among other things, this purchase
obligation. Unless otherwise stated
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in the applicable Prospectus Supplement, the aforementioned purchase
obligation constitutes the sole remedy available to the Certificateholders 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 Pooling and Servicing 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 Seller will be obligated to
repurchase such Contract. The Trustee, concurrently with such assignment, will
authenticate and deliver the Certificates. Each Contract will be identified in
a schedule appearing as an exhibit to the Agreement (the "Contract Schedule").
Unless otherwise specified in the related Prospectus Supplement, 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 Certificateholders. 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 Pass-Through Rate, plus any unreimbursed Advances respecting such
Contract. Unless otherwise specified in the related Prospectus Supplement, the
repurchase obligation constitutes the sole remedy available to the
Certificateholders 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,
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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 Pooling and Servicing Agreement
and that all premiums now due on such insurance have been paid in full.
All of the representations and warranties of a seller in respect of a
Contract will have been made as of the date on which such 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 Certificates. A substantial period of time may have
elapsed between the date as of which the representations and warranties were
made and the later date of initial issuance of the related Series of
Certificates. Since the representations and warranties referred to in the
preceding paragraph are the only representations and warranties that will be
made by a seller, the seller's repurchase obligation described below will not
arise if, during the period commencing on the date of sale of a Contract by
the 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 Certificates.
The only representations and warranties to be made for the benefit of
Certificateholders 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 Certificateholders 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
Pass-Through Rate, plus the amount of any unreimbursed Advances in respect of
such Contract (the "Purchase Price"). The Master Servicer will be required
under the applicable Pooling and Servicing Agreement to enforce this
obligation for the benefit of the Trustee and the Certificateholders,
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 Certificateholders 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."
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PRE-FUNDING
If so specified in the related Prospectus Supplement, a portion of the
issuance proceeds of the Certificates 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 or Contracts 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 or Contracts, such Pre-Funded Amount may be invested in one or
more Eligible Investments. An "Eligible Investment" is 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 whose rating 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 each
Rating Agency, (iii) certificates of deposit having a rating in the highest
rating from each 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 each 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 credit
rating in the highest rating category from each Rating Agency; (d) Eurodollar
time deposits that are obligations of institutions whose time deposits carry a
credit rating in the highest rating category from each 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 each Rating Agency; and (f) any other investment
with respect to which each Rating Agency rating such Certificates indicates
will not result in the reduction or withdrawal of its then existing rating of
the certificates. 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 or Contracts 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 Certificates 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 or Contracts 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 Certificates issued pursuant to a particular offering.
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
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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 Pooling and Servicing Agreement provides that, if
for any reason the Master Servicer for such Series of Certificates 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 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. A 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 Note 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
Pooling and Servicing 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.
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 Pooling and Servicing Agreement. Upon termination
of a Servicing Agreement, the Master Servicer may act as servicer of the
related Mortgage Loans or Contracts or 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
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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 Pooling and Servicing Agreement with
respect to a Series will provide that any such amendment or new agreement may
not be inconsistent with or violate such Pooling and Servicing Agreement.
PAYMENTS ON MORTGAGE LOANS
The Master Servicer will, unless otherwise specified in the Prospectus
Supplement with respect to a Series of Certificates, establish and maintain a
separate account or accounts in the name of the Trustee (the "Certificate
Account"), which must be maintained with a depository institution and in a
manner acceptable to the Rating Agency rating the Certificates of a Series.
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
Certificateholders 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 Certificates 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 Loan. 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 Certificates 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, on 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
Certificates and any title, hazard or other insurance policy covering any
of the Mortgage Loans
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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).
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 Certificateholders 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
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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 Certificates--Payments on Mortgage Loans" will be established in the
name of the Trustee.
There will be deposited in the Certificate Account on a daily basis the
following payments and collections received or made by it subsequent to the
Cut-off Date (including scheduled payments of principal and interest due after
the Cut-off Date but received by the Master Servicer on or before the Cut-off
Date):
(i) all Obligor payments on account of principal, including principal
prepayments, on the Contracts;
(ii) all Obligor payments on account of interest on the Contracts,
adjusted to the Pass-Through Rate;
(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 Pooling and Servicing Agreement to be deposited
in the Certificate Account;
(vi) all amounts received from Credit Support provided with respect to a
Series of Certificates;
(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 Certificates will be registered in the name of the Trustee so that
all distributions thereon will be made directly to the Trustee. The Pooling
and Servicing 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 Certificateholders 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 Certificateholders that it is not
obligated to pursue any such available remedies unless adequate indemnity for
its legal fees and expenses is provided by such Certificateholders.
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DISTRIBUTIONS ON CERTIFICATES
On each Distribution Date with respect to a Series of Certificates 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
Certificateholders of record on the applicable Record Date. Such distributions
shall occur in the manner described herein under "Description of the
Certificates--Distributions of Principal and Interest" and in the 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 Certificates--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 Certificates, 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 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 Certificates 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 Certificates 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 Certificateholders, 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.
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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 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. The Certificate Account established pursuant
to the Deposit 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 Certificates 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
Certificates, one or more Classes of Multi-Class Certificates 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 Pooling and Servicing 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 Certificates of such Classes or Subclasses may be less than the
sum of (i) the interest scheduled to be distributed to holders of the
Certificates of such Classes or Subclasses and (ii) the amount to be
distributed in reduction of Stated Principal Balance or such Certificates 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 CERTIFICATEHOLDERS
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 Certificateholders 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 Certificate, as to
(i) through (iii) or (iv) through (vi) below, as applicable):
(i) to each holder of a Certificate, 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 Certificate, 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 Certificate, 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 Certificateholders 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 Certificates outstanding of each Class or 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
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aggregate Stated Principal Balance the Stated Principal Balance of the
Compound Interest Certificates, if any, outstanding and the amount of any
accrued interest added to the Compound Value of such Compound Interest
Certificates on such Distribution Date;
(vi) to each holder of a Compound Interest Certificate (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 Certificates with respect to such Distribution Date and added
to the Compound Value of such Compound Interest Certificate; and
(c) the Stated Principal Balance of such Class or Subclass of
Compound Interest Certificates after giving effect to the addition
thereto of all interest accrued thereon;
(vii) in the case of a series of Certificates with a variable Pass-
Through Rate, the weighted average Pass-Through 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 distributed to Certificateholders on the Distribution Date;
(ix) in the case of a Series of Certificates 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 Certificateholders 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 Certificateholders 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
Certificateholder 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
Certificateholder to prepare its tax return, as applicable, for such calendar
year or, in the event such person was a Certificateholder 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 the
aggregate scheduled installments of payments of principal and interest
(adjusted to the applicable Pass-Through Rate) that were due on the Due Date
with respect to a Mortgage Loan or Contract and that were delinquent
(including any
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payments that have been deferred by the Servicer or the Master Servicer) as of
the close of business on the date specified in the Pooling and 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
Certificateholders, 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 Certificateholders 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 (adjusted to the applicable Pass-Through Rate)
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 Pooling
and 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, 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.
Under the Pooling and 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 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
Certificates, covering loss occasioned by the failure to escrow such amounts.
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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 at least equal to the
maximum insurable value or the improvements securing such Mortgage Loan or
Contract or the principal balance of such Mortgage Loan or Contract, whichever
is less. 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 Certificateholders, 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 Pooling and 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.
The Pooling and 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.
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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
Certificates 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 Certificates in effect throughout
the term of the Pooling and Servicing 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 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
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Mortgage Insurer") with regard to each Mortgage Loan for which such coverage
is required pursuant to the applicable Servicing Agreement and the Pooling and
Servicing 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
Certificates that is required to be kept in force under the Pooling and
Servicing Agreement or applicable 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 Certificates. 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 Certificates in full force and effect throughout the term
of the Pooling and Servicing 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 Certificates, 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
Certificateholders, 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 Certificateholders, will present claims to the applicable Primary Mortgage
Insurer and to the FHA and the VA, 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 Certificateholders 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
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defaulted Mortgage Loan or Contract, respectively, plus interest accrued
thereon at the Pass-Through 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 the Pooling and Servicing 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 Pass-Through Rates, 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 Pooling and Servicing Agreement with
respect to Certificates representing interests in 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 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 Pooling and Servicing 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 Certificateholders 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.
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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 Servicing Agreement and Pooling and Servicing Agreement with respect to
Certificates representing interests in 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 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 Certificateholders,
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 Pooling and Servicing 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 Pooling and Servicing Agreement for a Series of Certificates, 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. The Master Servicer's primary
compensation generally will be equal to the difference, with respect to each
interest payment on a Mortgage Loan, between the Mortgage Rate and the Pass-
Through Rate for the related Mortgage Pool and with respect to each interest
payment on a Contract, between the APR and the Pass-Through Rate for the
related Contract (less any servicing compensation payable to the Servicer of
the related Mortgage Loan or Contract, if any, as set forth below, and the
amount, if any, payable to the Depositor or to the person or entity specified
in the applicable Prospectus Supplement). As
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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
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 Pooling and Servicing 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 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
Certificateholders 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 Deposit 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 Deposit 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 Pooling and 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 the Pooling and 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 the Pooling and 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
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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 Pooling and Servicing
Agreement and 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
The Master Servicer under each Pooling and Servicing 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 a Pooling and
Servicing 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
Pooling and Servicing 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 the Pooling and Servicing
Agreement.
The Trustee under each Pooling and Servicing Agreement or Deposit Trust
Agreement will be named in the applicable Prospectus Supplement. The
commercial bank or trust company serving as Trustee may have 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
Deposit 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 Deposit Trust Agreement.
Each Pooling and Servicing Agreement and Deposit Trust Agreement will also
provide that neither the Depositor nor the Master Servicer nor any director,
officer, employee or agent of the Depositor or the Master Servicer 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, the Master Servicer or the Trustee nor any such person
will be protected against, in the case of the Master Servicer and the
Depositor, any breach of representations or warranties made by them, and in
the case of the Master Servicer, 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 Deposit Trust Agreement will further provide that the
Depositor, the Master Servicer and the Trustee and any director, officer and
employee or agent of the Depositor, the Master Servicer or the Trustee shall
be entitled to indemnification, by the Trust Fund in the case of the Depositor
and Master Servicer 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
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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 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
Certificateholders thereunder. In such event, the legal expenses and costs of
such action and any liability resulting therefrom will be expenses, costs and
liabilities of the Trust Fund, and the 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 related Prospectus
Supplement, a deficiency event (a "Deficiency Event") with respect to the
Certificates of each Series may be defined in the Pooling and Servicing
Agreement as being the inability of the Trustee to distribute to holders of
one or more Classes of Certificates of such Series, in accordance with the
terms thereof and the Pooling and Servicing 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.
To the extent a deficiency event is specified in the related 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 Certificates in accordance with the priorities as to
distributions of principal and interest set forth in such Certificates will be
sufficient to make distributions of interest at the applicable Interest Rates
and to distribute in full the principal balance of each such Certificate on or
before the latest Final Distribution Date of any outstanding Certificates of
such Series.
To the extent a deficiency event is specified in the related 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 Certificates, which opinion or report will be
conclusive evidence as to such sufficiency. Pending the making of any such
determination, distributions on the Certificates shall continue to be made in
accordance with their terms.
To the extent a deficiency event is specified in the related 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 Certificates of such Series in accordance
with their terms, except that such distributions shall be made monthly and
without regard to the amount of principal that would otherwise be
distributable on any Distribution Date. Under certain circumstances following
such positive determination, the Trustee may resume making distributions on
such Certificates expressly in accordance with their terms.
To the extent a deficiency event is specified in the related Prospectus
Supplement, if the Trustee is unable to make the positive determination
described above, the Trustee will apply all amounts received in respect of the
related Trust Fund (after payment of Trustee and accountants' fees and
expenses) to monthly distributions on the Certificates of such series pro
rata, without regard to the priorities as to distribution of principal set
forth in such Certificates, and such Certificates will, to the extent
permitted by applicable law, accrue interest at the highest Interest Rate
borne by any Certificate 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
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applicable to the Class having such floating interest rate and on the original
principal amount of the Certificates of that Class. In such event, the holders
of a majority in outstanding principal balance of such Certificates may direct
the Trustee to sell the related Trust Fund, any such direction being
irrevocable and binding upon the holders of all Certificates 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
Events of Default under each Pooling and Servicing Agreement 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 Pooling and Servicing Agreement which
failure shall continue for 60 days (15 days in the case of a failure to pay
the premium for any insurance policy) or any breach of any representation and
warranty made by the Master Servicer or the Servicer, if applicable, which
continues unremedied for 120 days 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 Certificates by the Rating Agency rating such Certificates
because the existing or prospective financial condition or mortgage loan
servicing capability of the Master Servicer is insufficient to maintain such
rating.
RIGHTS UPON EVENT OF DEFAULT
So long as an Event of Default with respect to a Series of Certificates
remains unremedied, the Depositor, the Trustee or the holders of Certificates
evidencing not less than 25% of the voting rights evidenced by the
Certificates of such Series may terminate all of the rights and obligations of
the Master Servicer under the Pooling and 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 Pooling and Servicing
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 Pooling and Servicing Agreement.
AMENDMENT
Each Pooling and Servicing Agreement may be amended by the Depositor, the
Master Servicer and the Trustee, without the consent of the
Certificateholders, (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 Pooling and Servicing 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
Certificateholder of the related Series. The Pooling and Servicing Agreement
may also be amended by the Depositor, the Master Servicer and the Trustee with
the consent of holders of Certificates evidencing not less than 66 2/3% of the
voting rights evidenced by the Certificates, for the purpose of adding any
provisions to or changing in any manner or eliminating any of the provisions
of such Pooling and Servicing Agreement or of modifying in any manner the
rights of the Certificateholders; 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 Certificate
without the consent of the holder of such Certificate, (ii) adversely affect
in any material respect
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the interests of the holders of a Class or Subclass of the Senior
Certificates, 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 Certificates 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 Certificates of a Series in a manner other than that set forth in
(i) above without the consent of the holders of Subordinated Certificates
evidencing not less than 66 2/3% of such Class or Subclass, or (iv) reduce the
aforesaid percentage of the Certificates, the holders of which are required to
consent to such amendment, without the consent of the holders of the Class
affected thereby.
The Deposit 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 Deposit Trust
Agreement for each Series may also be amended by the Trustee and the Depositor
with the consent of the Holders of Certificates evidencing Percentage
Interests aggregating not less than 66 2/3% of each Class of the Certificates
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 Certificates the Holders of which are
required to consent to any such amendment, without the consent of the Holders
of all Certificates of such Series then outstanding.
TERMINATION
The obligations created by the Pooling and Servicing Agreement for a Series
of Certificates 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 Certificateholders of all amounts
held by the Master Servicer and required to be paid to them pursuant to such
Pooling and Servicing Agreement. The obligations created by the Deposit 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 Deposit Trust 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 Certificates, the Master Servicer will give written notice of
termination of the applicable Agreement of each Certificateholder, and the
final distribution will be made only upon surrender and cancellation of the
Certificates at an office or agency specified in the notice of termination.
If so provided in the related Prospectus Supplement, the Pooling and
Servicing Agreement for each Series of Certificates 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 Pooling and Servicing
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 Certificates 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.
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CREDIT SUPPORT
Credit support for a Series of Certificates may be provided by one or more
Letters of Credit, the issuance of Subordinated Classes or Subclasses of
Certificates (which may, if so specified in the related Prospectus Supplement,
be issued in notional amounts) 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 Certificates.
LETTERS OF CREDIT
The Letters of Credit, if any, with respect to a Series of Certificates 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 Certificates 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 Certificates. 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 Certificates will expire 30 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 all Mortgage Loans
or Contracts in the Mortgage Pool or Contract Pool in the circumstances
specified above. See "Description of the Certificates--Termination."
Unless otherwise specified in the applicable Prospectus Supplement, under
the Pooling and 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 Certificateholders, 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 Certificateholders 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.
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Prospective purchasers of Certificates 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 Certificateholders (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
Certificates 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.
SUBORDINATED CERTIFICATES
To the extent specified in the Prospectus Supplement with respect to a
Series of Certificates, credit support may be provided by the subordination of
the rights of the holders of one or more Classes or Subclasses of Certificates
to receive distributions with respect to the Mortgage Loans in the Mortgage
Pool or Contracts in the Contract Pool underlying such Series, or with respect
to a Subordinated Pool of mortgage loans or manufactured housing conditional
sales contracts and installment loan agreements, to the rights of the Senior
Certificateholders or holders of one or more Classes or Subclasses of
Subordinated Certificates of such Series to receive such distributions, to the
extent of the applicable Subordinated Amount. In such a case, credit support
may also be provided by the establishment of a Reserve Fund, as described
below. The Subordinated Amount, as described below, will be reduced by an
amount equal to Aggregate Losses. Aggregate Losses are defined in the related
Pooling and Servicing Agreement for any given period as the aggregate amount
of delinquencies, losses and other deficiencies in the amounts due to the
holders of the Certificates 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 Certificates of such Series ("payment deficiencies"), but
excluding any payments of interest on any amounts originally due to the
holders of the Certificates of a Class or Subclass to which the applicable
Class or Subclass of Subordinated Certificates 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 Certificateholders 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 Certificates with
respect to which credit support will be provided by one or more Classes or
Subclasses of Subordinated Certificates will set forth the Subordinated Amount
for such Series. 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.
SHIFTING INTEREST
If specified in the Prospectus Supplement for a Series of Certificates for
which credit enhancement is provided by shifting interest as described herein,
the rights of the holders of the Subordinated Certificates of a Series to
receive distributions with respect to the Mortgage Loans or Contracts in the
related Trust Fund or Subsidiary Trust will be subordinated to such right of
the holders of the Senior Certificates of the same Series to the extent
described in such Prospectus Supplement. This subordination feature is
intended to enhance the
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likelihood of regular receipt by holders of Senior Certificates 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 Certificates against
losses due to mortgagor defaults.
The protection afforded to the holders of Senior Certificates of a Series by
the shifting interest subordination feature will be effected by distributing
to the holders of the Senior Certificates 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 Certificates while
increasing the respective interest of the Subordinated Certificates in the
Mortgage Pool or Contract Pool. Increasing the respective interest of the
Subordinated Certificates relative to that of the Senior Certificates is
intended to preserve the availability of the benefits of the subordination
provided by the Subordinated Certificates.
SWAP AGREEMENT
If so specified in the Prospectus Supplement relating to a Series of
Certificates, the 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 Certificates having the benefit of an interest rate swap 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
Certificates also will set forth certain information relating to the corporate
status, ownership and credit quality of the counterparty or counterparties to
such swap agreement.
RESERVE FUND
If so specified in the related Prospectus Supplement, credit support with
respect to a Series of Certificates may be provided by the establishment and
maintenance with the Trustee for such Series of Certificates, 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 manufactured housing conditional sales contracts and
installment loan agreements 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. Following the initial issuance of the Certificates 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 Mortgage Loans or Contracts and/or on the mortgage loans or manufactured
housing conditional sales contracts and installment loan agreements in the
Subordinated Pool otherwise distributable to the holders of Subordinated
Certificates 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
Certificates or on the Certificates of such Series to which the applicable
Class or Subclass of Subordinated Certificates are subordinated and the
reimbursement of unreimbursed Advances and liquidation expenses, to maintain
the Reserve Fund at the Required Reserve. The balance in the Reserve Fund in
excess of the Required Reserve shall be paid to the applicable Class or
Subclass of Subordinated Certificates, 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 applicable from time
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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.
Amounts held in the Reserve Fund for a Series from time to time will
continue to be the property of the Subordinated Certificateholders 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. If on any Distribution Date the amount in the Certificate
Account available to be applied to distributions on the Senior Certificates 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 Certificateholders (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 the Senior
Certificateholders (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 Certificateholders on such
Distribution Date to the Required Distribution; provided, however, that in no
event will any 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 Certificateholders. 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 Subordinated
Certificateholders. Unless otherwise specified in the related Prospectus
Supplement, whenever the Reserve Fund is less than the Required Reserve,
holders of the Subordinated Certificates of the applicable Class or Subclass
will not receive any distributions with respect to the Mortgage Loans or
Contracts other than amounts attributable to interest on the Mortgage Loans 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. Whether or not the amount of the Reserve Fund exceeds the
Required Reserve on any Distribution Date, the holders of the Subordinated
Certificates of the applicable Class or Subclass are entitled to receive from
the Certificate Account their share of the proceeds of any Mortgage Loan 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. 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 Senior Certificates 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 Certificates 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 Pass-Through Rate,
to the extent that sufficient funds in the Certificate Account are not
available therefor.
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 Certificates, 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 Pooling and Servicing Agreement 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 Certificates
in accordance with their respective interests in the Reserve Fund in the
priority specified in the related Prospectus Supplement. Investment income in
the Reserve Fund is not available for distribution to the holders of the
Senior Certificates of such Series
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or otherwise subject to any claims or rights of the holders of the applicable
Class or Subclass of Senior Certificates. Eligible investments for monies
deposited in the Reserve Fund will be specified in the Pooling and Servicing
Agreement for a Series of Certificates for which a Reserve Fund is established
and in some instances will be limited to investments acceptable to the Rating
Agency rating the Certificates of such Series from time to time as being
consistent with its outstanding rating of such Certificates. 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 Pooling
and Servicing 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
Certificates of such Series and the availability of amounts in the Reserve
Fund for distributions on such Certificates 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.
CERTIFICATE GUARANTEE INSURANCE
If so specified in the related Prospectus Supplement, Certificate Guarantee
Insurance, if any, with respect to a Series of Certificates may be provided by
one or more insurance companies. Such Certificate Guarantee Insurance will
guarantee, with respect to one or more Classes of Certificates 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 Certificate Guarantee
Insurance will also guarantee against any payment made to a Certificateholder
which is subsequently recovered as a "voidable preference" payment under the
Bankruptcy Code. A copy of the certificate 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
Certificates 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 Agreement, including its obligation to advance delinquent installments of
principal and interest on Mortgage Loans or Contracts 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 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 the Certificates would be reduced by such 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 the
Certificates 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. Unless otherwise 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.
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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
Certificates 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.
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
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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 Certificates 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 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
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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 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
The 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.
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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 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 terms of the Pooling and Servicing Agreement 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 maximum insurable value of such
Manufactured Home or the principal balance due from the Obligor on the related
Contract, whichever is less; 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 exercise its best reasonable efforts to obtain from another
insurer a replacement policy comparable to such policy.
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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
Certificates 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 Certificates 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, 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. Any Pool Insurance Policies relating to
the Contracts will be described in the related Prospectus Supplement.
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
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expend its own funds to restore the damaged Mortgaged Property unless it is
determined (A) that such restoration will increase the proceeds to the
Certificateholders 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.
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 (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 Certificates--
Assignment of Mortgage Loans" above, 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 Certificateholders 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 Certificateholders 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--Representations by Unaffiliated Sellers; Repurchases"
and "Description of the Certificates--Assignment of Mortgage Loans."
The original amount of coverage under the Pool Insurance Policy will be
reduced over the life of the Certificates 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 Certificates 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 Certificates--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 Certificates. Any Special Hazard Insurance Policies for
a Contract Pool underlying a Series of Certificates will be described in the
related Prospectus Supplement. The Special Hazard Insurance Policy for the
Mortgage Pool underlying the Certificates 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
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form of hazard insurance policy for the respective states in which the
Mortgaged Properties are located. See "Description of the Certificates--
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.
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 Pooling and Servicing Agreement will require the Master
Servicer to maintain the Special Hazard Insurance Policy in full force and
effect throughout the term of the Pooling and Servicing Agreement. If a Pool
Insurance Policy is required to be maintained pursuant to the Pooling and
Servicing 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 Pooling and 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
Certificates will be covered under a Mortgagor Bankruptcy Bond (or any other
instrument that will not result in a downgrading of the rating of the
Certificates 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 Certificates 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 Certificates may be
reduced as long as any such
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reduction will not result in a reduction of the outstanding rating of the
Certificates of such Series by the Rating Agency rating such Series.
CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS AND CONTRACTS
The following discussion contains summaries of certain legal aspects of
mortgage loans and manufactured housing 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 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
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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
Certificates, 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 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
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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 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.
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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 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.
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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 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
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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.
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.
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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 Pooling and Servicing
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 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 Certificateholders 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 Certificates, 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 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.
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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.
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 Pooling and Servicing Agreement, the Master Servicer or the
Depositor, as the case may be, will transfer physical possession of the
Contracts to the Trustee or its custodian. 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.
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. Therefore, if a subsequent purchaser were able to
take physical possession of the Contracts without notice of such assignment,
the Trustee's interest in the Contracts could be defeated.
Security Interests in the Manufactured Homes
The 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 Certificateholders may not have a first
priority security interest in the Manufactured Home securing a Contract. As
manufactured homes have become larger and often have been attached 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 Certificates 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 Certificateholders 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
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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.
The Depositor will assign its security interests in the Manufactured Homes
to the Trustee on behalf of the Certificateholders. Unless otherwise specified
in the related Prospectus Supplement, neither the Depositor nor the Trustee
will amend the certificates of title to identify the Trustee 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 Certificateholders against the rights of subsequent
purchasers of a Manufactured Home or subsequent lenders who take a security
interest in the Manufactured Home. If there are any Manufactured Homes as to
which the security interest assigned to the Depositor and the
Certificateholders is not perfected, such security interest would be
subordinate to, among others, subsequent purchasers for value of Manufactured
Homes and holders of perfected security interests. There also exists a risk in
not identifying the Certificateholders as the new secured party on the
certificate of title that, through fraud or negligence, the security interest
of the Certificateholders could be released.
In the event that the owner of a Manufactured Home moves it to a state other
than the state in which such Manufactured Home initially is registered, under
the laws of most states the perfected security interest in the Manufactured
Home would continue for four months after such relocation and thereafter only
if and after the owner re-registers the Manufactured Home in such state. If
the owner were to relocate a Manufactured Home to another state and not re-
register the Manufactured Home in such state, and if steps are not taken to
re-perfect the Trustee's security interest in such state, the security
interest in the Manufactured Home would cease to be perfected. A majority of
states generally require surrender of a certificate of title to re-register a
Manufactured Home; accordingly, the Trustee, or the Master Servicer as
custodian for the Trustee, must surrender possession if it holds the
certificate of title to such Manufactured Home or, in the case of Manufactured
Homes registered in states which provide for notation of lien, the Trustee
would receive notice of surrender if the security interest in the Manufactured
Home is noted on the certificate of title. Accordingly, the Trustee would have
the opportunity to re-perfect its security interest in the Manufactured Home
in the state of relocation. In states which do not require a certificate of
title for registration of a Manufactured Home, re-registration could defeat
perfection. In the ordinary course of servicing manufactured housing
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 manufactured housing conditional sales contract or
installment loan agreement sells a Manufactured Home, the Trustee, or the
Master Servicer as custodian for the Trustee, must surrender possession of the
certificate of title or will receive notice as a result of its lien noted
thereon and accordingly will have an opportunity to require satisfaction of
the related manufactured housing conditional sales contract or installment
loan agreement before release of the lien. Under the Pooling and Servicing
Agreement, the Master Servicer, on behalf of the Depositor, is 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 Pooling and Servicing Agreement that it has no knowledge of
any such liens with respect to any Manufactured Home securing payment on any
Contract. However, such liens could arise at any time during the term of a
Contract. No notice will be given to the Trustee
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or Certificateholders 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
Pooling and Servicing Agreement.
Enforcement of Security Interests in Manufactured Homes
The Master Servicer on behalf of the Trustee, to the extent required by the
related Pooling and Servicing Agreement, may take action to enforce the
Trustee's security interest with respect to Contracts in default by
repossession and resale of the Manufactured Homes securing such 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 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.
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.
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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 Pooling
and Servicing Agreement will represent that all of the Contracts comply with
applicable usury laws.
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CERTAIN 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
Certificates. Stroock & Stroock & Lavan LLP, New York, New York, counsel to
the Depositor, 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
Stroock & Stroock & Lavan LLP's advice with respect to material federal income
tax issues. As used hereinafter in "Certain 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 Certificates. Investors should 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 Certificates offered hereunder.
The following discussion addresses securities of two general types: (i)
certificates ("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 ("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 pass-through 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 1273 and 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").
II. REMIC TRUST FUNDS
A. Classification of REMIC Trust Funds
With respect to each series of REMIC Certificates relating to a REMIC
Mortgage Pool, Stroock & Stroock & Lavan LLP, New York, New York or such other
counsel specified in the related Prospectus Supplement will deliver their
opinion generally to the effect that, assuming that (i) a REMIC election is
made timely in the
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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, as it may be
amended from time to time, 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 the heading "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 will constitute ""real
estate assets'' within the meaning of Code Section 856(c)(5)(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 and income 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)) and as ""interest on
obligations secured by mortgages on real property or on interests in real
property'', respectively. See, in this regard, ""Characterization of
Investments in Trust Certificates--Buydown Mortgage Loans,'' below. 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
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Section 856(c)(5)(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, Stroock & Stroock & Lavan LLP or such other counsel specified
in the related Prospectus Supplement 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)(5)(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 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
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such income. The Master Servicer will report annually (or more frequently if
required) to the Internal Revenue Service ("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 1273 and 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 are 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 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 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,
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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. 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." REMIC
Regular Certificates offered hereby other than such Certificates providing for
variable rates of interest are not anticipated to have stated interest other
than "qualified stated interest," but if any such REMIC Regular Certificates
are so offered, appropriate disclosures will be made in the Prospectus
Supplement. Some or all of the payments on REMIC Regular Certificates
providing for the accretion of interest will be included in the stated
redemption price at maturity of such 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 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 "Taxation of Owners of REMIC Regular Certificates--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
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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 the 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 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
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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 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 "Taxation of Owners of
REMIC Regular Certificates--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.
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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 or acquires. The election to accrue interest, discount
and premium on a constant yield method with respect to a Certificate is
irrevocable, unless the IRS consents of the 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 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 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
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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.
On June 27, 1996, the IRS published in the Federal Register proposed
regulations (the "Proposed Premium Regulations") on the amortization of bond
premium. The Proposed Premium Regulations describe the constant yield method
under which such premium is amortized and provide that the resulting offset to
interest income can be taken into account only as a Certificateholder takes
the corresponding interest income into account under such holder's regular
accounting method. In the case of instruments that may be called or repaid
prior to maturity, the Proposed Premium Regulations provide that the premium
is calculated by assuming that the issuer will exercise or not exercise its
redemption rights in the manner that maximizes the Certificateholder's yield
and the Certificateholder will exercise or not exercise its option in a manner
that maximizes the Certificateholder's Yield. The Proposed Premium Regulations
would not apply to a bond that is subject to Code Section 1272(a)(6). The
Proposed Premium Regulations are proposed to be effective for debt instruments
acquired on or after the date 60 days after the date final regulations are
published in the Federal Register. However, if a Certificateholder elects to
amortize bond premium for the taxable year containing such effective date, the
Proposed Premium Regulations will apply to all the Certificateholder's debt
instruments held on or after the first day of that taxable year. It cannot be
predicted at this time whether the Proposed Premium Regulations will become
effective or what, if any, modifications will be made to them prior to their
becoming effective.
3. TREATMENT OF SUBORDINATED CERTIFICATES
As described above under "Credit Support--Subordinated Certificates,"
certain Series of Certificates may contain one or more Classes or Subclasses
of Subordinated Certificates. Holders of Subordinated Certificates will be
required to report income with respect to such Certificates on the accrual
method without giving effect to delays and reductions in distributions
attributable to defaults or delinquencies on any Mortgage Loans, 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 Certificateholder of a
Subordinated Certificate in any period could significantly exceed the amount
of cash distributed to such Certificateholder 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 Certificate. 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 Certificate. Special rules are
applicable to banks and thrift institutions, including rules regarding
reserves for bad debts. Holders of Subordinated Certificates should consult
their own tax advisers regarding the appropriate timing, character and amount
of any loss sustained with respect to Subordinated Certificates.
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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 "Taxation of Owners of REMIC Residual
Certificates--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 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 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 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
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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 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 (see "Taxation of Owners
of REMIC Residual Certificates--Daily Portions" above), 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. The Residual Owner
does, however, receive reduced taxable income over the life of the REMIC
because the REMIC's basis in the underlying REMIC Mortgage Pool includes the
fair market value of the REMIC Regular Certificates and REMIC Residual
Certificates.
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 percent 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
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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." The Small Business Job Protection Act ("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 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 real estate
investment trust, 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, (1) 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 (2) 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
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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 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".
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 Pooling and Servicing Agreement, such organizations generally are
prohibited from owning Residual Certificates. See "Sales of REMIC
Certificates".
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 real estate investment trust ("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 percent 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.
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
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(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 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. The Code currently provides for a top marginal tax rate of 39.6%
for individuals while maintaining a maximum marginal rate for the long-term
capital gains of individuals at 28%. There is no such rate differential for
corporations. In addition, the distinction between a capital gain or loss and
ordinary income or loss remains relevant for other purposes, including
limitations on the use of capital losses to offset ordinary income.
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 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; any tax-exempt entity (other than a Code Section 521 cooperative)
which is not subject to the tax on unrelated business income; and 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 Pooling and
Servicing 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, however, if the
record holder of an interest in such entity furnishes to such entity (i) such
holder's social security
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number and a statement under penalties of perjury that such social security
number is that of the record holder or (ii) a statement under penalties of
perjury that such record holder is not a disqualified organization. For these
purposes, a "pass-through entity" means any regulated investment company, real
estate investment trust, 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.
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 percent 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 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 percent
tax on the value of any contribution of assets to the REMIC after the "startup
day" (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
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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 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 percent 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.
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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 (a) 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, (b) the holder of such Certificate signs a
statement under penalties of perjury that certifies that such holder is a Non-
U.S. Person, and provides the name and address of such holder, and (c) 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 percent, 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, 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 percent or more of the REMIC
Residual Certificates. Further, the foregoing rules will not apply to exempt a
"United States shareholder" (as such term is defined in Code Section 951) of a
controlled foreign corporation from taxation on such United States
shareholder's allocable portion of the interest or original issue discount
income earned by such controlled foreign corporation.
2. REMIC RESIDUAL CERTIFICATES
Amounts paid to a Residual Owner that is not a "U.S. Person" (as defined
above) (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 percent 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 percent, 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
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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. A transfer of a REMIC Residual Certificate has tax
avoidance potential unless, at the time of the transfer, the transferor
reasonably expects (1) that the REMIC will distribute to the transferee
Residual Certificateholder amounts that will equal at least 30 percent of each
excess inclusion, and (2) 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 percent of the accrued excess inclusions
is not terminated even though the REMIC Residual Certificate is no longer held
by a non-U.S. Person.
Holders of REMIC Regular Certificates and REMIC Residual Certificates should
be aware that proposed Treasury Regulations (the "1996 Proposed Regulations")
were issued on April 15, 1996 which, if adopted in final form, could affect
the United States taxation of foreign investors in REMIC Certificates. The
1996 Proposed Regulations are generally proposed to be effective for payments
after December 31, 1997, regardless of the issue date of the REMIC Certificate
with respect to which such payments are made, subject to certain transition
rules. One of the effects of the 1996 Proposed Regulations would be to provide
certain presumptions with respect to withholding for holders not providing the
required certifications to qualify for the withholding exemption described
above. In addition, the 1996 Proposed Regulations would replace a number of
current tax certification forms with a single, restated form and standardize
the period of time for which withholding agents could rely on such
certifications. The 1996 Proposed Regulations would also provide rules to
determine whether, for purposes of United States federal withholding tax,
interest paid to a non-U.S. Person that is an entity should be treated as paid
to the entity or those holding an interest in that entity.
The discussion under this heading is not intended to be a complete
discussion of the provisions of the 1996 Proposed Regulations, and prospective
investors are urged to consult their tax advisers with respect to the effect
the 1996 Proposed Regulations may have.
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
A. Classification of Trust Funds
With respect to each series of Trust Certificates Stroock & Stroock & Lavan
LLP or such other counsel specified in the related Prospectus Supplement will
deliver their opinion to the effect that the arrangements
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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 real estate investment trust will represent
"real estate assets" within the meaning of Code Section 856(c)(5)(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.
2. TRUST INTEREST CERTIFICATES
With respect to each Series of Certificates, Stroock & Stroock & Lavan LLP
or such other counsel specified in the related Prospectus Supplement 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, (1) a Trust Interest Certificate owned by a
"domestic building and loan association" within the meaning of Code Section
7701(a)(19) will be considered to represent "loans . . . secured by an
interest in real property" within the meaning of Code Section
7701(a)(19)(C)(v); or (2) a real estate investment trust which owns a Trust
Interest Certificate will be considered to own "real estate assets" within the
meaning of Code Section 856(c)(5)(A), and interest income thereon will 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.
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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)(5)(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. 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 Company 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, and will be allowed no
deduction for such fees in determining its liability for alternative minimum
tax. 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
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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, essentially
equivalent to that portion of interest payable with respect to each Mortgage
Loan that is retained by the Depositor ("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 Fee or Master Servicing Fee 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, Stroock & Stroock & Lavan LLP or such
other counsel specified in the related Prospectus Supplement 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".
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. Further, such purchasers
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may be required to determine if the above described de minimis and market
discount rules apply at the time a Trust Fractional Certificate is acquired,
based on the characteristics of the Mortgage Loans at that time.
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 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.
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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 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 shares 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 Unstripped Mortgage Loans as it accrues or is received by the
Trustee, whichever is earlier.
Code Sections 1272 through 1273 and 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 would 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
would have original issue discount if the points charged at origination (or
other loan discount) exceeded 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. The OID Regulations treat certain
variable rate mortgage loans as having original issue discount because of an
initial rate of interest that differs from that determined by the mechanism
for setting the interest rate during the remainder of the loan, or because of
the use of an index that does not vary in a manner approved by the OID
Regulations. 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
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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 "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 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 portion of such premium allocated to Unstripped
Mortgage Loans originated on or before September 27, 1985 may only be deducted
upon the sale or final distribution in respect of any such Mortgage Loan, as
the special rules of the Code that permit the amortization of such premium
apply in the case of debt instruments other than corporate and governmental
obligations, only to obligations issued after that date. Upon such a sale or
final distribution in respect of such a Mortgage Loan, the premium, if any,
allocable thereto would be recognized as a short-term or long-term capital
loss by a Certificateholder holding the interests in Mortgage Loans
represented by such Certificate as capital assets, depending on how long the
Certificate had been held.
The application of the Stripped Bond Rules to Stripped Mortgage Loans will
generally cause any premium allocable to Stripped Mortgage Loans to be
amortized automatically by adjusting the rate of accrual of interest and
discount to take account of the allocable portion of the actual purchase price
of the Certificate. In that event, no additional deduction for the
amortization of premium would be allowed. It is possible that the IRS may take
the position that the application of the Stripped Bond Rules to the Stripped
Mortgage Loans should be adjusted so as not to take account of any premium
allocable to a Stripped Mortgage Loan originated on or before September 27,
1985. Any such premium would then be subject to the provisions of the Code
relating to the amortization of bond premium, including the limitations
described in the preceding paragraph on the amortization of premium allocable
to Mortgage Loans originated on or before September 27, 1985.
On June 27, 1996, the IRS published in the Federal Register proposed
regulations (the "Proposed Premium Regulations") on the amortization of bond
premium. The Proposed Premium Regulations describe the constant yield method
under which such premium is amortized and provide that the resulting offset to
interest income can be taken into account only as a Certificateholder takes
the corresponding interest income into account under such holder's regular
accounting method. In the case of instruments that may be called or repaid
prior to maturity, the Proposed Premium Regulations provide that the premium
is calculated by assuming that the issuer will exercise or not exercise its
redemption rights in the manner that maximizes the Certificateholder's yield
and the Certificateholder will exercise or not exercise its option in a manner
that maximizes the Certificateholder's yield. The Proposed Premium Regulations
are proposed to be effective for debt instruments acquired on or after the
date 60 days after the date final regulations are published in the Federal
Register. However, if a Certificateholder elects to amortize bond premium for
the taxable year containing such effective date, the Proposed Premium
Regulations would apply to all the Certificateholder's debt instruments held
on or after the first day of that taxable year. It cannot be predicted at this
time whether the Proposed Premium Regulations will become effective or what,
if any, modifications will be made to them prior to their becoming effective.
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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, Stroock & Stroock & Lavan LLP
or such other counsel specified in the related Prospectus Supplement 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" below, 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 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, and will be allowed no
deduction for such fees in determining its liability for alternative minimum
tax. 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, Stroock & Stroock & Lavan LLP or such other counsel specified in
the related Prospectus Supplement 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
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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 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
above in "REMIC Trust Funds--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount" apply; however there is no authority
permitting Trust Interest Certificateholders to take into account the
Prepayment Assumption in computing original issue discount accruals. See
"Prepayments" below. 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. The
amount of original issue discount with respect to a Trust Interest Certificate
may be treated as zero under the original issue discount de minimis rules
described above.
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. The effect of an aggregate
computation for the inclusion of original issue discount in income may be to
defer the recognition of losses due to early prepayments relative to a
computation on a Mortgage by Mortgage basis. 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 Tax Reform Act of 1986 (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 proper treatment of
interests, such as the Trust Fractional Certificates and the Trust Interest
Certificates, in debt instruments that are subject to prepayment is unclear.
Legislation that has been proposed but not yet enacted would extend the rules
contained in the 1986 Act to any pool of debt instruments the payments on
which may be accelerated 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
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the possibility of prepayment and, with respect to the Trust Interest
Certificates, 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 Certificate
was held as a capital asset except to the extent that code Section 582(c)
applies to such gain or loss.
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 Pass-Through 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"
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, 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, each of the issuers of the Mortgage Loans 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. This
withholding tax may be reduced or eliminated by an applicable tax treaty.
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.
Holders of Trust Certificates should be aware that proposed Treasury
Regulations were issued on April 15, 1996 which, if adopted in final form,
could affect the United States taxation of foreign investors in Trust
Certificates. For further discussion of those proposed regulations, see "REMIC
TRUST FUNDS--Foreign Investors in REMIC Certificates" above.
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J. State and Local Taxation
In addition to the federal income tax consequences described in "Certain
Federal Income Tax Consequences," potential investors should consider the
state income tax consequences of the acquisition, ownership, and disposition
of the 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 Certificates.
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 Certificates 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 Certificates 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
penalities 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
Certificates of the applicable Series, an investment in Certificates 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 final regulation
(the "Final 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 Final Regulation provides an 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 Certificateholder of the applicable Series.
The Final 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 Certificateholders of the applicable Series at any time, there can be no
assurance that any Series or Class of Certificates will qualify for this
exemption.
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PROHIBITED TRANSACTION CLASS EXEMPTIONS
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 an "Exempt Series" 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
an Exempt Series (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. It does not appear that PTCE 83-1 applies to a
Series of Certificates with respect to which the Trust Assets include
Nonexempt Assets (a "Nonexempt Series"). See "The Trust Fund--The Mortgage
Pools" and "--The Contract Pools". Accordingly, it appears that PTCE 83-1 will
not exempt Plans that acquire Certificates of a Nonexempt Series from the
prohibited transaction rules of ERISA and Section 4975 of the Code.
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
Exempt Series for which such a method of Credit Support is provided (see
"Credit Support--Subordinated Certificates" and "--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 Exempt
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 Exempt 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 indemnity 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 Exempt Series.
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<PAGE>
If an Exempt 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 an Exempt 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.
If for any reason neither PTCE 83-1 nor the Underwriter's PTE do not provide
an exemption for a particular Plan Certificateholder, one of five other
prohibited transaction class exemptions issued by the DOL might apply, i.e.,
PTCE 91-38 (formerly PTCE 80- 51) (Class Exemption for Certain Transactions
Involving Bank Collective Investment Funds), PTCE 90-1 (formerly PTCE 78-19)
(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). There can be no assurance that any of these class
exemptions will apply with respect to any particular Plan Certificateholder
or, even if it were to apply, that the 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 (a "Plan investor") and who is considering the use of "plan assets" of
any Plan to purchase of 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.
UNDERWRITER'S PTE
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 Final Regulation) and (iii) undivided fractional interests in
the above.
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");
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(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 Structured Ratings Group, Moody's Investors Service, Inc., Duff &
Phelps Credit Rating Co. or Fitch Investors Service, L.P., 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 Certificates) 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, 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").
Whether the conditions in the Underwriter's PTE 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
117
<PAGE>
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 CONSIDERATIONS
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.
Subordinated Certificates are not available for purchase by or with "plan
assets" of any Plan, other than a governmental or church plan which is not
subject to ERISA or Section 4975 of the Code (as described above), and any
acquisition of Subordinated Certificates by, on behalf of or with "plan
assets" of any such Plan will be treated as null and void for all purposes.
ANY PLAN INVESTOR WHO PROPOSES TO USE "PLAN ASSETS" OF ANY PLAN TO PURCHASE
CERTIFICATES 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 CERTIFICATES.
LEGAL INVESTMENT
The applicable Prospectus Supplement for a Series of Certificates will
specify whether a Class or Subclass of such Certificates, 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
Certificates 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
118
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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 12 C.F.R.
SectionSection 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 Certificates), except under limited
circumstances.
All depository institutions considering an investment in the Certificates
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 securities" (including securities such as certain Series,
Classes or Subclasses of the Certificates), except under limited
circumstances, and sets forth certain investment practices deemed to be
unsuitable for regulated institutions.
Institutions whose investment activities are subject to regulation by
federal or state authorities should review rules, policies and guidelines
adopted from time to time by such authorities before purchasing any
Certificates, 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
Certificates 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 Certificates as "mortgage
related securities," no representation is made as to the proper
characterization of the Certificates for legal investment purposes, financial
institution regulatory purposes, or other purposes, or as to the ability of
particular investors to purchase Certificates under applicable legal
investment restrictions. The uncertainties described above (and any
unfavorable future determinations concerning legal investment or financial
institution regulatory characteristics of the Certificates) may adversely
affect the liquidity of the Certificates.
Investors should consult their own legal advisers in determining whether and
to what extent such Certificates constitute legal investments for such
investors.
PLAN OF DISTRIBUTION
Each Series of Certificates 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 Certificates will set forth the terms of the offering of
such Series or Certificates 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 Certificates will be determined.
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<PAGE>
Unless otherwise specified in the Prospectus Supplement, the Underwriters
will be obligated to purchase all of the Certificates of a Series described in
the Prospectus Supplement with respect to such Series if any such Certificates
are purchased. The Certificates 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
Underwriters or other persons acting as the Depositor's agents to solicit
offers by certain institutions to purchase the Certificates 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 Certificates 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 Certificates 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 Certificates 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
Certificates for whom they may act as agents.
The place and time of delivery for each Series of Certificates 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
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 sales.
LEGAL MATTERS
Certain legal matters in connection with the Certificates offered hereby
will be passed upon for the Depositor and for the Underwriters by Stroock &
Stroock & Lavan LLP, New York, New York or such other counsel specified in the
related Prospectus Supplement.
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INDEX OF TERMS
<TABLE>
<CAPTION>
PAGE ON WHICH
TERM IS DEFINED
TERM IN THE PROSPECTUS
---- ------------------
<S> <C>
Accrual Distribution Amount.................................. 40
Advances..................................................... 17
AFR.......................................................... 97
Agreement.................................................... 36
Alternative Credit Support................................... 12
Approved Sale................................................ 73
APR.......................................................... 30
ARM Loans.................................................... 22
Asset Value.................................................. 37
Assets....................................................... 88
Buy-Down Fund................................................ 16
Buy-Down Loans............................................... 23
Cede......................................................... 21
Certificate Account.......................................... 47
Certificate Guarantee Insurance.............................. 16
Certificate Principal Balance................................ 5
Certificateholders........................................... 25
Certificates................................................. 1
Class........................................................ 1
Clean up Costs............................................... 82
Closed Loans................................................. 26
Closing Date................................................. 90
Code......................................................... 17
Contract Loan-to-Value Ratio................................. 10
Contract Pool................................................ 6
Contract Schedule............................................ 43
Contracts.................................................... 1
Converted Mortgage Loan...................................... 23
Cooperative.................................................. 6
Cooperative Dwelling......................................... 6
Cooperative Loans............................................ 6
Credit Suisse First Boston Corporation's PTE................. 116
Custodial Account............................................ 47
Custodial Agreement.......................................... 30
Custodian.................................................... 30
Cut-off Date................................................. 21
Deferred Interest............................................ 23
Defnitive Certificates....................................... 21
Deficiency Event............................................. 61
Deleted Contract............................................. 31
Deleted Mortgage Certificates................................ 41
Deleted Mortgage Loans....................................... 42
Depositor.................................................... 1
Deposit Trust Agreement...................................... 36
Determination Date........................................... 50
Discount Certificate......................................... 10
Distribution Date............................................ 7
DOL.......................................................... 114
</TABLE>
121
<PAGE>
<TABLE>
<CAPTION>
PAGE ON WHICH
TERM IS DEFINED
TERM IN THE PROSPECTUS
---- ------------------
<S> <C>
DTC--Depository Trust Comany................................. 21
Due Date..................................................... 22
Due Period................................................... 40
Eligible Investment.......................................... 46
Escrow Account............................................... 53
ERISA........................................................ 17
ERISA Plans.................................................. 114
Exempt Series................................................ 115
FBSC......................................................... 24
FHA.......................................................... 24
FHA Experience............................................... 35
FHA Loans.................................................... 22
Final Regulation............................................. 114
First Boston................................................. 114
Garn-St Germain Act.......................................... 81
GPM Fund..................................................... 16
GPM Loans.................................................... 23
Home Equity Loans............................................ 6
Initial Deposit.............................................. 15
Insurance Proceeds........................................... 48
Insured...................................................... 56
Insured Series............................................... 115
Interest Coupon.............................................. 111
Interest Distribution........................................ 39
Interest Rate................................................ 5
Interest Weighted Class...................................... 5
Interest Weighted Subclass................................... 5
IRS.......................................................... 90
L/C Bank..................................................... 12
L/C Percentage............................................... 12
Letter of Credit............................................. 12
Liquidating Loan............................................. 12
Liquidation Proceeds......................................... 48
Loan-to-Value Ratio.......................................... 8
Loss......................................................... 69
Manufactured Home............................................ 10
Master Servicer.............................................. 7
Mortgage Certificates........................................ 29
Mortgage Loans............................................... 29
Mortgage Notes............................................... 22
Mortgage Pool................................................ 4
Mortgage Rates............................................... 9
Mortgaged Property........................................... 8
Mortgagor.................................................... 8
Mortgagor Bankruptcy Bond.................................... 12
Multi-Class Certificates..................................... 5
Multifamily Property......................................... 6
Multiple Variable Rate....................................... 92
1988 Act..................................................... 99
1986 Act..................................................... 112
1996 Contingent Debt Regulations............................. 93
</TABLE>
122
<PAGE>
<TABLE>
<CAPTION>
PAGE ON WHICH
TERM IS DEFINED
TERM IN THE PROSPECTUS
---- ------------------
<S> <C>
1996 Proposed Regulations.................................... 104
Nonexempt Assets............................................. 115
Nonexempt Series............................................. 115
non-U.S. Person.............................................. 103
Obligor...................................................... 33
OID Regulations.............................................. 87
Original Value............................................... 23
Originator................................................... 26
Other Pools.................................................. 116
Parties in Interest.......................................... 114
Pass-Through Rate............................................ 9
Percentage Interest.......................................... 21(1)
Performance Bond............................................. 31
Plans........................................................ 114
Policy Statement............................................. 119
Pool Insurance Policy........................................ 12
Pool Insurer................................................. 13
Pooling and Servicing Agreement.............................. 25
Pre-Funded Amount............................................ 11
Pre-Funding Account.......................................... 11
Pre-Funding Period........................................... 11
Premium Certificate.......................................... 10
Prepayment Assumption........................................ 90
Primary Insurer.............................................. 48
Primary Mortgage Insurance Policy............................ 13
Primary Mortgage Insurer..................................... 55
Principal Distribution....................................... 39
Principal Prepayments........................................ 14
Principal Weighted Class..................................... 5
Principal Weighted Subclass.................................. 5
Proposed Premium Regulations................................. 95
PTCE 83-1.................................................... 115
Purchase Price............................................... 46
Rating Agency................................................ 6
Record Date.................................................. 38
Reference Agreement.......................................... 36
REIT......................................................... 99
REMIC........................................................ 17
REMIC Certificateholders..................................... 88
REMIC Certificates........................................... 87
REMIC Mortgage Pool.......................................... 87
REMIC Provisions............................................. 87
REMIC Regulations............................................ 87
REMIC Regular Certificate.................................... 87
REMIC Residual Certificate................................... 87
Required Distribution........................................ 59
Required Reserve............................................. 15
Reserve Fund................................................. 12
Residual Certificates........................................ 5
Residual Owner............................................... 96
Restricted Group............................................. 117
</TABLE>
123
<PAGE>
<TABLE>
<CAPTION>
PAGE ON WHICH
TERM IS DEFINED
TERM IN THE PROSPECTUS
---- ------------------
<S> <C>
Retained Yield............................................... 107
Securities Act............................................... 38
Senior Certificates.......................................... 12
Senior Class................................................. 5
Senior Prepayment Percentage................................. 66
Senior Subclass.............................................. 5
Series....................................................... 1
Servicemen's Readjustment Act................................ 24
Servicer..................................................... 25
Servicing Account............................................ 47
Servicing Agreement.......................................... 25
Single-Class REMIC........................................... 101
Single Family Property....................................... 6
Single Variable Rate......................................... 90
SMMEA........................................................ 17
SBJPA--Small Business........................................ 98
SPA.......................................................... 35
Special Distributions........................................ 8(51)
Special Hazard Insurance Policy.............................. 16
Standard Hazard Insurance Policy............................. 54
Standard Terms............................................... 31
Stated Principal Balance..................................... 5
Stated Principal Distribution Amount......................... 40
Stripped Bond Rules.......................................... 107
Stripped Interest............................................ 111
Stripped Mortgage Loan....................................... 107
Subclass..................................................... 1
Subordinated Amount.......................................... 12
Subordinated Certificates.................................... 12
Subordinated Class........................................... 5
Subordinated Pool............................................ 15
Subordinated Subclass........................................ 5
Substitute Contract.......................................... 31
Substitute Mortgage Certificates............................. 41
Substitute Mortgage Loans.................................... 42
Thrift Institutions.......................................... 98
Tiered REMICS................................................ 89
Title V...................................................... 86
Trust Assets................................................. 6
Trust Certificates........................................... 87
Trust Fractional Certificateholder........................... 106
Trust Fractional Certificate................................. 106
Trust Fund................................................... 6
Trust Interest Certificate................................... 106
Trust Interest Certificateholder............................. 111
Unaffiliated Sellers......................................... 26
Underwriters................................................. 119
UCC.......................................................... 79
Unstripped Mortgage Loans.................................... 109
U. S. Person................................................. 103
VA........................................................... 16
VA Loans..................................................... 22
</TABLE>
124
<PAGE>
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS
SUPPLEMENT OR THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON. THIS PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITIES OTHER THAN THE OFFERED CERTIFICATES OFFERED HEREBY, NOR AN
OFFER OF THE OFFERED CERTIFICATES IN ANY STATE OR JURISDICTION IN WHICH, OR TO
ANY PERSON TO WHOM, SUCH OFFER WOULD BE UNLAWFUL. THE DELIVERY OF THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT
INFORMATION HEREIN OR THEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS
DATE; HOWEVER, IF ANY MATERIAL CHANGE OCCURS WHILE THIS PROSPECTUS SUPPLEMENT
OR THE PROSPECTUS IS REQUIRED BY LAW TO BE DELIVERED, THIS PROSPECTUS
SUPPLEMENT OR THE PROSPECTUS WILL BE AMENDED OR SUPPLEMENTED ACCORDINGLY.
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT
Summary.................................................................... S-3
Risk Factors............................................................... S-17
Description of the Mortgage Loans.......................................... S-21
The Seller................................................................. S-32
Description of the Sale and Purchase Agreement............................. S-33
The Servicer............................................................... S-34
Prepayment and Yield Considerations........................................ S-35
Description of the Certificates............................................ S-42
Servicing of the Mortgage Loans............................................ S-56
The Trustee................................................................ S-62
Certain Legal Aspects of the Mortgage Loans................................ S-64
The Certificate Insurance Policy and the Certificate Insurer............... S-69
Certain Federal Income Tax Considerations.................................. S-73
ERISA Considerations....................................................... S-73
Legal Investment........................................................... S-75
Underwriting............................................................... S-75
Report of Experts.......................................................... S-76
Ratings.................................................................... S-76
Legal Matters.............................................................. S-76
Index of Significant Prospectus Supplement Definitions..................... S-77
Annex I.................................................................... I-1
PROSPECTUS
Prospectus Supplement...................................................... 3
Additional Information..................................................... 3
Incorporation of Certain Information by Reference.......................... 3
Summary of Terms........................................................... 5
Risk Factors............................................................... 19
The Trust Fund............................................................. 21
The Depositor.............................................................. 32
Use of Proceeds............................................................ 32
Yield Considerations....................................................... 32
Maturity and Prepayment Considerations..................................... 34
Description of the Certificates............................................ 36
Credit Support............................................................. 64
Description of Insurance................................................... 68
Certain Legal Aspects of the Mortgage Loans and Contracts.................. 76
Certain Federal Income Tax Consequences.................................... 87
ERISA Considerations....................................................... 114
Legal Investment........................................................... 118
Plan of Distribution....................................................... 119
Legal Matters.............................................................. 120
Index of Terms............................................................. 121
</TABLE>
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE OFFERED CERTIFICATES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS
SUPPLEMENT AND PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN ACTING AS UNDERWRITERS AND
WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
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PREFERRED
CREDIT CORPORATION
(Seller)
$200,000,000
Preferred Credit Asset-Backed Certificates, Series 1997-1
Credit Suisse First Boston Mortgage Securities Corp.
(Depositor)
$47,800,000 % Class A-1 Certificates
$29,500,000 % Class A-2 Certificates
$23,200,000 % Class A-3 Certificates
$50,600,000 % Class A-4 Certificates
$11,500,000 % Class A-5 Certificates
$37,400,000 % Class A-6 Certificates
PROSPECTUS SUPPLEMENT
LOGO
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